SECURITIES AND EXCHANGE COMMISSION
Washington,
(Mark One) | | | | | |
| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31,
20172023
OR | | | | | |
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission
File Number 001‑32622file number: 001-32622
(Exact name of registrant as specified in its charter) | | | | | | | | |
| Delaware | | 20‑0723270
20-0723270 |
(State or other jurisdiction
| | (I.R.S. Employer
|
7250 S. Tenaya Way, Suite 100 | | |
Las Vegas Nevada | | |
| Nevada | | 89113 |
(Address of principal executive offices) | | (Zip Code) |
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: | | | | | | | | |
| 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 ☒¨ 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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒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. ☒
¨ 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”company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. | | | | | | | | | | | | | | | | | | | | |
| Large accelerated filer | | ☐
x | | Accelerated filer | | ☒
☐ |
Non-accelerated filer | | ☐ (Do not check if a smaller reporting company) | | Smaller reporting company | | ☐ |
Emerging growth company | | ☐ | | | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant 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
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☒
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
As of June 30, 2017,2023, the aggregate market value of the registrant’s common stock held by non-affiliates was approximately $485.3 million $1.2 billionbased on the closing sale price as reported on Thethe New York Stock Exchange. There were
68,825,42283,778,581 shares of the registrant’s common stock issued and outstanding as of the close of business on
March 1, 2018.February 23, 2024.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant’s Definitive Proxy Statement for its
20182024 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
20172023 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.
ANNUAL REPORT ON FORM
10‑K10-K
FOR FISCAL YEAR ENDED
DECEMBERDecember 31,
20172023
| | | | | | | | |
| | |
| | | |
| | | 5
|
| | | 18
|
| | | 36
|
| | |
| | | 36
|
| | | 36
|
| | | 36
|
| | | |
| | |
| | | |
| | | 37
|
| | | 40
|
| | | 41
|
| | | |
| | | |
| | | 106
|
| | | 106
|
| | | 106
|
| | | |
| | |
| | |
| | | |
| | | 109
|
| | | 109
|
| | | 109
|
| | | 109
|
| | | 109
|
| | | |
| | |
| | | |
| | | 110
|
| | | 114
|
| | | |
| | 115
|
2
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
LossOperations and Comprehensive
LossIncome as our “Statements of
Loss,Operations,” (iii) our audited Consolidated Balance Sheets as our “Balance Sheets,”
(iv) our audited Consolidated Statements of Cash Flows as our “Statements of Cash Flows,” and
(iv)(v) Item 7.
Managements’Management’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” or “Payments”). Unless otherwise indicated, the terms the “Company,” “we,”
“us”“us,” and “our” refer to Everi Holdings together with its consolidated subsidiaries.
Our disclosure and analysis in this
This 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 “anticipate,” “believe,” “expect,” “intend,” “estimate,” “project,” “may,” “should,” “will,” “likely,” “will likely result,” “will continue,” “future,” “plan,” “target,” “forecast,” “goal,” “observe,” “seek,” “strategy” and other words and terms of similar meaning. 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. Becauseconditions, as of the date on which this report is filed. Forward-looking statements often, but do not always, contain words such as “expect,” “anticipate,” “aim to,” “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.
Readers are cautioned not to place undue reliance on the forward-looking statements relatecontained herein, which are based only on information currently available to us and only as of the future, theydate hereof.
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: macro-economic impacts on consumer discretionary spending, interest rates and interest expense; global supply chain disruption; inflationary impact on supply chain costs; inflationary impact on labor costs and retention; equity incentive activity and compensation expense; our ability to maintain revenue, earnings, and cash flow momentum or lack thereof; changes in global market, business and regulatory conditions whether as a result of a pandemic, or other economic or geopolitical developments around the world, including availability of discretionary spending income of casino patrons as well as expectations for the closing or re-opening of casinos; product and technological innovations that address customer needs in a new and evolving operating environment or disrupt the industry, such as generative artificial intelligence; to enhance shareholder value in the long-term; trends in gaming operator 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 benefits from the release of new products, new product features, product enhancements, or product extensions; regulatory approvals and changes; gaming, financial regulatory, 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; borrowings and debt repayments; goodwill impairment charges; international expansion or lack thereof; resolution of litigation or government investigations; our share repurchase and dividend policy; new customer contracts and contract renewals or lack thereof; and financial performance and results of operations (including revenue, expenses, margins, earnings, cash flow, and capital expenditures).
Our actual results and financial condition may differ materially from those indicated in forward-looking statements. Importantstatements, and important factors that could cause our actual results and financial conditionthem to differ materially from those indicated indo so include, but are not limited to, the forward-looking statements include, without limitation:following:
our history of net losses and •our ability to generate profits in the future;
future and to create incremental value for shareholders;
our substantial leverage and •our ability to raise additionalwithstand economic slowdowns, inflationary and other economic factors that pressure discretionary consumer spending;
•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 agreements;
•inaccuracies in underlying operating assumptions;
•our ability to withstand direct and indirect impacts of a pandemic outbreak, or other public health crises of uncertain duration on our business and the businesses of our customers and suppliers, including as a result of actions taken in response to governments, regulators, markets and individual consumers;
•changes in global market, business, and regulatory conditions arising as a result of economic, geopolitical and other developments around the world, including a global pandemic, increased conflict and political turmoil, capital market disruptions and instability of financial institutions, climate change or currently unexpected crises or natural disasters;
•our leverage and the related covenants that restrict our operations;
•our ability to fund operations;
comply with our debt covenants and our ability to generate sufficient cash to service all of our indebtedness, and fund working capital, and capital expenditures;
restrictions under our indebtedness;
•our ability to compete inwithstand the gaming industry;
the impact of changes in Federal corporate tax laws;
•our ability to maintain our current customers;
•our ability to replace revenue associated with terminated contracts or margin degradation from contract renewals;
•expectations regarding customers’ preferences and demands for future product and service offerings;
•our ability to successfully introduce new products and services, including third-party licensed content;
•gaming operator and patron preferences;
•failure to control product development costs and create successful new products;
•the overall growth or contraction of the gaming industry;
•anticipated sales performance;
•our ability to prevent, mitigate, or timely recover from cybersecurity breaches, attacks, compromises and compromises;
3
| •
| our ability to execute on mergers, acquisitions or strategic alliances, including our ability to integrate and operate such acquisitions consistent with our forecasts;
|
other security vulnerabilities;expectations regarding our existing•national and future installed baseinternational economic and win per day;
expectations regarding development and placement fee arrangements;
inaccuracies in underlying operating assumptions;
expectations regarding customers’ preferences and demands for future gaming offerings;
expectations regarding our product portfolio;
industry conditions, including the overall growthprospect of a shutdown of the U.S. federal government;
•changes in gaming industry, if any;regulatory, financial regulatory, legal, card association, and statutory requirements;
•the impact of evolving legal and regulatory requirements, including emerging environmental, social and governance requirements;
•regulatory and licensing difficulties, competitive pressures and changes in the competitive environment;
•operational limitations;
•changes to tax laws;
•uncertainty of litigation outcomes;
•interest rate fluctuations;
•business prospects;
•unanticipated expenses or capital needs;
•technological obsolescence and our ability to replace revenue associated with terminated contracts; margin degradation from contract renewals;
adapt to evolving technologies, including generative artificial intelligence;•employee hiring, turnover and retention;
•our ability to comply with regulatory requirements under the Europay, MasterCardPayment Card Industry (“PCI”) Data Security Standards and Visa global standard for cards equipped with security chip technology (“EMV”);
our ability to introduce new products and services, including third-party licensed content;
gaming establishment and patron preferences;
expenditures and product development;
anticipated sales performance;
national and international economic conditions;
changes in gaming regulatory, card association and statutory requirements;
regulatory and licensing difficulties;
gaming market contraction;
uncertainty of litigation outcomes;
interest rate fluctuations;
unanticipated expenses or capital needs;
technological obsolescence; 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, whetherstatements 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”).
4
PART I
Everi develops and offers products and services that provide gaming entertainment, improve our customers’ patron engagement, and help our casino customers operate their businesses more efficiently. We develop and supply entertaining game content, gaming machines and gaming systems and services for land-based and iGaming operators. Everi is a leading supplierprovider of financial technology solutions that power casino floors, improve operational efficiencies, and fulfill regulatory requirements. The Company also develops and supplies player loyalty tools and mobile-first applications that enhance patron engagement for our customers and venues in the casino, gaming industry. The Company provides casino operators with a diverse portfolio of products including innovative gaming machines that powersports, entertainment, and hospitality industries.
Everi reports its financial performance, and organizes and manages its operations, across the
casino floor, and casino operational and management systems that include comprehensive, end-to-end payments solutions, critical intelligence offerings, and gaming operations efficiency technology. Everi’s mission is to be a transformative force for casino operations by facilitating memorable player experiences, delivering reliable protection and security, and striving for customer satisfaction and operational excellence. We are divided intofollowing two
primary business segments:
“Everi Games” or “Games”(i) Games and
“Everi Payments” or “Payments.”(ii) Financial Technology Solutions (“FinTech”).
Everi Games provides
a number ofgaming operators with gaming technology and entertainment products and services,
for casinos, including:
(a)(i) gaming machines,
comprised primarily
ofcomprising Class II,
and Class III
and Historic Horse Racing (“HHR”) slot machines placed under participation
or fixed feeand fixed-fee lease arrangements or sold to casino
customers, including the award-winning TournEvent®;customers; (ii) providing and
(b) system software, licenses, ancillary equipment and maintenance to its casino customers. Everi Games also develops and managesmaintaining the central determinant
systemsystems for the video lottery terminals (“VLTs”) installed in the State of New
York.Everi Payments provides its casino customers cash accessYork and similar technology in certain tribal jurisdictions; (iii) business-to-business (“B2B”) digital online gaming activities; and (iv) bingo solutions through consoles, integrated electronic gaming tablets and related systems.
Everi FinTech provides gaming operators with 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. We also develop and offer mobile-first applications aimed at enhancing patron engagement for customers in the casino, sports, entertainment, and hospitality industries. Our solutions are secured using an end-to-end security suite to protect against cyber-related attacks allowing us to maintain appropriate levels of security. 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 transactions,purchases at casino cages, kiosk and mobile POS devices; accounts for the CashClub Wallet, check verificationwarranty services, self-service loyalty and warranty services; (b) fully integrated gaming industry kiosks that provide cash accesskiosk maintenance services; self-service loyalty tools and 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 gamingreporting services; marketing and lottery activities.Everi Holdings was formedpromotional offering subscription-based services; and other ancillary offerings.
Macro-Economic Volatility and Global Instability, Employment Constraints and Supply Chain Disruptions
We have experienced an impact from macro-economic volatility as a Delaware limited liability company on February 4, 2004result of inflation, interest rate movements and was convertedglobal instability, particularly as it relates 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 informationour supply chain, both from an upstream and downstream perspective, which impacts the delivery of our products; and we continue to evaluate the effects of interest rate movements on our website is not partvariable rate debt and pricing pressures on our business.
We have experienced an impact from employment constraints as a result of this Annual Reportinflation that has significantly increased over prior years. This has placed pressure on Form 10-K orcompetitive wages, which has led to increases in wages and other related costs.
We have experienced an impact from supply chain disruptions that have resulted in additional costs incurred to develop, produce, and ship our
other filings with the SEC.Our Business Segments
We report our financial performance, and organize and manage our operations, across the following two business segments: (a) Games; and (b) Payments. products.
Our Products and Services
Our Games products and services include commercial products,electronic gaming devices, such as Native American Class II products,offerings and other electronic bingo products, Class III products, lotteryslot machines and HHR gaming machines placed under participation or fixed-fee lease arrangements, or sold to casino customers, B2B digital online gaming activities, accounting and central determinant systems, and other back officeback-office systems. InWe conduct our Games segment business based on results generated from the following major revenue streams: (i) Gaming Operations; and (ii) Gaming Equipment and Systems.
Gaming Operations
With respect to our Gaming operations revenue stream, we generallyprimarily provide: (i) leased gaming equipment, Class II, Class III and HHR offerings, on a revenue participation or a daily fixed-fee basis, including standard games and hardware and premium games and hardware, which include local-area progressive jackpot offerings and wide-area progressive (“WAP”) jackpot offerings; (ii) accounting and central determinant systems; (iii) digital online gaming activities; and (iv) bingo solutions through consoles, integrated electronic gaming tablets and related systems.
In connection with our leased gaming equipment, we retain ownership of the
leased gaming equipmentmachines installed at customer
facilities andfacilities. 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,
or a
fixedpercentage of the total cash/coin-in, a daily
feefixed-fee based
onupon the number of
player terminals installed at the facility. We also make direct sales of player terminals, licenses, back office systems and other related equipment to customers. The majoritygaming machines placed or a combination of these
direct sales contracts are for some combination of gaming equipment, player terminals, content, system software, license fees, ancillary equipment and maintenance.5
With respectmethods. We expect to continue to (i) increase our Games business, we have expanded our licensing into new jurisdictions, increased investment in research and development to innovate and introducedintroduce new gaming hardware and theme content; (ii) expand our offering of new standard and premium game products (which typically include high definition (“HD”) dual-screens, liquid crystal display (“LCD”) panels,hardware and red green blue (“RGB”) top box lighting).theme content; and (iii) extend and expand our game placements into new gaming markets and 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 well asmarkets. As of December 31, 2023, approximately 10,758 units, or 61.4% of the development and placementtotal installed base, were outside of premium products.the Oklahoma tribal market. Additionally, Everi Games has grownmaintained its premium game installations, with this portion of games representing approximately 2,532 units installed (representing approximately 19.0%48.6% of our total installed base as of December 31, 2017) since entering2023.
In connection with our WAP offering, machines placed under such arrangements fall into the premium leased gaming equipment category approximately five years ago. Developmentand we retain ownership of generally higher-earning premium games has supported Everi Games’ abilitysuch machines. Currently spanning multiple product lines, our WAP is offered to enter new markets, expand its footprint, customers onthe Player Classic, Player Classic Reserve, Player Classic Skyline, Player Classic Revolve, Core HDX Renegade, Empire 5527, Empire MPX, Empire Flex and Empire DCX cabinets.
Gaming operations also include revenues generated under our arrangement to provide
broad and new content across its installed base.Everi Games provides 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,November 2019, an amendment to the 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 of 2019.2029. As of December 31, 2017, this system2023, there were approximately 17,400 VLTs connected to approximately 19,100 VLTs and hasour central determinant system for the ability to interface with, provide outcomes to, and manage the VLTs.New York Lottery. Pursuant to itsour agreement with the New York State Gaming Commission, Everi Games receiveswe receive a portion of the network-wide net win (generally, cash-incredits played less free pay allowances and prizes paid)paid to patrons per dayday) in exchange for provision and maintenance of the central determinant system. Everi GamesWe also providesprovide the central determinant system technology to Native American tribes in the State of Washingtonother licensed jurisdictions, for which it receiveswe receive a portion of the revenue generated from the VLTs that are connected to the system.
In connection with our digital online gaming activities, Everi provides our games to business customers, including both regulated real money and social casinos, which offer the games to consumers through their online gaming platforms. Everi has developed its own remote gaming server (“RGS”) that allows us to deliver a selection of games from our extensive library of land-based and internally developed content to our digital customers in a manner that allows for the 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 games available for real money
gaming (“RMG”) that are offered to regulated online casinos that operate in the RMG regulated markets, and social games that are offered to our business customers that operate play-for-fun social casinos on their mobile apps and websites. We enter into revenue share agreements with these online business customers.
Gaming operations also include revenues generated by bingo solutions through consoles, integrated electronic gaming tablets and related systems.
Gaming Equipment and Systems
Gaming equipment and systems revenues are derived from the sale of some combination of: (i) gaming equipment and player terminals; (ii) game content; (iii) license fees; and (iv) ancillary equipment, such as signage and lighting packages.
Games Products
Our Games products
include:include mechanical and video reel games in Class II, Class III and HHR 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 Signature. The Player Classic Signature was launched in 2022 and is an update to the successful Player Classic cabinet. The cabinet has newer components and technology with more on-screen merchandising capabilities.
•Player Classic Reserve. The Player Classic Reserve launched in 2023 is a high-profile three-reel mechanical cabinet with an extensive top box that can incorporate a variety of premium content and secondary bonusing.
•Player Classic: These games leverage our long-standing experience in building enduring brands, such asBlack Diamond®andWild Wild Gems®, and feature a unique takeperspective on traditional slot games with eye-catching features. Super Jackpot Series features, such as Cash Machine™, a three-reel, one-line mechanical slot game that offers large linked progressives on the “win what you see” gameplay.
•Player Classic packagedSkyline: These games utilize common recognizable light sequencing in the top box in sync with the Foundation Sign to display rolling progressive meters and exciting win celebrations from across the casino floor. The premium Skyline mechanical reel series is a vintage-inspired bezel showcasing RGB lighting and a 24-inch LCD display, with successful titles including specific game themes such as Double Jackpot Gems Kingmaker, and Blazin’ Gems. OurTriple Double Patriot along with licensed brand strategy spans into Skyline with DreamWorks Animation®game themes such as Casper and Smokin’ Hot Stuff Stuff.
•Player Classic Revolve: Our premium linked products such as Cash Machine Jackpots and Casper.Gold Standard Jackpots builds upon the skyline cabinet and also includes a mechanical wheel top box and merchandising options for casino operators that can include overhead signage, and wedge kits.
Video Reel Games. We offer a growing range of dual-screen video reel games that provide a uniquely entertaining slot gaming experience. TheseBelow is a list of our video gaming cabinets and select games leverage the well-established Player HD and recently introduced, high-performing Core HDX cabinets to deliver eye-catching graphics and full, rich sound. Everi Way Pays games have been introduced to the market,on these platforms.
•Dynasty Vue.Dynasty Vue is our unique “square-like” low-profile portrait screen, released in partnershipMarch of 2023 with Lightning Box Games, for titles including More Fire, Silver Pride, and Great Tiger. A range of progressive features round out our game library,themes such as Must-Hit Jackpots™Octopus Gold and High Rollin Gems.
•Dynasty Sol. Dynasty Sol is our newest 49-inch portrait screen, released in Dream Catcher, Money Frog,December of 2023 with games such as Dynamite Pop and Egypt Twins;Destiny Link.
•Empire Flex. The Empire Flex cabinet, released in December 2019, is part of the Empire Cabinet Series. The cabinet features a 49-inch flexed monitor capable of supporting 4K content, an enlarged glass button deck, and curved LED light bars that are available in standard or extended options. The cabinet officially launched with two games that are part of the Jackpot Jump™ feature in Jackpot Inferno, Payday Jackpots, Golden Riches, Fire Jewels, Hearts of Egypt and Fiesta. Additional specialized game mechanics include Lightning Multipliers™ in High Voltage Blackout; Sticky Stacks™ in Butterfly Kingdom, Pixie Power, and Tiger Queen; Real Match™ feature on Start Magic and El DoradoWicked Wheel™ Series.
•Empire DCX. The Lost City; and Wild Match™ in Fortuna Goddess of Luck and Carnival in Rio Wild Match.Core HDX. The Core HDX enhances the player gaming experience with its dual widescreen 23” monitors with 1080p HD capability, integrated touchscreens and premium 3-way sound system. Its eye-catching cabinet commands a presence on the casino floor with game-controlled lighting and a custom premium LCD topper. 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 platform
Empire DCX is designed to be playable on the Core HDX. Empire MPX and The Texan HDX. The new Empire MPX represents both a premium participation cabinet and a single-screen, for salevideo cabinet that offers afeatures dual curved 43-inch monitor, full 1080p HD graphics capabilities, a fully-customizable touchscreen button panel,displays that support 4K content with integrated edge lighting, premium 4.1 surround sound, and a smaller footprint that allows for tighter pod banking configurations.
6
The Empire MPX debuted in April 2017 with the launch of the Company’s first video title on its WAP. The Texan HDX is an 8-foot tall cabinet with twin 42-inch video screens, featuring a two-person bench seat.enhanced game-controlled lighting. The cabinet is designed to showcase the available exclusively with licensed brand game themes having launched with Little Shop of Horrors Director’s Cut™ slot game.
Everi
Standard Video Library in oversized format, allowing the games to be prominently displayed on the casino floor.Wide Area Progressive. We debuted our first WAP in Class II markets in 2017. Spanning two product lines, our WAP is offered to customers on Player Classic and Empire MPX. The mechanical offering, Jackpot Lockdown, debuted with two themes: Jackpot Lockdown Mega Meltdown and Jackpot Lockdown High Voltage, and will have additional branded themes including Willie Nelson and Singing in the Rain available in 2018. Empire MPX features branded video content with Casablanca and Penn & Teller, all hitting the casino floor in 2017, and new titles, including Buffy the Vampire Slayer and South Park, expected to be delivered in 2018.
TournEvent®. FinTech
Our award-winning slot tournament system is a proven solution that allows operators to switch from in-revenue gaming to out-of-revenue tournaments with the simple click of a mouse. TournEvent®’s expansive tournament game library helps operators customize their tournaments, including providing unique bonus opportunities that improve scores or automatically move a player to first place. Casino operators can easily design and build a variety of flexible tournament formats, such as solo or team tournament play, session or round winner advancement, and cumulative or maximum scoring. The latest TournEvent®5.0 version includes new system enhancements that improve operator efficiencies and hardware and offers engaging tournament games that attracts players. New TournEvent® 5.0 features include:Automated Wild Card drawing and feature for potential round advancement that automates current tournament procedure and facilitates a smooth player selection process, utilizing overhead signage to quickly identify players who were randomly selected to advance.
Find Your Seat Helper that allows operators to preset a color for tournamentbanks/electronic gaming machines (“EGMs”), auto assign colors to players, and display player names on EGM screens, allowing players to quickly locate their assigned seats.
Automated VIP Filter that allows operators to filter a player database so that only select players will be automatically registered into tournaments when a player card is swiped.
On Deck Display feature that consists of three session panes, which continuously display player registrations in real-time and allow players to see who is in the current and future sessions.
New Skill Tournament Games with interactive bonuses:
| o
| Fruit Ninja® is an interactive game, much like the popular mobile app game that brings skill into slot tournaments.
|
| o
| Electric Diamonds features two new interactive bonuses, Pop Frenzy and Reel Frenzy.
|
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 Payments
Our PaymentsFinTech products and services include solutions that we provide directlyoffer to gaming establishmentsoperators to offerprovide their patrons with financial access and funds-based services supporting digital, cashless and physical cash accessoptions across mobile, assisted and self-service channels along with related servicesloyalty and marketing tools, and other information-related products including: and services.
We also develop and offer mobile-first applications aimed at enhancing patron engagement for customers in the casino, sports, entertainment, and hospitality industries. These solutions include:
•access to cash at gaming facilities via ATM cashdebit withdrawals, credit card cashfinancial access transactions, and POS debit card cash purchase at casino cages, kiosk and mobile POS devices;
•access transactions; check-relatedto cashless funding through the CashClub Wallet® and QuikTicket;
•check warranty services;
•self-service fully integrated kiosks and related maintenance services;
•self-service loyalty tools, promotion management software and loyalty kiosks and related maintenance services;
•compliance, audit, and data software;
•a credit bureau focused on casino credit with data and reporting servicesservices;
•marketing and promotional based services; and
•other ancillary offerings.The markets we address
We conduct our FinTech segment business based on results generated from the following major revenue streams: (i) Financial Access Services; (ii) Software and Other; and (iii) Hardware.
Financial Access Services
In connection with our
principal Payments products and services are:ATM Cash WithdrawalsFinancial Access Services, we offer the following:
Funds Dispensed. ATM cash withdrawalFunds dispensed transactions represent thethe largest categorycategory of electronic payment transactions that we process, as measured by dollardollars processed and transaction volume. In an ATM cash withdrawala funds dispensed transaction,7
a patron directly accesses funds from either a standalone ATM or a device enabled with our ATMfunds dispensing service by either using an ATM ora 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.credit, or disbursing funds authorized by a third party through direct application programming interface integration. In eitherany event, the patron must use the personal identification number (“PIN”) associated with such card.card or other accepted authentication method. Our processorsystem then routes the transaction request through an electronic funds transfer (“EFT”) network to the patron’s bank or card issuer, or through a third party system, as applicable.
Depending upon a number ofon several factors, including the patron’s account balance, ortheir credit limit andand/or the daily withdrawal limitlimits (which limits are often 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 ora 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, the our
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 reversethe 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 fee
that we receivereceived 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
establishmentoperator customers for the right to operate on their premises.
Funds Transmitted. Everi products are also able to transmit funds to a patron’s external bank account or other approved account from physical devices such as our kiosks or via the CashClub Wallet. These funds may be sent via ACH, the debit card networks, or direct connections with third parties. In all cases, Everi will either charge a fee to the casino operator or share in revenue from the patron where fees are presented to them for the service.
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 Payments.Everi. 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
financial 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’soperator’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.
Once atWe receive the
gaming establishment’s cashier or at our financial services center,transaction amount and the
patron acknowledges acceptance ofservice fee from the
fee. Wecard issuer, and we reimburse the gaming
establishmentoperator 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,
we generallywill pay the gaming
establishmentoperator a portion of the service fee
we collected as a commission for the right to operate on its
premises, although this payment as a percentage of the fee is generally smaller for credit card cash access and POS debit card cash access transactions than for ATM withdrawals. In addition, wepremises. 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-Related
Check Warranty Services. Patrons are ableEveri provides a check warranty service that allows gaming operators 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 at a gaming operator, the gaming establishment can accept or denycheck and patron information is sent through Everi’s system to our third-party partner. The partner evaluates 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 relatingreturns to the check to manage its risk, or obtaincashier 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 chooses to havelimit 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,8
the gaming establishment invokes the warranty, andoperator that subscribes to the check warranty service, provider purchasesEveri will warranty any dishonored check that was approved, eliminating any risk of loss on check acceptance for the gaming operator. 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.
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 currently 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. any checks.
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
establishmentsoperators 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.
Our principal Payments products and services consist of the following:
Casino Cash Plus 3-in-1 ATMs are unmanned, cash-dispensing machines
CashClub® is a software payments platform 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 transaction or a credit card cash access transaction instead.Check Verification and Warranty Services allowprovides gaming establishments to manage and reduce risk on patron checks that they cash. A gaming establishment can query our Central Credit database to review the check cashing history of a gaming establishment patron before deciding whether to cash the patron’s check. If the gaming establishment desires additional protection against loss, it can seek a warranty on payment of the check. We have a relationshipoperators with a third-party check warranty service provider to market check warranty services to gaming establishments.
CashClub® provides gaming establishments with a single dashboardpersonal computer workstation software user interface and point-of-sale terminal that streamlines credit and debit card cashfinancial access transaction processing and check warranty transactions.transactions for casino patrons. It allows for electronic signature capture and dynamic currency conversion. Several mobile versions, such as CashClub Concierge, are also available that enable operators to serve their patrons when, where, and how they are needed. 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.
Fully Integrated Kiosks are
CashClub Wallet® is a complete linedigital payments platform for gaming operators to offer their patrons a digital cashless method to fund their entertainment experience, including funding at the gaming device, payments at point of productssale for retail, online, hotel and food/beverage, igaming, and sports wagering. The wallet allows patrons various funding options including credit card financial access transactions and POS debit card financial access transactions, Automated Clearing House, and E-Check check warranty. It also interfaces with our Everi Compliance solutions (defined below) to assist casino operators with meeting regulatory requirements under Title 31 of the Bank Secrecy Act. The wallet also has capabilities to integrate with our Loyalty platform including our Enrollment and Promotional kiosks.
Software and Other
JackpotXpress 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 (“KYC”) checks. It is fully integrated with our Everi Compliance, CageConnect, 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.
Loyalty Platform provides a software platform that enables 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 applications to engage with patrons in a more relevant and personalized fashion. We provide multiple functionsthe operators with a control panel to assist with the planning, personalization, and optimization of delivering messages and content via interactions within our platform depending on how much value 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 patrons at locations that are usually closer to gaming devices than traditional cash access devices that are typically locatedplaces on the periphery ofpatron. This allows our customers to unify the gaming areapatron experience across all touchpoints within the casino floor and also 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 other Everi applications for financial access and compliance tools.
Maintenance provides various levels of support and maintenance services for our fully integrated 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 Anti-money Laundering (“AML”) management tool for the gaming patrons with more opportunities to access their cash with less cashier involvement.Other Integrated Kiosk Solutions provide casinos with more efficientindustry. Everi Compliance encompasses many elements including filing Suspicious Activity Reports (“SARs”) and streamlined methods for cash handlingCurrency Transaction Reports (“CTRs”), and transaction processing. They allow casino personnel to immediately process and dispense taxable jackpotsassisting our customers in performing KYC activities. Everi Compliance automates much of the form of cash, tickets or a combination of both. They also help to improve cage security and accuracy while reducing count and balancing times. These products are designedmanual processes gaming operators employ to be integratedcompliant with our suite of cagethose requirements, thus saving time, improving accuracy, and allowing operators to manage their compliance softwareprograms much more efficiently. In addition, Everi Compliance gives operators the ability to ensureenter Multiple Transaction Log and Negotiable Instrument Log transactions, file Financial Crimes Enforcement Network (“FinCEN”) reports electronically, conduct transaction analysis, complete compliance with anti-money laundering regulationsaudits, and provide an automated way to process common tax forms such as the Internal Revenue Service Form W-2G or Form 1042-S.
review reports.
Central Creditis our gaming patron credit bureau service which, on a subscription basis, allows gaming establishmentsoperators 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 of9
comprise information recorded from
patron credit histories at hundreds of gaming
establishments.operators. We provide such information to gaming
establishmentsoperators that subscribe to the service. These
establishmentsoperators 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.
Everi Compliance
Mobile-first Applications is centered around the BeOn™ Mobile platform. Fortified by the 2022 asset acquisition of Venuetize, Inc., a leading mobile platform provider in the sports, entertainment, and hospitality industries, we now have products and services formulated for casino operators, sports teams and other venues going through their mobile digital transformation. By offering turn-key solutions that simplify the entire process of the customer journey, digital offerings like our suitemarketing technology associated with it, a mobile app now becomes a powerful tool for any casino operator or venue owner.
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”). 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 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 offerings for gaming operators. Theseensuring compliance solutions help our gaming establishment customers comply with financial services and gaming regulations. These compliance solutions include software to assist with anti-money laundering regulations, and provide an automated way to process common tax forms, such as filing currency transaction reports (“CTRs”) and suspicious activity reports (“SARs”). Additionally, these compliance solutions also assist casinosthe Internal Revenue Service Form W-2G or Form 1042-S. In addition, we offer hardware in filing required tax forms in connection with the payoutform of jackpot winnings to patrons and assist casinos with auditing cash on the floor and in casino cages.We also offer:
Stand alone, non-ATMstandalone, non-funds dispensing terminals that perform authorizations for credit card cashfinancial access and POS debit card cashfinancial access transactions.
Our kiosk solutions include the following products:•JackpotXchange family of kiosks, JXC 4.0, andJXC-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.
•CageConnect is a cash dispensing device that helps streamline casino cage operations. With CageConnect, 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. CageConnect is integrated with CashClub® to create an efficient transaction for casino patrons.
•Our Cash Recycling Solutions allow casinos to fully automate the check in and check out process of money, saving time and expense. As gaming operators vary in size and complexity, these Cash Recycling Solutions support a number of diverse operations such as retail, food and beverage, entertainment, and gaming operations.
Loyalty Kiosk and Related Equipment provide gaming operators with self-service loyalty enrollment, player card issuance, and marketing equipment that manages and delivers a gaming operator’s marketing programs through the patron interfaces. This loyalty-related equipment allows the customer to utilize and interact with the loyalty platform as the central hub for all the marketing offerings.
Database•Enrollment Kiosk is a self-service kiosk that allows casino patrons to either sign up for an initial loyalty card or print a replacement card. These kiosks provide an enhanced level of customer service when the club desk is busy or closed by creating patron self-service locations throughout the casino floor without costly infrastructure or additional overhead costs. Such kiosks also assist with updating contact information of card holders and to verify 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 better 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 content.
Sales
As of December 31, 2023, we served more than 2,800 casinos and other gaming properties primarily in the United States, Canada and Australia, with additional customers in the United Kingdom, Europe, the Caribbean, Central America, and Asia.
In our Games and FinTech businesses, we sell and market our products and services that allowprimarily through direct sales force, which targets regulated gaming establishments access to information from our proprietary patron transaction database for purposesoperators in the United States, Canada, and in certain international markets. Our sales and marketing efforts are directed by a team of player acquisition, direct marketing, market share analysis, and a varietycustomer service executives, each 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.
An online payment processing solutionwhom has business development responsibility for gaming operators in states that offer intra-state, internet-basedspecified geographic regions. These customer service executives direct their efforts at various gaming operator personnel, including: senior executives, finance professionals, marketing staff, slot directors, and lottery activities.
Manufacturing
We utilize contract manufacturerscashiers, and seek to produceeducate them on the cabinets that make up our EGMs and our kiosk products, as well as other sub-assemblies. We have assembly facilities in Austin, Texas and Las Vegas, Nevada, where we assemble 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 sourcesbenefits of supply of component parts and raw materials for 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. In other cases, our sales executives directly maintain the customer relationships. These customer service executives and field service and customer engagement teams generally adequatereside in the vicinity of the specific gaming operators they support to provide a prompt response to the needs of those gaming operators. In some situations, we also have joint sales efforts with several strategic partners, including independent sales organizations, which allow us to market our products and we have few sole-sourced parts.
Research and services to gaming operators through channels other than our direct sales force.
Markets
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, gaminggame 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, as well asand to add enhancements toenhance 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
game lab testing fees. Once the technological feasibility
of a project has been established,
the project is capitalized until it
is transferred from research to development and capitalization of development costs begins until the product isbecomes available for general release.
Research and development costs were $18.9 million, $19.4 million and $19.1 million for the years ended December 31, 2017, 2016 and 2015, respectively.Customers
As of December 31, 2017, we served over 1,000 casinos and other gaming properties in the United States, 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.
10
Sales and Marketing
In our Games business, we sell and market our products and services to gaming establishments primarily through the use of a direct sales force, which targets gaming establishments in the United States and in international markets.
Competitive Conditions
With respect to
our gaming products, we participate in the Class III and Class II gaming machine markets, as well as 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. Revenues from our operations outside the United States were 4.7%, 3.7% and 2.9% for the years ended December 31, 2017, 2016 and 2015, respectively. All of our long-lived assets outside of the United States were immaterial for each of fiscal 2017 and 2016.In our Payments business, we sell and market Cash Access (Cash Advance, ATM and Check Services), Kiosks Sales and Services, Compliance Sales and Services and Central Credit Services. For the year ended December 31, 2017, approximately 95% of our revenues were earned from North American sources, while the remaining 5% were derived internationally.
Our 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 all 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 account managers, who provide on-site customer service to most of our customers. In other cases, our sales executives directly maintain the customer relationships. These customer service executives and field service and account managers generally reside in the vicinity of the specific gaming establishments that they support to ensure that they respond to the customer service needs of those gaming establishments. 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.
Competition
In 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 to end users, we continually work to develop a consistent pipeline of new game themes, gaming engines,game platforms, hardware platformscabinets, 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.
In
With respect to our
PaymentsFinTech 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)(i) other manufacturers that provide similar goods and services; (ii) independent sales organizations, which provide basic services
andoften at aggressive pricing;
(b) other manufacturers that provide similar good and
services; 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.
Proprietary Rights
In addition to competing with various providers of financial access services, FinTech experiences competition from either those same providers or standalone providers of AML compliance products and self-service kiosks for ticket and jackpot redemption.
Resources
Manufacturing
We have assembly facilities in Las Vegas, Nevada and Sydney, Australia, 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 had assembly facilities in Austin, Texas until we transitioned to our new assembly facility in Las Vegas, Nevada during the fourth quarter of 2023.
We believe that our sources of supply of component parts and raw materials for our products are generally adequate. 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,operators, 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.
11
We rely on a combination of patents, trademarks, copyrights, trade secrets, and contractual restrictions to protect our intellectual property. In our business, we have over 250 patents issued related to games and systems and processes, and have more than 50 patent applications pending world-wide. 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 productsproducts and have registered hundreds of trademarks in the UnitedUnited 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 equipment 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.Employees
Human Capital
Composition of our Workforce
As of December 31, 2017, we had2023, Everi employed approximately 1,100 employees. We believe that our relations with our employees2,200 people, a vast majority of whom work in the United States. Approximately 1,000 people are good. We have never experienced a work stoppageemployed within the Games segment and noneapproximately 1,200 people are employed within the FinTech segment. None of our employees are subjectparty to a collective bargaining agreement.Available Information
Our website address is www.everi.com. We make available freeagreement and we have had no labor-related work stoppages.
Culture of chargeour Workplace
In 2023, we reaffirmed our mission statement and continued to focus on our websiteemployees’ collective imagination, talent, and innovation with our Annual ReportsCompany’s objectives. 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 Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K,these values consistently, we H.A.V.E. (v) Fun! We live these values by investing in programs and all amendmentsimplementing standards to those reports filed or furnished pursuant to Section 13(a) or 15(d)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 Exchange Act,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 apply the Company “WHY” that puts our employees and their success front and center:
Elevate the Success of:
•Everi Employee
•Everi Customer
•Everi Day!
Diversity and Inclusion
At Everi, one of our fundamental values is inclusion, a principle we actively embrace and embody in our daily operations. We firmly believe that our strength lies in the diversity of our employees, customers, and the communities we serve. This belief drives our commitment to being an equal opportunity employer dedicated to fostering a diverse and inclusive work environment.
We work to uphold a workplace where every employee is treated with dignity and respect, free from any form of harassment or discrimination. Our policies and practices are designed to support a safe and supportive environment for all, regardless of race, color, age, gender, disability, sexual orientation, or any other protected characteristic. By steadfastly adhering to these principles, we not only honor our commitment to diversity and inclusion but also enhance our ability to innovate, understand our customers, and succeed as soona company.
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 reasonably practicable after such reports are electronically filed with, or furnisheda top priority and expectation; (iii) focusing resources on recruiting and retaining qualified employees from diverse backgrounds; and (iv) continuing to build awareness of the SEC.importance and benefits that diversity and inclusion provides to our Company and
employees. In addition, our earnings conference callsCompensation Committee and Nominating and Governance Committee oversee initiatives and metrics concerning human capital management, including corporate culture, diversity, acceptance, inclusion, and attracting and retaining talent.
Our commitment to fostering a diverse and inclusive workplace is reinforced through mandatory company-wide training. This program is designed to address key challenges in advancing inclusion and supporting diversity, with a focus on understanding and mitigating unconscious bias and micro-inequities. Recognizing the pivotal role of hiring managers in promoting diversity, we have implemented specialized training for them. This training is aimed at building a foundational awareness of how biases influence decision-making, examining their effects on the selection process, and highlighting the advantages of bias-free hiring practices. Leadership by example is crucial in these efforts. Our executive leadership team leads the way, having participated in training focused on inclusive leadership. We take this top-down approach so that our commitment to diversity and inclusion is not only preached but also practiced at every level of our organization.
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 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. As a result of the success of the WLI initiative, we have expanded the program company wide and rebranded it as the Everi Leadership Initiative.
At Everi, we place great importance on recognizing and celebrating the rich and diverse heritage of our employees, customers, and the communities we serve. Throughout the year, we dedicate ourselves to various heritage celebrations, holidays, and commemorative events. Our approach includes engaging our employees through educational webinars and guest lectures, which are web cast live via our website. designed to build awareness and foster a deeper understanding of different cultures and traditions.
In addition to visitinginternal initiatives, our website, you may readcommitment extends to the communities around us. We actively support local charitable organizations that provide essential services and copy any documentsupport. These donations are a vital part of our engagement, reflecting our dedication to not only acknowledging diversity but also contributing positively to the communities where we fileoperate. Through these efforts, Everi strives to create an inclusive environment that values and celebrates the unique backgrounds and experiences of all individuals connected to our company.
Employee Engagement
At Everi, our core values of Inclusion and Collaboration, are at the forefront of our efforts to foster ongoing dialogue with our employees. Recognizing that over 70% of our workforce operates outside of an office, we understand the critical importance of maintaining robust employee engagement and providing avenues for employee input. To achieve this, we employ a variety of feedback mechanisms. These include annual employee surveys, regular company-wide email communications and periodic town hall meetings. These platforms serve a dual purpose: they not only disseminate crucial company updates from our leadership but also provide opportunities for active employee participation and involvement.
Our leadership team takes a hands-on approach to addressing the feedback received through these channels. This practice is a testament to our commitment to not just listen, but to act on employee input, working to foster a culture where every voice is valued and can lead to tangible, positive changes. This approach has been met with success, as evidenced by a notable increase in our employee satisfaction scores in 2023 compared to 2022.
In 2023, Everi proudly continued its recognition as an exemplary employer through various prestigious programs. Participating in both the 'Top Workplaces' and 'Great Place to Work' initiatives, we benchmark our employee experience against thousands of organizations nationwide. This year, the Company was honored with seven distinct national awards, underscoring our employees' confidence in our leadership, employee well-being, and
innovation among others. Notably, we maintained our status as a Nevada Top Workplace and again secured the Greater Austin Top Workplace title. Our overseas Technology Development Centers also continued their streak as a Great Place to Work in India. This marks the third consecutive year of Everi being recognized as both a Top Workplace and a Great Place to Work, a testament to our unwavering commitment to fostering an exceptional work environment.
Employee Development and Training
Everi is dedicated to fostering the growth and development of our employees through a multifaceted training program. We provide specialized leadership training and development courses for newly hired or promoted leaders, equipping them with the SECskills necessary for their new roles. Additionally, our online learning platform offers an extensive catalog of courses accessible to all employees. This catalog covers a broad spectrum of topics, essential for both leadership and professional development. Key areas include conflict management, effective delegation, understanding unconscious bias, recognizing team achievements, and techniques for coaching and delivering constructive feedback.
Recognizing the importance of holistic development, our program also includes training in vital soft skills. Courses on emotional intelligence, email etiquette, and developing a professional presence are designed to support each employee's personal and professional journey. We believe that investing in such diverse training opportunities not only enhances individual capabilities but also contributes significantly to the overall success and culture of our organization.
Talent Acquisition and Diverse Recruiting
The Recruitment Team at Everi is dedicated to sourcing talent from a wide array of channels, particularly recognizing the SEC’s Public Reference Room at 100 F. Street NE, Washington, D.C. 20549increasing prevalence of remote work. By leveraging advanced tools and systems, we minimize geographic limitations, thereby broadening our talent pool. This approach is especially beneficial in today’s competitive job market, allowing us to fill a variety of roles, including those requiring specific, in-demand skills. We are regularly enhancing our recruitment strategies to identify and attract new, untapped talent, supporting the growth and diversification of our business.
At Everi, we understand that creativity and innovation are the fruits of diverse backgrounds and perspectives. To foster a more diverse workplace, we employ a blind resume screening process for initial applicants. This method focuses on evaluating talent, experience, and qualifications without the influence of certain demographic information to help provide a fair and unbiased selection process. Additionally, we are proactive in expanding our reach to new candidates. A dedicated member of our Recruitment Team actively collaborates with various educational institutions, professional associations and student organizations. This collaboration not only provides support and information to diverse groups of students and job seekers but also helps us discover potential candidates for our open positions. Through these efforts, we are committed to nurturing an inclusive and dynamic workforce that reflects the diverse world in which we operate.
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.
At Everi, we seek to recognize the diverse needs of our workforce and have tailored our benefits program accordingly. We aim to provide competitive and comprehensive options that are both valuable and accessible to our employees. Our benefits package encompasses a wide range of offerings. These include extensive medical, dental and wellness programs, flexible time-off plans and paid holidays, flexible spending accounts, and a 401(k) retirement plan complimented by a company match on employee contributions. Additionally, we offer financial wellness services to support our employees’ overall financial health.
To align our benefits with our employees' needs, we conduct an annual employee benefits survey. This survey serves as a crucial tool for gathering feedback directly from our employees. We actively use this input to refine and
enhance our benefits offerings, demonstrating our commitment to regularly improving the work-life balance and overall satisfaction of our workforce.
Everi strives to be steadfast in its commitment to adhering to relevant laws and regulations concerning workplace health and safety, as well as emergency and disaster recovery protocols. Our approach is proactive and informed, as we consistently draw upon the expertise of leading national health organizations. This strategy is integral to our operations, particularly in navigating the macroenvironment and its challenges. Our primary objective is safeguarding our employees, protecting them from potential harm. By staying abreast of and responsive to the latest guidance and best practices, we strive to maintain a safe and secure working environment for all.
Seasonality
Our revenues and cash flows may fluctuate throughout the year driven by seasonality, among other factors. Historically, we have generally experienced higher operating income during the first half of a year and lower operating results during the second half of a year; however, such fluctuations do not have a material impact on our revenues and cash flow.
Government Regulation
General
We are subject to a number of gaming and financial institution laws and regulations and believe that we are in substantial compliance with these laws and regulations. We have designed a diligent internal compliance program governing our business activities, as well as legal requirements generally applicable to 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 an independent member. While 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
at www.sec.gov. Please callcompetitive position. Despite our compliance efforts, we can give no assurance that our business activities or the
SEC at 1-800-SEC-0330 for information onactivities of our customers in the
Public Reference Room.REGULATION
gaming industry will not be subject to any regulatory or legal enforcement proceedings in the future.
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 establishmentsoperators, the manufacture and distribution of gaming devices, as well as certain financial services conducted at such establishments. These gamingoperators. The stated policies and other purposes behind such laws, regulations, and ordinances require usare generally to: (i) secure 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 be licensed, registered, found suitable, qualified or otherwise approvedwhich 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.business as either a: (i) manufacturer of gaming devices, in those jurisdictions where we manufacture gaming devices and systems; (ii) distributor of gaming devices, in those jurisdictions where we distribute gaming devices and systems; (iii) supplier of “associated equipment,” in those jurisdictions where we sell and service fully integrated kiosks and other integrated kiosk solutions; and (iv) non-gaming supplier or vendor, in those jurisdictions where we provide financial access and Central Credit services only. We must maintain those licenses, registrations, or other approvals in good standing to continue our business, all of which generally impose certain: (i) financial and operational reporting, and oversight requirements; and (ii) character and fitness suitability requirements, in each case administered by the Gaming Authorities, upon us and our affiliated or subsidiary organizations, as well as the officers, directors, key personnel and, in certain instances, holders of our debt or equity securities in each of those organizations, and our material business associates.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.In general,
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
licensure, qualificationregulators as to our suitability as a manufacturer, distributor, supplier, or vendor to gaming operators. Authorities have broad discretion and
approval requirementsmay 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
the regulations imposed on non-gaming suppliersbe 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,
vendors are less stringent than those requirements and regulations imposed on gaming operators, gaming-related manufacturers and suppliers. However,in some jurisdictions,
do not distinguish between non-gamingnon-voting securities, to report the acquisition to Gaming Authorities, and
gaming suppliers and vendors while other jurisdictions classify allGaming Authorities may require such holders to apply for qualification or a finding of
our products and services as gaming-related. In those jurisdictions which classify our products and services as gaming-related, we aresuitability, subject to
the more stringent licensing and regulatory framework. The stated policies and otherlimited exceptions for “institutional investors” that hold a company’s voting securities for investment purposes
behind such laws, regulations, and ordinances are generally to: (i) ensure 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.12
Moreover, ouronly.
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.
We believe Moreover, there are no guarantees that we arewill be successful in substantial compliance withobtaining and maintaining all materialnecessary licenses, permits, and approvals; or in continuing to hold other necessary gaming licenses, permits, and financial institution laws applicableapprovals to conduct our business. 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 gaming lawsbusinesses either as currently being conducted by us or any ofto expand 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.
A description of the material regulations to which we are subject is set forth below.
Federal Regulation. At the federal level, we are subject to two key pieces of legislation. 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
(the “IGRA”(“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:
| | | | | | | | | | | | | | |
| 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.
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.
State and Tribal Gaming Commissions. We are regulated by gaming commissions or similar authorities at the state or tribal level 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 cash access and Central Credit services only. Such commissions or similar authorities may include: Nevada Gaming Commission and Gaming Control Board, Mississippi Gaming Commission, Indiana Gaming Commission, Illinois Gaming Board, New Jersey Casino Control Commission, New Jersey Division of Gaming Enforcement, Iowa Racing and Gaming Commission, the Kansas Lottery Commission, the Kansas Racing and Gaming Commission, the Louisiana State Gaming Control Board, the Louisiana State Racing Commission, as well as other various federal, state and local government entities and agencies.
13
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. Such suitability examinations may also generally include the following:
requiring the licensure or finding of suitability of any of our officers, directors, key employees, or beneficial owners of our debt or equity securities as well as our key third-party vendors, suppliers, customers, and other companies with whom we conduct business;
the termination or disassociation with such officer, director, key employee, or beneficial owner of our securities that fails to file an application or to obtain a license or finding of suitability and prohibiting unapproved payments and distributions to such persons;
the submission of detailed financial and operating reports;
the submission of reports of material loans, leases, sales of securities, and financings; and
the regulatory approval of certain material transactions, such as the merger with or acquisition of other companies, the transfer or pledge of our stock or other equity interests or restrictions on transfer of such interests, or similar financing transactions.
These regulatory obligations are imposed upon gaming-related manufacturers, suppliers, or vendors on an ongoing basis, and there are no guaranties that we will be successful in obtaining and maintaining all necessary licenses, permits, and approvals and to continue to hold other necessary gaming licenses, permits, and approvals to conduct our businesses as currently being conducted by us. The expansion of our businesses, the introduction of new games, systems, products or services, or changes to applicable rules and regulations may result in additional regulatory or licensing requirements being imposed upon us. Many Gaming Authorities will require us to submit software and other key technology components of our gaming devices and systems, as well as our fully integrated kiosks and other integrated kiosk solutions, to government or third-party gaming laboratories for testing and certification prior to deploying such games, systems, and devices in a particular gaming jurisdiction.
Gaming regulatory authorities 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 of voting securities of a 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. If a beneficial holder of our securities is a corporation, partnership, or trust, such entity must submit detailed business and financial information, which may include information regarding its officers, directors, partners, key personnel, and beneficial owners. Further disclosure by those officers, directors, partners, key personnel, and beneficial owners may also be required. Under some circumstances and in some jurisdictions, an institutional investor, as defined in the applicable gaming regulations, that acquires and holds a specified amount of our securities in the ordinary course of its business may apply to the regulatory authority for a waiver of these licensure, qualification, or finding of suitability requirements, provided that the institutional investor holds the voting securities for investment purposes only, meets certain thresholds relating to the number of securities held, and certifies as to its intentions not to directly or indirectly exert control or influence over the management, policies, and operations of the licensed entity or to change its corporate governance documents.
Tribal-State Compacts and Tribal Regulation. Native American gaming is subject to certain federal and tribal laws, rules, and regulations, including, for purposes of illustration and without limitation, IGRA. IGRA is the federal enactment that created the NIGC, which is vested with the authority to regulate gaming activities conducted by federally-recognized Native American tribes on Indian lands. Tribal legislation regarding gambling operations on Indian lands must be approved by the NIGC and, in certain instances, compacts are required to be executed between Native American tribes and the state governments proximate to such Indian lands. Native American tribes must adopt and submit for NIGC approval the ordinances that regulate their gaming activities. Pursuant to the requirements of IGRA, our tribal customers require the tribe to have the sole proprietary interest in their gaming
14
activities, and management contracts and collateral agreements in which tribes transfer authority to a third party for purposes of controlling all or part of the gaming operations are subject to the express review and approval of the NIGC. Because federally recognized Native American tribes are considered “domestic dependent nations” with certain sovereign rights, Native American tribes can enact their own laws and regulate gaming operations and contracts, and, with some exceptions, 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.
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.
Charity Regulation
The Johnson Act. We have historically supplied bingo gamesThe 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 systemsrequires a wide variety of record keeping and equipment identification efforts on our part. Registration is required for us to nonprofit organizations that operate these games for charitable, educational and other lawful purposes. Bingo for charity is notsell, 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 nationwide regulatory system, such asvariety of penalties, including, but not limited to, the system created by IGRA to regulate Native American gaming,seizure and as a result, regulation for this market is generally on a state-by-state basis, although in some cases it is regulated by county commissions or other local government authorities.Lottery Commissions. Most states and the Districtforfeiture of Columbia have lotteries. The operation of lotteries is subject to extensive regulation. Many aspects of lottery operations are determined by state or local legislation, but lottery regulatory authorities exercise significant discretion to ensure the integrity of contract awards and lottery operations, including in the process of selecting suppliers of equipment, technology and services and retailers of lottery products. Lottery regulatory commissions typically require detailed background disclosure by and investigations of vendors and their subsidiaries, affiliates, principal stockholders, officers, directors, and employees who will be directly responsible for the operation of lottery systems. These regulators may have authority to order removal of employees who they deem to be unsuitable or whose presence they believe may adversely affect the operational security or integrity of the lottery. Some lottery commissions mandate extensive personal and financial disclosure and background checks from persons and entities beneficially owning a specified percentage (typically 5% or more) of a vendor’s securities. The failure of such beneficial owners of our securities to cooperate with the regulators could result in penalties, jeopardize the award of a lottery contract to us, or provide grounds for termination of an existing lottery contract.
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. This is due, in part, to: (a) a rule of construction contained within the Unlawful Internet Gaming Enforcement Act (“UIGEA”) that limits and prevents UIGEA application from altering, limiting or extending any federal, state or tribal laws regulating gambling; (b) a definition within UIGEA that excludes certain intra-state, intra-tribal and interstate horseracing transactions from the phrase “unlawful Internet gambling,” provided certain threshold requirements are met; (c) a memorandum dated September 20, 2011 and published by the United States Department of Justice, Criminal Division, in which the Department concludes, among other things, that the Federal Wire Act of 1961 (the “Wire Act”) does not apply to interstate transmissions of wire communications that do not relate to a sporting event or contest; and (d) traditional constitutional jurisprudence originating from the Commerce Clause of and Tenth (10th) Amendment to the United States Constitution and preemption jurisprudence, among others. To date, several states such as Delaware, Georgia, Illinois, Michigan, Nevada, New Jersey, New York, North Carolina, North Dakota and Pennsylvania have authorized some form of internetInternet or online gaming or lottery activities.
However, the legislative and regulatory environment surrounding online, wager-based games in the United States remains uncertain and complex, and it is unclear how the legislative and regulatory framework governing these activities willmay continue to evolve in the future. Many states have yet to introduce or finalize regulations regarding the licensing and operational requirements regarding online, wager-based activity, including the licensing and technological requirements relating to the funding and processing of payments relating to online, wager-based casino and lottery games. In addition, the funding of online casino gaming activity is subject to the requirement of the UIGEA, which15
may prohibit or significantly impede the funding of online, wager-based gaming activity. There is also a possibility that the Wire Act may be amended in the future to prevent or prohibit the use of Internet or mobile-based platforms regardless of the involvement of a sporting event or contest or that the United States Department of Justice may amend, modify, rescind, or otherwise alter its previous memoranda and that such action may result in a materially different interpretation of the Wire Act, which may result in civil or criminal enforcement actions.
Financial Services Regulation
Our
PaymentsFinTech business is also subject to
a number ofseveral 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 establishmentoperator customers are required to file a 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.patrons. 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 establishmentoperator customers, in situations where our cashfinancial access services are provided through gaming establishmentoperator cashier personnel, and we, in situations where we provide our cashfinancial access services, through a financial services center, are required to file a 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. When we issue
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
sell drafts for currency in amounts between $3,000other 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
$10,000, we maintain a record of information about the purchaser, such as the purchaser’s address and date of birth.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.
Check Cashing. In jurisdictions in which we may provide check cashing services, we are required to be licensed by the applicable state banking regulator at the appropriate level for the services we deliver. 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.
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
Fair Credit Reporting ActFCRA and the
Fair and Accurate Credit Transactions Act of 2003.16
FACTA.
Debt Collection. We currently outsource most of our debt collection efforts to third parties. However, we domay 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 Gramm-Leach-Bliley ActGLBA 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.ATM In addition, we are 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 certain requirements regarding data privacy and security.
Funds 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 a check casher, 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”)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.
17
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. Difficulties in obtaining approvals, licenses
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 waivers fromfurnished, pursuant to Section 13(a) or 15(d) of the gaming and monetary authorities, inExchange 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 other potential regulatory and quasi-regulatory issues thatvisiting our website, you may read documents we have not yet ascertained, may arise in other international jurisdictions into which we wish to enter.file with the SEC at www.sec.gov.
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
We have recorded net losses in each of the last three fiscal years and we may not generate profits in the future.
We had net losses of $51.9 million, $249.5 million and $105.0 million for the years ended December 31, 2017, 2016 and 2015, respectively. As a result of the interest payments on the indebtedness incurred in connection with Everi Holdings’ purchase of Everi Games Holding in December 2014 (the “Merger”), amortization of intangible assets associated with the Merger and other acquisitions, other related acquisition and financing costs, asset impairment charges and depreciation and other amortization, we may not be able to generate profits in the future. We expect to continue to incur charges in the future in connection with the Merger and future acquisitions and we cannot assure you that we will generate net profits from
Overall
•Our operations in 2018 or subsequent years. Our ability 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 marketsand to new customers in existing markets and retain our existing customers;
develop new games or license third party content in our Gamesare dependent upon business and develop new products and services in our Payments 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 so could have a material adverse effect on our business, financial condition, operations or cash flows, which could, among other things, affect our ability to make payments under our New Credit Facilities (defined herein) or the 2017 Unsecured Notes (as defined herein).
18
Our substantial leverage could adversely affect 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.
As of December 31, 2017, 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:
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.
We may not be able to generate sufficient cash to service all of our indebtedness, including the New Credit Facilities and the 2017 Unsecured Notes, 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 and, 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, foreclose against the assets securing the borrowings under the New Credit Facilities, and we could be forced 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.
19
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 2017 Unsecured Notes contain a number of significant restrictions and covenants that limit our ability 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;
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, 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. If we violate this covenant and are unable to obtain a waiver from our lenders, our debt under the New Credit Facilities would be 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.
If 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.
Our net operating losses and other tax credit carry forwards are subject to limitations that could potentially reduce these tax assets.
As of December 31, 2017, we had tax effected federal and state net operating loss (“NOL”) carry forwards of approximately $74.1 million and $13.1 million, respectively, federal research and development credit carry forwards of approximately $6.0 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 in 2022. The state net operating loss carry forwards will expire between 2018 and 2038. 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 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. As we are in a cumulative loss position, we increased our valuation allowance for deferred tax assets by $2.3 million (net of a reduction for the decrease in the US federal corporate tax rate) during 2017, related to these NOL and other tax credit carry-forwards. 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 allowance and may be subject to record an additional valuation allowance in the future.
20
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 recently passed Tax Cuts and Jobs Act of 2017 (“2017 Tax Act”) could adversely affect our business and financial condition.
The 2017 Tax Act, among other changes, makes a US federal net operating loss less valuable as an asset due to a new flat US federal corporate income tax rate of 21%, replacing a graduated rate with a maximum income tax rate of 35%, effective January 1, 2018. Net operating losses arising in taxable years beginning after December 31, 2017 are limited in use to offset eighty percent of taxable income, without the ability to carryback such net operating losses, but with an indefinite carryforward of such losses (instead of the former 2 year carryback and 20 year carryforward for net operating losses arising in taxable years beginning before December 31, 2017). The amount of the net US 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. We continue to examine the impact this tax reform legislation may have on our deferred tax assets and our business. Notwithstanding the reduction in the corporate income tax rate, the overall impact of the 2017 Tax Act is uncertain and our business and financial condition could be adversely affected.
We may experience network or system failures, or service interruptions, including cybersecurity attacks or other technology risks. Our inability to protect our systems and data against such risks could harm our business and reputation.
In the course of providing our cash access services, we engage third-party processors, data center providers, telecommunication networks and other third-party technology vendors. In addition, we gather, as permitted by law, non-public, personally-identifiable financial information from patrons who use our cash access services, such as names, addresses, telephone numbers, bank and credit card account numbers and transaction information, which may be routed through our third-party vendors. We are required by law to safeguard and protect the privacy of such non-public personal information and we take such responsibilities seriously, which we demonstrate by carefully vetting the third parties we choose to provide technology services to us.
In the course of providing our gaming related products and services, we engage third-party processors, data center providers, telecommunication networks and other third-party technology vendors. In the event our EGMs are compromised, gaming establishments may require us to remediate any abnormality or suspicious activity or require us to indemnify casino operators for lost business and, potentially, their patrons. This may have cascading implications across our network security platform and information technology infrastructure that could require greater management and employee focus on these issues, resulting in lost productivity and increased costs. We also could be subject to liability claims or regulatory compliance implications.
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 may also 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, but 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, and are hard to defend against. Our defensive measures, and those employed by our third-party vendors, may not be sufficient to defend against all such methods, and any such failure to defend could lead to interruptions or outages of our services, delays, loss of data or public release of confidential data. In some instances, such failures could cause us to fail to meet contractual deadlines or
21
specifications and force us to renegotiate contracts on less favorable terms, pay penalties or liquidated damages or suffer major losses if the customer exercises its right to terminate. We are parties to certain agreements that could require us to pay damages resulting from loss of revenues if our systems are not properly functioning or as a result of a system malfunction. For example, our agreement with the New York State Gaming Commission permits termination of the contract at any time for failure by us or our system to perform properly, and any such unforeseen downtime could subject us to liquidated damages. In addition, if we fail to meet the terms specified in our contracts, we may not realize their full benefits. Failure to perform under any contract could result in substantial monetary damages, as well as contract termination. We also could be subject to liability for claims relating to misuse of personal information in violation of contractual obligations or data privacy laws. In addition, we cannot provide assurance that the contractual requirements related to the security and privacy that we impose on our third-party vendors who have access to this data will be followed or will be adequate to prevent the misuse of this data.
Any of the issues described above, whether experienced by us or a third-party vendor, could harm our reputation, deter existing and prospective customers from using our services, increase our operating expenses in order to contain and remediate the incident, expose us to unanticipated or uninsured liabilities, disrupt our operations (including potential service interruptions), distract our management, increase our risk of litigation or regulatory scrutiny, result in the imposition of penalties and fines under applicable laws, or lead to the loss of customers and revenue. We maintain insurance against cybersecurity and related risks, but it may not cover all losses that we could suffer.
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, cash access products, and related services is highly competitive, and we expect competition to increase and intensify in the future. In both our Games and Payments 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 as well as, in respect of our cash access business, to pay higher commissions or other incentives to gaming establishments in order to gain new customers. In our Payments business, we compete with other established providers of cash 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 to us to establish or maintain relationships with gaming establishments, our business, financial condition, operations or cash flows could be materially and adversely affected.
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 thatwho use our products and services or the amounts of cash that they access using our services.
We provide our gaming-related and
cashfinancial access products and services almost exclusively to
regulated gaming
establishments.operators. 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,preferences; (ii) economic downturns,
or periods of high inflation, due to decreases in our
customers’consumers’ disposable income or general tourism
activities,activities; and (iii) declining consumer confidence, due to general economic conditions,
geopoliticaldomestic- 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
problemresponsible 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
traditionalthe establishments of regulated gaming
establishmentsoperators declines as a result of any of these factors, the demand for our
cashfinancial 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.
22
Most of our leased gaming device contracts with our customers are on a month-to-month basis, 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 on a month-to-month basis, 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 maintain our existing placement of units, then our business, financial condition, operations or cash flows may suffer an adverse effect.
As of December 31, 2017, we operated 8,875 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 a material 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 $18.1 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 a material adverse effect.
Consolidation among our customers 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 our products and services are used. In addition, 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.
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
23
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. Even if the waiver of sovereign immunity by a Native American tribe is deemed effective, there could be an issue as to the forum in which a lawsuit may be brought against the Native American tribe. Federal courts are courts of limited jurisdiction and generally do not have jurisdiction to hear civil cases relating to Native American tribes, and we may be unable to enforce any arbitration decision effectively. Although we attempt to agree upon governing law and venue provisions in our contracts with Native American tribal customers, these provisions vary widely and may not be enforceable.
Certain of our agreements with Native American tribes are subject to review by regulatory authorities. For example, our development agreements are subject to review by the NIGC, and any such review could require substantial modifications to our agreements or result in the determination that we have a proprietary interest in a Native American tribe’s gaming activity, which could materially and adversely affect the terms on which we conduct our business. The NIGC has previously expressed the view that some of our development agreements could be in violation of the requirements of the IGRA and Native American tribal gaming regulations, which state that the Native American tribes must hold “sole proprietary interest” in the Native American tribes’ gaming operations, which presents additional risk for our business. The NIGC may also reinterpret applicable laws and regulations, which could affect our agreements with Native American tribes. We could also be affected by alternative interpretations of the Johnson Act as the Native American tribes, who are the customers for our Class II games, could be subject to significant fines and penalties if it is ultimately determined they are offering an illegal game, and an adverse regulatory or judicial determination regarding the legal status of our products could have material adverse consequences for our business, financial condition, operations, cash flows or prospects.
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. 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.
Certain Native American tribes require us to contract with entities that are owned, controlled or managed by tribal members to provide a portion of our services. In some instances, these entities are subcontractors of ours in connection with providing our services, while in other instances we are a subcontractor to these entities who contract with the applicable tribal gaming casino or tribe directly to provide cash access services. 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.
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
24
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, legal or 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. Furthermore, as we attempt to generate new streams of revenue by selling our games, products and services to new customers in new jurisdictions, we will face licensing and approval requirements of Gaming Authorities influencing the timing of our market entry and we may have difficulty implementing an effective sales strategy for these new jurisdictions. 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.
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 are less certain. Our international operations are 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, such as the authorization and settlement services that are required to implement electronic payment transactions and the telecommunications facilities that would enable us to reliably connect our networks to our products at gaming establishments in these new markets. 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. 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.
25
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 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.
We depend on third-party transaction processors, third-party data center providers, telecommunication networks and other third-party technology vendors to provide our cash access and related services; and if we, or any of these third parties, experience system or service failures, the products and services we provide could be delayed or interrupted, which could harm our business and reputation.
Our ability to provide uninterrupted and high levels of services depends upon the performance of the third-party processors, data center providers, telecommunication networks and other third-party technology vendors that we use. 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 as well as third-party providers and their networks, systems and related infrastructure are potentially vulnerable to computer viruses, physical or electronic security breaches, natural disasters and similar disruptions, which could lead to interruptions or outages of our services, delays, loss of data or public release of confidential data, all of which could have a material adverse effect on our business, financial condition, operations or cash flows. In some instances, such failures could cause us to fail to meet contractual deadlines or specifications and force us to renegotiate contracts on less favorable terms, pay penalties or liquidated damages or suffer major losses if the customer exercises its right to terminate. We are parties to certain agreements that could require us to pay damages resulting from loss of revenues if our systems are not properly functioning or as a result of a system malfunction. For example, our agreement with the New York State Gaming Commission permits termination of the contract at any time for failure by us or our system to perform properly, and any such unforeseen downtime could subject us to liquidated damages. In addition, if we fail to meet the terms specified in our contracts, we may not realize their full benefits. Failure to perform under any contract could result in substantial monetary damages, as well as contract termination. Our results of operations are dependent on our ability to maximize our earnings from our contracts.
We typically rely on a single third-party processor to process substantially all of our cash access transactions that are processed through various card associations and EFT payment networks, and the failure of our third-party processor to adequately provide such processing services could have a material adverse effect on our business, financial condition, operations or cash flows.
We typically rely on a single third party to provide processing services for the majority of our cash access transactions by obtaining authorizations for ATM cash withdrawal, POS debit card and credit card cash access transactions and to provide settlement transaction files to card associations and EFT payment networks for some of these transactions. If our third-party processor fails to adequately provide these services, it could result in our systems being unable to process our cash access transactions intermittently or for extended periods of time, which could have a material adverse effect on our business, financial condition, operations or cash flows.
26
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. Historically, the U.S. payments industry has relied on magnetic stripe cards instead of EMV compliant chip-based cards. Recently, however, U.S. card issuers have begun to offer EMV-capable chip-based smart-cards, and as of October 1, 2015, the U.S. payment card industry shifted the liability for fraudulent transactions generated through EMV-enabled cards onto merchants whose devices are not capable of processing chip-based smart-card EMV transactions. This shifted the responsibility for chargebacks due to fraudulent transactions on such cards from the card issuer onto the merchant. We currently do not incur such costs as we are compliant with the EMV regulations. However, if we are unable to maintain such status, 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 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 service 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 fees for convenience or lower cost cash access alternatives become available, the demand for cash access services within gaming establishments will decline and our business could suffer.
If we are unable to 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
copyright, patent, trademarka combination of patents, trademarks, copyrights, trade secrets, and
trade secret lawscontractual restrictions to protect our intellectual property. We also rely on other confidentiality and contractual agreements and arrangements with our employees, affiliates, business partners,
contractors and customers to establish and protect our intellectual property and similar proprietary rights.
While we expect these agreements and arrangements to be honored, weWe cannot assure you that
theywe 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.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 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 asset portfolios. The gaming manufacturer industry is very competitive and litigious, and a lawsuit brought by one of our larger competitors, regardless of 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.
27
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.
•We rely on hardware, software and games licensed from third parties, and 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
cashfinancial 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
We have in the past and shippingmay again experience various difficulties related to our supply chain, 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 productproducts 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 financial service products, gaming systems and player terminals. Furthermore, we might be forced to limit the features available in our current or future offerings.We rely
•Our net operating losses and other tax credit carry-forwards are subject to limitations that could potentially reduce these tax assets.
As of December 31, 2023, we had tax effected state net operating loss (“NOL”) carry-forwards of approximately $4.1 million, federal research and development credit carry-forwards of approximately $17.1 million, federal solar tax credit carry-forwards of approximately $0.5 million, and Australia NOL carry-forwards of approximately $1.1 million.
Our state NOL carry-forwards will expire between 2025 and 2041. Our federal research and development credits are limited to a 20 year carry-forward period and will begin to expire in varying amounts in 2037, if not utilized. Our federal solar tax credit is limited to a 22 year carry-forward period and will expire in 2045, if not utilized, at which time one-half of any unused credit can be deducted. Our Australia NOL carry-forwards can be carried forward indefinitely.
Based on intellectual property licenses from onethe weight of available evidence, including both positive and negative indicators, if it is more likely than not that a portion, or more third-party competitors,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, 2023, we placed a full valuation allowance on the Australia net deferred tax assets of $1.1 million, among other foreign items, as we evaluated negative evidence noting a three-year
cumulative loss in Australia. As of which could materially and adversely affect our business and the sale or placementDecember 31, 2023, approximately $0.6 million of our products. Various third-party gaming manufacturers with whichvaluation allowance relates to certain state NOL carry-forwards that we competeestimate are much largernot more likely than us and have substantially larger intellectual property assets. The gaming manufacturer industry is very competitive and litigious, andnot to be realized.
As of December 31, 2021, our U.S. operations emerged from a lawsuit brought by one of our larger competitors, whether or not well-founded, may have a material adverse effectthree-year cumulative loss position. Based on our business, financial condition,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 or cash flows anddecline, 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
sell or place our products.Our inability to identify business opportunitiesuse these tax assets could be adversely affected by the limitations of Sections 382, 383 and future acquisitions, or successfully execute any384 of the Internal Revenue Code. In addition, a portion of our identified business opportunities or future acquisitions could limit our future growth.
From time to time, we pursue strategic acquisitions in supportNOL’s include amortization 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 synergiesgoodwill for tax purposes associated with such acquisitionsa restructuring that occurred in 2004, which is subject to audit by the IRS and thus 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.
28
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.disasters, public health issues, political instability and other potentially catastrophic events. Any interruption to our business resulting from a natural disastersuch an event will adversely affect our revenues and results of operations.
In the event of a natural or human-caused disaster or other catastrophic event, the operations of gaming establishmentsoperators 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 userspatrons 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 COVID-19, often deter patrons from visiting our customer’s gaming operators. 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 areand FinTech equipment is installed, either individually or simultaneously experienced adverse weather conditions or other catastrophic events, our results of business,29
financial condition, and operations could be materially and adversely affected. During 2017,From time to time, the impact of weather-related natural disasters has resulted in business disruption at certa
in 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 has in the past resulted in uncertainty in our supply chain and could in the future result in disruptions to our supply chain that adversely affect our results of business, financial condition, and operations.
•The global COVID-19 pandemic had, and may in the future have, a material adverse impact on our operations and financial performance, as well as on the operations and financial performance of the customers and suppliers in the gaming industry that we serve.
The COVID-19 pandemic 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. Consequently, demand for our products and services could be impacted in the future as a result of decreases in gaming activity, whether resulting from the COVID-19 pandemic or other public health crises, uncertainty in the economy or industry, supply chain disruptions, or other for reasons. 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 that are highly uncertain and cannot be predicted, including the scope and duration of the pandemic, the resurgence of its variants, and actions taken by
governmental authorities and other third parties in response to the pandemic. The COVID-19 pandemic may also exacerbate the risks disclosed in this section of our Annual Report.
•The emergence of generative artificial intelligence (“GenAI”) may have material adverse impacts on our operations and financial performance, the gaming industry that we serve, our customers, and gaming patrons.
GenAI is likely to have a variety of unforeseeable impacts, the nature of which are highly uncertain and cannot be predicted, on our business and the gaming industry. Existing and new competitors using GenAI may bring new gaming products to the market, increasing competition and choices for our customers and patrons, resulting in a decrease in demand for our products. New GenAI-based or GenAI-created non-gaming products and services may emerge and compete for consumers' leisure and entertainment spending, resulting in a decrease in spending on our gaming products and services. GenAI can be used to create false and misleading information, impersonate people, and increase the effectiveness of fraudulent activities and cyberattacks, leading to increased costs of fraud and cybersecurity detection and remediation, as well as a loss in operational efficiency, reputation and revenues. GenAI can create art, music and literature with little or no human intervention, leading to disruption in the gaming industry and job displacement among our employees, customers and patrons, and affecting spending on gaming-related leisure activities. The use of GenAI tools and content in the creation of intellectual property, games and content by our employees and suppliers, whether authorized or unauthorized, may lead to third-party claims related to that intellectual property or our inability to maintain full ownership over our intellectual property, resulting in litigation, damages and license fees, or the requirement that we withdraw certain content from the marketplace, leading to loss of revenue. The recent emergence and fast growth of GenAI technology means that the full range of impacts on the Company are unknowable at this time.
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 numbers of Class II gaming units may negotiate arrangements with state governments or renegotiate existing gaming compacts that could impact the number of Class II gaming devices currently supplied by the Company, to the extent there is a desire to change to Class III gaming units. 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, 2023, we operated more than 10,558 Class II gaming units under lease or daily fixed-fee arrangements with 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, our business, financial condition, operations, or cash flows could be negatively impacted.
•Tribal gaming customers that operate Class III gaming units do so under compacts 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, 2023, we operated approximately 3,584 Class III gaming units under lease or daily fixed-fee arrangements with 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, may negatively impact our business, financial condition, operations, or cash flows.
•We derive a significant portion of our revenue from tribal customers, and our ability to effectively operate in tribal gaming markets is vulnerable to legal and regulatory uncertainties, including the ability to enforce contractual rights on tribal 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 tribal lands. 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 tribal lands, such tribes can enact their own laws and regulate gaming operations and contracts. In this capacity, 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 tribe, or an agency or instrumentality of a tribe, we must obtain from the 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 tribe, including the right to enter 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 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 tribal lands. The legal and regulatory uncertainties surrounding our 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 customers’agreements with 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, tribal policies and procedures, as well as tribal selection of gaming vendors, are subject to the political and governance environment within each tribe. Changes in tribal leadership or tribal political pressure can affect our business relationships within markets.
•We may not realize sufficient returns or be successful in renewing our existing or future placement and development fee agreements 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 agreements sometimes provide for the removal of our player terminal placements in the event of poor game performance with no further obligation from 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 collect payment for such transaction and such transaction becomes a chargeback. If 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 consumers’ 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 operator. 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 the establishments of gaming operators or access cash outside of gaming operators without paying a fee for the convenience of not having to leave the 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 the establishments of gaming operators may 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. The insurance we typically require our service providers, who either transport the cash or otherwise have access to the ATM safe, to maintain in the event cash losses occur as a result of theft, misconduct or negligence on the part of such providers may be insufficient. Cash losses at the ATM could occur in a variety of ways, such as natural disasters, 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 losses could lead to a material loss of cash and negatively impact our operating results.
Risks Related to Our 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, 2023, our total indebtedness was approximately $1.0 billion, which included the senior secured term loan and senior secured revolving credit facility (“Credit Facilities”) and the senior unsecured notes due 2029 (the “2021 Unsecured Notes”), (as discussed in “Note 13 - Long Term Debt”), each of which contain restrictive covenants. Our existing borrowings could impact 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 on our variable rate debt, and prevent us from meeting our obligations with respect to our indebtedness, any of which could have significant adverse effects on our business, financial condition and results of operations.
•We may not be able to generate sufficient cash to service all of our indebtedness, including the Credit Facilities and the 2021 Unsecured Notes, 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 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 Credit Facilities, will be available to us in an amount sufficient to pay our indebtedness or to fund other liquidity needs.
•The agreements and instruments governing our debt impose restrictions that may limit our operating and financial flexibility.
The Credit Facilities and the indenture governing the 2021 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 extent we are found in default and if 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.
•A material increase in market interest rates could adversely affect our business and results of operations.
As of December 31, 2023, all of our indebtedness under our Senior Credit Facilities is at variable interest rates tied to the Secured Overnight Financing Rate (“SOFR”). Any material increases to SOFR could increase the amount of interest we are required to pay under the Senior Credit Facilities and adversely affect our business and results of operations.
In addition, we have commercial arrangements with third-party vendors to provide cash for certain of our fund dispensing devices. For the use of these funds, we pay a usage fee on either the average daily balance of funds utilized multiplied by a contractually defined usage rate or the amounts supplied multiplied by a contractually defined usage rate. Assuming no change in the amount of cash used to supply our ATMs, an increase in SOFR would result in higher monthly fees that we must pay to obtain this supply of cash, thereby increasing our ATM operating costs. Any increase in the amount of cash required to supply our ATMs would magnify the impact of an increase in SOFR and our business could be adversely affected.
Risks Related to Our Information Technology
•We have experienced in the past and may experience in the future 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 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 technological 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. Our investment in security measures and other defensive measures, and those employed by our third-party vendors, may 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; 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; increased regulatory scrutiny on us; compromised trade secret and intellectual property; exposure 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; liability for claims relating to misuse of personal information in violation of contractual obligations or data privacy 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 and delay our ability to achieve our strategic initiatives. In the event our EGMs or financial access products, systems, or networks are compromised, gaming operators 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 financial 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.
Our insurance coverage may be insufficient to protect us against 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 cyber 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 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, financial 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; 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 financial access business, to pay higher commissions or other incentives to gaming operators in order to gain new customers. In our FinTech business, we compete with other established providers of financial 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 operators. To the extent that we lose customers to these competitors, or competitive pressures force us to offer incentives or less favorable pricing terms for us to establish or maintain relationships with gaming operators, 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 the establishments of multiple gaming operators. 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 requirements, market conditions, or customer requirements, or
preferences, 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.
Risks Related to the Regulation of Our
IndustryWe may be subject to fines, penalties, liabilities and legal claims resulting from unauthorizedBusiness
•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.data could subjects us to costly fines, penalties, and legal claims.
We collect and store personally identifiable information about cardholders and patrons,
thatwho 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
establishmentoperator 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
establishmentoperator 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
establishmentoperator 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.operators. 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 andcountries; therefore,
it could limit our future growth.
•We are subject to extensive governmental gaming regulation, which may harm our business.Our operation of gaming activities, including the sale and manufacturing of gaming devices, fully integrated kiosks, the provision of cash access services at gaming establishments and the operation of central determinant systems, is subject to extensive regulation by the jurisdictions where we operate. The gaming laws, regulations and ordinances vary from jurisdiction to jurisdiction, but 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. Our violation of these gaming laws, regulations and ordinances could result in the imposition of substantial fines, or in the conditioning, limitation, suspension or revocation of a required license, registration or other approval, either of which could have a material adverse impact on our business depending on the specific circumstances. In addition, we are subject to the possible increase at any time by various state and federal
30
legislatures and officials of gaming taxes or fees, which could adversely affect our results. For a summary of gaming regulations that could affect our business, see “Item 1. Business—Regulation.”
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 Americantribal, and foreign
regulations.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.
While we seek to comply withThe 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
set forth by each jurisdiction, a governmental agency or court could disagree with our interpretation of these standards and regulations or determine that the manufacturing and use of certain of our electronic player terminals,
and perhaps other key components of our gaming systems,
that rely to some extent upon electronic equipment to run a game, is impermissible under applicable law. An adverse regulatory or judicial determination regardingand certain other products; and set forth the
legal status of our products could have material adverse consequences for us in other jurisdictions, including with gaming regulators,process and
our business, operating results and prospects could suffer and we and our officers and directors could be subject to significant fines and penalties. Furthermore,manner by which the
failure to become licensed, or the loss or conditioning of a license, in one market may have the adverse effect of preventing licensing in other markets or the revocation of licenses we already maintain.As we expand into new markets, we expect to encounter business, legal, operational and regulatory uncertainties as well as additional responsibilities. As we enter new jurisdictions, we are subject to increasing legal, regulatory and reporting requirements that will require substantial additional resources,Gaming Authorities issue such as new licenses, permits and approvals, including third-party certifications that our games comply with a particular jurisdiction’s stated regulations, in order to meet our expectations for new market entry, and such licenses, permits or approvals may not be timely granted to us, or granted to us at all, which could have a material effect on our business in general and new market entry specifically. Obtaining and maintaining all required licenses, findings of suitability, registrations, permits or approvals is time consuming, expensive and potentially distracting to management. As we enter new jurisdictions, our reporting systems will need to be developed or updated, and we may fail to provide timely or adequate notifications or reporting requirements within these new jurisdictions, which could have adverse regulatory consequences for us in that, or in other, jurisdictions, which could affect our business. In addition, entry into new markets may require us to make changes to our gaming systems to ensure that they comply with applicable regulatory requirements. We may also encounter additional legal and regulatory challenges that are difficult or impossible to foresee and which could result in an unforeseen adverse impact on planned revenues or costs associated with the new market opportunity. If we are unable to effectively develop and operate within these new markets, then our business, operating results and financial condition would be impaired.
Generally, our placement of systems, games and technology into new market segments involves a number of business uncertainties, including whether:
the technical platform on which our gaming units, systems and products are based will comply, or can be modified to comply, with the minimum technical requirements for each of the identified new gaming markets;
we are able to successfully pass required field trials and comply with the initial game/system installation requirements for each new jurisdiction;
our resources and expertise will enable us to effectively operate and grow in such new markets, including meeting regulatory requirements;
our internal processes and controls will continue to function effectively within these new segments;
we have enough experience to accurately predict revenues and expenses in these new markets;
the diversion of management attention and resources from our traditional business, caused by entering into new market segments, will have harmful effects on our traditional business;
we will be able to successfully compete against larger companies who dominate the markets that we are trying to enter; and
we can timely perform under our agreements in these new markets because of other unforeseen obstacles.
31
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 gaming 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.
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, regardless of 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 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
Fair Credit Reporting Act,FCRA, the
Fair and Accurate Credit Transactions Act of 2003FACTA, and similar state laws. The collection practices that are used by our third-party providers and us may be subject to the
Fair Debt Collection Practices ActFDCPA 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
operators’ establishments where we provide our
cashfinancial access services through a gaming
establishment’soperator’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,
including VISA,
MasterCard and
MasterCard. The rules and regulations do not expressly address some of the contexts and settings in which we process cash 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.EFT Networks. 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
32
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), netnet 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.transactions. 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 uponat the sole discretion of the card associations and EFT networks and are subject to increase at any time. Although certain ofWe 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 contracts enable us to pass through increases in interchange or other network processing fees to our customers, competitivefinancial 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 feefee 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 wouldcould 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
cashfinancial 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.
33
•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,ATMs, which regulations relate to thethe 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 ATMfunds 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 operators’ 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
operators’ 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 expendspend significant amounts on compliance with such laws.Our patron marketing
Certain 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, California Consumer Privacy Act and General Data Protection Regulation, 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 the 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 may be curtailed. Further, 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 whichhow 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 are impacted by increasing stakeholder interest in and legislative or regulatory requirements regarding public company performance, disclosure, and goal-setting with respect to environmental, social and governance (“ESG”) matters.
In response to growing customer, investor, employee, governmental and other stakeholder interest in our policiesESG practices, including our procedures, standards, performance metrics, and practicesgoals, we have increased reporting of our ESG programs and performance and have established goals and other objectives related to ESG matters. These goal statements reflect our current plans and aspirations and are not guarantees that we will be able to achieve them. Our ability to achieve any goal or objective, including with respect to ESG initiatives, is subject to numerous risks, many of which are outside of our control. Examples of such risks
include, but are not limited to: (i) the availability and cost of low-energy sources and technologies; (ii) evolving regulatory requirements affecting ESG standards or disclosures; (iii) the availability of suppliers that can meet our sustainability, diversity and other standards; (iv) our ability to recruit, develop, and retain diverse talent in our labor markets; and (v) the impact of our organic growth and acquisitions of businesses or operations. In addition, frameworks for tracking and reporting on ESG matters have not been standardized and continue to evolve. Our processes and controls for reporting of ESG matters may requirenot always comply with evolving and disparate standards for identifying, measuring, and reporting ESG metrics, our interpretation of reporting standards may differ from those of others, and such standards may change over time, any of which could result in significant revisions to our performance metrics, goals or reported progress in achieving such goals. In addition, certain of our products and services may be unattractive to certain investors and may cause us to modifybe increasingly subject to ESG-driven investment practices that preclude investment in our practices in a material or immaterial manner or impose fines or other penalties if they believe thatdebt and equity securities.
To the extent our policies andESG practices do not meet, or viewed as not meeting, evolving investor or other stakeholder expectations, then our reputation, our ability to attract or retain employees and our attractiveness as a gaming supplier, business partner or acquirer could be negatively impacted. Our failure, or perceived failure, to pursue or fulfill our goals, targets and objectives or to satisfy various reporting standards within the necessary standard. Totimelines we announce, or at all, could have similar negative impacts and expose us to government enforcement actions and private litigation.
•We may not generate profits in the extent thatfuture.
As a result of the interest payments on our patron marketingindebtedness, amortization of intangible assets incurred in connection with our acquisitions, other related acquisition and database servicesfinancing costs, asset impairment charges, depreciation, and other amortization, we have failed, are now failing orexperienced periods in which we were not profitable, and we may not always be able to generate profits in the future. 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 comply with applicable law,new customers in existing markets; develop new games or license third-party content in our privacy policiesGames 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, security and regulatory changes, in the markets we target or the notices that we provideoperate in; respond to patrons, wecompetitive developments and challenges; and attract and retain experienced and talented personnel.
We may
become subjectnot be able to
actions bydo any of these successfully, and our failure to do so could have a
regulatory authoritymaterial adverse effect on our business, financial condition, operations, 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 information 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 ofmake payments under our
patron marketing and database services.Risks Related to Our Stock
Our common stock has been publicly traded since September 2005, and we expect that thedebt agreements.
•The price of our common stock willmay continue to fluctuate substantially.There has been a public market for our common stock since September 2005. significantly.
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;
39
increases in commissions paid to gaming establishments as a result of competition;
increases in interchange rates, processing fees or other fees paid by us;
34
| •
| 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;
35
| •
| 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 1C. Cybersecurity
Risk Management and Strategy
Everi recognizes the critical importance of developing, implementing, and maintaining the appropriate cybersecurity measures to safeguard our information systems and protect the confidentiality, integrity, and availability of our data and that of our customers or patrons. Everi has strategically integrated cybersecurity risk management into our broader risk management framework to establish a robust process for the monitoring and evaluation of cybersecurity risks in our business to promote a company-wide culture of cybersecurity risk management. This integration supports our efforts to assess and incorporate cybersecurity considerations into our decision-making processes.
Everi’s Security department, Chief Information Security Officer (CISO), and Chief Information Officer (CIO), with oversight from the CEO, lead the cybersecurity detection and risk reduction and mitigation efforts for the Company. These efforts include, but are not limited to the following:
•Monitoring logs and alerts for security issues, events, and breaches;
•Preparing and regularly testing Everi’s preparedness for attacks, incidents, and breaches, including the use of table-top exercises of simulated cyber incidents with the executive team;
•Developing policies and procedures to identify, classify, and define protection and management objectives, and define acceptable use of Company information assets;
•Deploying monitoring and data collection tools to monitor the security of devices and processes;
•Monitoring and reviewing physical and logical access to Everi data and properties to meet applicable security and regulatory requirements;
•Developing and maintaining a vulnerability identification and management program;
•Developing and maintaining a security awareness and training program; and
•Obtaining System and Organizational Controls Two certifications for products
Given the complexity and evolving nature of cybersecurity threats, Everi engages with a range of external experts, including cybersecurity assessors, consultants, and auditors in evaluating and testing our risk management systems. These partnerships enable us to leverage specialized knowledge and insights to maintain and enhance our cybersecurity strategies and processes. Our collaboration with these third-parties includes regular audits, threat assessments, and consultation on security enhancements.
We perform due diligence on select third-party vendors by collecting and reviewing certifications when available for our vendors. Certifications and reviews of third parties’ security practices are no guarantee and of little assurance that a vendor will not suffer a breach or loss of Everi data. Along with due diligence efforts, we review vendor contracts for contractual controls, and to seek that legal recourse is available in cases of a breach and or data loss.
As of the date of this Annual Report, we have not experienced a cybersecurity incident that has or is reasonably likely to materially affect us, including our business strategy, results of operations or financial condition. While we have not experienced any material cybersecurity incidents, there can be no guarantee that we will not be the subject of future successful attacks, threats or incidents. Additional information on cybersecurity risks we face can be found in Part I, Item 1A “Risk Factors” of this AnnualReport on Form 10-K under the heading “Risks Related to Our Information Technology,” which should be read in conjunction with the foregoing information.
Governance
The Board of Directors is primarily responsible for overseeing, and is regularly updated on the nature of, the Company’s efforts to manage risks associated with cybersecurity threats.
The CISO and the CIO have significant experience in information technology and cybersecurity, including over 20 years of experience each in information security and compliance, multiple security certifications, and experience building vulnerability management, application security, and security operations groups. Additionally, their experience includes payments fraud prevention and enhancing the organization's ability to safeguard against financial cyber threats, among other intrusions. Our CIO and CISO combine leadership, familiarity with and resolution of various cyber-related perils, to help mitigate these types of risks for the Company. Due to their experience in the field, they play a pivotal role in informing the Board on cybersecurity risks. They provide briefings to the Board on a quarterly basis. These briefings encompass a broad range of topics, including:
•The current cybersecurity landscape and emerging threats;
•The status of ongoing cybersecurity initiatives and strategies;
•Incident reports and learnings from any cybersecurity events; and
•The Company’s compliance with regulatory requirements and industry standards
Cybersecurity Risk, Data Risk, and Technology Infrastructure Risk are among the risks assessed by the Company’s Enterprise Risk Management Program with the oversight of an executive-level Enterprise Risk Management Committee.Information Technology, Information Security, product development, and Internal Audit managers update the CISO, CIO and CEO on technology, cybersecurity, and privacy threats, risk mitigation efforts, penetration testing, and control testing at a regular Enterprise Security Meeting.
In addition to scheduled meetings, the CISO, CIO, and CEO maintain a regular dialogue regarding emerging or potential cybersecurity risks. Together, they receive updates on significant developments in the cybersecurity domain, as needed, but no less than quarterly, supporting the Board’s proactive and responsive oversight of cybersecurity-related risks. This engagement also supports the consideration and integration of cybersecurity matters into the broader strategic objectives.
Item 2. Properties.
Our headquarters are located
We occupy real estate properties mostly in
the United States and, to a
facility in Las Vegas, Nevada, consisting of approximately 62,000 square feet of office space under a lease through April 2023. In addition, we have approximately 103,000 square feet of office space in Austin, Texas under a lease through June 2021. We also lease facilities with approximately 17,000 square feet in Chicago, Illinois and Reno, Nevada, which support the design, production and expansion of our gaming content. These design studioslesser degree, internationally that are under
a lease
through June 2023 and May 2021 for the Chicago and Reno offices, respectively. We also lease several other properties that are used to support all our products and services.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 |
Las Vegas, Nevada (1) | 244,832 | Corporate Headquarters and Operations | FinTech and Games |
Austin, Texas (1) | 51,000 | Office | Games |
(1)We had assembly facilities in Austin, Texas until we transitioned to our new assembly facility in Las Vegas, Nevada during the fourth quarter of 2023.
In addition, we lease additional less significant real estate properties that are used to support our products and services.
Item 3. Legal Proceedings.
We are involved in various investigations, claims and lawsuits in the ordinary course of our business. Although the outcome
Item 4. Mine Safety Disclosures.
PART
IIIn this filing, we refer to: (i) our audited consolidated financial statements and notes thereto as our “Financial Statements,” (ii) our Consolidated Statements of Loss and Comprehensive Loss as our “Statements of Loss,” (iii) our Consolidated Balance Sheets as our “Balance Sheets,” and (iv) Item 7. Managements’ Discussion and Analysis of Financial Condition and Results of Operations as our “Results of Operations.”
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, 2018,February 23, 2024, there were
five9 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.The following table sets forth for the indicated periods, the high and low sale prices per shareholders of our common stock:
record. | | Price Range | |
| | High | | | Low | |
2017 | | | | | | | | |
First Quarter | | $ | 5.06 | | | $ | 2.16 | |
Second Quarter | | | 7.50 | | | | 4.66 | |
Third Quarter | | | 8.99 | | | | 6.81 | |
Fourth Quarter | | | 8.99 | | | | 7.16 | |
2016 | | | | | | | | |
First Quarter | | $ | 4.50 | | | $ | 1.73 | |
Second Quarter | | | 2.29 | | | | 1.13 | |
Third Quarter | | | 2.64 | | | | 1.16 | |
Fourth Quarter | | | 2.60 | | | | 1.21 | |
On March 1, 2018, the closing sale price of our common stock on the New York Stock Exchange was $7.32.
Dividend Policy
We have nevernot declared or paid any cash dividends on our capital stock. We currentlystock as we intend to retain allour earnings and utilize them for the repayment of our outstanding debt and to finance the growth and development of our business. AnyAny future change in our dividend policy will be made at the discretion of our Board of Directors, and will depend on our contractual restrictions, our 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 20172021 Unsecured Notes limit our ability to declare and pay cash dividends. Common Stock Repurchases
We did not have
On May 3, 2023, our Board of Directors authorized and approved a new share repurchase program in effectan amount not to exceed $180.0 million pursuant to which we may purchase outstanding Company common stock in open market or privately negotiated transactions over a period of eighteen (18) months through November 3, 2024, in accordance with Company and regulatory policies and trading plans established in accordance with Rules 10b5-1 and 10b-18 of the Securities Exchange Act of 1934. The actual number of shares to be purchased will depend upon market conditions and is subject to available liquidity, general market and economic conditions, alternative uses for capital and other factors. All shares purchased will be held in the Company’s treasury for possible future use. There is no minimum number of shares that the Company is required to repurchase, and the program may be suspended or discontinued at any time without prior notice. This new repurchase program supersedes and replaces, in its entirety, the previous share repurchase program.
There were approximately 7.5 million and 5.0 million shares repurchased at an average price of $13.40 and $16.93 per share for an aggregate amount of $100.0 million and $84.3 million during the years ended December 31, 2017, 20162023 and 2015.37
2022, respectively. The remaining availability under the May 3, 2023 $180.0 million share repurchase program was $80.0 million as of December 31, 2023. There were no share repurchases during the year ended December 31, 2021.
Issuer Purchases and Withholding of Equity Securities
We repurchased or withheld from restricted stock awards 15,457, 18,717, and 32,617 shares of our common stock at an aggregate purchase price of $0.1 million, $41,528, and $0.2 million, respectively, to satisfy the minimum applicable tax withholding obligations incident to the vesting of such restricted stock awards for the years ended December 31, 2017, 2016 and 2015, respectively.
The following table includes the monthly repurchases or withholdings of our common stock during the fourth quarter ended December 31,
2017: | | Total Number of Shares Purchased (1) | | | Average Price per Share (2) | |
| | (in thousands) | | | | | |
Tax Withholdings | | | | | | | | |
10/1/17 - 10/31/17 | | | 10.2 | | | $ | 8.14 | |
11/1/17 - 11/30/17 | | | 0.4 | | | $ | 8.38 | |
12/1/17 - 12/31/17 | | | 0.5 | | | $ | 7.70 | |
Total | | | 11.1 | | | $ | 8.13 | |
(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.
|
2023:(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 or Withheld
(in thousands) | | Average Price Purchased or Withheld per Share (3) | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (4) (in thousands) | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (4) (in thousands) |
| | | | | | | | | |
| Share Repurchases | | | | | | | | |
| 10/1/23 - 10/31/23 | | 471.3 | | (1) | $ | 12.86 | | | 471.3 | | | $ | 100,000.0 | |
| 11/1/23 - 11/30/23 | | 881.5 | | (1) | $ | 11.01 | | | 881.5 | | | 90,295.9 | |
| 12/1/23 - 12/31/23 | | 963.9 | | (1) | $ | 10.68 | | | 963.9 | | | 80,000.0 | |
| Sub-total | | 2,316.7 | | | $ | 11.25 | | | 2,316.7 | | | $ | 80,000.0 | |
| | | | | | | | |
| Tax Withholdings | | | | | | | | |
| 10/1/23 - 10/31/23 | | 2.1 | | (2) | $ | 10.76 | | | — | | | $ | — | |
| 11/1/23 - 11/30/23 | | — | | | $ | — | | | — | | | — | |
| 12/1/23 - 12/31/23 | | — | | | $ | — | | | — | | | — | |
| Sub-total | | 2.1 | | | $ | 10.76 | | | — | | | $ | — | |
| | | | | | | | |
| Total | | 2,318.8 | | | $ | 11.25 | | | 2,316.7 | | | $ | 80,000.0 | |
38
(2)Represents the shares of common stock that were withheld from restricted stock awards and the net settlement of stock option exercises to satisfy the applicable tax withholding obligations incident to the vesting of such restricted stock awards and the exercise of such stock options. There are no limitations on the number of shares of common stock that may be withheld from restricted stock awards or stock options to satisfy the tax withholding obligations incident to the vesting of restricted stock awards or exercise of stock options. We withheld approximately 0.6 million, 0.7 million, and 0.5 million shares of our common stock at an aggregate purchase price of approximately $9.2 million, $12.0 million and $9.4 million for the years ended December 31, 2023, 2022 and 2021, respectively, to satisfy the minimum applicable tax withholding obligations incident to the vesting of such restricted stock awards and stock option exercises.
(3)Represents the average price per share of common stock purchased or withheld on the date of withholding.
(4)There were 2.3 million and 2.1 million shares repurchased at an average price of $11.25 and $17.00 per share for an aggregate amount of $26.1 million and $35.0 million during the three months ended December 31, 2023 and 2022, respectively. The remaining availability under the May 3, 2023 $180.0 million share repurchase program was $80.0 million as of December 31, 2023. There were no share repurchases during the three months ended December 31, 2021.
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 TechnologySoftware and Service Index during the
five yearfive-year period ended December 31,
2017.2023. We included the S&P Software and Service Index in the Stock Performance Graph as we believe it is a more comparable metric that includes small and mid-capitalization stocks, which are similar in capitalization to our Company.
The graph assumes that $100 was invested on December 31,
20122018 in our common stock, in the S&P 500 Index,
the S&P 1000 Index and the S&P
Information TechnologySoftware and Service 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 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.
39
Item 6.
Selected Financial Data.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, | |
| | 2017(1) | | | 2016(2) | | | 2015(3) | | | 2014(5) | | | 2013 | |
Income Statement Data | | | | | | | | | | | | | | | | | | | | |
Revenues | | $ | 974,948 | | | $ | 859,456 | | | $ | 826,999 | | | $ | 593,053 | | | $ | 582,444 | |
Operating income (loss) | | | 81,819 | | | | (118,555 | ) | | | (9,730 | ) | | | 33,782 | | | | 49,150 | |
Net (loss) income | | | (51,903 | ) | | | (249,479 | ) | | | (104,972 | ) | | | 12,140 | | | | 24,398 | |
Basic (loss) earnings per share | | | (0.78 | ) | | | (3.78 | ) | | | (1.59 | ) | | | 0.18 | | | | 0.37 | |
Diluted (loss) earnings per share | | | (0.78 | ) | | | (3.78 | ) | | | (1.59 | ) | | | 0.18 | | | | 0.36 | |
Weighted average common shares outstanding | | | | | | | | | | | | | | | | | | | | |
Basic | | | 66,816 | | | | 66,050 | | | | 65,854 | | | | 65,780 | | | | 66,014 | |
Diluted | | | 66,816 | | | | 66,050 | | | | 65,854 | | | | 66,863 | | | | 67,205 | |
| | At and For the Year Ended December 31, | |
| | 2017(1) | | | 2016(2) | | | 2015(3)(4) | | | 2014(5) | | | 2013 | |
Balance sheet data | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 128,586 | | | $ | 119,051 | | | $ | 102,030 | | | $ | 89,095 | | | $ | 114,254 | |
Working capital(6) | | | (12,040 | ) | | | (1,875 | ) | | | 2,452 | | | | 12,550 | | | | (1,682 | ) |
Total assets | | | 1,537,074 | | | | 1,408,163 | | | | 1,550,385 | | | | 1,707,285 | | | | 527,327 | |
Total borrowings | | | 1,167,843 | | | | 1,121,880 | | | | 1,139,899 | | | | 1,188,787 | | | | 103,000 | |
Stockholders’ (deficit) equity | | | (140,633 | ) | | | (107,793 | ) | | | 137,420 | | | | 231,473 | | | | 218,604 | |
Cash flow data | | | | | | | | | | | | | | | | | | | | |
Net cash provided by operating activities | | $ | 95,828 | | | $ | 131,711 | | | $ | 124,587 | | | $ | 24,531 | | | $ | 4,334 | |
Net cash used in investing activities | | | (109,979 | ) | | | (88,054 | ) | | | (85,549 | ) | | | (1,085,847 | ) | | | (13,990 | ) |
Net cash provided by (used in) financing activities | | | 22,394 | | | | (24,922 | ) | | | (24,551 | ) | | | 1,037,423 | | | | (29,183 | ) |
(1)
| 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.
|
Reserved.(2)
| During 2016, the Games reporting unit had a goodwill impairment of $146.3 million.
|
(3)
| 2015 amounts include a full year of financial results for Everi Games. During 2015, the Games reporting unit had a goodwill impairment of $75.0 million.
|
(4)
| 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.
|
(5)
| 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.
|
(6)
| As a result of the Merger on December 19, 2014, we provide a classified balance sheet, for which a calculation of working capital has been included.
|
40
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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 Loss and Comprehensive Loss as our “Statements of Loss;” (iii) our audited Consolidated Balance Sheets as our “Balance Sheets;” and (iv) our consolidated results of operations as our “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
Overview
Everi develops and
the Private Securities Litigation Reform Act of 1995offers products and
should be read in conjunction with the disclosureservices that provide gaming entertainment, improve our customers’ patron engagement, and
information containedhelp our casino customers operate their businesses more efficiently. We develop and
referenced in “Cautionary Note Regarding Forward-Looking Statements”supply entertaining game content, gaming machines and
“Item 1A. Risk Factors” included elsewhere in this Annual Report on Form 10-K.Overview
gaming systems and services for land-based and iGaming operators. Everi is a leading supplierinnovator and provider of trusted financial technology solutions that power casino floors, improve operational efficiencies, and fulfill regulatory requirements. The Company also develops and supplies player loyalty tools and mobile-first applications that enhance patron engagement for our customers and venues in the casino, gaming industry. The Company provides casino operators with a diverse portfolio of products including innovative gaming machines that powersports, entertainment, and hospitality industries.
Everi reports its financial performance, and organizes and manages its operations, across the
casino floor,following two business segments: (i) Games and
casino operational and management systems that include comprehensive, end-to-end payments solutions, critical intelligence offerings, and gaming operations efficiency technology. Everi’s mission is to be a transformative force for casino operations by facilitating memorable player experiences, delivering reliable protection and security, and striving for customer satisfaction and operational excellence.(ii) Financial Technology Solutions (“FinTech”).
Everi Games provides
a number ofgaming operators with gaming technology and entertainment products and services,
for casinos, including (a)including: (i) gaming machines,
comprised primarily
ofcomprising Class II,
and Class III
and Historic Horse Racing (“HHR”) slot machines placed under participation
or fixed feeand fixed-fee lease arrangements or sold to casino
customers, including the award-winning TournEvent®;customers; (ii) providing and
(b) system software, licenses, ancillary equipment and maintenance to its casino customers. Everi Games also develops and managesmaintaining the central determinant
systemsystems for the
VLTsvideo lottery terminals (“VLTs”) installed in the State of New
York. Everi Payments provides its casino customers cash accessYork and similar technology in certain tribal jurisdictions; (iii) business-to-business (“B2B”) digital online gaming activities; and (iv) bingo solutions through consoles, integrated electronic gaming tablets and related systems.
Everi FinTech provides gaming operators with 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. We also develop and offer mobile-first applications aimed at enhancing patron engagement for customers in the casino, sports, entertainment, and hospitality industries. Our solutions are secured using an end-to-end security suite to protect against cyber-related attacks allowing us to maintain appropriate levels of security. These solutions include: access to cash and cashless funding at gaming facilities via ATM cashAutomated Teller Machine (“ATM”) debit withdrawals, credit card cashfinancial access transactions, POSand point of sale (“POS”) debit card cash access transactionpurchases at casino cages, kiosk and mobile POS devices; accounts for the CashClub Wallet, check verificationwarranty services, self-service loyalty and warranty services; (b) fully integrated gaming industry kiosks that provide cash accesskiosk maintenance services; self-service loyalty tools and 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 operatorsreporting services; marketing and promotional offering subscription-based services; and other ancillary offerings.
Impact of Macro-Economic Volatility and Global Instability, Employment Constraints and Supply Chain Disruptions
We have experienced an impact from macro-economic volatility as a result of inflation, interest rate movements and global instability, particularly as it relates to our supply chain, both from an upstream and downstream perspective, which impacts the delivery of our products; and we continue to evaluate the effects of interest rate movements on our variable rate debt and pricing pressures on our business.
We have experienced an impact from employment constraints as a result of inflation that has significantly increased over prior years. This has placed pressure on competitive wages, which has led to increases in stateswages and other related costs.
We have experienced an impact from supply chain disruptions that
offer intrastate, internet-based gaminghave resulted in additional costs incurred to develop, produce, and
lottery activities.ship our products.
Additional Items Impacting Comparability of Results of Operations
and Financial Condition
Our Financial Statements included in this report that presentreflect the following additional items impacting the comparability of results of operations:
•During the year 2023, we acquired certain strategic assets of VKGS LLC (“Video King”), a privately owned provider of integrated electronic bingo gaming tablets, video gaming content, instant win games and systems. Under the terms of the purchase agreement, we paid the seller approximately $61.0 million, inclusive of a net working capital payment during the second quarter of 2023. We also made an additional net working capital payment of $0.3 million post-closing, early in the third quarter of 2023. In addition, we expect to pay approximately $0.2 million related to an indemnity holdback, which is scheduled for release on the eighteen-month anniversary of the acquisition date. The acquisition did not have a significant impact on our financial condition andor results of operations reflectas of and for the following transactions and events: | •
| During the fourth quarter of 2017, we recorded a $37.2 million loss on extinguishment of debt consisting of a $26.3 million make-whole premium 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 in the second quarter of 2017 for the unamortized deferred financing fees and discounts related to the extinguished term loan under the Prior Credit Facility and the redeemed Refinanced Secured Notes (both defined herein). In April 2015, we redeemed, in full, the 7.75% Secured Notes due 2021 and issued the Refinanced Secured Notes resulting in $13.0 million of debt issuance costs and fees being expensed to loss on extinguishment of debt.
|
period ended December 31, 2023.In October•During the fourth quarter of each year,2023, we conductrecorded a partial write-down of the definite-lived customer relationships intangible asset associated with the Intuicode Gaming Corporation (“Intuicode”) acquisition, reflected in our annualGames segment. The impairment test for our reporting units. Based on the resultsloss of approximately $11.7 million was included within Operating Expenses of our testing, there was no goodwill impairment for 2017 and there were goodwill impairmentsStatements of approximately $146.3Operations. The customer relationships intangible asset had a revised cost basis of $0.5 million and $75.0 million for 2016 and 2015, respectively.
41
| •
| The income tax benefit was $20.2 million for the year ended December 31, 2017, as compared to an income tax provision of $31.7 million in the prior year period. 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 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%, primarily due to an increase in our valuation allowance for deferred tax assets and the impairment of goodwill for which no tax benefit was provided for book purposes.
|
In January 2015, we entered into a settlement agreement inremaining life of five years at December 31, 2023. In connection with this impairment recorded during the fourth quarter of 2023, we also recorded an adjustment of $1.7 million based on our revised estimate of the second earn-out payment related to the Intuicode acquisition reflected within Operating Expenses of our Statements of Operations.
•During the year 2023, we incurred an increase in interest expense, net of interest income, of $21.9 million as a lawsuit we participatedresult of rising interest rates in as plaintiffs,the macroeconomic environment that impacted our variable rate debt.
•During the second quarter of 2023, our Board of Directors authorized and approved a new share repurchase program in an amount not to exceed $180.0 million pursuant to which we received and recorded the settlement proceedsmay purchase outstanding Company common stock in open market or privately negotiated transactions over a period of $14.4eighteen (18) months through November 3, 2024. There were 7.5 million in the first quarter of 2015. This settlement is included as a reduction of operating expenses in our Statements of Loss forshares repurchased during the year ended December 31, 2015.2023 at an average price of $13.40 per share for an aggregate amount of $100.0 million. The Company utilizedremaining availability under the proceeds along withMay 2023 $180.0 million share repurchase program was $80.0 million as of December 31, 2023. This new repurchase program supersedes and replaces, in its entirety, the previous share repurchase program.
•During the year 2022, we acquired the stock of eCash Holdings Pty Limited and wholly-owned subsidiaries (collectively “eCash”), Intuicode, and certain strategic assets of Venuetize, Inc. (“Venuetize”) and made an initial cash payment of $15.0 million, $12.5 million and $18.2 million at the closing of each transaction, respectively. The acquisitions did not have a significant impact on hand to make a $15.0 million principal reduction payment onour financial condition or results of operations as of and for the Secured Notes due 2021 in the first quarter of 2015.period ended December 31, 2023.
As a result of
the above transactionsthese events, together with macro-economic volatility and
events, theglobal instability, our employment constraints and supply chain disruptions, 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 wideindustry-wide trends that may impact our Games and PaymentsFinTech businesses. WeBelow we have identified thea number of trends that could have a material positive and negative trends affectingimpact on our business as the following: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 operator capital budgets, and ultimately the demand for new gaming equipment.
equipment, which impacts both of our segments.
•We face continued macro-economic volatility, global instability, inflationary pricing pressures and interest rate movements, which impacts both our segments.
The total North American installed slot base in 2017 remained relatively flat•Disruption of global supply chains related to 2016macro-economic volatility, including inflation and 2015. We expect flat to moderate growth in the forward replacement cycle for EGMs.
The volume of new casino openingsinterest rate movements, and new market expansions in North America is expected to be slightly higher in 2018 as compared to the prior year. This could positivelyglobal instability may negatively impact the overall demand for slot machinesanticipated increase in North America during 2018.
•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 PaymentsFinTech businesses.
Governmental oversight related•We continue to remain competitive in the costgaming supplier space by launching new cabinet form factors and game theme software titles, which may be either delayed or not received well by casino operators that could negatively impact our outlook of transactionsales in 2024.
•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, which maychanges, including in ways that could negatively impact our PaymentsFinTech business in the future.
•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.
Impactproducts and services that impact both of ASC Topic 606our operating segments.
Operating Segments
We report our financial performance within two operating segments: (i) Games; and (ii) FinTech. For additional information on the Comparability of Our Results of Operations in Future Periodsour segments see
“Item 1. Business”As discussed in “Note 2 and “Part II — Basis of Presentation and Summary of Significant Accounting Policies – Recent Accounting Guidance – Recent Accounting Guidance Not Yet Adopted,” in Item 8:8 — Financial Statements and Supplementary Data, on January 1, 2018, the Company implemented the new revenue recognition standard promulgated by the FASB. The Company adopted ASC 606 using the modified retrospective method that requires companies — Notes to record a cumulative adjustment to retained earnings (or deficit) presented in the unaudited condensed,42
consolidated balance sheets for interim periods and presented in the audited consolidated balance sheets for annual periods for any contract modifications made to those arrangements not yet completed as of the adoption date of January 1, 2018. The Company determined that there was no such cumulative adjustment required to be made to its interim, condensed, consolidated balance sheets as of the adoption date. In addition, under the modified retrospective method, the Company’s prior period results will not be recast to reflect the new revenue recognition standard.
The Company determined that the adoption of ASC 606 will have a material impact on the presentation of its financial information primarily due to the reporting on a net revenues basis, rather than a gross presentation, of certain costs of revenues (exclusive of depreciation and amortization) related to the cash access activities of the Company’s Payments segment (with additional immaterial changes due to the net reporting of certain of the gaming operations activities of the Company’s Games segment). The net revenues reporting requirement under ASC 606 will have an effect on both the Payments and Games segment revenues and related cost of revenues (exclusive of depreciation and amortization); however, this net presentation will not have an effect on operating income (loss), net loss, cash flows or the timing of revenues recognized and costs incurred.
To provide a greater understanding of the impact of this new revenue recognition standard, the Company determined that under the provisions set forth in ASC 606, the effect on certain Payments and Games revenues and costs of revenues would have collectively decreased by approximately $564.2 million, $476.4 million and $438.3 million for the years ended December 31, 2017, 2016 and 2015, respectively.
With respect to its Payments segment, the Company will have a material impact on the presentation of its financial information related to the reclassification of certain cost of revenues (exclusive of depreciation and amortization)Consolidated Financial Statements — Note 19 — Segment Information”
included in the cash advance, automated teller machine and check services revenue streams to be netted against those related revenue streams. The Company will report these items, which include commission expenses paid to casino operators, interchange costs paid to the network associations and processing and related costs paid to other third party partners as amounts that will be reported “net of transaction price” as reductions to its Payments segment revenues, rather than the current gross revenues presentation with these costs and expenses historically reported as Payments segment cost of revenue (exclusive of depreciation and amortization).With respect to its Games segment, the Company will not have a material impactthis Annual Report on the presentation of its financial information related to the reclassification of certain cost of revenues included in the gaming operations revenue stream to be netted against this revenue stream in connection with the Company’s Wide Area Progressive (the “WAP”) offering, which was initiated in 2017. The Company will report these items, which include WAP jackpot expenses as amounts that will be reported “net of the transaction price” as reductions to its Games segment revenues, rather than the current gross revenues presentation with these expenses historically reported as Games segment cost of revenue (exclusive of depreciation and amortization).
Furthermore, for presentation purposes, given the fact that the Company’s total revenues, on a consolidated basis, will be significantly reduced in connection with the adoption of the new revenue recognition standard, the Company’s revenue streams will be evaluated on a recurring basis to ensure compliance with Rule 5-03(b) of Regulation S-X to present those revenues that exceed the quantitative threshold on the Company’s Statements of Loss. For a preview of revenues on a disaggregated basis, we refer to the tabular illustration presented in this section Item 7. Management’s Discussion and Analysis of Financial Condition and Form 10-K.
Results of Operations
under the sub-caption, “Results of Operations.” In addition, the Company determined that there was no cumulative adjustment to be recorded to Stockholders’ Deficit in its Consolidated Balance Sheets.Operating Segments
Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision-making group in deciding how to allocate resources and in assessing performance. Our chief operating decision-making group consists of the Chief Executive Officer and the Chief Financial Officer. This group manages the business, allocates resources and measures profitability based on our operating segments. The operating segments are managed and reviewed separately as each represents products that can be sold separately to our customers.
43
Our chief operating decision-making group has determined the following to be the operating segments for which we conduct business: (a) Games and (b) Payments. We have reported our financial performance based on our segments in both the current and prior periods. Each of these segments is monitored by our management for performance against its internal forecast and is consistent with our internal management reporting.
The Games segment provides a number of products and services for casinos, including (a) gaming machines comprised primarily of Class II and Class III slot machines placed under participation or fixed fee lease arrangements or sold to casino customers, including the award-winning TournEvent®; and (b) system software, licenses, ancillary equipment and maintenance to its casino customers. It also develops and manages the central determinant system for the VLTs installed in the State of New York.
The Payments segment provides its casino customers cash access and related products and services including: (a) access to cash at gaming facilities via ATM cash withdrawals, credit card cash access transactions, POS debit card cash access transactions, and check verification and warranty services; (b) fully integrated gaming industry kiosks that provide cash access and related services; (c) products and services that improve credit decision making, automate cashier operations and enhance patron marketing activities for gaming establishments; (d) compliance, audit and data solutions; and (e) online payment processing solutions for gaming operators in states that offer intrastate, internet-based gaming and lottery activities.
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 appropriate operating segment.
Our business is predominantly domestic, with no specific regional concentrations and no significant assets in foreign locations.
44
Results of Operations
Year ended December 31, 20172023 compared to the year ended December 31, 2016
2022
The following table presents our Results of Operations
(inas reported for the year ended December 31, 2023 compared to the year ended December 31, 2022 (amounts in thousands)*:
| | Year Ended | | | | | | | | | |
| | December 31, 2017 | | | | December 31, 2016 | | | | 2017 vs 2016 | | |
| | $ | | | % | | | | $ | | | % | | | | $ Variance | | | % Variance | | |
Revenues | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Games | | $ | 222,777 | | | | 23 | | % | | $ | 213,253 | | | | 25 | | % | | $ | 9,524 | | | | 4 | | % |
Payments | | | 752,171 | | | | 77 | | % | | | 646,203 | | | | 75 | | % | | | 105,968 | | | | 16 | | % |
Total revenues | | | 974,948 | | | | 100 | | % | | | 859,456 | | | | 100 | | % | | | 115,492 | | | | 13 | | % |
Costs and expenses | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Games cost of revenue (exclusive of depreciation and amortization) | | | 54,695 | | | | 6 | | % | | | 50,308 | | | | 6 | | % | | | 4,387 | | | | 9 | | % |
Payments cost of revenue (exclusive of depreciation and amortization) | | | 583,850 | | | | 60 | | % | | | 498,706 | | | | 58 | | % | | | 85,144 | | | | 17 | | % |
Operating expenses | | | 118,935 | | | | 12 | | % | | | 118,709 | | | | 14 | | % | | | 226 | | | | — | | % |
Research and development | | | 18,862 | | | | 2 | | % | | | 19,356 | | | | 2 | | % | | | (494 | ) | | | (3 | ) | % |
Goodwill impairment | | | — | | | | — | | % | | | 146,299 | | | | 17 | | % | | | (146,299 | ) | | | (100 | ) | % |
Depreciation | | | 47,282 | | | | 5 | | % | | | 49,995 | | | | 6 | | % | | | (2,713 | ) | | | (5 | ) | % |
Amortization | | | 69,505 | | | | 7 | | % | | | 94,638 | | | | 11 | | % | | | (25,133 | ) | | | (27 | ) | % |
Total costs and expenses | | | 893,129 | | | | 92 | | % | | | 978,011 | | | | 114 | | % | | | (84,882 | ) | | | (9 | ) | % |
Operating income (loss) | | | 81,819 | | | | 8 | | % | | | (118,555 | ) | | | (14 | ) | % | | | 200,374 | | | | 169 | | % |
Other expenses | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest expense, net of interest income | | | 102,136 | | | | 10 | | % | | | 99,228 | | | | 12 | | % | | | 2,908 | | | | 3 | | % |
Loss on extinguishment of debt | | | 51,750 | | | | 5 | | % | | | — | | | | — | | % | | | 51,750 | | | | — | | % |
Total other expenses | | | 153,886 | | | | 15 | | % | | | 99,228 | | | | 12 | | % | | | 54,658 | | | | 55 | | % |
Loss before income tax | | | (72,067 | ) | | | (7 | ) | % | | | (217,783 | ) | | | (25 | ) | % | | | 145,716 | | | | 67 | | % |
Income tax (benefit) provision | | | (20,164 | ) | | | (2 | ) | % | | | 31,696 | | | | 4 | | % | | | (51,860 | ) | | | (164 | ) | % |
Net loss | | $ | (51,903 | ) | | | (5 | ) | % | | $ | (249,479 | ) | | | (29 | ) | % | | $ | 197,576 | | | | 79 | | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended | | |
| | | December 31, 2023 | | December 31, 2022 | | 2023 vs 2022 |
| | | $ | | % | | $ | | % | | $ | | % |
| Revenues | | | | | | | | | | | | |
| Games revenues | | | | | | | | | | | | |
| Gaming operations | | $ | 304,132 | | | 38 | % | | $ | 292,873 | | | 37 | % | | $ | 11,259 | | | 4 | % |
| Gaming equipment and systems | | 125,022 | | | 15 | % | | 143,553 | | | 18 | % | | (18,531) | | | (13) | % |
| Games total revenues | | 429,154 | | | 53 | % | | 436,426 | | | 56 | % | | (7,272) | | | (2) | % |
| FinTech revenues | | | | | | | | | | | | |
| Financial access services | | 225,054 | | | 28 | % | | 206,860 | | | 26 | % | | 18,194 | | | 9 | % |
| Software and other | | 99,490 | | | 12 | % | | 80,232 | | | 10 | % | | 19,258 | | | 24 | % |
| Hardware | | 54,123 | | | 7 | % | | 59,001 | | | 8 | % | | (4,878) | | | (8) | % |
| FinTech total revenues | | 378,667 | | | 47 | % | | 346,093 | | | 44 | % | | 32,574 | | | 9 | % |
| Total revenues | | 807,821 | | | 100 | % | | 782,519 | | | 100 | % | | 25,302 | | | 3 | % |
| Costs and expenses | | | | | | | | | | | | |
Games cost of revenues (1) | | | | | | | | | | | | |
| Gaming operations | | 35,205 | | | 4 | % | | 25,153 | | | 3 | % | | 10,052 | | | 40 | % |
| Gaming equipment and systems | | 72,191 | | | 9 | % | | 86,638 | | | 11 | % | | (14,447) | | | (17) | % |
| Games total cost of revenues | | 107,396 | | | 13 | % | | 111,791 | | | 14 | % | | (4,395) | | | (4) | % |
FinTech cost of revenues (1) | | | | | | | | | | | | |
| Financial access services | | 11,064 | | | 1 | % | | 10,186 | | | 1 | % | | 878 | | | 9 | % |
| Software and other | | 6,159 | | | 1 | % | | 4,125 | | | 1 | % | | 2,034 | | | 49 | % |
| Hardware | | 36,621 | | | 5 | % | | 39,220 | | | 5 | % | | (2,599) | | | (7) | % |
| FinTech total cost of revenues | | 53,844 | | | 7 | % | | 53,531 | | | 7 | % | | 313 | | | 1 | % |
| Operating expenses | | 260,931 | | | 32 | % | | 216,959 | | | 28 | % | | 43,972 | | | 20 | % |
| Research and development | | 67,633 | | | 8 | % | | 60,527 | | | 8 | % | | 7,106 | | | 12 | % |
| Depreciation | | 78,691 | | | 10 | % | | 66,801 | | | 9 | % | | 11,890 | | | 18 | % |
| Amortization | | 60,042 | | | 7 | % | | 59,558 | | | 8 | % | | 484 | | | 1 | % |
| Total costs and expenses | | 628,537 | | | 78 | % | | 569,167 | | | 73 | % | | 59,370 | | | 10 | % |
| Operating income | | 179,284 | | | 22 | % | | 213,352 | | | 27 | % | | (34,068) | | | (16) | % |
*
| * Rounding may cause variances. |
(1) Exclusive of depreciation and amortization.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended | | |
| | December 31, 2023 | | December 31, 2022 | | 2023 vs 2022 |
| | $ | | % | | $ | | % | | $ | | % |
| Other expenses | | | | | | | | | | | | |
| Interest expense, net of interest income | | 77,693 | | | 10 | % | | 55,752 | | | 7 | % | | 21,941 | | | 39 | % |
| | | | | | | | | | | | |
| Total other expenses | | 77,693 | | | 10 | % | | 55,752 | | | 7 | % | | 21,941 | | | 39 | % |
| Income before income tax | | 101,591 | | | 13 | % | | 157,600 | | | 20 | % | | (56,009) | | | (36) | % |
| Income tax provision | | 17,594 | | | 2 | % | | 37,111 | | | 5 | % | | (19,517) | | | (53) | % |
| Net income | | $ | 83,997 | | | 10 | % | | $ | 120,489 | | | 15 | % | | $ | (36,492) | | | (30) | % |
* Rounding may cause variances.
Total revenues increased by $115.5approximately $25.3 million, or 13%3%, to $974.9approximately $807.8 million for the year ended December 31, 2017,2023, as compared to the prior year period. year. This was primarily due to increased Payments and Games revenues.lower Games revenues, increasedpartially offset by $9.5the higher FinTech revenues described below.
Games revenues decreased by approximately $7.3 million, or 4%2%, to $222.8approximately $429.2 million for the year ended December 31, 2017,2023, as compared to the prior year. This change was primarily due to a decrease in the number of electronic gaming machines sold, partially offset by over a $600 higher average selling price per unit and continued results from our HHR and bingo solutions reflected in our gaming equipment and systems revenues. The decrease in Games revenues was also partially offset by the contribution from our bingo solutions and growth in our interactive and digital offerings reflected in our gaming operations revenues.
FinTech revenues increased by approximately $32.6 million, or 9%, to approximately $378.7 million for the year
period.ended December 31, 2023, as compared to the prior year. This
change was primarily due to an increase in
units sold,both transaction and dollar volumes reflected in our financial access services revenues associated with continued strength in the gaming industry. In addition, we had continued results from software sales and support related services attributable to our kiosk, loyalty and compliance solutions and from acquired businesses reflected in our software and other revenues. The increase in FinTech revenues was partially offset by
lower daily win perfewer kiosks unit
on leased games.Payments revenuessales, tempered by more loyalty unit sales with higher average selling prices reflected in our hardware revenues.
Costs and Expenses
Total costs and expenses increased by $106.0approximately $59.4 million, or 16%10%, to $752.2approximately $628.5 million for the year ended December 31, 2017,2023, as compared to the prior year period. year. This was primarily due to higher dollar the movements in costs and transaction volume and fees earned from cash access services, new customer openings, the expansion of our ATM services in Canada, as well as overall growth in the segment.Costs and Expenses
expenses described below.
Games cost of revenues
(exclusive of depreciation and amortization) increaseddecreased by
approximately $4.4 million, or
9%4%, to
$54.7approximately $107.4 million for the year ended December 31,
2017,2023, as compared to the prior
year period.year. This
change was primarily due to
higherthe reduced variable costs associated with
increasedthe lower unit
sales.45
Paymentssales reflected in our gaming equipment systems cost of revenues. The decrease in Games cost of revenues (exclusivewas partially offset by the additional costs related to our installed base of depreciationleased machines and amortization)the variable costs from our bingo integrated electronic gaming tablets reflected in our gaming operations cost of revenues.
FinTech cost of revenues increased by $85.1approximately $0.3 million, or 17%1%, to $583.9approximately $53.8 million for the year ended December 31, 2017,2023, as compared to the prior year period.year. This change was primarily due to higherthe increased variable costs related to software from our kiosk and loyalty solutions, hardware from our loyalty unit sales, and financial access services from our check warranty offering. The increase in FinTech cost of revenues was partially offset by the reduced variable costs of hardware associated with the lower kiosk unit sales.
Operating expenses increased by approximately $44.0 million, or 20%, to approximately $260.9 million for the year ended December 31, 2023, as compared to the prior year. This was due in large part to an impairment charge of $11.7 million with respect to a partial write-down of the definite-lived customer relationships intangible asset related to our Intuicode acquisition, partially offset by an adjustment recorded in connection with our second earn-out payment related to the same transaction, each of which were reflected in our Games segment. In addition, the increase in
cash access services.Operatingoperating expenses remained relatively consistentwas related to increases in inventory and occupancy costs mostly associated with the move to our new manufacturing facility in Las Vegas, Nevada during the fourth quarter of 2023 in an effort to consolidate our warehousing operations, which impacted both our Games and FinTech segments. We also incurred higher payroll and related expenses to support the growth of our existing operations and new employees from acquisitions in our FinTech and Games segments. We also incurred higher expenses for software licensing and additional employee travel and related costs in our Games and FinTech segments. The increase in operating expenses was partially offset by lower legal costs due to higher costs incurred in the prior period due to litigation activities from existing proceedings in our Games and FinTech segments.
Research and development expense increased by approximately $7.1 million, or 12%, to approximately $67.6 million for the year ended December 31, 2023, as compared to the prior year. This was primarily due to an increasethe growth in payrollour operations and benefit-related expenses offset by the decreasefrom our acquired businesses in expenses related to the 2016 Bee Cave loan impairment that did not impact our 2017 results for our Games segment; and an increase in payroll and benefits-related expenses and professional services expenses offsetFinTech segments.
Depreciation expense 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 Payments 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.
Depreciation decreased by $2.7approximately $11.9 million, or 5%18%, to $47.3approximately $78.7 million for the year ended December 31, 2017,2023, as compared to the prior year period.year. This was primarily dueassociated with the shortening of estimated remaining useful lives that were no longer supportable for certain fixed assets and an increase in capital spending related to a decreaseacquired businesses in depreciation from certain assets being fully depreciated in both our Games and Payments segments.
segment.
Amortization
decreased by $25.1 million, or 27%, to $69.5expense was relatively consistent at $60.0 million for the year ended December 31,
2017,2023, as compared to the prior
year period. This was primarily due to certain acquired intangible assets being fully amortized in the fourth quarter of 2016 for both our Games and Payments segments.year.
Primarily as a result of the factors described above,
our operating income
increaseddecreased by
$200.4approximately $34.1 million, or
169%16%,
to $81.8and resulted in an operating income of approximately $179.3 million for the year ended December 31,
2017,2023, as compared to the prior
year period.year. The operating income margin
increased from negative 14% to a positive 8%was 22% for the year ended December 31,
2017.2023 compared to an operating income margin of 27% for the prior year.
Interest expense, net of interest income, increased by $2.9approximately $21.9 million, or 3%39%, to $102.1approximately $77.7 million for the year ended December 31, 2017,2023, as compared to the prior year period.year. This was primarily attributabledue to higher interest recognizedrates on our variable debt and our vault cash as a result of our debt restructuring activitiesinflationary pressures in the fourth quarter of 2017 as well as higher cash usage fees,macro-economic environment and global instability. This was partially offset by lower interest expense as a resultearned of approximately $12.1 million on our debt refinancing in May 2017.Loss on extinguishment of debt forcash balances due to rising interest rates throughout 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 (defined herein), 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 (both defined herein) in the second quarter of 2017. There was no loss on extinguishment of debt in the prior year period.
year.
Income tax benefit was $20.2provision decreased by $19.5 million to approximately $17.6 million for the year ended December 31, 2017,2023, as compared to an income tax provision of $31.7 million in the prior year period. 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 the valuation allowance for deferred tax assets.year. The income tax provision for the year ended December 31, 20162023 reflected an effective income tax rate of 17.3%, which was less than the statutory federal rate of 21.0%, primarily due to a negativeresearch credit and the benefit from equity award activities, partially offset by state taxes, compensation deduction limitations and a net operating loss limitation. The income tax provision of $37.1 million for the year ended December 31, 2022 reflected an effective income tax rate of 14.6%23.5%, which was lessgreater than the statutory federal rate of 35.0%21.0%, primarily due to state taxes, compensation deduction limitations, a net operating loss limitation and an increase in our valuation allowanceaccrual for deferreda foreign withholding tax, assets and the impairment of goodwill for which no tax benefit was provided for book purposes.Primarily as a result of the foregoing, our net loss decreased by $197.6 million, or 79%, to $51.9 million for the year ended December 31, 2017, as compared to the prior year period.
46
Year ended December 31, 2016 compared to year ended December 31, 2015:
The following table presents our Results of Operations (in thousands)*:
| | Year Ended | | | | | | | | | | |
| | December 31, 2016 | | | December 31, 2015 | | | December 31, 2016 vs 2015 | | |
| | $ | | | % | | | $ | | | % | | | $ Variance | | | % Variance | | |
Revenues | | | | | | | | | | | | | | | | | | | | | | | | | |
Games | | $ | 213,253 | | | | 25 | | % | $ | 214,424 | | | | 26 | | % | $ | (1,171 | ) | | | (1 | ) | % |
Payments | | | 646,203 | | | | 75 | | % | | 612,575 | | | | 74 | | % | | 33,628 | | | | 5 | | % |
Total revenues | | | 859,456 | | | | 100 | | % | | 826,999 | | | | 100 | | % | | 32,457 | | | | 4 | | % |
Costs and expenses | | | | | | | | | | | | | | | | | | | | | | | | | |
Games cost of revenue (exclusive of depreciation and amortization) | | | 50,308 | | | | 6 | | % | | 47,017 | | | | 6 | | % | | 3,291 | | | | 7 | | % |
Payments cost of revenue (exclusive of depreciation and amortization) | | | 498,706 | | | | 58 | | % | | 463,380 | | | | 56 | | % | | 35,326 | | | | 8 | | % |
Operating expenses | | | 118,709 | | | | 14 | | % | | 101,202 | | | | 12 | | % | | 17,507 | | | | 17 | | % |
Research and development | | | 19,356 | | | | 2 | | % | | 19,098 | | | | 2 | | % | | 258 | | | | 1 | | % |
Goodwill impairment | | | 146,299 | | | | 17 | | % | | 75,008 | | | | 9 | | % | | 71,291 | | | | 95 | | % |
Depreciation | | | 49,995 | | | | 6 | | % | | 45,551 | | | | 6 | | % | | 4,444 | | | | 10 | | % |
Amortization | | | 94,638 | | | | 11 | | % | | 85,473 | | | | 10 | | % | | 9,165 | | | | 11 | | % |
Total costs and expenses | | | 978,011 | | | | 114 | | % | | 836,729 | | | | 101 | | % | | 141,282 | | | | 17 | | % |
Operating loss | | | (118,555 | ) | | | (14 | ) | % | | (9,730 | ) | | | (1 | ) | % | | (108,825 | ) | | | 1,118 | | % |
Other expenses | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest expense, net of interest income | | | 99,228 | | | | 12 | | % | | 100,290 | | | | 12 | | % | | (1,062 | ) | | | (1 | ) | % |
Loss on extinguishment of debt | | | — | | | | — | | % | | 13,063 | | | | 2 | | % | | (13,063 | ) | | | (100 | ) | % |
Total other expenses | | | 99,228 | | | | 12 | | % | | 113,353 | | | | 14 | | % | | (14,125 | ) | | | (12 | ) | % |
Loss before income tax | | | (217,783 | ) | | | (25 | ) | % | | (123,083 | ) | | | (15 | ) | % | | (94,700 | ) | | | 77 | | % |
Income tax provision (benefit) | | | 31,696 | | | | 4 | | % | | (18,111 | ) | | | (2 | ) | % | | 49,807 | | | | (275 | ) | % |
Net loss | | $ | (249,479 | ) | | | (29 | ) | % | $ | (104,972 | ) | | | (13 | ) | % | $ | (144,507 | ) | | | 138 | | % |
*
| Rounding may cause variances.
|
Total Revenues
Total revenues increased by $32.5 million, or 4%, to $859.5 million for the year ended December 31, 2016, as compared to the prior year period. This was due to increased Payments revenues, slightly offset by lower Games revenues.
Games revenues decreased by $1.2 million, or 1%, to $213.3 million for the year ended December 31, 2016, as compared to the prior year period. This was primarily due to a lower daily win per unit on leased games, partially offset by an increase in unit salesboth a research credit and average sales price per unit.
Payments revenues increased by $33.6 million, the benefit from equity award activities.
For 5%,additional information, refer to $646.2 million for the year ended December 31, 2016, as compared “Part II — Item 8 — Financial Statements and Supplementary Data — Notes to the prior year period. This was primarily due to higher ATM transaction volume and fees, including an increase in transaction volume from ATM portfolios acquired in late 2015.Costs and Expenses
Games cost of revenues (exclusive of depreciation and amortization) increased by $3.3 million, or 7%, to $50.3 million for the year ended December 31, 2016, as compared to the prior year period. This was primarily due to higher costs associated with the increased unit sales volume.
47
Consolidated Financial Statements — Note 18 —
Income TaxesPayments cost of revenues (exclusive of depreciation and amortization) increased by $35.3 million, or 8%, to $498.7 million for the year ended December 31, 2016, as compared to the prior year period. This was primarily due to the ATM portfolio acquisitions and higher commission expense on ATM revenues.Operating expenses increased by $17.5 million, or 17%, to $118.7 million for the year ended December 31, 2016, as compared to the prior year period. This was primarily due to the impact of a $14.4 million gain contingency settlement during the prior year and a $4.3 million write-down of a note receivable and warrant associated with Bee Cave Games, Inc.
Goodwill impairment increased by $71.3 million, or 95%, to $146.3 million for the year ended December 31, 2016, as compared to the prior year period. This non-cash charge was a result of our October 1, 2016 annual goodwill assessment and attributable to our Games reporting unit.
Depreciation increased by $4.4 million, or 10%, to $50.0 million for the year ended December 31, 2016, as compared to the prior year period. This was primarily related to increased fixed assets being placed in service.
Amortization increased by $9.2 million, or 11%, to $94.6 million for the year ended December 31, 2016, as compared to the prior year period. This was primarily related to an increase in intangible assets being placed in service related to developed technology and software.
”. Primarily as a result of the factors described above, operating loss increased by $108.8 million, or 1,118%, to an operating losswe had net income of $118.6approximately $84.0 million for the year ended December 31, 2016,2023, as compared to a prior year net income of approximately $120.5 million.
Year ended December 31, 2022 compared to year ended December 31, 2021:
The following table presents our Results of Operations as reported for the year ended December 31, 2022 compared to the year ended December 31, 2021 (amounts in thousands)*:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended | | |
| | | December 31, 2022 | | December 31, 2021 | | 2022 vs 2021 |
| | | $ | | % | | $ | | % | | $ | | % |
| Revenues | | | | | | | | | | | | |
| Games revenues | | | | | | | | | | | | |
| Gaming operations | | $ | 292,873 | | | 37 | % | | $ | 272,885 | | | 41 | % | | $ | 19,988 | | | 7 | % |
| Gaming equipment and systems | | 143,553 | | | 18 | % | | 103,844 | | | 16 | % | | 39,709 | | | 38 | % |
| Games total revenues | | 436,426 | | | 56 | % | | 376,729 | | | 57 | % | | 59,697 | | | 16 | % |
| FinTech revenues | | | | | | | | | | | | |
| Financial access services | | 206,860 | | | 26 | % | | 178,019 | | | 28 | % | | 28,841 | | | 16 | % |
| Software and other | | 80,232 | | | 10 | % | | 67,797 | | | 10 | % | | 12,435 | | | 18 | % |
| Hardware | | 59,001 | | | 8 | % | | 37,840 | | | 6 | % | | 21,161 | | | 56 | % |
| FinTech total revenues | | 346,093 | | | 44 | % | | 283,656 | | | 43 | % | | 62,437 | | | 22 | % |
| Total revenues | | 782,519 | | | 100 | % | | 660,385 | | | 100 | % | | 122,134 | | | 18 | % |
| Costs and expenses | | | | | | | | | | | | |
Games cost of revenues (1) | | | | | | | | | | | | |
| Gaming operations | | 25,153 | | | 3 | % | | 21,663 | | | 3 | % | | 3,490 | | | 16 | % |
| Gaming equipment and systems | | 86,638 | | | 11 | % | | 60,093 | | | 9 | % | | 26,545 | | | 44 | % |
| Games total cost of revenues | | 111,791 | | | 14 | % | | 81,756 | | | 12 | % | | 30,035 | | | 37 | % |
FinTech cost of revenues (1) | | | | | | | | | | | | |
| Financial access services | | 10,186 | | | 1 | % | | 6,779 | | | 1 | % | | 3,407 | | | 50 | % |
| Software and other | | 4,125 | | | 1 | % | | 4,129 | | | — | % | | (4) | | | — | % |
| Hardware | | 39,220 | | | 5 | % | | 22,785 | | | 3 | % | | 16,435 | | | 72 | % |
| FinTech total cost of revenues | | 53,531 | | | 7 | % | | 33,693 | | | 5 | % | | 19,838 | | | 59 | % |
| Operating expenses | | 216,959 | | | 28 | % | | 188,900 | | | 29 | % | | 28,059 | | | 15 | % |
| Research and development | | 60,527 | | | 8 | % | | 39,051 | | | 6 | % | | 21,476 | | | 55 | % |
| Depreciation | | 66,801 | | | 9 | % | | 61,487 | | | 9 | % | | 5,314 | | | 9 | % |
| Amortization | | 59,558 | | | 8 | % | | 57,987 | | | 9 | % | | 1,571 | | | 3 | % |
| Total costs and expenses | | 569,167 | | | 73 | % | | 462,874 | | | 70 | % | | 106,293 | | | 23 | % |
| Operating income | | 213,352 | | | 27 | % | | 197,511 | | | 30 | % | | 15,841 | | | 8 | % |
* Rounding may cause variances.
(1) Exclusive of depreciation and amortization.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended | | |
| | December 31, 2022 | | December 31, 2021 | | 2022 vs 2021 |
| | $ | | % | | $ | | % | | $ | | % |
| Other expenses | | | | | | | | | | | | |
| Interest expense, net of interest income | | 55,752 | | | 7 | % | | 62,097 | | | 9 | % | | (6,345) | | | (10) | % |
| Loss on extinguishment of debt | | — | | | — | % | | 34,389 | | | 5 | % | | (34,389) | | | (100) | % |
| Total other expenses | | 55,752 | | | 7 | % | | 96,486 | | | 15 | % | | (40,734) | | | (42) | % |
| Income before income tax | | 157,600 | | | 20 | % | | 101,025 | | | 15 | % | | 56,575 | | | 56 | % |
| Income tax provision (benefit) | | 37,111 | | | 5 | % | | (51,900) | | | (8) | % | | 89,011 | | | 172 | % |
| Net income | | $ | 120,489 | | | 15 | % | | $ | 152,925 | | | 23 | % | | $ | (32,436) | | | (21) | % |
* Rounding may cause variances.
Total Revenues
Total revenues increased by approximately $122.1 million, or 18%, to approximately $782.5 million for the year ended December 31, 2022, as compared to the prior year. This was primarily due to the higher Games and FinTech revenues described below.
Games revenues increased by approximately $59.7 million, or 16%, to approximately $436.4 million for the year ended December 31, 2022, as compared to the prior year. This was primarily due to: (i) an increase of 1,785 gaming machines sold (including those from the acquired HHR development company, Intuicode), with $779 higher average selling price per unit, which resulted in additional gaming equipment revenues; (ii) a 1,072 unit increase in the number of units in our installed base from our gaming operations revenues; (iii) the recurring, participation revenue contributions from Intuicode, which is in our gaming operations revenues, and also in our gaming equipment revenues; and (iv) an $8.7 million increase in our online digital and interactive solutions as a result of growth in the customer base and expansion of our product with existing customers, which were reflected in our gaming operations revenues.
FinTech revenues increased by approximately $62.4 million, or 22%, to approximately $346.1 million for the year ended December 31, 2022, as compared to the prior year. This was primarily due to contributions that included: (i) an increase in both transaction and dollar volumes attributable to more normalized operations in the gaming industry and new and renewed business from our financial access services revenues; (ii) contributions from acquired businesses, reflected mostly in our hardware revenues and software and financial access services revenues; and (iii) an increase in unit sales of our kiosks reflected in our hardware revenues.
Costs and Expenses
Total costs and expenses increased by approximately $106.3 million, or 23%, to approximately $569.2 million for the year ended December 31, 2022, 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 approximately $30.0 million, or 37%, to approximately $111.8 million for the year ended December 31, 2022, as compared to the prior year. This was primarily due to the additional variable costs associated with the higher unit sales from our gaming equipment and systems activities, increased freight and delivery costs, and increased supply chain related costs. There were also additional costs associated with our installed base from our gaming operations activities, primarily from increased payroll related costs.
FinTech cost of revenues increased by approximately $19.8 million, or 59%, to approximately $53.5 million for the year ended December 31, 2022, as compared to the prior year. This was primarily due to additional variable costs associated with the higher unit sales from our hardware revenue, increased supply chain related costs, increased freight and delivery costs, and an additional $3.4 million in check warranty expenses. Check warranty losses have been increasing in 2022 as declining or eliminated governmental stimulus efforts have been greatly reduced or ceased and nationwide patrons’ cash balances have been declining. These check warranty losses are reported within our financial access services activities.
Operating expenses increased by approximately $28.1 million, or 15%, to approximately $217.0 million for the year ended December 31, 2022, as compared to the prior year. This was primarily due to higher payroll and related expenses to support the growth of our existing operations and new employees from acquisitions completed during the year in our Games and FinTech segments. We also incurred higher employee travel and related costs resulting from more normalized operations of our customers in our Games and FinTech segments. In addition, the increase was attributable to rising expenses for software licensing and information technology hardware support. The prior year operating expenses were 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 in our FinTech segment.
Research and development expense increased by approximately $21.5 million, or 55%, to approximately $60.5 million for the year ended December 31, 2022, as compared to the prior year. This increase was primarily the result of the growth in our operations, expense from our recently completed acquisitions and the continued investment in new products in our Games and FinTech segments.
Depreciation expense increased by approximately $5.3 million, or 9%, to approximately $66.8 million for the year ended December 31, 2022, as compared to the prior year, period. The operating loss marginand was primarily associated with an increase in capital spending resulting in a higher asset base in our Games and FinTech segments.
Amortization expense increased by approximately $1.6 million, or 3%, to 14%approximately $59.6 million for the year ended December 31, 2016,2022, as compared to 1%the prior year, and was primarily associated with an increase in intangible assets acquired in 2022 for our Games and FinTech segments.
Primarily as a result of the factors described above, our operating income increased by approximately $15.8 million, or 8%, and resulted in an operating income of approximately $213.4 million for the year ended December 31, 2022, as compared to the prior year. The operating income margin was 27% for the year ended December 31, 2022 compared to an operating income margin of 30% for the prior
year period. Excluding the goodwill impairment charge in 2016 and 2015, the operating margin would have been approximately 3% and 8%, respectively.year.
Interest expense, net of interest income, decreased by $1.1approximately $6.3 million, or 1%10%, to $99.2approximately $55.8 million for the year ended December 31, 2016,2022, as compared to the prior year period. year. This was primarily related due to interest savings achieved from a refinancing of our prior credit facilities and unsecured notes in the third quarter of 2021 that resulted in a lower outstanding debt balances, the write-offamount of debt issuance costs related to our Refinanced Secured Notes,principal outstanding. This was partially offset by a higher interest rate underrates on our variable debt and our vault cash as a result of inflationary pressures in the Contract Cash Solutions Agreement with Wells Fargo.macro-economic environment and global instability. Partially offsetting interest expense was approximately $3.9 million in interest earned on our cash balances due to rising interest rates throughout the year and on certain customer receivables.
There was no loss on extinguishment of debt for the year ended December 31,
2016,2022, as compared to
a loss on extinguishment of debt of $13.1$34.4 million in the prior year
period.resulting from a refinancing of our prior credit facilities and unsecured notes in the third quarter of 2021.
Income tax provision was $31.7benefit increased by $89.0 million to approximately $37.1 million for the year ended December 31, 2016,2022, as compared to an income tax benefit in the prior year period. This was primarily due to an increase in our valuation allowance for deferred tax assets. year. The income tax provision reflected a negative effective income tax rate of 14.6% for the year ended December 31, 2016,2022 reflected an effective income tax rate of 23.5%, which was greater than the statutory federal rate of 21.0%, primarily due to state taxes, compensation deduction limitations, a net operating loss limitation and an accrual for a foreign withholding tax, partially offset by both a research credit and the benefit from equity award activities. The income tax benefit of $51.9 million for the year ended December 31, 2021 reflected an effective income tax rate of negative 51.4%, which was less than the statutory federal rate of 35.0%21.0%, primarily due to an increasea decrease in our valuation allowance foras we removed the full valuation allowance on our federal and certain states deferred tax assets
Primarily as a result of the
foregoing,factors described above, we had net
loss increased by $144.5 million, or 138%, to $249.5income of approximately $120.5 million for the year ended December 31,
2016,2022, as compared to
thea prior year
period.48
Games Revenues
The following table includes the revenues from our Games segment (amounts in thousands):
net income of approximately $152.9 million. | | Year Ended |
| | December 31, 2017 | | December 31, 2016 |
| | | | | | % of Games | | | | | | % of Games |
| | Revenues | | | Revenues | | Revenues | | | Revenues |
Games revenues | | | | | | | | | | | | | | | | | | |
Gaming operations | | $ | 148,636 | | | | 67 | | % | | $ | 152,455 | | | | 71 | | % |
Gaming sales | | | 70,117 | | | | 31 | | % | | | 56,277 | | | | 26 | | % |
Other | | | 4,024 | | | | 2 | | % | | | 4,521 | | | | 3 | | % |
Total | | $ | 222,777 | | | | 100 | | % | | $ | 213,253 | | | | 100 | | % |
Payments Revenues
The following table includes the revenues from our Payments segment (amounts in thousands):
| | Year Ended |
| | December 31, 2017 | | December 31, 2016 |
| | | | | | % of Payments | | | | | | % of Payments |
| | Revenues | | | Revenues | | Revenues | | | Revenues |
Payments revenues | | | | | | | | | | | | | | | | | | |
Cash access services | | $ | 707,222 | | | | 94 | | % | | $ | 601,873 | | | | 93 | | % |
Kiosk sales and services | | | 25,000 | | | | 3 | | % | | | 25,330 | | | | 4 | | % |
Compliance and other | | | 19,949 | | | | 3 | | % | | | 19,000 | | | | 3 | | % |
Total | | $ | 752,171 | | | | 100 | | % | | $ | 646,203 | | | | 100 | | % |
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 and estimates as those addressed below. We also have other key accounting policies that involve the use of estimates, judgments, and assumptions. You should review “Note 2.Refer to “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.Segment Reporting.
Business Combinations
We applycompleted an acquisition for purchase consideration of approximately $61.5 million during the provisions of the Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (“ASC”) 280, “Segment Reporting”, in accounting for our business segments. This defines operating segments as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. In addition, ASC 280-10-50-34, as well as Rule 3-03(e) of Regulation S-X, requires us to recast financial information from prior years for segments if we change our internal organization in a way that effects the compositions of our reportable segments. Our operating segments were previously organized and managed under five business segments: (a) Cash Advance, (b) ATM, (c) Check Services, (d) Games, and (e) Other. During the first quarter of 2015, we changed our organizational structure as part of our transformation to a Games and Payments company providing solutions to the gaming industry. Accordingly, since the first quarter of 2015, we have reported our financial performance, and organized and managed our operations, across the following two business segments: (a) Games, and (b) Payments. Each of these segments is monitored by our management for performance against its internal forecast and is consistent with our internal management reporting.49
Business Combinations. We apply the provisions of the FASB ASC 805, “Business Combinations”, in the accounting for acquisitions. It requires us to recognize separately from goodwill the assets acquired and the liabilities assumed, at their acquisition date fair values. Goodwill as ofyear ended
December 31, 2023, specifically the acquisition date is measured as the excess of consideration transferred over the netVKGS LLC. This acquisition resulted in us recording a significant amount of the acquisition dateidentified intangible assets and goodwill. The determination of fair values of the assets acquired and liabilities assumed for our acquisitions requires the liabilities assumed. Significantuse of various assumptions, estimates or judgments in the valuation process, such as: the methodology, the estimated future cash flows and the discount rate used to present value such cash flows and benchmarking rates, as applicable. We utilize the assistance of third-party specialists in connection with the valuation process, as applicable.
Our estimates of fair values require significant judgment and are based on assumptions we determined to be reasonable; however, they are unpredictable and inherently uncertain, including, but not limited to: estimates of future growth rates, operating margins, results of operations and financial condition.
Management performs its forecasting process, which, among other factors, includes reviewing recent historical results, company-specific variables and industry trends, among other considerations. This process is generally fluid throughout each year and considered in conjunction with the acquisition activities that occur during any given year. Changes in forecasted operations can significantly impact these estimates, which could materially affect our results of operations.
There can be no assurance that our 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 calculationmade in our determination of an appropriate discount rate and projectionfair values 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 offsetfrom our acquisitions will prove to goodwill. 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 asbe accurate predictions of the acquisition date. We reevaluate these items quarterly based upon factsfuture. To the extent our assumptions regarding business plans, competitive environments, anticipated growth rates, or expectations of results of operations and circumstances that existed as of the acquisition date and anyfinancial condition are not correct, we may be required to record adjustments to its preliminary estimates are recordedin future periods, whether to goodwill in the period of identification, if identified withinduring the measurement period. Uponperiod or to the conclusionStatements of Operations upon the expiration of the measurement period, in the event items are present that were either known or final determinationknowable at the respective acquisition dates.
Goodwill
We had approximately $737.8 million of the valuesgoodwill, of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recordedwhich approximately $484.4 million was related to the Statements of Loss.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.
Property, Equipment and Leased Assets. We have approximately $113.5 million in net property, equipment and leased assets
our Games reporting unit, on our Balance Sheets at December 31, 2017. Property, equipment and leased assets are stated at cost, less accumulated depreciation, computed using the straight-line method over the lesser of the estimated life of the related assets, generally two to five years, or the related lease term. 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 arrangements, and “rental pool – undeployed,” which consists of assets held by us that are available for customer use. Rental pool – undeployed 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 Loss. 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 undiscounted future cash flows do not exceed the asset’s carrying value.Goodwill. We had approximately $640.6 million of goodwill on our Balance Sheets at December 31, 20172023 resulting from acquisitions of other businesses. All of our goodwill was subject to our annual goodwill impairment testing. We test for impairment annually on a reporting unit basis, at the beginning of our fourth fiscal quarter, or more often under certain circumstances. Our reporting units are identified as operating segments or one level
The annual
evaluation of goodwill requires the use of different assumptions, estimates, or judgments in the goodwill 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 determinestesting process, such as: the
fair value ofmethodology, the
reporting unit, using an income approach that discountsestimated future cash flows
based on the estimated future results of our reporting units,
the discount rate used to present value such cash flows, and
a market approach that comparesthe market multiples of comparable
companies to determine whether or not any impairment exists. If the fair value of a reporting unit is less than its carrying amount, an impairment charge equal to the amount by which the carrying amount of goodwill for the reporting unit exceeds the implied fair value of that goodwill is recorded. In connection with our annual goodwill impairment testing process for 2017, we determined that no impairment adjustment was necessary as the fair value exceeded the carrying amount for each of the Games (limited excess fair value), Cash Access Services, Kiosk Sales and Services, Central Credit Services and Compliance Sales and Services reporting units.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 quarterfluid throughout each year and considered in conjunction with the annual goodwill impairment evaluation.
50
The annual evaluation of goodwill and other non‑amortizing intangible assets 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 affectsignificantly impact these estimates, which could materially affect our results of operations. The estimateOur estimates of fair value requiresrequire significant judgment and we base our fair value estimatesare based on assumptions that we believedetermined to be reasonable; but thathowever, 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,
or anticipated growth rates,
or expectations of results of operations and financial condition are not correct, we may be required to record goodwill impairment charges in future periods, whether in connection with our next annual impairment testing
process, or earlier,
ifin the event 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 ascertainat such time during the resources to be allocated to the segment and assess its performance; and (c) have discrete financial information available. As of December 31, 2017, our reporting units included: Games, Cash Access Services, Kiosk Sales and Services, Central Credit Services, and Compliance Sales and Services. During the year ended December 31, 2016, the Company combined its Cash Advance, ATM and Check Services reporting units into a single Cash Access reporting unit to be consistent with the current corporate structure and segment management. The use of different assumptions, estimates or judgments in the goodwill impairment testing process, such as the estimated future cash flows of our reporting units, the discount rate used to discount such cash flows, or the estimated fair value of the reporting units’ tangible and intangible assets and liabilities, could significantly increase or decrease the estimated fair value of a reporting unit or its net assets, and therefore, impact the related impairment charge, if any.
Other Intangible Assets. We have approximately $324.3 million in net unamortized other intangible assets on our Balance Sheets at December 31, 2017. Other intangible assets are stated at cost, less accumulated amortization and computed primarily using the straight-line method. Other intangible assets consist primarily of: (i) customer contracts (rights to provide Games and Payments services to gaming establishment customers), developed technology, trade names and trademarks and contract rights acquired through business combinations; (ii) capitalized software development costs; and (iii) the acquisition cost of our patent related to the 3-in-1 rollover technology acquired in 2005. 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 five years. The acquisition cost of the 3-in-1 Rollover patent is being amortized over the term of the patent, which expired in January 2018. 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 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, undiscounted 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.
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, plus the provision for U.S. taxes on undistributed earnings of international subsidiaries as of December 31, 2017. With respect to new tax reform, we account for such provisions in the year of enactment in accordance with GAAP. 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
51
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 Loss 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 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, 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. If we no longer 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 expect to 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 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.
Revenue Recognition
Overview
We recognize revenue when evidence of an arrangement exists, services have been rendered, the price is fixed or determinable and collectability is reasonably assured. We evaluate our revenue streams for proper timing of revenue recognition. Revenue is recognized as products are delivered and or services are performed.
For sales arrangements with multiple deliverables, we apply the guidance from ASC 605-25, “Revenue Recognition - Multiple-Element Arrangements.” In addition, we apply the guidance from ASC 985-605, “Software – Revenue Recognition” which affects vendors that sell or lease tangible products in an arrangement that contains software that is more than incidental to the tangible product as a whole and clarifies what guidance should be used in allocating and measuring revenue. In allocating the arrangement fees to separate deliverables, we evaluate whether we have vendor-specific objective evidence (“VSOE”) of selling price, third party evidence (“TPE”) or estimate of selling price (“ESP”) for gaming devices, maintenance and product support fees and other revenue sources. We generally use ESP to determine the selling price used in the allocation of separate deliverables, as VSOE and TPE are generally not available. We determine the ESP on separate deliverables by estimating a margin typically received on such items and applying that margin to the product cost incurred.
Sales taxes and other taxes collected from customers on behalf of governmental authorities are accounted for on a net basis and are not included in revenues or operating expenses.
52
Games Revenues
Games revenues are primarily generated by our gaming operations under development, placement, and participation arrangements in which we provide our customers with player terminals, player terminal-content licenses, central determinate systems for devices placed in service in licensed jurisdictions and back-office equipment, collectively referred to herein as leased gaming equipment. Generally, under these arrangements, we retain ownership of the leased gaming equipment installed at customer facilities and we receive revenue based on a percentage of the net win per day generated by the leased gaming equipment or a fixed daily fee based on the number of player terminals installed at the facility. Revenue from lease participation or daily fee arrangements are considered both realizable and earned at the end of each gaming day. Gaming operations revenues generated by leased gaming equipment deployed at sites under development or placement fee agreements are reduced by the accretion of contract rights acquired in connection with those agreements. Contract rights are amounts allocated to intangible assets for dedicated floor space resulting from such agreements, described under “Development and Placement Fee Agreements.” The related amortization expense, or accretion of contract rights, is recorded net against the respective revenue category in the Statements of Loss.
In addition, we sell gaming equipment directly to our customers under sales contracts on standard credit terms, or may grant extended credit terms under sales contracts secured by the related equipment.
Other Games revenues primarily consist of our TournEvent of Champions® national tournament offering.
Generally, player terminal sales include ancillary equipment, such as networking gear, bases, chairs, and occasionally signage, some of which may be necessary for the full functionality of the player terminals in a casino. This ancillary equipment comprises an install kit that is shipped simultaneously with the player terminals. Although our products are analyzed as multiple deliverable arrangements, revenue for the player terminal and ancillary equipment is not recognized until all elements essential for the functionality of the product have been shipped or delivered. This includes game theme software and essential ancillary equipment. If elements that are not essential to the functionality of the player terminals are shipped after the unit, such as signage, chairs, or bases, these items would be classified as deferred revenue until shipped or delivered.
Revenue related to systems arrangements that contain both software and non-software deliverables requires allocation of the arrangement fee to the separate deliverables using the relative selling price method. Revenue for software deliverables is recognized under software revenue recognition guidance. Revenue resulting from the sale of non-software deliverables, such as gaming devices and other hardware, are accounted for based on other applicable revenue recognition guidance as the devices are tangible products containing both software and non-software components that function together to deliver the product's essential functionality.
The majority of our multiple element sales contracts are for some combination of gaming equipment, player terminals, content, system software, license fees, ancillary equipment and maintenance.
Payments Revenues
Cash advance revenues are comprised of transaction fees assessed to gaming patrons in connection with credit card cash access and POS debit card cash access transactions and are recognized at the time the transactions are authorized. Such fees are based on a combination of a fixed amount plus a percentage of the face amount of the credit card cash access or POS debit card cash access transaction amount.
ATM revenues are comprised of transaction fees in the form of cardholder surcharges assessed to gaming patrons in connection with ATM cash withdrawals at the time the transactions are authorized and reverse interchange fees paid to us by the patrons’ issuing banks. Cardholder surcharges and reverse interchange are recognized as revenue when a transaction is initiated. The cardholder surcharges assessed to gaming patrons in connection with ATM cash withdrawals are currently a fixed dollar amount and not a percentage of the transaction amount.
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 sell
53
fully integrated kiosks directly to our customers under sales contracts on standard credit terms, or may grant extended credit terms under sales contracts secured by the related equipment.
Kiosk Sales and Services revenues are derived from the sale of cash access equipment and certain other ancillary fees associated with the sale, installation and maintenance of those offerings directly to our customers under sales contracts on standard credit terms, or may grant extended credit terms under sales contracts secured by the related equipment.
Compliance and other revenues include amounts derived from: (i) the sale of software licensing, software subscriptions professional services and certain other ancillary fees; (ii) Central Credit revenues 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 (iii) fees generated from ancillary marketing, database and internet-based gaming activities.
The majority of our multiple element sales contracts are for some combination of cash access services, fully integrated kiosks and related equipment, ancillary services and maintenance.
Stock‑Based Compensation. Stock‑based compensation expense for all awards is based on the grant date fair value estimated. We estimate the weighted‑average fair value of options granted for our time‑based and cliff vesting time‑based options using the Black‑Scholes Option Pricing Model. We estimate the weighted‑average fair value of options granted for our market‑based options using a lattice‑based option valuation model. Each model is based on assumptions regarding expected volatility, dividend yield, risk‑free interest rates, the expected term of the option and the expected forfeiture rate. Each of these assumptions, while reasonable, requires a certain degree of judgment and the fair value estimates could vary if the actual results are materially different than those initially applied.
Recent Accounting Guidance
Liquidity and Capital Resources
The following table presents selected information about our financial position (in thousands):
| | | At December 31, | | | | At December 31, |
| | 2017 | | | 2016 | | | | 2023 | | 2022 |
Balance sheet data | | | | | | | | | Balance sheet data | | |
Total assets | | $ | 1,537,074 | | | $ | 1,408,163 | |
Total borrowings | | | 1,167,843 | | | | 1,121,880 | |
Total stockholders’ deficit | | | (140,633 | ) | | | (107,793 | ) |
| Total stockholders’ equity | |
Cash available | | | | | | | | | Cash available | | |
Cash and cash equivalents | | $ | 128,586 | | | $ | 119,051 | |
Settlement receivables | | | 227,403 | | | | 128,821 | |
Settlement liabilities | | | (317,744 | ) | | | (239,123 | ) |
Net cash position(1) | | | 38,245 | | | | 8,749 | |
Undrawn revolving credit facility | | | 35,000 | | | | 50,000 | |
Net cash available(1) | | $ | 73,245 | | | $ | 58,749 | |
| (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
|
(1)Non-GAAP financial measure. In order to enhance investor understanding of our cash balance, we are providing in this Annual Report on Form 10-K our Net Cash Position and Net Cash Available, which are not measures of financial position under GAAP. Accordingly, these measures should not be considered in isolation or as a substitute for GAAP measures, and should be read in conjunction with our balance sheets prepared in accordance with GAAP. We define our (i) Net Cash Position as cash and cash equivalents plus settlement receivables less settlement liabilities; and (ii) Net Cash Available as Net Cash Position plus undrawn amounts available under our Revolving Credit Facility. Our Net Cash Position and Net Cash Available change substantially based upon the timing of our receipt of funds for settlement receivables and payments we make to customers for our settlement liabilities. We present these non-GAAP measures as we monitor these amounts in connection with forecasting of cash flows and future cash requirements, both on a short-term and long-term basis.54
| | Revolving Credit Facility (defined herein). We present net cash position because our cash position, as measured by cash and cash equivalents, depends upon changes in settlement receivables and the timing of payments related to settlement liabilities. As such, our cash and cash equivalents can change substantially based upon the timing of our receipt of payments for settlement receivables and payments we make to customers for our settlement liabilities. We present net cash available as management monitors this amount in connection with its forecasting of cash flows and future cash requirements.
|
Cash Resources
Our
As of December 31, 2023, 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,
20172023 included cash in
non‑U.S.non-U.S. jurisdictions of approximately
$18.6$22.0 million. Generally, these funds are available for operating and investment purposes within the jurisdiction in which they reside,
butand we may
befrom time to time consider repatriating these foreign funds to the United States, subject to
potential withholding tax
in the foreign jurisdiction upon repatriation.obligations, based on operating requirements.
We expect that our cash provided by operating activities will also be sufficient for our operating and debt servicing needs during the next 12 months. If not,foreseeable 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 Amended Credit Agreement.We provide cash settlement services to our customers related to our cash access products. These services involve the movement of funds between the various parties associated with cash access transactions. These activities resultAgreement (defined in a balance due to us at the end of each business day for the face amount provided to patrons plus the service fee charged to those patrons that we recoup over the next few business days and classify as settlement receivables. These activities also result in a balance due to our customers at the end of each business day for the face amount provided to patrons that we remit over the next few business days and classify as settlement liabilities. As of December 31, 2017, we had $227.4 million in settlement receivables for which we generally receive payment within one week. As of December 31, 2017, we had $317.7 million in settlement liabilities due to our customers for these settlement services that are generally paid within the next month. As the timing of cash received from settlement receivables and payment of settlement liabilities may differ, the total amount of cash held by us will fluctuate throughout the year.
Our cash and cash equivalents were $128.6 million and $119.1 million as of December 31, 2017 and December 31, 2016, respectively. Our net cash position after considering the impact of settlement receivables and settlement liabilities was $38.2 million and $8.7 million as of December 31, 2017 and December 31, 2016, respectively. Our net cash available after considering the net cash position and undrawn amounts available under our Revolving Credit Facility was approximately $73.2 million and $58.7 million as of December 31, 2017 and December 31, 2016, respectively.
55
“Note 13 — Long-Term Debt”).
The following table
summarizespresents a summary of our cash
flowsflow activity for the years ended December 31,
2017, 20162023, 2022 and
20152021 (in thousands):
| | Year Ended December 31, | | | Increase/(Decrease) | |
| | 2017 | | | 2016 | | | 2015 | | | 2017 Vs 2016 | | | 2016 Vs 2015 | | | | Year Ended December 31, | | $ Change |
| | | | | 2023 | | 2022 | | 2021 | | 2023 vs 2022 | | 2022 vs 2021 |
| | | | As adjusted | | | | | | As adjusted | | As adjusted | | | | As adjusted |
Cash flow activities | | | | | | | | | | | | | | | | | | | | | Cash flow activities | | | | | | | | |
Net cash provided by operating activities | | $ | 95,828 | | | $ | 131,711 | | | $ | 124,587 | | | $ | (35,883 | ) | | $ | 7,124 | |
Net cash used in investing activities | | | (109,979 | ) | | | (88,054 | ) | | | (85,549 | ) | | | (21,925 | ) | | | (2,505 | ) |
Net cash provided by (used in) financing activities | | | 22,394 | | | | (24,922 | ) | | | (24,551 | ) | | | 47,316 | | | | (371 | ) |
Effect of exchange rates on cash | | | 1,292 | | | | (1,714 | ) | | | (1,552 | ) | | | 3,006 | | | | (162 | ) |
Cash and cash equivalents | | | | | | | | | | | | | | | | | | | | |
Net increase for the period | | | 9,535 | | | | 17,021 | | | | 12,935 | | | | (7,486 | ) | | | 4,086 | |
| Net cash used in financing activities | |
| Effect of exchange rates on cash and cash equivalents | |
| Cash and cash equivalents and restricted cash | | Cash and cash equivalents and restricted cash | | |
| Net (decrease) increase for the period | |
Balance, beginning of the period | | | 119,051 | | | | 102,030 | | | | 89,095 | | | | 17,021 | | | | 12,935 | |
Balance, end of the period | | $ | 128,586 | | | $ | 119,051 | | | $ | 102,030 | | | $ | 9,535 | | | $ | 17,021 | |
Cash flows provided by operating activities
were $95.8 million, $131.7 million, and $124.6increased by approximately $20.1 million for the
yearsyear ended December 31,
2017, 20162023, as compared to the prior year. This was primarily attributable to changes in operating assets and
2015, respectively.liabilities, mostly associated with settlement activities from our FinTech segment. These receivables and liabilities are generally highly liquid in nature, with settlement receivables collected within one to three days of the financial access transaction performed by the patron and settlement liabilities repaid to our casino customers within three to five days of the original transaction date. As a result of the timing of weekends and holidays in relation to the close of an accounting period, the amount of uncollected settlement receivables and unpaid settlement liabilities can vary greatly. In addition, the changes in other operating assets and liabilities were related to cash receipts and disbursements in the normal course of business in both the Games and FinTech segments. Cash flows provided by operating activities decreased by
$35.9approximately $88.1 million for the year ended December 31,
2017,2022, as compared to the prior
year period.year. This was primarily attributable to
changes in operating assets and liabilities, mostly associated with settlement activities from our FinTech segment and reduced placement fees from our Games segment. In addition, the
impactchanges in other operating assets and liabilities were related to cash receipts and disbursements in the normal course of
business in both the
change in settlement receivablesGames and
settlement liabilities. Cash flows provided by operating activities increased by $7.1 million for the year ended December 31, 2016, as compared to the prior year period. This was also primarily attributable to the impact of the change in settlement receivables and settlement liabilities.Cash flows used in investing activities were $110.0 million, $88.1 million, and $85.5 million for the years ended December 31, 2017, 2016 and 2015, respectively. FinTech segments.
Cash flows used in investing activities increased by $21.9approximately $25.5 million for the year ended December 31, 2017,2023, as compared to the prior year period.year. This was primarily attributable to our acquisition activities and an increase in capital expenditures higher placement fee arrangements in our Games segment, and decreased sales of fixed assets.partially offset by reduced capital expenditures in our FinTech segment. Cash flows used in investing activities increased by $2.5approximately $58.3 million for the year ended December 31, 2016,2022, as compared to the prior year period.year. This was primarily attributable to our acquisition activities and an increase in capital expenditures and placement fee arrangements in our Games segment, partially offsetand FinTech segments.
Cash flows used in financing activities increased by a reduction in capital expenditures in our Payments segment.Cash flows provided by financing activities were $22.4approximately $10.4 million for the year ended December 31, 20172023, as compared to $24.9 millionthe prior year. This was primarily attributable to share repurchase activities, together with payments of contingent consideration from our Games and $24.6 million of cashFinTech segments, partially offset by proceeds from option exercise activities. Cash flows used in financing activities for the years ended December 31, 2016 and 2015, respectively. The increase in cash flows from financing activities of $47.3decreased by approximately $87.8 million in the year ended December 31, 2017, as compared to the prior year period was primarily attributable to our debt restructuring activities completed in 2017 and an increase in proceeds from the exercise of the stock options, partially offset by an increase in debt issuance costs. The cash flows used in 2016 and 2015 were relatively consistent and were primarily associated with the repayments of debt.
56
Long‑Term Debt
The following table summarizes our indebtedness (in thousands):
Refinancing
| | December 31, | |
| | 2017 | | | 2016 | |
Long-term debt | | | | | | | | |
Senior secured term loan | | $ | 815,900 | | | $ | 465,600 | |
Senior secured notes | | | — | | | | 335,000 | |
Senior unsecured notes | | | 375,000 | | | | 350,000 | |
Total debt | | | 1,190,900 | | | | 1,150,600 | |
Less: debt issuance costs and discount | | | (23,057 | ) | | | (28,720 | ) |
Total debt after debt issuance costs and discount | | | 1,167,843 | | | | 1,121,880 | |
Less: current portion of long-term debt | | | (8,200 | ) | | | (10,000 | ) |
Long-term debt, less current portion | | $ | 1,159,643 | | | $ | 1,111,880 | |
On May 9, 2017 (the “Closing Date”), Everi Payments, as borrower, and Holdings entered into a credit agreement with the lenders party thereto and Jefferies Finance LLC, as administrative agent, collateral agent, swing line lender, letter of credit issuer, sole lead arranger and sole book manager (amended as described below, the “New Credit Agreement”). The New Credit Agreement provides for: (i) a $35.0 million, five-year senior secured revolving credit facility (the “New Revolving Credit Facility”); and (ii) an $820.0 million, seven-year senior secured term loan facility (the “New Term Loan Facility,” and together with the New Revolving Credit Facility, the “New Credit Facilities”). The fees associated with the New Credit Facilities included discounts of approximately $4.1 million and debt issuance costs of approximately $15.5 million. All borrowings under the New Revolving Credit Facility are subject to the satisfaction of customary conditions, including the absence of defaults and the accuracy of representations and warranties.
The proceeds from the New Term Loan Facility incurred on the Closing Date were used to: (i) refinance: (a) 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. The maturity date for the New Term Loan Facility remains May 9, 2024, the maturity date for the New Revolving Credit Facility remains May 9, 2022, and no changes were made to 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.
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.
57
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 are: (i) 3.50% in respect of Eurodollar Rate loans and (ii) 2.50% in respect of base rate loans.
Voluntary prepayments of the term loan and the revolving loans and voluntary reductions in the unused commitments are permitted in whole or in part, in minimum amounts as set forth in the New Credit Agreement governing the New Credit Facilities, with prior notice but without premium or penalty, except that certain refinancings of the term loans within six months after the 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, 2017, our consolidated secured leverage ratio was 3.59 to 1.00, with a maximum allowable ratio of 5.00 to 1.00. Our maximum consolidated secured leverage ratio will be 4.75 to 1.00 as of December 31, 2018, 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, 2017.
Events of default under the New Credit Agreement governing the New Credit Facilities include customary events such as a cross-default provision with respect to other material debt. In addition, an event of default will occur if Holdings undergoes a change of control. This is defined to include the case where Holdings ceases to own 100% of the equity interests of Everi Payments, or where any person or group acquires a percentage of the economic or voting interests of Holdings’ capital stock of 35% or more (determined on a fully diluted basis).
We are required to repay the New Term Loan Facility in an amount equal to 0.25% per quarter of the initial aggregate principal, with the final principal repayment installment on the maturity date. Interest is due in arrears on each interest payment date applicable thereto and at such other times as may be specified in the New Credit Agreement. As to any loan other than a base rate loan, the interest payment dates shall be the last day of each interest period applicable to such loan and the maturity date (provided, however, that if any interest period for a Eurodollar Rate loan exceeds three months, the respective dates that fall every three months after the beginning of such interest period shall also be interest payment dates). As to any base rate loan, the interest payment dates shall be last business day of each March, June, September and December and the maturity date.
58
For the period from January 1, 2017 to the Closing Date, the Prior Credit Facility had an applicable weighted average interest rate of 6.43%. For the period from the Closing Date to December 31, 2017, the New Term Loan Facility had an applicable weighted average interest rate of 5.55%. Together, for the year ended December 31, 2017,2022, as c
ompared to the two facilities had a blended weighted average interest rateprior year. This was primarily attributable to the debt refinancing activities in the prior year, together with payments of 5.73%.contingent consideration from our FinTech segment, partially offset by increased share repurchase activities and reduced option exercise activities.
Capital Expenditures
For the year ended December 31, 2023, cash paid for capital expenditures totaled $145.1 million, of which $117.0 million and $28.1 million were related to our Games and FinTech segments, respectively. For the year ended December 31, 2022, cash paid for capital expenditures totaled $127.6 million, of which $96.0 million and $31.6 million, were related to our Games and FinTech segments, respectively.
Long-Term Debt
At December 31,
2017,2023, we had approximately
$815.9$587 million of borrowings outstanding under the
New Term Loan
Facility and
there were no borrowings outstanding under the
New Revolving Credit Facility.Revolver. We had
$35.0$125 million of additional borrowing availability under the
New Revolving Credit FacilityRevolver as of December 31,
2017.Refinanced Senior Secured Notes
In connection with entering into the New Credit Agreement, on May 9, 2017, Everi Payments redeemed in full all2023. At December 31, 2023, we had $400 million 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 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.
Senior Unsecured Notes
In December 2014, we issued $350.0 million in aggregate principal amount of 10.0% Senior Unsecured Notes due 2022 (the “2014 Unsecured Notes”) under an indenture (as supplemented, the “2014 Notes Indenture”), dated December 19, 2014, between Everi Payments (as successor issuer), and Deutsche Bank Trust Company Americas, as trustee. The fees associated with the 2014 Unsecured Notes included original issue discounts of approximately $3.8 million and debt issuance costs of approximately $14.0 million. In December 2015, we completed an exchange offer in which all of 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. Interest on the 2017 Unsecured Notes accrues at a rate of 7.50% per annum and is payable semi-annually in arrears on each June 15 and December 15, commencing on June 15, 2018. The 2017 Unsecured Notes will mature on December 15, 2025. We incurred approximately $6.1 million of debt issuance costs and fees associated with the refinancing of our 20172021 Unsecured Notes.
On December 5, 2017, together with the issuance of the 2017 Unsecured
For additional information regarding our credit agreement and other debt as well as interest rate risk see “Contractual Obligations” in this Item 7 below, “Part II, Item 7A Quantitative and Qualitative Disclosures About Market Risk,” and “Item 8 — Financial Statements and Supplementary Data — Notes Everi Payments satisfied and discharged the 2014 Notes Indenture relating to the 2014 Unsecured Notes. To effect the satisfaction and discharge, Everi Payments issued an unconditional notice of redemption to Deutsche Bank Trust Company Americas, as trustee, of the redemption in full on January 15, 2018 (the “Redemption Date”) of all outstanding 2014 Unsecured Notes 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 deposited with the trustee funds sufficient to pay the redemption price of the 2014 Unsecured Notes of 107.5% of the principal amount thereof, plus accrued 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, along with an officer’s certificate of Everi Payments and an opinion of counsel certifying and opining that all conditions under the 2014 Notes Indenture to the satisfaction and discharge of the 2014 Notes Indenture had been satisfied, the 2014 Notes Indenture was satisfied and discharged, and all of theConsolidated Financial Statements — Note 13 — Long-Term Debt.” Contractual Obligations
Our contractual obligations
of Everi Payments and the guarantors under the 2014 Notes Indenture ceased to be of further effect,are summarized below as of December
5, 2017 (subject to certain exceptions). The 2014 Unsecured Notes were thereafter redeemed on the Redemption Date.59
31, 2023 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Total | | 2024 | | 2025 | | 2026 | | 2027 | | 2028 | | Thereafter |
| Contractual obligations | | | | | | | | | | | | | | |
Debt obligations (1) | | $ | 986,500 | | | $ | 6,000 | | | $ | 6,000 | | | $ | 6,000 | | | $ | 6,000 | | | $ | 562,500 | | | $ | 400,000 | |
Estimated interest obligations (2) | | 268,487 | | | 63,483 | | | 55,849 | | | 54,351 | | | 54,343 | | | 20,461 | | | 20,000 | |
Lease obligations (3) | | 42,901 | | | 8,575 | | | 8,551 | | | 5,012 | | | 3,083 | | | 2,864 | | | 14,816 | |
Purchase obligations (4) | | 149,191 | | | 113,944 | | | 24,418 | | | 5,266 | | | 4,438 | | | 1,125 | | | — | |
Acquisition related obligations (5) | | 9,225 | | | 8,475 | | | 750 | | | — | | | — | | | — | | | — | |
| Total contractual obligations | | $ | 1,456,304 | | | $ | 200,477 | | | $ | 95,568 | | | $ | 70,629 | | | $ | 67,864 | | | $ | 586,950 | | | $ | 434,816 | |
(2)Estimated interest payments were computed using the redemptioninterest rate in effect at December 31, 2023 multiplied by the principal balance outstanding.
(4)The Company is a $37.2 million lossparty 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 extinguishment of debt consisting of a $26.3 million make-whole premium relatedour business needs prior to the satisfactiondelivery of goods or performance of services.
(5)Represents our obligations under the purchase agreements, including eCash, Intuicode, Venuetize and redemption of the 2014 UnsecuredVideo King. For additional information see “Part II — Item 8 — Financial Statements and Supplementary Data — Notes and approximately $10.9 million for the write-off of related unamortized debt issuance costs and fees.We were in compliance with the terms of the 2017 Unsecured Notes as of December 31, 2017.
Contractual Obligations
The following summarizes our contractual cash obligations (in thousands):
| | At December 31, 2017 | |
| | Total | | | 2018 | | | 2019 | | | 2020 | | | 2021 | | | 2022 | | | Thereafter | |
Contractual obligations | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Debt obligations(1) | | $ | 1,190,900 | | | $ | 8,200 | | | $ | 8,200 | | | $ | 8,200 | | | $ | 8,200 | | | $ | 8,200 | | | $ | 1,149,900 | |
Estimated interest obligations(2) | | | 476,236 | | | | 69,264 | | | | 68,079 | | | | 67,755 | | | | 67,379 | | | | 66,870 | | | | 136,889 | |
Operating lease obligations | | | 22,107 | | | | 4,943 | | | | 5,050 | | | | 5,046 | | | | 4,007 | | | | 2,193 | | | | 868 | |
Purchase obligations(3) | | | 98,094 | | | | 68,089 | | | | 25,646 | | | | 1,994 | | | | 1,820 | | | | 508 | | | | 37 | |
Total contractual obligations | | $ | 1,787,337 | | | $ | 150,496 | | | $ | 106,975 | | | $ | 82,995 | | | $ | 81,406 | | | $ | 77,771 | | | $ | 1,287,694 | |
(1)
| We are required to make principal payments of 1% annually under the New Term Loan Facility 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.
|
to Consolidated Financial Statements — Note 5 — Business Combinations.”(2)
| Estimated interest payments were computed using the interest rate in effect at December 31, 2017 multiplied by the principal balance outstanding after scheduled principal amortization payments. For our debt obligations, the weighted average rate assumed was approximately 5.70% until 2025, when the weighted average rate would increase to approximately 7.50%.
|
(3)
| Included in purchase obligations are minimum transaction processing services from various third‑party processors used by us as well as open purchase orders and placement fee agreements related to our Games business.
|
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 decide to repatriate foreign funds, 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 mustwill 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‑Balancecapital
. Off-Balance Sheet Arrangements
Our Contract Cash Solutions Agreement
In the normal course of business, we have commercial arrangements with Wells Fargo Bank, N.A. (“Wells Fargo”) allows us to use funds owned by Wells Fargothird-party vendors to provide the currency neededcash for normal operating requirements forcertain of our ATMs. For the use of these funds, we pay Wells Fargo a cash usage fee on either the average daily balance of funds utilized multiplied by a contractually defined cashusage rate or the amounts supplied multiplied by a contractually defined usage rate. These cash usage fees, reflected as interest expense within the Consolidated Statements of Loss,Operations, were $4.9approximately $20.4 million, $3.1$9.3 million, and $2.3$4.0 million for the years ended December 31, 2017, 20162023, 2022, and 2015,2021, respectively. The usage fees increased in the current year as compared to the prior year as a result of elevated funds dispensing volumes at our customer locations and higher interest rates as a result of macro-economic conditions.
We are exposed to interest rate risk to the extent that the applicable
LIBOR (defined to befederal funds rate increases. Under these agreements, the
Interbank Offered Rate or a comparable or successor rate) increases.60
Under this agreement, all currency supplied by Wells Fargothird-party vendors remains thetheir sole property of Wells Fargo at all times until it is dispensed, at which time Wells Fargo obtains an interest in the corresponding settlement receivable which is recorded on a net basis.funds are dispensed. As these funds are not our assets, supplied cash is not reflected on theour Balance Sheets. The outstanding balances of ATM cash utilized by us from Wells Fargo were $289.8 million and $285.4 million as of December 31, 2017 and 2016, respectively.
The
Our primary commercial arrangement, the Contract Cash Solutions Agreement, as amended,
is with Wells Fargo, N.A. (“Wells Fargo”). Wells Fargo provides us with cash
in the maximum amount of $300.0up to $450 million with the ability to increase the amount
permitted by
$75 million over a 5-day period for special occasions, such as New Years.the vault cash provider. The term of the agreement expires on
June 30, 2020.December 1, 2026 and will automatically renew for additional one-year periods unless either party provides a ninety-day written notice of its intent not to renew. The outstanding balances of funds provided in connection with this arrangement were approximately $388.5 million and $444.6 million as of December 31, 2023 and 2022, respectively.
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,
20172023, 2022, and
2016.2021.
Our monetary assets consistingthat primarily consist of cash, receivables, inventory, andas well as our non‑monetarynon-monetary assets consisting primarilythat are mostly comprised of the deferred tax asset, goodwill and other intangible assets, are not significantly affected by inflation. We believe that replacement costs of equipment, furniture, and leasehold improvements will not materially affect our operations. However, the rate of inflation affects our operating expenses, such as those for salaries and benefits, armored carrier expenses, telecommunications expenses, and equipment repair and maintenance services, which may not be readily recoverable in the financial terms under which we provide our Games and PaymentsFinTech products and services to gaming establishments and their patrons.operators.
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
position.condition. At present, we do not hedge this
risk, butexposure; however, we continue to evaluate such foreign currency
translation risk exposure.Wells Fargo supplies usexchange risk.
In the normal course of business, we have commercial arrangements with
currency neededthird-party vendors to provide cash for
normal operating requirementscertain of our
domestic ATMs pursuant to the Contract Cash Solutions Agreement.fund dispensing devices. Under the terms of
this agreement,these agreements, we pay a monthly
cashfund usage fee
that is generally based upon the
product of the average daily dollars outstanding in all such ATMs multiplied by a margin that is tied to LIBOR.target federal funds rate. We are, therefore, exposed to interest rate risk to the extent that the
applicable LIBORtarget federal funds rate increases. The
currency suppliedoutstanding balance of funds provided by
Wells Fargoour primary third-party vendor was
$289.8approximately $388.5 million as of December 31,
2017. Based upon this outstanding amount of currency supplied by Wells Fargo,2023; therefore, each
1%100 basis points increase in the
applicable LIBORtarget federal funds rate would have
approximately a
$2.9$3.9 million impact on income before
taxestax over a
12‑month12-month period.
Foreign gaming establishments or third-party vendors supply the currency needs for the ATMs located on their premises. The senior secured term loan and senior secured revolving credit facility (“Credit FacilitiesFacilities”) 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 based onusing a base rate or based ona benchmark rate, the Eurodollar Rate.secured overnight financing rate (“SOFR”). We have historically elected to pay interest based on the Eurodollar Rate,benchmark rate, and we expect to continue to pay interest based on the Eurodollar Rate ofdo so for various maturities.
The weighted average interest rate on credit facilitiesthe Term Loan, which includes a 50 basis point floor, was approximately 5.73%7.59% for the year ended December 31, 2017.2023. Based upon the outstanding balance onof the New Credit FacilitiesTerm Loan of $815.9$586.5 million as of December 31, 2017,2023, each 1%100 basis points increase in the applicable Eurodollar RateSOFR would have an $8.2a combined impact of approximately $5.9 million impact on interest expense over a 12‑month12-month period.
The interest rate is fixed at 5.00% for the 2021 Unsecured Notes due 2029; therefore, changing interest rates have no impact on the 2017 Unsecured Notes are fixed and therefore an increaserelated interest expense.
At present, we do not hedge the risk related to the changes in
interest rates does not impact the interest
expense associated with the notes.rate; however, we continue to evaluate such interest rate exposure.
Item 8. Financial Statements and Supplementary
Data.Data.
Index to Consolidated Financial Statements
REPORT OF INDEPENDENT
REGISTEREDREGISTERED PUBLIC ACCOUNTING FIRMShareholders
To the Stockholders and
the Board of Directors
of Everi Holdings Inc. and subsidiaries
Las Vegas, NV
Opinion on the
Consolidated Financial Statements
We have audited the accompanying consolidated balance
sheetssheet of Everi Holdings Inc.
(the “Company”) and subsidiaries
(the Company) as of December 31,
2017 and 2016,2023, the related consolidated statements of
lossoperations and comprehensive
loss, stockholders’ (deficit)income, stockholders' equity and cash flows for
each of the
three years in the periodyear ended December 31,
2017,2023, 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,
2017 and 2016,2023, and the results of
theirits operations and
theirits cash flows for
each of the
three years in the periodyear ended December 31,
2017,2023, in conformity with
accounting principlesU.S. generally accepted
in the United States of America.accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(“PCAOB”)(PCAOB), the Company's internal control over financial reporting as of December 31,
2017,2023, based on criteria established in
Internal Control – IntegratedControl-Integrated Framework(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”)(2013 framework), and our report dated
March 15, 2018February 29, 2024 expressed an unqualified opinion thereon.
These
consolidated financial statements are the responsibility of the
Company’sCompany's management. Our responsibility is to express an opinion on the Company’s
consolidated financial statements based on our
audits.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 the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit 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 financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the 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 financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit 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 financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter 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 a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Acquisition of Video King
| | | | | |
| Description of the Matter | On May 1, 2023, the Company completed its acquisition of VKGS LLC (“Video King”) for net consideration of $61.5 million, as disclosed in Note 5 to the consolidated financial statements. The transaction was accounted for as a business combination, which requires that the assets acquired and liabilities assumed be recognized at their acquisition date fair values. Auditing the Company's accounting for its acquisition of Video King was complex due to the estimation in the Company’s determination of the fair value of identified intangible assets of $25.8 million, which principally consisted of developed technology and customer relationships. The Company used a discounted cash flow model to measure the developed technology and customer relationship intangible assets. The assumptions used to estimate the value of the intangible assets included discount rates and revenue growth rate, which are forward looking and could be affected by future economic and market conditions.
|
| |
| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design and tested the Company's controls over its accounting for the Video King acquisition. For example, we tested controls over the valuation process supporting the recognition and measurement of consideration transferred, developed technology and customer-related intangible assets. We also tested management’s review of assumptions used in the valuation models. To test the estimated fair value of the developed technology and customer-related intangible assets, we performed audit procedures that included, among others, evaluating the Company's selection of the valuation methodology, evaluating the methods and assumptions used by the Company's valuation specialist, and evaluating the completeness and accuracy of the underlying data supporting the assumptions and estimates. We involved our valuation specialists to assist in the evaluation of the methodology and significant assumptions included in the fair value estimates. We also compared the significant assumptions used to third-party industry projections for the specific gaming market in which Video King operates. |
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2023.
Las Vegas, Nevada
February 29, 2024
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and Board of Directors
Everi Holdings Inc. and Subsidiaries
Las Vegas, NV
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheet of Everi Holdings Inc. and subsidiaries (the “Company”) as of December 31, 2022, the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity (deficit), and cash flows for each of the two years in the period ended December 31, 2022, 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 at December 31, 2022, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
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 Public Company Accounting Oversight Board (United States) (“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.
We served as the Company's auditor from 2015 to 2023.
/s/ BDO USA, LLP
We have served as the Company’s auditor since 2015.
Las Vegas, Nevada
March 15, 2018
63
February 28, 2023
EVERI HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
LOSSOPERATIONS AND COMPREHENSIVE
LOSSINCOME
(In thousands, except
earnings per share amounts)
| | Year Ended December 31, | |
| | 2017 | | | 2016 | | | 2015 | |
Revenues | | | | | | | | | | | | |
Games | | $ | 222,777 | | | $ | 213,253 | | | $ | 214,424 | |
Payments | | | 752,171 | | | | 646,203 | | | | 612,575 | |
Total revenues | | | 974,948 | | | | 859,456 | | | | 826,999 | |
Costs and expenses | | | | | | | | | | | | |
Games cost of revenue (exclusive of depreciation and amortization) | | | 54,695 | | | | 50,308 | | | | 47,017 | |
Payments cost of revenue (exclusive of depreciation and amortization) | | | 583,850 | | | | 498,706 | | | | 463,380 | |
Operating expenses | | | 118,935 | | | | 118,709 | | | | 101,202 | |
Research and development | | | 18,862 | | | | 19,356 | | | | 19,098 | |
Goodwill impairment | | | — | | | | 146,299 | | | | 75,008 | |
Depreciation | | | 47,282 | | | | 49,995 | | | | 45,551 | |
Amortization | | | 69,505 | | | | 94,638 | | | | 85,473 | |
Total costs and expenses | | | 893,129 | | | | 978,011 | | | | 836,729 | |
Operating income (loss) | | | 81,819 | | | | (118,555 | ) | | | (9,730 | ) |
Other expenses | | | | | | | | | | | | |
Interest expense, net of interest income | | | 102,136 | | | | 99,228 | | | | 100,290 | |
Loss on extinguishment of debt | | | 51,750 | | | | — | | | | 13,063 | |
Total other expenses | | | 153,886 | | | | 99,228 | | | | 113,353 | |
Loss before income tax | | | (72,067 | ) | | | (217,783 | ) | | | (123,083 | ) |
Income tax (benefit) provision | | | (20,164 | ) | | | 31,696 | | | | (18,111 | ) |
Net loss | | | (51,903 | ) | | | (249,479 | ) | | | (104,972 | ) |
Foreign currency translation | | | 1,856 | | | | (2,427 | ) | | | (1,251 | ) |
Comprehensive loss | | $ | (50,047 | ) | | $ | (251,906 | ) | | $ | (106,223 | ) |
Loss per share | | | | | | | | | | | | |
Basic | | $ | (0.78 | ) | | $ | (3.78 | ) | | $ | (1.59 | ) |
Diluted | | $ | (0.78 | ) | | $ | (3.78 | ) | | $ | (1.59 | ) |
Weighted average common shares outstanding | | | | | | | | | | | | |
Basic | | | 66,816 | | | | 66,050 | | | | 65,854 | |
Diluted | | | 66,816 | | | | 66,050 | | | | 65,854 | |
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2023 | | 2022 | | 2021 |
| Revenues | | | | | | |
| Games revenues | | | | | | |
| Gaming operations | | $ | 304,132 | | | $ | 292,873 | | | $ | 272,885 | |
| Gaming equipment and systems | | 125,022 | | | 143,553 | | | 103,844 | |
| Games total revenues | | 429,154 | | | 436,426 | | | 376,729 | |
| FinTech revenues | | | | | | |
| Financial access services | | 225,054 | | | 206,860 | | | 178,019 | |
| Software and other | | 99,490 | | | 80,232 | | | 67,797 | |
| Hardware | | 54,123 | | | 59,001 | | | 37,840 | |
| FinTech total revenues | | 378,667 | | | 346,093 | | | 283,656 | |
| Total revenues | | 807,821 | | | 782,519 | | | 660,385 | |
| Costs and expenses | | | | | | |
Games cost of revenues (1) | | | | | | |
| Gaming operations | | 35,205 | | | 25,153 | | | 21,663 | |
| Gaming equipment and systems | | 72,191 | | | 86,638 | | | 60,093 | |
| Games total cost of revenues | | 107,396 | | | 111,791 | | | 81,756 | |
FinTech cost of revenues (1) | | | | | | |
| Financial access services | | 11,064 | | | 10,186 | | | 6,779 | |
| Software and other | | 6,159 | | | 4,125 | | | 4,129 | |
| Hardware | | 36,621 | | | 39,220 | | | 22,785 | |
| FinTech total cost of revenues | | 53,844 | | | 53,531 | | | 33,693 | |
| Operating expenses | | 260,931 | | | 216,959 | | | 188,900 | |
| Research and development | | 67,633 | | | 60,527 | | | 39,051 | |
| Depreciation | | 78,691 | | | 66,801 | | | 61,487 | |
| Amortization | | 60,042 | | | 59,558 | | | 57,987 | |
| Total costs and expenses | | 628,537 | | | 569,167 | | | 462,874 | |
| Operating income | | 179,284 | | | 213,352 | | | 197,511 | |
| Other expenses | | | | | | |
| Interest expense, net of interest income | | 77,693 | | | 55,752 | | | 62,097 | |
| Loss on extinguishment of debt | | — | | | — | | | 34,389 | |
| Total other expenses | | 77,693 | | | 55,752 | | | 96,486 | |
| Income before income tax | | 101,591 | | | 157,600 | | | 101,025 | |
| Income tax provision (benefit) | | 17,594 | | | 37,111 | | | (51,900) | |
| Net income | | 83,997 | | | 120,489 | | | 152,925 | |
| Foreign currency translation gain (loss) | | 730 | | | (2,742) | | | (264) | |
| Comprehensive income | | $ | 84,727 | | | $ | 117,747 | | | $ | 152,661 | |
(1) Exclusive of depreciation and amortization.
EVERI HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(In thousands, except earnings per share amounts)
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2023 | | 2022 | | 2021 |
| Earnings per share | | | | | | |
| Basic | | $ | 0.96 | | | $ | 1.33 | | | $ | 1.71 | |
| Diluted | | $ | 0.91 | | | $ | 1.24 | | | $ | 1.53 | |
| Weighted average common shares outstanding | | | | | | |
| Basic | | 87,176 | | | 90,494 | | | 89,284 | |
| Diluted | | 91,985 | | | 97,507 | | | 99,967 | |
See notes to consolidated financial statements.
64
EVERI HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value amounts)
| | At December 31, | |
| | 2017 | | | 2016 | |
ASSETS | | | | | | | | |
Current assets | | | | | | | | |
Cash and cash equivalents | | $ | 128,586 | | | $ | 119,051 | |
Settlement receivables | | | 227,403 | | | | 128,821 | |
Trade and other receivables, net of allowances for doubtful accounts of $4,706 and $4,701 at December 31, 2017 and December 31, 2016, respectively | | | 47,782 | | | | 56,651 | |
Inventory | | | 23,967 | | | | 19,068 | |
Prepaid expenses and other assets | | | 20,670 | | | | 18,048 | |
Total current assets | | | 448,408 | | | | 341,639 | |
Non-current assets | | | | | | | | |
Property, equipment and leased assets, net | | | 113,519 | | | | 98,439 | |
Goodwill | | | 640,589 | | | | 640,546 | |
Other intangible assets, net | | | 324,311 | | | | 317,997 | |
Other receivables | | | 2,638 | | | | 2,020 | |
Other assets | | | 7,609 | | | | 7,522 | |
Total non-current assets | | | 1,088,666 | | | | 1,066,524 | |
Total assets | | $ | 1,537,074 | | | $ | 1,408,163 | |
LIABILITIES AND STOCKHOLDERS’ DEFICIT | | | | | | | | |
Current liabilities | | | | | | | | |
Settlement liabilities | | $ | 317,744 | | | $ | 239,123 | |
Accounts payable and accrued expenses | | | 134,504 | | | | 94,391 | |
Current portion of long-term debt | | | 8,200 | | | | 10,000 | |
Total current liabilities | | | 460,448 | | | | 343,514 | |
Non-current liabilities | | | | | | | | |
Deferred tax liability | | | 38,207 | | | | 57,611 | |
Long-term debt, less current portion | | | 1,159,643 | | | | 1,111,880 | |
Other accrued expenses and liabilities | | | 19,409 | | | | 2,951 | |
Total non-current liabilities | | | 1,217,259 | | | | 1,172,442 | |
Total liabilities | | | 1,677,707 | | | | 1,515,956 | |
Commitments and contingencies (Note 12) | | | | | | | | |
Stockholders’ deficit | | | | | | | | |
Common stock, $0.001 par value, 500,000 shares authorized and 93,120 and 90,952 shares issued at December 31, 2017 and December 31, 2016, respectively | | | 93 | | | | 91 | |
Convertible preferred stock, $0.001 par value, 50,000 shares authorized and no shares outstanding at December 31, 2017 and December 31, 2016, respectively | | | — | | | | — | |
Additional paid-in capital | | | 282,070 | | | | 264,755 | |
Accumulated deficit | | | (246,202 | ) | | | (194,299 | ) |
Accumulated other comprehensive loss | | | (253 | ) | | | (2,109 | ) |
Treasury stock, at cost, 24,883 and 24,867 shares at December 31, 2017 and December 31, 2016, respectively | | | (176,341 | ) | | | (176,231 | ) |
Total stockholders’ deficit | | | (140,633 | ) | | | (107,793 | ) |
Total liabilities and stockholders’ deficit | | $ | 1,537,074 | | | $ | 1,408,163 | |
| | | | | | | | | | | | | | |
| | | At December 31, |
| | | 2023 | | 2022 |
| ASSETS | | | | |
| Current assets | | | | |
| Cash and cash equivalents | | $ | 267,215 | | | $ | 293,394 | |
| Settlement receivables | | 441,852 | | | 263,745 | |
| Trade and other receivables, net of allowances for credit losses of $5,210 and $4,855 at December 31, 2023 and December 31, 2022, respectively | | 107,933 | | | 118,895 | |
| Inventory | | 70,624 | | | 58,350 | |
| Prepaid expenses and other current assets | | 43,906 | | | 38,822 | |
| Total current assets | | 931,530 | | | 773,206 | |
| Non-current assets | | | | |
| Property and equipment, net | | 152,704 | | | 133,645 | |
| Goodwill | | 737,804 | | | 715,870 | |
| Other intangible assets, net | | 234,138 | | | 238,275 | |
| Other receivables | | 29,015 | | | 27,757 | |
| Deferred tax assets, net | | 598 | | | 1,584 | |
| Other assets | | 38,081 | | | 27,906 | |
| Total non-current assets | | 1,192,340 | | | 1,145,037 | |
| Total assets | | $ | 2,123,870 | | | $ | 1,918,243 | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | |
| Current liabilities | | | | |
| Settlement liabilities | | $ | 662,967 | | | $ | 467,903 | |
| Accounts payable and accrued expenses | | 215,530 | | | 217,424 | |
| Current portion of long-term debt | | 6,000 | | | 6,000 | |
| Total current liabilities | | 884,497 | | | 691,327 | |
| Non-current liabilities | | | | |
| Deferred tax liabilities, net | | 13,762 | | | 5,994 | |
| Long-term debt, less current portion | | 968,465 | | | 971,995 | |
| Other accrued expenses and liabilities | | 31,004 | | | 31,286 | |
| Total non-current liabilities | | 1,013,231 | | | 1,009,275 | |
| Total liabilities | | 1,897,728 | | | 1,700,602 | |
| Commitments and contingencies (Note 14) | | | | |
| Stockholders’ equity | | | | |
| Convertible preferred stock, $0.001 par value, 50,000 shares authorized and no shares outstanding at December 31, 2023 and December 31, 2022, respectively | | — | | | — | |
| Common stock, $0.001 par value, 500,000 shares authorized and 123,179 and 83,738 shares issued and outstanding at December 31, 2023, respectively, and 119,390 and 88,036 shares issued and outstanding at December 31, 2022, respectively | | 123 | | | 119 | |
| Additional paid-in capital | | 560,945 | | | 527,465 | |
| Retained earnings (accumulated deficit) | | 62,731 | | | (21,266) | |
| Accumulated other comprehensive loss | | (3,467) | | | (4,197) | |
| Treasury stock, at cost, 39,441 and 31,353 shares at December 31, 2023 and December 31, 2022, respectively | | (394,190) | | | (284,480) | |
| Total stockholders’ equity | | 226,142 | | | 217,641 | |
| Total liabilities and stockholders’ equity | | $ | 2,123,870 | | | $ | 1,918,243 | |
See notes to consolidated financial statements.
65
EVERI HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2023 | | 2022 | | 2021 |
| | | | | | |
| Cash flows from operating activities | | | | | | |
| Net income | | $ | 83,997 | | | $ | 120,489 | | | $ | 152,925 | |
| Adjustments to reconcile net income to cash provided by operating activities: | | | | | | |
| Depreciation | | 78,691 | | | 66,801 | | | 61,487 | |
| Amortization | | 60,042 | | | 59,558 | | | 57,987 | |
| Non-cash lease expense | | 6,096 | | | 4,847 | | | 4,401 | |
| Amortization of financing costs and discounts | | 2,854 | | | 2,854 | | | 3,937 | |
| Loss on sale or disposal of assets | | 1,467 | | | 591 | | | 1,658 | |
| Accretion of contract rights | | 9,340 | | | 9,578 | | | 9,318 | |
| Provision for credit losses | | 11,623 | | | 10,115 | | | 7,540 | |
| Deferred income taxes | | 8,754 | | | 32,618 | | | (52,077) | |
| Reserve for inventory obsolescence | | 1,220 | | | 792 | | | 2,275 | |
| Write-down of assets | | 13,629 | | | — | | | — | |
| Loss on extinguishment of debt | | — | | | — | | | 34,389 | |
| Stock-based compensation | | 18,711 | | | 19,789 | | | 20,900 | |
| Adjustment to acquisition contingent consideration | | (1,766) | | | — | | | — | |
| Other non-cash items | | — | | | — | | | 53 | |
| Changes in operating assets and liabilities: | | | | | | |
| Settlement receivables | | (177,947) | | | (174,604) | | | (28,624) | |
| Trade and other receivables | | 91 | | | (30,974) | | | (37,617) | |
| Inventory | | (11,954) | | | (26,314) | | | (3,755) | |
| Prepaid expenses and other assets | | 374 | | | (25,717) | | | (10,219) | |
| Settlement liabilities | | 194,878 | | | 176,274 | | | 118,651 | |
| Accounts payable and accrued expenses | | (7,870) | | | 25,944 | | | 48,401 | |
| Placement fee agreements | | — | | | (547) | | | (31,465) | |
| Net cash provided by operating activities | | 292,230 | | | 272,094 | | | 360,165 | |
| Cash flows from investing activities | | | | | | |
| Capital expenditures | | (145,108) | | | (127,568) | | | (104,708) | |
| Acquisitions, net of cash acquired | | (59,405) | | | (51,450) | | | (16,000) | |
| Proceeds from sale of property and equipment | | 206 | | | 227 | | | 261 | |
| Net cash used in investing activities | | (204,307) | | | (178,791) | | | (120,447) | |
| EVERI HOLDINGS INC. AND SUBSIDIARIES |
| CONSOLIDATED STATEMENTS OF CASH FLOWS |
| (In thousands) |
| | Year Ended December 31, |
| | 2023 | | 2022 | | 2021 |
| | | | | | |
| Cash flows from financing activities | | | | | | |
| Proceeds from term loan | | — | | | — | | | 600,000 | |
| Repayments of term loan | | (6,000) | | | (6,000) | | | (1,500) | |
| Repayments of prior term loan | | — | | | — | | | (735,500) | |
| Repayment of prior incremental term loan | | — | | | — | | | (124,375) | |
| Proceeds from 2021 unsecured notes | | — | | | — | | | 400,000 | |
| Repayments of 2017 unsecured notes | | — | | | — | | | (285,381) | |
| Fees associated with debt transactions — new debt | | — | | | — | | | (19,797) | |
| Fees associated with debt transactions — prior debt | | — | | | — | | | (20,828) | |
| Proceeds from exercise of stock options | | 13,739 | | | 1,921 | | | 18,251 | |
| Treasury stock - equity award activities, net of shares withheld | | (8,151) | | | (11,969) | | | (9,354) | |
| Treasury stock - repurchase of shares | | (100,000) | | | (84,347) | | | — | |
| Payment of acquisition contingent consideration | | (10,529) | | | (173) | | | (9,875) | |
| Net cash used in financing activities | | (110,941) | | | (100,568) | | | (188,359) | |
| Effect of exchange rates on cash and cash equivalents | | 461 | | | (1,398) | | | 18 | |
| Cash, cash equivalents and restricted cash | | | | | | |
| Net (decrease) increase for the period | | (22,557) | | | (8,663) | | | 51,377 | |
| Balance, beginning of the period | | 295,063 | | | 303,726 | | | 252,349 | |
| Balance, end of the period | | $ | 272,506 | | | $ | 295,063 | | | $ | 303,726 | |
| | Year Ended December 31, | |
| | 2017 | | | 2016 | | | 2015 | |
Cash flows from operating activities | | | | | | | | | | | | |
Net loss | | $ | (51,903 | ) | | $ | (249,479 | ) | | $ | (104,972 | ) |
Adjustments to reconcile net loss to cash provided by operating activities: | | | | | | | | | | | | |
Depreciation and amortization | | | 116,787 | | | | 144,633 | | | | 131,024 | |
Amortization of financing costs and discounts | | | 8,706 | | | | 6,695 | | | | 7,109 | |
Loss (gain) on sale or disposal of assets | | | 2,513 | | | | 2,563 | | | | (2,789 | ) |
Accretion of contract rights | | | 7,819 | | | | 8,692 | | | | 7,614 | |
Provision for bad debts | | | 9,737 | | | | 9,908 | | | | 10,135 | |
Deferred income taxes | | | (20,015 | ) | | | 29,940 | | | | (19,878 | ) |
Write-down of assets | | | — | | | | 4,289 | | | | — | |
Reserve for obsolescence | | | 397 | | | | 3,581 | | | | 1,243 | |
Goodwill impairment | | | — | | | | 146,299 | | | | 75,008 | |
Loss on extinguishment of debt | | | 51,750 | | | | — | | | | 13,063 | |
Stock-based compensation | | | 6,411 | | | | 6,735 | | | | 8,284 | |
Changes in operating assets and liabilities: | | | | | | | | | | | | |
Settlement receivables | | | (98,390 | ) | | | (83,998 | ) | | | (1,830 | ) |
Trade and other receivables | | | (884 | ) | | | (8,207 | ) | | | (5,219 | ) |
Inventory | | | (5,753 | ) | | | 5,600 | | | | (1,075 | ) |
Prepaid and other assets | | | (1,536 | ) | | | 4,480 | | | | (5,553 | ) |
Settlement liabilities | | | 78,465 | | | | 99,245 | | | | 21,229 | |
Accounts payable and accrued expenses | | | (8,276 | ) | | | 735 | | | | (8,806 | ) |
Net cash provided by operating activities | | | 95,828 | | | | 131,711 | | | | 124,587 | |
Cash flows from investing activities | | | | | | | | | | | | |
Capital expenditures | | | (96,490 | ) | | | (80,741 | ) | | | (76,988 | ) |
Acquisitions, net of cash acquired | | | — | | | | (694 | ) | | | (10,857 | ) |
Proceeds from sale of fixed assets | | | 10 | | | | 4,599 | | | | 2,102 | |
Placement fee agreements | | | (13,300 | ) | | | (11,312 | ) | | | (2,813 | ) |
Repayments under development agreements | | | — | | | | — | | | | 3,104 | |
Changes in restricted cash | | | (199 | ) | | | 94 | | | | (97 | ) |
Net cash used in investing activities | | | (109,979 | ) | | | (88,054 | ) | | | (85,549 | ) |
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 | ) | | | (10,000 | ) |
Repayments of secured notes | | | (335,000 | ) | | | — | | | | (350,000 | ) |
Repayments of unsecured notes | | | (350,000 | ) | | | — | | | | — | |
Repayments of new credit facility | | | (4,100 | ) | | | — | | | | — | |
Proceeds from issuance of secured notes | | | — | | | | — | | | | 335,000 | |
Debt issuance costs | | | (28,702 | ) | | | (480 | ) | | | (1,221 | ) |
Proceeds from exercise of stock options | | | 10,906 | | | | — | | | | 1,839 | |
Purchase of treasury stock | | | (110 | ) | | | (42 | ) | | | (169 | ) |
Net cash provided by (used in) financing activities | | | 22,394 | | | | (24,922 | ) | | | (24,551 | ) |
Effect of exchange rates on cash | | | 1,292 | | | | (1,714 | ) | | | (1,552 | ) |
Cash and cash equivalents | | | | | | | | | | | | |
Net increase for the period | | | 9,535 | | | | 17,021 | | | | 12,935 | |
Balance, beginning of the period | | | 119,051 | | | | 102,030 | | | | 89,095 | |
Balance, end of the period | | $ | 128,586 | | | $ | 119,051 | | | $ | 102,030 | |
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2023 | | 2022 | | 2021 |
| Supplemental cash disclosures | | | | | | |
| Cash paid for interest | | $ | 86,528 | | | $ | 54,749 | | | $ | 51,224 | |
| Cash paid for income tax, net of refunds | | 5,481 | | | 4,522 | | | 1,062 | |
| Supplemental non-cash disclosures | | | | | | |
| Accrued and unpaid capital expenditures | | $ | 4,408 | | | $ | 3,222 | | | $ | 3,690 | |
| Transfer of leased gaming equipment to inventory | | 6,719 | | | 9,588 | | | 8,782 | |
See notes to consolidated financial statements.
66
| | Year Ended December 31, |
| | 2017 | | | 2016 | | | 2015 | | |
Supplemental cash disclosures | | | | | | | | | | | | | |
Cash paid for interest | | $ | 89,008 | | | $ | 93,420 | | | $ | 98,361 | | |
Cash paid for income tax | | | 1,009 | | | | 1,703 | | | | 2,098 | | |
Cash refunded for income tax | | | 829 | | | | 171 | | | | 14,477 | | |
Supplemental non-cash disclosures | | | | | | | | | | | | | |
Accrued and unpaid capital expenditures | | $ | 1,386 | | | $ | 2,104 | | | $ | 5,578 | | |
Accrued and unpaid placement fees | | | 39,074 | | | | — | | | | — | | |
Accrued and unpaid contingent liability for acquisitions | | | — | | | | (3,169 | ) | | | 4,681 | | |
Transfer of leased gaming equipment to inventory | | | 7,820 | | | | 9,042 | | | | 4,698 | | |
Issuance of warrant | | | — | | | | — | | | | 2,246 | | |
67
EVERI HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’
(DEFICIT) EQUITY
| | Common Stock— | | | | | | | | | | | Accumulated | | | | | | | | | |
| | Series A | | | Additional | | | Retained | | | Other | | | | | | | Total | |
| | Number of | | | | | | | Paid-in | | | Earnings | | | Comprehensive | | | Treasury | | | (Deficit) | |
| | Shares | | | Amount | | | Capital | | | (Deficit) | | | Income (Loss) | | | Stock | | | Equity | |
Balance, December 31, 2014 | | | 90,405 | | | $ | 90 | | | $ | 245,682 | | | $ | 160,152 | | | $ | 1,569 | | | $ | (176,020 | ) | | $ | 231,473 | |
Net loss | | | — | | | | — | | | | — | | | | (104,972 | ) | | | — | | | | — | | | | (104,972 | ) |
Foreign currency translation | | | — | | | | — | | | | — | | | | — | | | | (1,251 | ) | | | — | | | | (1,251 | ) |
Stock-based compensation expense | | | — | | | | — | | | | 8,258 | | | | — | | | | — | | | | — | | | | 8,258 | |
Exercise of options | | | 343 | | | | 1 | | | | 1,834 | | | | — | | | | — | | | | — | | | | 1,835 | |
Restricted share vesting withholdings | | | — | | | | — | | | | — | | | | — | | | | — | | | | (169 | ) | | | (169 | ) |
Restricted shares | | | 129 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Issuance of warrants | | | — | | | | — | | | | 2,246 | | | | — | | | | — | | | | — | | | | 2,246 | |
Balance, December 31, 2015 | | | 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 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock—
Series A | | Additional | | Retained Earnings | | Accumulated
Other | | | | Total |
| | Number of
Shares | | Amount | | Paid-in
Capital | | (Accumulated
Deficit) | | Comprehensive Loss | | Treasury
Stock | | Equity
|
| Balance, January 1, 2021 | | 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 stock vesting, net of shares withheld | | 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 | |
| Net income | | — | | | — | | | — | | | 120,489 | | | — | | | — | | | 120,489 | |
| Foreign currency translation | | — | | | — | | | — | | | — | | | (2,742) | | | — | | | (2,742) | |
| Stock-based compensation expense | | — | | | — | | | 19,789 | | | — | | | — | | | — | | | 19,789 | |
| Exercise of options | | 333 | | | — | | | 1,921 | | | — | | | — | | | — | | | 1,921 | |
| Restricted stock vesting, net of shares withheld | | 2,061 | | | 2 | | | (2) | | | — | | | — | | | (11,969) | | | (11,969) | |
| Repurchase of shares | | — | | | — | | | — | | | | | — | | | (84,347) | | | (84,347) | |
| Balance, December 31, 2022 | | 119,390 | | | $ | 119 | | | $ | 527,465 | | | $ | (21,266) | | | $ | (4,197) | | | $ | (284,480) | | | $ | 217,641 | |
| Net income | | — | | | — | | | — | | | 83,997 | | | — | | | — | | | 83,997 | |
| Foreign currency translation | | — | | | — | | | — | | | — | | | 730 | | | — | | | 730 | |
| Stock-based compensation expense | | — | | | — | | | 18,711 | | | — | | | — | | | — | | | 18,711 | |
| Exercise of options, net of shares withheld | | 2,061 | | | 2 | | | 14,773 | | | — | | | — | | | (1,056) | | | 13,719 | |
| Restricted stock vesting, net of shares withheld | | 1,728 | | | 2 | | | (4) | | | — | | | — | | | (8,149) | | | (8,151) | |
| Repurchase of shares | | — | | | — | | | — | | | — | | | — | | | (100,505) | | | (100,505) | |
| Balance, December 31, 2023 | | 123,179 | | | $ | 123 | | | $ | 560,945 | | | $ | 62,731 | | | $ | (3,467) | | | $ | (394,190) | | | $ | 226,142 | |
See notes to consolidated financial statements.
68
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
LossOperations and Comprehensive
LossIncome as our “Statements of
Loss;” andOperations”; (iii) our audited Consolidated Balance Sheets as our “Balance
Sheets.Sheets”; and (iv) our audited Consolidated Statements of Cash Flows as our “Statements of Cash Flows.”
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” or “Payments”). Unless otherwise indicated, the terms the “Company,” “we,”
“us”“us,” and “our” refer to
Everi Holdings together with its consolidated subsidiaries.
Everi develops and offers products and services that provide gaming entertainment, improve our customers’ patron engagement, and help our casino customers operate their businesses more efficiently. We develop and supply entertaining game content, gaming machines and gaming systems and services for land-based and iGaming operators. Everi is a leading supplierprovider of financial technology solutions that power casino floors, provide operational efficiencies, and help fulfill regulatory requirements. The Company also develops and supplies player loyalty tools and mobile-first applications that enhance patron engagement for our customers and venues in the casino, gaming industry. Thesports, entertainment and hospitality industries. In addition, the Company provides casino operators with a diverse portfolio of products including innovativebingo solutions through its consoles, electronic gaming machines that powertablets and related systems.
Everi reports its financial performance, and organizes and manages its operations, across the
casino floor,following two business segments: (i) Games and
casino operational and management systems that include comprehensive, end-to-end payments solutions, critical intelligence offerings, and gaming operations efficiency technology.(ii) Financial Technology Solutions (“FinTech”).
Everi Games provides
a number ofgaming operators with gaming technology and entertainment products and services,
for casinos, including (a)including: (i) gaming machines,
comprised primarily
ofcomprising Class II,
and Class III
and Historic Horse Racing (“HHR”) slot machines placed under participation
or fixed feeand fixed-fee lease arrangements or sold to casino
customers, including the award-winning TournEvent®;customers; (ii) providing and
(b) system software, licenses, ancillary equipment and maintenance to its casino customers. Everi Games also develops and managesmaintaining the central determinant
systemsystems for the
VLTsvideo lottery terminals (“VLTs”) installed in the State of New
York.Everi Payments provides its casino customers cash accessYork and similar technology in certain tribal jurisdictions; (iii) business-to-business (“B2B”) digital online gaming activities; and (iv) bingo solutions through consoles, integrated electronic gaming tablets and related systems.
Everi FinTech provides gaming operators with 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. We also develop and offer mobile-first applications aimed at enhancing patron engagement for customers in the casino, sports, entertainment, and hospitality industries. Our solutions are secured using an end-to-end security suite to protect against cyber-related attacks allowing us to maintain appropriate levels of security. 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 transactionspurchases at casino cages, kiosk and mobile POS devices; accounts for the CashClub Wallet, check verificationwarranty services, self-service loyalty and warranty services; (b) fully integrated gaming industry kiosks that provide cash accesskiosk maintenance services; self-service loyalty tools and 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 operatorsreporting services; marketing and promotional offering subscription-based services; and other ancillary offerings.
Macro-Economic Volatility and Global Instability, Employment Constraints and Supply Chain Disruptions
We have experienced an impact from macro-economic volatility as a result of inflation, interest rate movements and global instability, particularly as it relates to our supply chain, both from an upstream and downstream
perspective, which impacts the delivery of our products; and we continue to evaluate the effects of interest rate movements on our variable rate debt and pricing pressures on our business.
We have experienced an impact from employment constraints as a result of inflation that has significantly increased over prior years. This has placed pressure on competitive wages, which has led to increases in stateswages and other related costs.
We have experienced an impact from supply chain disruptions that
offer intrastate, internet-based gaminghave resulted in additional costs incurred to develop, produce, and
lottery activities.ship our products.
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 to
When 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
69
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 toin the Statements of Loss.
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.
Operations.
Cash and Cash Equivalents
Cash and cash equivalents include cash and
all balances on deposit in banks and financial institutions. We consider
all 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. However,limits; however, we periodically evaluate the creditworthiness of these institutions to minimize risk.
We obtain all of the cash required to operate our ATMs through various ATM Funding Agreements. Some gaming
establishmentsoperators 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
establishmentoperator for the face amount of the cash dispensed. In
theour 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
establishmentoperator for the face amount of dispensing transactions is included within settlement liabilities.
For the Non‑Site‑Fundednon-Site-Funded locations, our Contract Cash Solutions Agreementwe enter into commercial arrangements with Wells Fargo allows us to use funds owned by Wells Fargothird party vendors to provide us the currency needed for normal operating requirements for our ATMs. For the use of these funds, we pay Wells Fargo a cash usage fee onbased upon the average daily balance oftarget federal funds utilized multiplied by a contractually defined cash usage rate. Under this agreement, allthese agreements, the currency supplied by Wells Fargothe third-party vendors remains the sole property of Wells Fargo at all timesthese suppliers until it isfunds are dispensed, at which time Wells Fargo obtainsthe third-party
vendors obtain an interest in the corresponding settlement receivable. As the cash is
never an asset of
ours, supplied cashthese suppliers, it is
therefore not reflected on our
balance sheet. We are charged a cashBalance Sheets. The usage fee for the cash
usedsupplied in these ATMs
which is included as interest expense in the Statements of
Loss. We recognize theOperations. 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. 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, customer concentration, and creditworthiness when evaluating the adequacy of our allowance for doubtful accounts. In our overall allowance for doubtful accounts we include any receivable balances for which uncertainty exists as to whether the account balance has become uncollectible. 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
In
We provide cash settlement services to gaming operators related to our financial 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
card cash access and POSor debit card
cash access transactions provided by us,issuing financial institution for the amount owed to the gaming
establishment is reimbursedoperator 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 operators for the cash disbursed to
gaming patrons through the issuance of a negotiable instrument or through electronic
settlement. We receive reimbursement from the patron’s credit or debit card issuersettlement for the
transaction in anface amount
equalprovided to
patrons that we generally remit over the
amount owed to the gaming establishment plus the fee charged to the patron. This70
reimbursement is included within the settlement receivables on the Balance Sheets. The amounts owed to gaming establishmentsnext few business days, which are included withinclassified as settlement liabilities on theour Balance Sheets.
If a gaming establishmentoperator chooses to have a check warranted, it sends a request to our third partythird-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 establishmentoperator 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 establishmentoperator invokes the warranty, and the check warranty service provider purchases the check from the gaming establishmentoperator 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 partythird-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
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.
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) funds held in connection with a sponsorship agreement; (iii) wide-area progressive (“WAP”)-related restricted funds; and (iv) financial access activities related to cashless balances held on behalf of patrons. The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the Balance Sheets that sum to the total of the same such amounts shown in the Statements of Cash Flows for the years ended December 31, 2023, 2022, and 2021, respectively (in thousands).
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Year Ended December 31, |
| | Classification on our Balance Sheets | | 2023 | | 2022 | | 2021 |
| Cash and cash equivalents | | Cash and cash equivalents | | $ | 267,215 | | | $ | 293,394 | | | $ | 302,009 | |
| Restricted cash — current | | Prepaid expenses and other current assets | | 5,190 | | | 1,568 | | | 1,616 | |
| Restricted cash — non-current | | Other assets | | 101 | | | 101 | | | 101 | |
| Total | | | | $ | 272,506 | | | $ | 295,063 | | | $ | 303,726 | |
Property
Equipment and
Leased AssetsEquipment
Property equipment and leased assetsequipment are stated at cost, less accumulated depreciation, and are computed using the straight-line method over the lesserestimated life of the assets, generally one to five years. Assets leased to customers are included within property and equipment are stated at cost, less accumulated depreciation, and are computed using the straight-line method over the estimated life of the related assets, generally two 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 generally 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 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 undiscounted future cash flows, on an undiscounted basis, do not exceed the asset’s carrying value.Development and value of the asset.
Placement Fee Agreements
We
Periodically, we enter into
development andlong-term agreements with certain gaming establishments to secure the placement of our electronic gaming machines (“EGMs”) on casino floors. Under the terms of these placement fee agreements that we generally pay in full at the start of the term, the Company has the ability to install EGMs on the gaming floor for an extended period of time (i.e., generally multi-year agreements, with our largest agreement covering 83 months) under right to use arrangements. The gaming operations revenues generated as a result of these agreements are reduced by the accretion of contract rights, which represents the related amortization of the contract rights recorded in connection with such agreements. To the extent payments are made for these placement fee agreements to
provide financing for newcertain gaming
facilities or forestablishments, we classify the
expansionamounts as cash outflows from operating activities in our Statements of
existing facilities. All or a portion of the funds provided under development agreements are reimbursed to us, while funds provided under placement fee agreements are not reimbursed. 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 per day over the term of the agreement which is generally for 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 the71
Cash Flows.
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 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
the adoptionour normal review procedures periodically, or earlier, if an indicator of
ASU No 2017-04.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,
2017,2023, 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. During the year ended December 31, 2016, the Company combined its Cash Advance, ATMServices; (vi) Loyalty Sales and
Check Services,
reporting units into a Cash Access reporting unit to be consistent with the current corporate structure and
segment management.(vii) Mobile Technologies.
Other intangible assets are stated at cost, less accumulated amortization, and are
computedamortized primarily using the straight-line method. Other intangible assets consist primarily
of: (i)of customer
contractsrelationships (rights to provide Games and
PaymentsFinTech services to gaming
establishmentoperator customers), developed technology,
including capitalized software development costs, trade names and trademarks,
and contract rights acquired through business
combinations; (ii) capitalized software development costs;combinations and
(iii) the acquisition cost of our patent related to the 3-in-1 rollover technology acquired in 2005.contract rights. Customer
contractsrelationships 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.
The acquisition cost of the 3-in-1 Rollover patent is being amortized over the term of the patent, which expires in 2018. 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 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
theour Balance Sheets. All other debt issuance costs are included as contra-liabilities in long-term debt.
72
Original Issue Discounts
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 the Balance Sheets.
Deferred Revenue
Deferred revenue represents amounts from the sale of fully integrated kiosks and related service contracts, anti-money laundering and tax compliance software, and gaming equipment and systems that have been billed, or for which notes receivable have been executed, but which transaction has not met our revenue recognition criteria. The cost of the fully integrated kiosks and related service contracts, anti-money laundering and tax compliance software, and gaming equipment and systems is deferred and recorded at the time revenue is recognized. Amounts are classified between current and long-term liabilities, based upon the expected period in which the revenue will be recognized.
Revenue Recognition
Overall
We recognize revenue when evidence of an arrangement exists, services have been rendered, the price is fixed or determinable and collectability is reasonably assured. We evaluate our revenue streams for proper timing of revenue recognition. Revenue is recognized as products are delivered and or services are performed.
For sales arrangements with multiple deliverables, we apply the guidance from ASC 605-25, “Revenue Recognition - Multiple-Element Arrangements.” In addition, we apply the guidance from ASC 985-605, “Software – Revenue Recognition” which affects vendors that sell or lease tangible products in an arrangement that contains software that is more than incidental to the tangible product as a whole and clarifies what guidance should be used in allocating and measuring revenue. In allocating the arrangement fees to separate deliverables, we evaluate whether we have vendor-specific objective evidence (“VSOE”) of selling price, third party evidence (“TPE”) or estimate of selling price (“ESP”) for gaming devices, maintenance and product support fees and other revenue sources. We generally use ESP to determine the selling price used in the allocation of separate deliverables, as VSOE and TPE are generally not available. We determine the ESP on separate deliverables by estimating a margin typically received on such items and applying that margin to the product cost incurred.
Sales taxes and other taxes collected from customers on behalf of governmental authorities are accounted for on a net basis and are not included in revenues or operating expenses.
Games Revenues
Games revenues are primarily generated by our gaming operations under development, placement, and participation arrangements in which we provide our customers with player terminals, player terminal-content licenses, central determinate systems for devices placed in service in licensed jurisdictions and back-office equipment, collectively referred to herein as leased gaming equipment. Generally, under these arrangements, we retain ownership of the leased gaming equipment installed at customer facilities and we receive revenue based on a percentage of the net win per day generated by the leased gaming equipment or a fixed daily fee based on the number of player terminals installed at the facility. Revenue from lease participation or daily fee arrangements are considered both realizable and earned at the end of each gaming day. Gaming operations revenues generated by leased gaming equipment deployed at sites under development or placement fee agreements are reduced by the accretion of contract rights acquired in connection with those agreements. Contract rights are amounts allocated to intangible assets for dedicated floor space resulting from such agreements, described under “Development and Placement Fee Agreements.” The related amortization expense, or accretion of contract rights, is recorded net against the respective revenue category in the Statements of Loss.
73
In addition, we sell gaming equipment directly to our customers under sales contracts on standard credit terms, or may grant extended credit terms under sales contracts secured by the related equipment.
Other Games revenues primarily consist of our TournEvent of Champions® national tournament offering.
Generally, player terminal sales include ancillary equipment, such as networking gear, bases, chairs, and occasionally signage, some of which may be necessary for the full functionality of the player terminals in a casino. This ancillary equipment comprises an install kit that is shipped simultaneously with the player terminals. Although our products are analyzed as multiple deliverable arrangements, revenue for the player terminal and ancillary equipment is not recognized until all elements essential for the functionality of the product have been shipped or delivered. This includes game theme software and essential ancillary equipment. If elements that are not essential to the functionality of the player terminals are shipped after the unit, such as signage, chairs, or bases, these items would be classified as deferred revenue until shipped or delivered.
Revenue related to systems arrangements that contain both software and non-software deliverables requires allocation of the arrangement fee to the separate deliverables using the relative selling price method. Revenue for software deliverables is recognized under software revenue recognition guidance. Revenue resulting from the sale of non-software deliverables, such as gaming devices and other hardware, are accounted for based on other applicable revenue recognition guidance as the devices are tangible products containing both software and non-software components that function together to deliver the product's essential functionality.
The majority of our multiple element sales contracts are for some combination of gaming equipment, player terminals, content, system software, license fees, ancillary equipment and maintenance.
Payments Revenues
Cash advance revenues are comprised of transaction fees assessed to gaming patrons in connection with credit card cash access and POS debit card cash access transactions and are recognized at the time the transactions are authorized. Such fees are based on a combination of a fixed amount plus a percentage of the face amount of the credit card cash access or POS debit card cash access transaction amount.
ATM revenues are comprised of transaction fees in the form of cardholder surcharges assessed to gaming patrons in connection with ATM cash withdrawals at the time the transactions are authorized and reverse interchange fees paid to us by the patrons’ issuing banks. Cardholder surcharges and reverse interchange are recognized as revenue when a transaction is initiated. The cardholder surcharges assessed to gaming patrons in connection with ATM cash withdrawals are currently a fixed dollar amount and not a percentage of the transaction amount.
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.
Kiosk Sales and Services revenues are derived from the sale of cash access equipment and certain other ancillary fees associated with the sale, installation and maintenance of those offerings directly to our customers under sales contracts on standard credit terms, or may grant extended credit terms under sales contracts secured by the related equipment.
Compliance and other revenues include amounts derived from: (i) the sale of software licensing, software subscriptions professional services and certain other ancillary fees; (ii) Central Credit revenues 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 (iii) fees generated from ancillary marketing, database and internet-based gaming activities.
The majority of our multiple element sales contracts are for some combination of cash access services, fully integrated kiosks and related equipment, ancillary services and maintenance.
74
Cost of Revenues
(exclusive(Exclusive of
depreciationDepreciation and
amortization)Amortization)
The cost of revenues (exclusive of depreciation and amortization) represents the direct costs required to perform revenue generating
transactions. The principal costs included within costtransactions, and are comprised primarily of
revenues (exclusive of depreciation and amortization) are commissions paid to gaming establishments, interchange fees paid to credit and debit card networks, transaction processing fees to our transaction processor, inventory and related costs associated with the sale of our
fully integratedfinancial access and loyalty kiosks
and software, electronic gaming machines and system
sales,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
Loss,Operations, were
$1.1$4.0 million,
$1.2$3.5 million, and
$0.9$2.6 million for the years ended December 31,
2017, 20162023, 2022, and
2015,2021, 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, gaminggame 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, as well asand to add enhancements toenhance 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; (iii) loyalty products, systems, and features that attract, engage, and retain patrons in more intuitive and contextual ways than our competition; (iv) cashless alternatives, such as the CashClub Wallet; and (v) mobile-first applications aimed at enhancing patron engagement for customers in the future. casino, sports, entertainment, and hospitality industries.
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,
the project is capitalized until it
is transferred from research to development and capitalization of development costs begins until the product isbecomes available for general release.
Research and development costs were
$18.9$67.6 million,
$19.4$60.5 million, and
$19.1$39.1 million for the years ended December 31,
2017, 20162023, 2022, and
2015,2021, respectively.
We are subject to income taxes in the United States as well as various states and foreign jurisdictions in which we operate.
InWe account for income taxes in accordance with accounting guidance
our income taxes include amounts from domestic and international jurisdictions, plus the provision for U.S. taxes on undistributed earnings of international subsidiaries as of December 31, 2017. With respect to new tax reform, we account for such provisions in the year of enactment in accordance with GAAP. 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.Ourwhereby deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been included in our Financial Statementsthe 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 of a change in tax rates on the income tax provision or benefit and deferred tax assets and liabilities for a change in ratesgenerally is recognized in the Statementsresults of Lossoperations in the period that includes the enactment date.
When measuring We evaluate the realization of our deferred tax assets certain estimatesbased on all available evidence and assumptions are required to assess whetherestablish 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 valuation allowance involves significant estimates regarding future taxable income andto reduce deferred tax assets 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 assetsthey 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 ofThis assessment considers all available positive and negative evidence, is difficult to overcome. Therefore, we include certain aspects ofincluding our historicalpast operating results, in our forecasts of future taxable income, as we do not haveearnings, the ability to solely rely on forecasted improvements in earnings to recover deferred tax assets. When we report a cumulative loss position,
75
to the extent our resultsscheduled reversal of operations improve, such that we have the ability to overcome the more likely than not accounting standard, we expect to be able to reverse the valuation allowance in the applicable period of determination. In addition, we rely on deferred tax liabilities, in our assessmentthe duration of the realizability of deferredstatutory carryforward periods and 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.
planning strategies.
We
also follow accounting guidance 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
Although we believe our assumptions, judgments and estimates are reasonable, changes in tax laws, and their interpretation, as well as the examination of our tax returns by taxing authorities, could significantly impact the amounts provided for income taxes
paid may vary from estimates depending upon changes in
incomeour consolidated financial statements. Our effective tax
laws,rate is affected by a number of factors including the actual results of operations,
changes in our stock price for shares issued as employee compensation, changes in the valuation of our deferred tax assets or liabilities and
changes in tax laws or rates for income taxes and other non-income taxes in various jurisdictions. The Organization for Economic Cooperation and Development’s (“OECD”) Base Erosion and Profit Shifting project involving negotiations among over 140 countries has the
final auditpotential to substantially affect international tax policies, including the implementation of
a minimum global effective tax
returns by taxing authorities. Tax assessments may arise several years afterrate of 15%. We are not currently subject to these rules as they are only applicable to multinational companies with global revenue of at least EUR 750 million. We will continue to monitor developments in the OECD’s project and policy changes in the countries in which we operate, as our effective tax
returns have been filed.rate and cash tax payments could increase when we become subject to these rules in future years.
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). Expenses related to the matching portion of the contributions to the
Surviving 401(k) Plan were
$2.3$6.3 million,
$1.9$4.6 million, and
$1.3$2.6 million for the years ended December 31,
2017, 20162023, 2022, and
2015,2021, 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 receivables,and other receivables, settlement liabilities, accounts payable, and accrued expenses approximatesapproximate 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. As of December 31, 2023 and 2022, the fair value of trade and loan receivable approximated the carrying value due to contractual terms generally being slightly over 12 months. The fair value of our borrowings areis 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, 2017 | | | | | | | | | | |
Term loan | | 2 | | $ | 826,099 | | | $ | 815,900 | |
Senior unsecured notes | | 1 | | $ | 372,656 | | | $ | 375,000 | |
| | | | | | | | | | |
December 31, 2016 | | | | | | | | | | |
Term loan | | 1 | | $ | 451,632 | | | $ | 465,600 | |
Senior secured notes | | 3 | | $ | 324,950 | | | $ | 335,000 | |
Senior unsecured notes | | 1 | | $ | 350,000 | | | $ | 350,000 | |
| | | | | | | | | | | | | | | | | |
| | Level of Hierarchy | | Fair Value | | Outstanding Balance |
| December 31, 2023 | | | | | |
| $600 million Term Loan | 2 | | $ | 589,433 | | | $ | 586,500 | |
| $400 million 2021 Unsecured Notes | 2 | | $ | 365,000 | | | $ | 400,000 | |
| December 31, 2022 | | | | | |
| $600 million Term Loan | 2 | | $ | 588,560 | | | $ | 592,500 | |
| $400 million 2021 Unsecured Notes | 2 | | $ | 346,000 | | | $ | 400,000 | |
76
The
term loan facility was reported at fair
valuevalues of our borrowings 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, 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, 2017.The term loan was reported at fair value using a Level 1 input as there were quoted prices in markets that were considered active as of December 31, 2016. The senior secured notes were reported at fair value using a Level 3 input as there was no market activity or observable inputs as of December 31, 2016. The senior unsecured notes were reported at fair value using a Level 1 input as there were quoted prices in markets that were considered active as of December 31, 2016.
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
on(loss) in the Statements of
Loss.Operations. Translation adjustments on intercompany balances of a long-term investment nature are recorded as a component of accumulated other comprehensive loss
onin our Balance Sheets.
We have made estimates and judgments affecting the amounts reported in these financial statements and the accompanying
notes.notes in conformity with GAAP. The actual results may
materially differ from these estimates.
These accounting estimates incorporated into our Financial Statements include, but are not limited to:the estimated reserve for warranty expense associated with our check warranty receivables;
the estimated reserve for bad debt expense associated with our trade receivables;
the estimated reserve for inventory obsolescence;
the valuation and recognition of share based compensation;
the valuation allowance on our deferred income tax assets;
the estimated cash flows in assessing the recoverability of long lived assets;
the estimates of future operating performance, weighted average cost of capital (“WACC”) and growth rates as well as other factors used in our annual goodwill and assets impairment evaluations;
the renewal assumptions used for customer contracts to estimate the useful lives of such assets;
the judgments used to determine the stages of development and costs eligible for capitalization as internally developed software; and
the estimated liability for health care claims under our self-insured health care program.
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
antidilutive.Share‑Basedanti-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.
Stock-Based Compensation
Share-based payment awards result
Stock-based compensation results in a cost that is measured at fair value on the
award’s grant
date.date of an award. Generally, we issue grants that are classified as equity awards. To the extent 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 with 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, except for certain awards with a share-based payment arrangements priced in relation to similar indexed securities, which are valued using a lattice model. 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 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.
77
Our market-based options granted
Forfeiture amounts are estimated at the grant date for stock awards and are updated periodically based on actual results, to the extent they differ from the estimates.
Acquisition-Related Costs
We expense acquisition-related costs as 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 Balances
Certain amounts in 2017the accompanying consolidated financial statements and 2016 under our 2014 Equity Incentive Plan (the “2014 Plan”)accompanying notes have been reclassified to be consistent with the current year presentation. These reclassifications had no effect on net income for the prior periods.
The Company determined that the placement fee arrangements were previously misclassified in its Statements of Cash Flows. Previously, these placement fee arrangements were reported as cash flows from investing activities, and 2012 Equity Incentive Plan (as amended,they should have been presented as cash flows from operating activities for the “2012 Plan”) vest at a rate of 25% per year onfiscal years ended December 31, 2022 and 2021. The error has been corrected by adjusting each of the first four anniversariesaffected financial statement categories for these prior periods. The changes in the prior periods were made to conform to the current period presentation. For additional information, refer to “Item 8 — Financial Statements and Supplementary Data — Notes to Consolidated Financial Statements — Note 20 — Error Correction of an Immaterial Prior Year Misstatement.” Recent Accounting Guidance
Recently Adopted Accounting Guidance
None.
Recent Accounting Guidance Not Yet Adopted
| | | | | | | | | | | |
| Standard | Description | Date of Planned Adoption | Effect on Financial Statements |
Accounting Standards Update (“ASU”) 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures | The amendments in this update require enhanced reportable segment disclosures, primarily concerning significant segment expenses. | January 1, 2024 | 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. |
ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosure | The amendments in this Update require enhanced income tax disclosures, primarily concerning the rate reconciliation and income taxes paid information. | January 1, 2025 | We are currently evaluating the effect of adopting this ASU on our Financial Statement disclosures. |
As of December 31, 2023, other than what has been described above, we do not anticipate recently issued accounting guidance to have a significant impact on our consolidated financial statements.
3. Revenues
Revenue Recognition
Overview
We evaluate the recognition of revenue based on the criteria set forth in Accounting Standards Codification (“ASC”) 606 — Revenue from Contracts with Customers and ASC 842 — Leases, as appropriate. We recognize revenue upon transferring control of goods or services to our customers in an amount that reflects the consideration we expect to receive in exchange for those goods or services. We enter into contracts with customers that include various performance obligations consisting of goods, services, or combinations of goods and services. Timing of the grant date, provided that astransfer of control varies based on the nature of the vesting datecontract. 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.
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 our 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 Stand-Alone Selling Price (“SSP”) will be determined for each vesting tranche,performance obligation in the closingcombined 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 Company’s sharespromises 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
Outbound Freight Costs, Installation and Training
Upon transferring control of goods 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 commissions; however, because the expected benefit from these contracts is one year or less, we expense these amounts as incurred.
Contract Balances
Since our contracts may include multiple performance obligations, there is often a timing difference between cash collections and the satisfaction of such performance obligations and revenue recognition. Such arrangements are evaluated to determine whether contract assets and liabilities exist. We generally record contract assets when the timing of billing differs from when revenue is recognized due to contracts containing specific performance obligations that are required to be met prior to a customer being invoiced. We generally record contract liabilities when cash is collected in advance of us satisfying performance obligations, including those that are satisfied over a period of time. Balances of our contract assets and contract liabilities may fluctuate due to timing of cash collections.
The following table summarizes our contract assets and contract liabilities arising from contracts with customers (in thousands):
| | | | | | | | | | | | | | |
| | 2023 | | 2022 |
Contract assets(1) | | | | |
| Balance, beginning of period | | $ | 22,417 | | | $ | 15,221 | |
| Balance, end of period | | 26,635 | | | 22,417 | |
| Increase | | $ | 4,218 | | | $ | 7,196 | |
| | | | |
Contract liabilities(2) | | | | |
| Balance, beginning of period | | $ | 53,419 | | | $ | 36,615 | |
| Balance, end of period | | 51,799 | | | 53,419 | |
| (Decrease) increase | | $ | (1,620) | | | $ | 16,804 | |
(1) Contract assets are included within trade and other receivables, net and other receivables in our Balance Sheets.
(2) Contract liabilities are included within accounts payable and accrued expenses and other accrued expenses and liabilities in our Balance Sheets.
We recognized approximately $36.0 million and $27.5 million in revenue that was included in the beginning contract liability balance during 2023 and 2022, respectively.
Games Revenues
Our products and services include electronic gaming devices, such as Native American Class II offerings and other electronic bingo products, Class III slot machine offerings, HHR offerings, integrated electronic bingo gaming tablets, VLTs installed in the State of New York and similar technology in certain tribal jurisdictions, 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; and (ii) Gaming Equipment and Systems.
Gaming Operations
We primarily provide: (i) leased gaming equipment, both Class II and Class III offerings, and HHR on a participation and a daily fixed-fee basis, including standard games and hardware and premium games and hardware, inclusive of local-area progressive, and WAP; (ii) accounting and central determinant systems; (iii) digital online gaming activities; and (iv) bingo solutions through consoles, integrated electronic gaming tablets and related systems. We evaluate the recognition of lease revenues based on criteria set forth in ASC 842. Under these arrangements, we retain ownership of the machines installed at customer facilities. We recognize recurring rental 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 and the fixed daily fee and the lease payments that have been collected from the lessee.
Gaming operations revenues generated by leased gaming equipment deployed at sites under placement fee agreements for dedicated floor space. The gaming operations revenues generated by these agreements are reduced by the accretion of contract rights, which represents the related amortization recorded in connection with such agreements.
Gaming operations lease revenues accounted for under ASC 842 are generally short-term in nature with payment terms ranging from 30 to 90 days. We recognized $201.9 million, $197.9 million, and $189.8 million in lease revenues for the years ended December 31, 2023, 2022, and 2021, respectively.
Gaming operations revenues include amounts generated by 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 administered 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 offering. The gaming operations revenues with respect to WAP machines represent a separate performance obligation and we transfer control and recognize revenue over time based on a percentage of the coin-in, a percentage of net win, or a combination of both, based on the timing services are provided. These arrangements are generally short-term in nature with a majority of invoices payable within 30 to 90 days. Such revenues are presented in the Statements of Operations, net of the jackpot expense, which are composed of incremental amounts funded by a portion of coin-in from the players. At the time a jackpot is won by a player, an additional jackpot expense is recorded in connection with the base seed amount required to fund the minimum level as set forth in the WAP arrangements with the casino operators.
In addition, gaming operations include revenues generated under our arrangement to provide the New York Stock Exchange isState Gaming Commission (the “NYSGC”) with a central determinant monitoring and accounting system for the VLTs in operation at leastlicensed State of New York gaming facilities. Pursuant to our agreement with the NYSGC, we receive a specified price hurdle, defined asportion 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 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 25% and 50% premium for 2017 and 2016, respectively,portion of the revenue generated from the VLTs connected to the closing stock pricesystem. These arrangements are generally short-term in nature with payments due monthly.
Gaming operations also include revenues generated by our digital solutions comprised of B2B activities. Our B2B operations provide games to our business customers, including both regulated real money and social casinos, which offer the games to consumers on their apps. Our B2B arrangements primarily provide access to our game content, and revenue is recognized over time as the control transfers upon our business partners’ daily access to such content based on either a flat fee or revenue share arrangements with the social and regulated real money casinos, based on the grant date. Iftiming services are provided.
Gaming operations also include revenues generated by bingo solutions through consoles, integrated electronic gaming tablets and related systems.
Gaming operations also include other revenues that are generated from fees paid by casino customers that participate in our TournEvent of Champions® national slot tournament or who contract with us to provide certain service functions on games that are owned by the price hurdle is not metcustomer.
Gaming Equipment and Systems
Gaming equipment and systems revenues are derived from the sale of some combination of: (i) gaming equipment and player terminals; (ii) game content; (iii) license fees; and (iv) ancillary equipment, such as
of the vesting datesignage and 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
a vesting tranche, then the vested tranche shall vest and become vested shares on the last day ofextended payment terms up to 39 months. Each contract containing extended payment terms over a period of
30 consecutive trading days during12 months is evaluated for the presence of a financing component; however, our contracts generally do not contain a financing component that has been determined to be significant to the contract. Distinct and thus, separately identifiable performance obligations for gaming equipment and systems arrangements include gaming equipment, player terminals, content, system software, license fees, ancillary equipment, 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
closing price isterms of the contract. The performance obligations are generally satisfied at
least the
price hurdle.Our market-based stock options granted in 2015 under the 2014 Plan will vest if our average stock price in anysame time or within a short period of 30 consecutive trading days meets certain target prices duringtime.
FinTech Revenues
Financial Access Services
Financial Access Services revenues are generally comprised of the following distinct performance obligations: funds advanced, funds dispensed, and check services. We do not control the funds advanced and funds dispensed services provided to a four-year period that commenced oncustomer and, therefore, we are acting as an agent whose performance obligation is to arrange for the grant dateprovision of these options. Ifservices. Our financial access services involve the movement of funds between the various parties associated with financial access transactions and give rise to settlement receivables and settlement liabilities, both of which are settled in days following the transaction.
Funds advance revenues are primarily comprised of transaction fees assessed to gaming patrons in connection with credit card financial access and POS debit card financial 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 financial access or POS debit card financial access transaction amount. In connection with these target pricestypes 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-party partners.
Funds dispensed revenues are not met during the four year period, the unvested shares underlying the options will terminate except if there is a Change in Control (as definedprimarily comprised of transaction fees in the 2014 Plan)form of cardholder surcharges assessed to gaming patrons in connection with funds dispensed cash withdrawals at the time the transactions are authorized and interchange reimbursement fees paid to us by the patrons’ issuing banks. The cardholder surcharges assessed to gaming patrons in connection with funds dispensed cash withdrawals are currently a fixed dollar amount and not a percentage of the Company,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-party partners.
Funds transmitted revenues are primarily comprised of transaction fees assessed to gaming patrons in connection with funds transmitted to a patron’s external bank account or other approved account from a physical device such as our kiosks, or via the CashClub Wallet. In connection with these types of transactions, we report certain direct costs incurred as reductions to revenues on a net basis.
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 operators. We report certain direct costs incurred as reductions to revenues on a net basis, which case,include: (i) warranty expenses, defined as amounts paid by the unvested shares underlyingthird-party check warranty service provider to gaming operators to purchase dishonored checks; and (ii) service fees, defined as amounts paid to the third-party check warranty service provider for its assistance.
For financial 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 options shall become fully vestedas volume of transactions processed with variability generally resolved in the reporting period.
Software and Other
Software and other revenues 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-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 services. Software license revenues are recognized at a point in time; 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 generally 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 12 months is evaluated for the presence of a financing component; however, our contracts generally do not contain a financing component that has been determined to be significant to the contract.
4. LEASES
We determine if a contract is, or contains, a lease at the inception, or modification, of a contract based on
whether the
effective datecontract conveys the right to control the use of
such changean identified asset for a period of time in
control transaction.The market-based options were measured at fair value onexchange for consideration. Control over the grant date usinguse of an asset is predicated upon the notion that a lattice-based valuation modellessee has both the right to (i) obtain substantially all of the economic benefit from the use of the asset; and (ii) direct the use of the asset.
Operating lease right-of-use (“ROU”) assets and liabilities are recognized based on the
median time horizon frompresent value of minimum lease payments over the
date of grant for these options to the vesting date for those paths that achieved the target threshold(s). The compensationexpected lease term at commencement date. Lease expense is recognized on a straight-line basis over the
median vesting periods calculated under such valuation model.Forfeitures are estimated atexpected lease term. Our lease arrangements have both lease and non-lease components, and we have elected the grant date for our time-based and market-based awards, with such estimates updated periodically; and with actual forfeitures recognized currently 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. In connection with our annual grant in 2015, certain market-based stock option awards were issued that expire seven 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.
Reclassification of Prior Year Balances
Reclassifications were made to the prior-period financial statements to conform to the current period presentation.
Recent Accounting Guidance
Recently Adopted Accounting Guidance
In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-04, which provides updated guidance on the goodwill impairment test and the method by which an entity recognizes an impairment charge. These amendments eliminate “Step 2” from the current goodwill impairment process and require that an entity recognize an impairment charge equal to the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to that reporting unit. Additionally, a company should also take into consideration income tax effects from tax deductible goodwill on the carrying amount of a reporting unit when recording an impairment loss. The new standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. This guidance will be applied using a prospective approach. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We adopted this guidance in the current period. The adoption of this ASU did not impact our Financial Statements.
In March 2016, the FASB issued ASU No. 2016-09, which simplifies several aspects of the accounting for share-based payment transactions, including the accounting for income taxes, statutory tax withholding requirements and classification on the statement of cash flows. The new standard is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. This guidance will be applied either prospectively, retrospectively or using a modified retrospective transition method, depending on the area covered in this update. Early adoption is permitted. We adopted this guidance in the current period on a prospective basis. As of December 31, 2017, the adoption of ASU No. 2016-09 has not materially impacted our Financial Statements. With respect to forfeitures, the Company will continue to estimate the number of awards expected to be forfeited in
78
accordance with our existing accounting policy. In addition, our Cash Flows present excess tax benefits as operating activities in the current period, as the prior period was not adjusted.
In July 2015, the FASB issued ASU No. 2015-11, which provides guidance on the measurement of inventory value. The amendments require an entity to measure in scope inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Subsequent measurement is unchanged for inventory measured using last-in, first-out (“LIFO”) or the retail inventory method. The amendments do not apply to inventory that is measured using LIFO or the retail inventory method. The amendments apply to all other inventory, which includes inventory that is measured using FIFO or average cost. The pronouncement is effective for annual periods beginning after December 15, 2016, and interim periods within those fiscal years, and early adoption is permitted. We adopted this guidance in the current period. This ASU did not have a material impact on our Financial Statements.
Recent Accounting Guidance Not Yet Adopted
In May 2017, the FASB issued ASU No. 2017-09 to clarify which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting under Topic 718. An entity is requiredpractical expedient to account for the effectslease and non-lease elements as a single lease.
Certain of our lease arrangements contain options to renew with terms that generally have the ability to extend the lease term to a modificationrange of approximately one to ten years. The exercise of lease renewal options is generally at our sole discretion. The expected lease terms include options to extend or terminate the lease when it is reasonably certain that we will exercise such option. The depreciable life of leased assets and leasehold improvements are limited by the expected term of such assets, unless allthere is a transfer of the following conditionstitle or purchase option reasonably certain to be exercised.
Lessee
We enter into operating lease agreements for real estate purposes that generally consist of buildings for office space and warehouses for manufacturing purposes. Certain of our lease agreements consist of rental payments that are
met: (i) the fairperiodically adjusted for inflation. Our lease agreements do not contain material residual value
(or calculated valueguarantees or
intrinsic value, if such an alternative measurement methodmaterial restrictive covenants. Our lease agreements do not generally provide explicit rates of interest; therefore, we use our incremental collateralized borrowing rate, which is
used) of the modified award isbased on a fully collateralized and fully amortizing loan with a maturity date the same as the
fair value (or value using an alternative measurement method)length of the
original award immediately before the original awardlease that is
modified. If the modification does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not required to estimate the value immediately before and after the modification; (ii) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; and (iii) the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The new standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted in the first period of the year this guidance is adopted. We do not expect the adoption of this guidance to 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 will be applied using a prospective approach as of the beginning of the first period of adoption. Early adoption is permitted for acquisitions, or disposals that occur before the issuance date or effectiveness date of the amendments when the transaction has not been reported in financial statements that have been issued or made available for issuance. We do not expect the adoption of this guidance to 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 shownbased on the statementinformation available at the commencement date to determine the present value of cash flows. The amendments dolease payments. Leases with an initial expected term of 12 months or less (short-term) are not provide a definition of restricted cash or restricted cash equivalents. The new standard is effectiveaccounted for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. This guidance will be applied using a retrospective approach to each period presented. Early adoption is permitted and adoption in an interim period should reflect adjustments as of the beginning of the fiscal year that includes that interim period. We do not expect the adoption of this guidance to 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. The new standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. This guidance will be applied using a modified retrospective approach through a cumulative-effective adjustment directly to retained earnings as of the beginning of the period of adoption. Early adoption is permitted during the first interim period of
79
the year this guidance is adopted. We do not expect the adoption of this guidance to 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. The new standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. This guidance will be applied using a retrospective approach. If it is impracticable to apply the amendments retrospectively for some of the issues within this ASU, the amendments for those issues would be applied prospectively as of the earliest date practicable. Early adoption is permitted including adoption in an interim period. We do not expect the adoption of this guidance to have a material impact on our Financial Statements.
In June 2016, the FASB issued ASU No. 2016-13, which provides updated guidance on credit losses for financial assets measured at amortized cost basis and available-for sale debt securities. The new standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. This guidance will be applied using a modified retrospective approach for the cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective and using a prospective approach for debt securities for which any other-than-temporary impairment had been recognized before the effective date. Early adoption is permitted for fiscal years beginning after December 15, 2018. We are currently assessing the effect the adoption of this guidance will have on our Financial Statements, but do not expect the effect to be material.
In February 2016, the FASB issued ASU No. 2016-02, which provides guidance on the accounting treatment of leases. The ASU establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either financing or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years and early adoption is permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. While we are currently assessing the impact of this ASU on our Financial Statements, we expect the primary impact to our consolidated financial position upon adoption will be the recognition, on a discounted basis, of our minimum commitments under noncancelable operating leases on our Balance Sheets,Sheets. As of December 31, 2023 and December 31, 2022, 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, 2023 | | At December 31, 2022 |
| Assets | | | | | | |
| Operating lease ROU assets | | Other assets, non-current | | $ | 27,489 | | | $ | 17,169 | |
| Liabilities | | | | | | |
| Current operating lease liabilities | | Accounts payable and accrued expenses | | $ | 7,079 | | | $ | 6,507 | |
| Non-current operating lease liabilities | | Other accrued expenses and liabilities | | $ | 26,930 | | | $ | 14,738 | |
During the fourth quarter of 2023, the Company commenced a real estate lease with a term of ten years and future minimum lease payments of approximately $27.3 million, which will resultare reflected in the recording of right of use assets and lease obligations and are currently discussed in “Note 12 — Commitments and Contingencies.”In May 2014, the FASB issued ASC 606, “Revenue from Contracts with Customers,” which outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes the existing revenue recognition guidance, including industry-specific guidance. 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 qualitativebalances above.
Supplemental cash flow 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. This guidance was originally effective for interim and annual reporting periods beginning after December 15, 2016. However, in August 2015, the FASB issued ASU No. 2015-14, which extended the effective date to interim and annual periods beginning after December 15, 2017. This guidance may be adopted under a full retrospective application or under a modified retrospective method whereby the cumulative effect is recognized at the date of initial application.On January 1, 2018, the Company implemented the new revenue recognition standard promulgated by the FASB. The Company adopted ASC 606 using the modified retrospective method that requires companies to record a cumulative adjustment to retained earnings (or deficit) presented in the unaudited condensed, consolidated balance sheets for interim periods and presented in the audited consolidated balance sheets for annual periods for any contract modifications made to those arrangements not yet completed as of the adoption date of January 1, 2018. The Company determined that there was no such cumulative adjustment required to be made to its interim, condensed, consolidated balance sheets as of the adoption date. In addition, under the modified retrospective method, the Company’s prior period results will not be recast to reflect the new revenue recognition standard.
80
The Company determined that the adoption of ASC 606 will have a material impact on the presentation of its financial information primarily due to the reporting on a net revenues basis, rather than a gross presentation, of certain costs of revenues (exclusive of depreciation and amortization) related to leases is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | |
| | 2023 | | 2022 | | 2021 |
| Cash paid for: | | | | | | | |
| Long-term operating leases | | $ | 7,413 | | | $ | 6,885 | | | $ | 6,675 | | |
| Short-term operating leases | | $ | 2,090 | | | $ | 1,660 | | | $ | 1,622 | | |
| Right-of-use assets obtained in exchange for lease obligations: | | | | | | | |
Operating leases(1) | | $ | 17,690 | | | $ | 7,502 | | | $ | 1,362 | | |
(1) The amounts are presented net of current year terminations and exclude amortization for the cash access activitiesperiod.
Other information related to lease terms and discount rates is as follows:
| | | | | | | | | | | | | | |
| | At December 31, 2023 | | At December 31, 2022 |
| Weighted Average Remaining Lease Term (in years): | | | | |
| Operating leases | | 6.71 | | 3.37 |
| Weighted Average Discount Rate: | | | | |
| Operating leases | | 6.08 | % | | 4.72 | % |
Components of the Company’s Payments segment (with additional immaterial changes due to the net reporting of certain of the gaming operations activities of the Company’s Games segment).lease expense are as follows (in thousands): | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2023 | | 2022 | | 2021 |
| Operating Lease Cost: | | | | | | |
Operating lease cost (1) | | $ | 6,786 | | | $ | 6,008 | | | $ | 5,474 | |
| Variable lease cost | | $ | 1,461 | | | $ | 1,164 | | | $ | 1,267 | |
(1) The
net revenues reporting requirement under ASC 606 will have an effect on both the Payments and Games segment revenues and related cost of revenues (exclusive of depreciation and amortization); however, this net presentation will not have an effect on operating income (loss), net loss, cash flows or the timing of revenues recognized and costs incurred.To provide a greater understanding of the impact of this new revenue recognition standard, the Company determined that under the provisions set forth in ASC 606, the effect on certain Payments and Games revenues and costs of revenues would have collectively decreased byamount includes approximately $564.2$6.1 million, $476.4$4.8 million and $438.3$4.4 million in non-cash lease expense attributable to amortization of ROU assets for the years ended December 31, 2017, 20162023, 2022 and 2015,2021, respectively.
With respect
Maturities of lease liabilities are summarized as follows as of December 31, 2023 (in thousands):
| | | | | | | | |
| Year ending December 31, | | Amount |
| 2024 | | $ | 8,575 | |
| 2025 | | 8,551 | |
| 2026 | | 5,012 | |
| 2027 | | 3,083 | |
| 2028 | | 2,864 | |
| Thereafter | | 14,816 | |
| Total future minimum lease payments | | $ | 42,901 | |
| Amount representing interest | | 8,892 | |
| Present value of future minimum lease payments | | $ | 34,009 | |
| Current operating lease obligations | | 7,079 | |
| Long-term lease obligations | | $ | 26,930 | |
Lessor
We generate lease revenues primarily from our gaming operations activities, and the majority of our leases are month-to-month leases. Under these arrangements, we retain ownership of the electronic gaming machines (“EGMs”) installed at customer facilities. We receive recurring revenues based on a percentage of the net win per day generated by the leased gaming equipment or a fixed daily fee. Such revenues are generated daily and are limited to its Payments segment, the Company willlesser 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 3 — Revenues” for further discussion of lease revenues. We did not have material impact onsales transactions that qualified for sales-type lease accounting treatment during the presentation of its financialyears ended December 31, 2023 and December 31, 2022. Supplemental balance sheet information related to
the reclassification of certain cost of revenues (exclusive of depreciation and amortization) included in the cash advance, automated teller machine and check services revenue streams to be netted against those related revenue streams. The Company will report these items, which include commission expenses paid to casino operators, interchange costs paid to the network associations and processing and related costs paid to other third party partnersour sales-type leases is as
amounts that will be reported “net of transaction price” as reductions to its Payments segment revenues, rather than the current gross revenues presentation with these costs and expenses historically reported as Payments segment cost of revenue (exclusive of depreciation and amortization).With respect to its Games segment, the Company will not have a material impact on the presentation of its financial information related to the reclassification of certain cost of revenues included in the gaming operations revenue stream to be netted against this revenue stream in connection with the Company’s Wide Area Progressive (the “WAP”) offering, which was initiated in 2017. The Company will report these items, which include WAP jackpot expenses as amounts that will be reported “net of the transaction price” as reductions to its Games segment revenues, rather than the current gross revenues presentation with these expenses historically reported as Games segment cost of revenue (exclusive of depreciation and amortization).
Furthermore, for presentation purposes, given the fact that the Company’s total revenues, on a consolidated basis, will be significantly reduced in connection with the adoption of the new revenue recognition standard, the Company’s revenue streams will be evaluated on a recurring basis to ensure compliance with Rule 5-03(b) of Regulation S-X to present those revenues that exceed the quantitative threshold on the Company’s Statements of Loss. In addition, the Company determined that there was no cumulative adjustment to be recorded to Stockholders’ Deficit in its Consolidated Balance Sheets.
81
We have completed our review of the requirements of the new revenue recognition standard by major revenue stream and present the impact to our operating segments as follows:
follows (in thousands): Major Revenue Stream
| | Impact Upon Adoption
|
| | |
Games Segment:
| | |
| | |
Game Sales
| | The adoption of ASC 606 will not have a material impact on this revenue stream; however, for presentation purposes, there will be a change to show this line item on our Consolidated Statements of Loss as we expect it to exceed the quantitative threshold set forth in Rule 5-03(b) of Regulation S-X.
|
| | |
Gaming Operations
| | The adoption of ASC 606 will not have a material impact on this revenue stream; however, with respect to our Wide Area Progressive (“WAP”) offering, which was initiated in 2017, there will be a change as the jackpot expense is required to be netted against the corresponding WAP revenue as opposed to the existing accounting practice of recording these amounts on a gross basis to Games cost of revenue. In addition, for presentation purposes, there will be a change to show this line item on our Statements of Loss as we expect it to exceed the quantitative threshold set forth in Rule 5-03(b) of Regulation S-X.
|
Games Segment Impact
| | The Games segment impact, on a pro forma basis giving effect to the implementation of ASC 606 for revenue and cost of revenue (exclusive of depreciation and amortization), would have been a decrease of approximately $0.6 million for the year ended December 31, 2017. There was no effect to the Statements of Loss with respect to the Games segment for the years ended December 31, 2016 and 2015.
|
Payments Segment:
| | |
| | |
Cash Advance, ATM and Check Services
| | There will be significant changes to the presentation of our financial information related to the Cash Advance, ATM and Check Services revenue streams. Certain costs of revenue, which include: (i) commission expenses paid to casino operators; (ii) interchange costs paid to the network associations; and (iii) processing and related costs paid to other third party partners, will be netted against the corresponding Payments segment revenue as opposed to the existing accounting practice of recording these amounts on a gross basis to Payments cost of revenue. In addition, for presentation purposes, there will be a change to show certain of these line items on our Statements of Loss as we expect it to exceed the quantitative threshold set forth in Rule 5-03(b) of Regulation S-X.
|
| | |
Central Credit
| | The adoption of ASC 606 will not have a material impact and there is no change expected from our current practices.
|
| | |
Kiosk Sales and Services
| | The adoption of ASC 606 will not have a material impact and there is no change expected from our current practices.
|
| | |
Compliance Sales and Services
| | The adoption of ASC 606 will not have a material impact and there is no change expected from our current practices.
|
| | | | | | | | | | | | | | | | | | | | |
| | Classification on our Balance Sheets | | At December 31, 2023 | | At December 31, 2022 |
| Assets | | | | | | |
| Net investment in sales-type leases — current | | Trade and other receivables, net | | $ | 810 | | | $ | 54 | |
82
Payments Segment Impact
| | The Payments segment impact on a pro forma basis giving effect to the implementation of ASC 606 for revenue and cost of revenue (exclusive of depreciation and amortization) would have been a decrease of approximately $563.6 million, $476.4 million and $438.3 million for the years ended December 31, 2017, 2016 and 2015, respectively.
|
3.
We account for business combinations in accordance with ASC 805— Business Combinations, 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 starting from the acquisition date.
eCash Holdings Pty Limited
On March 1, 2022 (the “eCash Closing Date”), the Company acquired the stock of eCash Holdings Pty Limited (“eCash”). Under the terms of the stock purchase agreement, we paid the seller AUD$20 million (approximately USD$15 million) on the eCash Closing Date and we paid the seller additional consideration of AUD$5.0 million (USD$3.4 million) approximately one year following the eCash Closing Date, with a final expected payment of AUD$6.5 million to be paid approximately two years following the eCash Closing Date. In addition, we paid approximately AUD$8.7 million (USD$6.0 million) for the excess net working capital during the second quarter of 2022. We finalized our measurement period adjustments and recorded approximately $2.3 million primarily related to deferred taxes during the quarter ending March 31, 2023. The acquisition did not have a significant impact on our results of operations or financial condition.
Intuicode Gaming Corporation
On April 30, 2022 (the “Intuicode Closing Date”), the Company acquired the stock of Intuicode Gaming Corporation (“Intuicode”), a privately owned game development and engineering firm focused on HHR games. Under the terms of the stock purchase agreement, we paid the seller $12.5 million on the Intuicode Closing Date of the transaction, a net working capital payment of $1.6 million during the second quarter of 2022 and $6.4 million based on the achievement of a certain revenue target one year following the Intuicode Closing Date. In addition, we expect to make a final payment of $2.6 million based on the achievement of a certain revenue target two years following the Intuicode Closing Date. We finalized our measurement period adjustments and recorded approximately $1.3 million primarily related to the final payment and deferred taxes during the quarter ended June 30, 2023.
During the fourth quarter of 2023, we revised our final payment estimate to reflect our current expectation of future operating results, which were negatively impacted by a certain large customer being acquired. As a result, we recorded an adjustment of approximately $1.7 million, which was included within Operating Expenses of our Statements of Operations. The acquisition did not have a significant impact on our results of operations or financial condition.
The fair value of the contingent consideration was based on Level 3 inputs utilizing a discounted cash flow methodology. The estimates and assumptions included projected future revenues of the acquired business and a discount rate of approximately 5%. Contingent consideration to be paid is comprised of a short-term component that is recorded in accounts payable and accrued expenses in our Balance Sheets.
Venuetize, Inc.
On October 14, 2022 (the “Venuetize Closing Date”), the Company acquired certain strategic assets of Venuetize, Inc. (“Venuetize”), a privately owned innovator of mobile-first technologies that provide an advanced guest engagement and m-commerce platform for the sports, entertainment and hospitality industries. Under the terms of the asset purchase agreement, we paid the seller $18.2 million on the Venuetize Closing Date of the transaction and an immaterial amount twelve-months following the Venuetize Closing Date that was netted against a net working capital receivable of approximately $1.0 million. In addition, we expect to pay approximately $1.8 million in contingent consideration based upon the achievement of certain revenue targets on the twenty-four month and thirty-month anniversaries of the Venuetize Closing Date. We finalized our measurement period adjustments and recorded approximately $1.2 million primarily related to the net working capital receivable and deferred taxes during the quarter ended December 31, 2023. The acquisition did not have a significant impact on our results of operations or financial condition.
The fair value of the contingent consideration was based on Level 3 inputs utilizing a discounted cash flow methodology. The estimates and assumptions included projected future revenues of the acquired business and a discount rate of approximately 7%. Contingent consideration to be paid is comprised of a short-term component that is recorded in accounts payable and accrued expenses and a long-term component payable within two years recorded in other accrued expenses and liabilities in our Balance Sheets. The change in fair value of the contingent consideration between the acquisition date and year ended December 31, 2023 was not material.
VKGS LLC
On May 1, 2023 (the “Video King Closing Date”), the Company acquired certain strategic assets of VKGS LLC (“Video King”), a privately owned leading provider of integrated electronic bingo gaming tablets, video gaming content, instant win games and systems within our Games segment. Under the terms of the purchase agreement, we paid the seller approximately $61.0 million, inclusive of a net working capital payment on the Video King Closing Date. We also made an additional net working capital payment of $0.3 million post-closing, early in the third quarter of 2023. In addition, we expect to pay approximately $0.2 million related to an indemnity holdback, which is scheduled for release on the eighteen-month anniversary of the Video King Closing Date. The acquisition did not have a significant impact on our results of operations or financial condition.
The total preliminary purchase consideration for Video King was as follows (in thousands, at fair value):
| | | | | |
| Amount |
| Purchase consideration | |
Cash consideration paid at closing(1) | $ | 61,013 | |
| Cash consideration to be paid post-closing | 466 | |
| Total purchase consideration | $ | 61,479 | |
(1) Current assets acquired included approximately $1.9 million in cash.
The transaction was accounted for using the acquisition method of accounting, which requires, among other things, the assets acquired and liabilities assumed be recognized at their respective fair values as of the acquisition date. The excess of the purchase price over those fair values was recorded as goodwill, which will be amortized for tax purposes. The goodwill recognized is primarily attributable to the income potential from the expansion of our footprint in the gaming space by accelerating our entry into and growth in the electronic bingo market and business line, and assembled workforce, among other strategic benefits.
The estimates and assumptions used include the projected timing and amount of future cash flows and discount rates reflecting risk inherent in the future cash flows. The estimated fair values of assets acquired and liabilities assumed and resulting goodwill are subject to adjustment as the Company finalizes its purchase price accounting. The items for which a final fair value has not been determined include, but are not limited to the valuation of intangible assets and deferred income taxes. We haddo not expect our fair value determinations to materially change; however, there may be differences between the amounts recorded at the Video King Closing Date and the final fair value analysis, which we expect to complete no later than the second quarter of 2024.
The information below reflects the preliminary amounts of identifiable assets acquired and liabilities assumed as of the closing date of the transaction (in thousands):
| | | | | |
| Amount |
| Current assets | $ | 7,715 | |
| Property and equipment | 4,485 | |
| Other intangible assets | 25,770 | |
Goodwill(1) | 24,267 | |
| Other assets | 763 | |
| Total Assets | 63,000 | |
| Accounts payable and accrued expenses | 1,193 | |
| Other accrued expenses and liabilities | 328 | |
| Total liabilities | 1,521 | |
| Net assets acquired | $ | 61,479 | |
(1) Reflects a measurement period adjustment of approximately $0.2 million from the initial allocation as of the closing date of the transaction.
Current assets acquired included approximately $1.9 million in cash. Trade receivables acquired of approximately $2.0 million were short-term in nature and considered to be collectible, and therefore, the carrying amounts of these assets represented their fair values. Inventory acquired of approximately $3.4 million consisted of raw materials and finished goods and was recorded at fair value based on the estimated net realizable value of these assets. Property, equipment and leased assets acquired were not material, acquisitionsand the carrying amounts of these assets approximated their fair values.
The following table summarizes preliminary values of acquired intangible assets (dollars in thousands):
| | | | | | | | | | | |
| Useful Life (Years) | | Estimated Fair Value |
| Other Intangible Assets | | | |
| Trade name | 10 | | $ | 950 | |
| Developed technology | 7 | | 7,300 | |
| Customer relationships | 14 | | 17,520 | |
| Total other intangible assets | | | $ | 25,770 | |
The fair value of intangible assets was determined by applying the income approach. Other intangible assets acquired of approximately $25.8 million were comprised of customer relationships, developed technology and trade name. The fair value of customer relationships of approximately $17.5 million was determined by applying the income approach utilizing the excess earnings methodology based on Level 3 inputs in the hierarchy with a discount rate of 14% and estimated attrition rates. The fair value of developed technology of approximately $7.3 million was determined by applying the income approach utilizing the relief from royalty methodology based on Level 3 inputs with a royalty rate of 10% and a discount rate of 14%. The fair value of trade name of approximately $1.0 million was determined by applying the income approach utilizing the relief from royalty methodology based on Level 3 inputs with a royalty rate of 1% and a discount rate of 15%.
The financial results included in our Statements of Operations since the acquisition date and through December 31, 2023 reflected revenues of approximately $18.4 million and net income of approximately $3.6 million. We incurred acquisition-related costs of approximately $0.6 million for the yearsyear ended December 31, 2017, 20162023.
Pro-forma financial information (unaudited)
The acquisition of Video King occurred during the fiscal year ended December 31, 2023, and 2015.4.the unaudited pro forma financial results on a consolidated basis, including the historical operating results of the Company reflected revenue of approximately
$817.0 million and net income of approximately $83.0 million for the year ended December 31, 2023. The unaudited pro forma financial data on a consolidated basis, including the historical operating results of the Company, as if the Video King acquisition occurred on January 1, 2022, reflected revenue of approximately $824.0 million and net income of approximately $109.2 million for the year ended December 31, 2022.
The acquisitions related to eCash, Intuicode and Venuetize occurred in the prior year; therefore, each are included in our Financial Statements for the year ended December 31, 2023.
The unaudited pro forma financial results on a consolidated basis, including the historical operating results of the Company, as if the eCash, Intuicode and Venuetize acquisitions occurred on January 1, 2022, reflected revenue of approximately $797.6 million and net income of approximately $111.4 million for the year ended December 31, 2022.
The unaudited pro forma results include increases to depreciation and amortization expense based on the purchased intangible assets and costs directly attributable to the acquisitions. The unaudited pro forma results do not purport to be indicative of results of operations as of the date hereof, for any period ended on the date hereof, or for any other future date or period; nor do they give effect to synergies, cost savings, fair market value adjustments and other changes expected as a result of the acquisitions.
6. FUNDING AGREEMENTS
Contract
Commercial Cash
Solutions AgreementOur Contract Cash Solutions AgreementArrangements
We have commercial arrangements with Wells Fargo Bank, N.A. (“Wells Fargo”) allows us to use funds owned by Wells Fargothird-party vendors to provide the currency neededcash for normal operating requirements forcertain of our ATMs.fund dispensing devices. For the use of these funds, we pay Wells Fargo a cash usage fee on either the average daily balance of funds utilized multiplied by a contractually defined cashusage rate or the amounts supplied multiplied by a contractually defined usage rate. These cashfund usage fees, reflected as interest expense within the Statements of Loss,Operations, were $4.9approximately $20.4 million, $3.1$9.3 million, and $2.3$4.0 million for the years ended December 31, 2017, 20162023, 2022, and 2015,2021, respectively. We are exposed to interest rate risk to the extent that the applicable LIBOR (defined to berates increase.
Under these agreements, the
Interbank Offered Rate or a comparable or successor rate) increases.Under this agreement, all currency supplied by Wells Fargo remains thethird party vendors remain their sole property of Wells Fargo at all times until it is dispensed, at which time Wells Fargo obtains an interest in the corresponding settlement receivable which is recorded on a net basis.funds are dispensed. As these funds are not our assets, supplied cash is not reflected on thein our Balance Sheets. The outstanding balances of ATM cash utilized by us from Wells Fargo were $289.8 million and $285.4 million as of December 31, 2017 and 2016, respectively.
The
Our primary commercial arrangement, the Contract Cash Solutions Agreement, as amended,
is with Wells Fargo, N.A. (“Wells Fargo”). Wells Fargo provides us with cash
in the maximum amount of $300.0up to $450 million with the ability to increase the amount
permitted by
$75 million over a 5-day period for special occasions, such as New Years.the vault cash provider. The term of the agreement expires on
June 30, 2020.December 1, 2026 and will automatically renew for additional one-year periods unless either party provides a ninety-day written notice of its intent not to renew. The outstanding balance of funds provided in connection with this arrangement were approximately $388.5 million and $444.6 million as of December 31, 2023 and 2022, respectively.
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,
20172023, 2022, and
2016.Site‑Funded2021.
We operate ATMs at certain customer gaming operators’ establishments where the gaming establishmentoperator 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-Fundedsite-funded ATMs. The Site-Fundedsite-funded ATM liability included within settlement liabilities in the accompanying Balance Sheets was approximately $483.7 million and $337.6 million as of December 31, 2023 and 2022, respectively.
Third-Party Funded ATMs
We enter into agreements with international customers for certain of our ATMs whereby we engage with third-parties to provide the cash required to operate the ATMs. The amount of cash supplied by these third-parties is included within settlement liabilities in the accompanying Balance
Sheets and was $210.8 million and $151.0 million as ofSheets. The outstanding balances in connection with these arrangements were immaterial at December 31,
20172023 and
2016, respectively.Prefunded Cash2022.
Pre-Funded Financial Access Agreements
Due to
certain regulatory requirements
in certain jurisdictions, some international gaming
establishmentsoperators 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
83
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 $8.4$3.6 million and $8.5$3.0 million at December 31, 20172023 and 2016,2022, respectively, and is included in prepaid expenses and other current assets line on our Balance Sheets.
5.
7. TRADE AND OTHER RECEIVABLES
Trade and loansother receivables represent short-term credit granted to customers as well asand long-term loans receivable onin connection with our games, fully integrated kiosksGames and FinTech equipment and software, and compliance products. Trade and loans receivablesreceivable generally do not require collateral.
The balance of trade and loans
receivablesreceivable consists of outstanding balances owed to us by gaming
establishments and casino patrons.operators. Other receivables include income
taxestax receivables and other miscellaneous receivables.
In addition, we had a note receivable with Bee Cave Games, Inc. (“Bee Cave”), which was established in December 2014 pursuant to a secured promissory note in the amount of $4.5 million. In connection with the promissory note, the Company received a warrant to purchase the common stock of Bee Cave and recorded a discount to the note for the fair value of the warrant received. In May 2016, Bee Cave failed to pay its scheduled interest-only. At such time, we recorded a write-down of approximately $4.3 million related to the Bee Cave note receivable and warrant in operating expenses on the Statements of Loss. During the third quarter of 2016, we foreclosed on the Bee Cave assets, evaluated its platform, and began to utilize these assets in connection with our social gaming strategy to deliver content from our existing game library. Consequently, we extinguished the note receivable and recorded $0.5 million of developed technology and software within other intangible assets, net on the Balance Sheets.
The balance of trade and other receivables consisted of the following (in thousands):
| | | At December 31, | | | | At December 31, |
| | 2017 | | | 2016 | | | | 2023 | | 2022 |
Trade and other receivables, net | | | | | | | | | Trade and other receivables, net | | |
Games trade and loans receivables | | $ | 38,070 | | | $ | 44,410 | |
Payments trade and loans receivables | | | 10,780 | | | | 12,337 | |
| Games trade and loans receivable | |
| FinTech trade and loans receivable | |
Contract assets (1) | |
Other receivables | | | 1,570 | | | | 1,924 | |
| Total trade and other receivables, net | | $ | 50,420 | | | $ | 58,671 | |
Less: non-current portion of receivables | | | 2,638 | | | | 2,020 | |
| Total trade and other receivables, net | |
| Total trade and other receivables, net | |
| | Non-current portion of receivables | |
| Non-current portion of receivables | |
| Non-current portion of receivables | |
| Games trade and loans receivable | |
| Games trade and loans receivable | |
| Games trade and loans receivable | |
| FinTech trade and loans receivable | |
Contract assets (1) | |
| | Total non-current portion of receivables | |
| Total non-current portion of receivables | |
| Total non-current portion of receivables | |
| Total trade and other receivables, current portion | | $ | 47,782 | | | $ | 56,651 | |
| Total trade and other receivables, current portion | |
| Total trade and other receivables, current portion | |
At least quarterly, we evaluate
(1) Refer to “Note 3 — Revenues” for a discussion on the collectability of the outstanding balances and establish a reservecontract assets. Allowance for Credit Losses
The activity in our allowance for credit losses for the
face amount of the expected losses on our receivables. The allowance for doubtful accounts for trade receivables includes reserves for both Games and Payments receivables. The provision for doubtful accounts is generally included within operating expenses in the Statements of Loss. We also have a provision for doubtful accounts specifically associated with our outstanding check warranty receivables, which is included within Payments cost of revenues (exclusive of depreciation and amortization) in the Statements of Loss. The outstanding balances of the check warranty and general reserves were $2.7 million and $2.0 million, respectively, as ofyears ended December 31,
20172023 and
$2.7 million and $2.0 million, respectively, as of December 31, 2016.84
A summary activity of the reserve for check warranty losses2022 is as follows (in thousands):
| | Amount | |
Balance, December 31, 2014 | | $ | 2,784 | |
Warranty expense provision | | | 9,263 | |
Charge-offs against reserve | | | (9,074 | ) |
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 | |
| | | | | | | | | | | |
| At December 31, |
| | 2023 | | 2022 |
| Beginning allowance for credit losses | $ | (4,855) | | | $ | (5,161) | |
| Provision | (11,623) | | | (10,115) | |
| Charge-offs and recoveries | 11,268 | | | 10,421 | |
| Ending allowance for credit losses | $ | (5,210) | | | $ | (4,855) | |
6.
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.value.
Inventory consisted of the following (in thousands):
| | | At December 31, | | | | At December 31, |
| | 2017 | | | 2016 | | | | 2023 | | 2022 |
Inventory | | | | | | | | | Inventory | | |
Raw materials and component parts, net of reserves of $1,327 and $2,155 at December 31, 2017 and 2016, respectively | | $ | 18,782 | | | $ | 12,570 | |
| Component parts, net of reserves of $3,144 and $2,919 at December 31, 2023 and December 31, 2022, respectively | |
Work-in-progress | | | 985 | | | | 1,502 | |
Finished goods | | | 4,200 | | | | 4,996 | |
Total inventory | | $ | 23,967 | | | $ | 19,068 | |
7.
9. PREPAID
EXPENSES AND OTHER ASSETS
Prepaid expenses and other assets include the balance of prepaid expenses, deposits, debt issuance costs on our Revolving Credit Facility (defined herein)Revolver (as defined below “Note 13 — Long-Term Debt”), 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 theour Balance Sheets. The balance of
the current portion of prepaid
expenses and other assets
current consisted of the following (in thousands):
| | At December 31, | |
| | 2017 | | | 2016 | | | | At December 31, |
Prepaid expenses and other assets | | | | | | | | |
| | | | | 2023 | | 2022 |
| Prepaid expenses and other current assets | | Prepaid expenses and other current assets | | |
| Prepaid expenses | |
Deposits | | $ | 9,003 | | | $ | 8,622 | |
Prepaid expenses | | | 6,426 | | | | 5,937 | |
Restricted cash(1) | |
Other | | | 5,241 | | | | 3,489 | |
Total prepaid expenses and other assets | | $ | 20,670 | | | $ | 18,048 | |
| Total prepaid expenses and other current assets | |
85
The balance of
the non-current portion of other assets
non-current consisted of the following (in thousands):
| | | At December 31, | | | | At December 31, |
| | 2017 | | | 2016 | | | | 2023 | | 2022 |
Other assets | | | | | | | | | Other assets | | |
| Operating lease ROU assets | |
Prepaid expenses and deposits | | $ | 4,103 | | | $ | 3,399 | |
Debt issuance costs of revolving credit facility | | | 849 | | | | 689 | |
Other | | | 2,657 | | | | 3,434 | |
Total other assets | | $ | 7,609 | | | $ | 7,522 | |
8.
10. PROPERTY
EQUIPMENT AND
LEASED ASSETSEQUIPMENT
Property
equipment and
leased assetsequipment consist of the following
(amounts in(in thousands):
| | | | At December 31, 2017 | | | At December 31, 2016 | |
| | Useful Life | | | | | | Accumulated | | | Net Book | | | | | | | Accumulated | | | Net Book | |
| | (Years) | | Cost | | | Depreciation | | | Value | | | Cost | | | Depreciation | | | Value | |
Property, equipment and leased assets | | | | | | | | | | | | | | | | | | | | | | | | | | |
Rental pool - deployed | | 2-4 | | $ | 162,319 | | | $ | 80,895 | | | $ | 81,424 | | | $ | 123,812 | | | $ | 59,188 | | | $ | 64,624 | |
Rental pool - undeployed | | 2-4 | | | 17,366 | | | | 9,374 | | | | 7,992 | | | | 13,456 | | | | 5,721 | | | | 7,735 | |
Cash access equipment | | 3-5 | | | 25,907 | | | | 18,654 | | | | 7,253 | | | | 25,127 | | | | 15,688 | | | | 9,439 | |
Leasehold and building improvements | | Lease Term | | | 10,981 | | | | 5,211 | | | | 5,770 | | | | 10,023 | | | | 3,698 | | | | 6,325 | |
Machinery, office and other equipment | | 2-5 | | | 35,167 | | | | 24,087 | | | | 11,080 | | | | 30,424 | | | | 20,108 | | | | 10,316 | |
Total | | | | $ | 251,740 | | | $ | 138,221 | | | $ | 113,519 | | | $ | 202,842 | | | $ | 104,403 | | | $ | 98,439 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | At December 31, 2023 | | At December 31, 2022 |
| | Useful Life (Years) | | Cost | | Accumulated Depreciation | | Net Book Value | | Cost | | Accumulated Depreciation | | Net Book Value |
| Property and equipment | | | | | | | | | | | | | | |
| Rental pool - deployed | | 2-5 | | $ | 308,438 | | | $ | 218,110 | | | $ | 90,328 | | | $ | 279,524 | | | $ | 188,369 | | | $ | 91,155 | |
| Rental pool - undeployed | | 2-5 | | 39,578 | | | 29,770 | | | 9,808 | | | 30,378 | | | 23,930 | | | 6,448 | |
| FinTech equipment | | 1-5 | | 32,719 | | | 21,911 | | | 10,808 | | | 36,442 | | | 24,167 | | | 12,275 | |
| Leasehold and building improvements | | Lease Term | | 19,271 | | | 4,887 | | | 14,384 | | | 13,666 | | | 10,689 | | | 2,977 | |
| Machinery, office, and other equipment | | 1-5 | | 63,857 | | | 36,481 | | | 27,376 | | | 55,246 | | | 34,456 | | | 20,790 | |
| Total | | | | $ | 463,863 | | | $ | 311,159 | | | $ | 152,704 | | | $ | 415,256 | | | $ | 281,611 | | | $ | 133,645 | |
In the second quarter of 2016, our corporate aircraft was classified as held for sale and sold for $4.8 million during the period. We recognized a $0.9 million loss on the sale of the aircraft, which was included in operating expenses in the Statements of Loss for the year ended December 31, 2016. The aircraft was included in machinery, office and other equipment.
In connection with the sale of certain assets related to our PokerTek products during the year ended December 31, 2015 for a purchase price of $5.4 million, we recorded a gain of approximately $3.9 million, which was included in operating expenses in our Statements of Loss for such period.
Depreciation expense related to
other property
equipment and
leased assetsequipment totaled approximately
$47.3$78.7 million,
$50.0$66.8 million, and
$45.6$61.5 million for the years ended December 31,
2017, 20162023, 2022, and
2015,2021, respectively.
There was no material impairment of our property, equipment and leased assets for the years ended December 31, 2017 and 2016. In connection with our fourth quarter 2015 annual financial statement review, we determined that certain of our Games fixed assets either: (a) had economic lives that were no longer supportable and shortened given approximately one year of experience with the Games segment that resulted in an accelerated depreciation charge of approximately $2.6 million; or (b) were fully impaired as there was little to no movement in the portfolio with recent shipments having been returned and no future deployment anticipated that resulted in an accelerated depreciation charge of approximately $1.0 million.
9.
11. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill represents the excess of the purchase price over the identifiable tangible and intangible assets acquired plus liabilities assumed arising from business combinations.
86
The balance of goodwill was approximately $737.8 million and $715.9 million at December 31, 2023 and 2022, 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; (vi) Loyalty Sales and Services; and (vii) Mobile Technologies.
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 forecasted cash flows are based on our most recent annual budget and projected years beyond. Our budgets and forecasted 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 the adoption of ASU No 2017-04.
We had approximately $640.6 million and $640.5 million of goodwill on our Balance Sheets as of December 31, 2017 and 2016, respectively, resulting from acquisitions of other businesses.
recorded.
In connection with our annual goodwill impairment testing process for 2017,2023 and 2022, we determineddetermined that no impairment adjustment was necessary. The fair value exceeded the carrying amountadjustments were necessary for each of the Games, Cash Access Services, Kiosk Sales and Services, Central Credit Services and Compliance Sales and Services reporting units. In connection with our annual goodwill impairment testing process for 2016 and 2015, 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 and $75.0 million for 2016 and 2015, respectively. The impairments recorded in 2016 and 2015 were 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 and other non‑amortizing intangible assets 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 estimate of fair value requires significant judgment and we base our fair value estimates on assumptions that we believe to be reasonable; but that are unpredictable and inherently uncertain, including: estimates of future growth rates,
87
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. In 2017, our reporting units included: Games, Cash Access Services, Kiosk Sales and Services, Central Credit Services, and Compliance Sales and Services. During the year ended December 31, 2016, the Company combined its Cash Advance, ATM and Check Services reporting units into a single Cash Access Services reporting unit to be consistent with the current corporate structure and segment management. The use of different assumptions, estimates or judgments in the goodwill impairment testing process, such as the estimated future cash flows of our reporting units, the discount rate used to discount such cash flows, or the estimated fair value of the reporting units’ tangible and intangible assets and liabilities, could significantly increase or decrease the estimated fair value of a reporting unit or its net assets, and therefore, impact the related impairment charge, if any.
Key assumptions used in estimating fair value of the Games reporting unit under the income approach included a discount rate of 9.5% and 10% and a terminal value growth rate of approximately 3% for the years ended December 31, 2017 and 2016. Projected compound average revenue growth rates of approximately 11% and 5.2% were used for the years ended December 31, 2017 and 2016, respectively. The discounted cash flow analyses included estimated future cash inflows from operations and estimated future cash outflows for capital expenditures.
Key assumptions used in estimating fair value of the Games reporting unit under the market approach were based on observed market multiples of enterprise value to revenue and EBITDA for both comparable publicly traded companies and recent merger and acquisition transactions involving similar companies to estimate appropriate controlling basis multiples to apply to each of the reporting units. Based on the multiples implied by this market data, we selected multiples of revenue of approximately 1.4 to 1.6 times and multiples of EBITDA of 6.8 to 7.7 times for the year ended December 31, 2017. We selected multiples of revenue of approximately 3.1 to 3.4 times and multiples of EBITDA of 6.5 to 8.3 times for the year ended December 31, 2016.
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 | |
Goodwill | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2015 | | $ | 595,340 | | | $ | 157,035 | | | $ | 5,745 | | | $ | 17,127 | | | $ | 14,556 | | | $ | 789,803 | |
Goodwill impairment | | | (146,299 | ) | | — | | | — | | | — | | | — | | | | (146,299 | ) |
Foreign translation adjustment | | — | | | 20 | | | — | | | — | | | — | | | | 20 | |
Other(1) | | — | | | — | | | — | | | — | | | | (2,978 | ) | | | (2,978 | ) |
Balance, December 31, 2016 | | $ | 449,041 | | | $ | 157,055 | | | $ | 5,745 | | | $ | 17,127 | | | $ | 11,578 | | | $ | 640,546 | |
Foreign translation adjustment | | — | | | | 43 | | | — | | | — | | | — | | | | 43 | |
Balance, December 31, 2017 | | $ | 449,041 | | | $ | 157,098 | | | $ | 5,745 | | | $ | 17,127 | | | $ | 11,578 | | | $ | 640,589 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Games | | Financial Access Services | | Kiosk Sales and Services | | Central Credit Services | | Compliance Sales and Services | | Loyalty Sales and Services | | Mobile Technologies | | Total |
| Goodwill | | | | | | | | | | | | | | | | |
| Balance, December 31, 2021 | | $449,041 | | $157,090 | | $5,745 | | $17,127 | | $12,265 | | $41,395 | | $— | | $682,663 |
| Foreign currency translation | | — | | (41) | | (661) | | — | | — | | — | | — | | (702) |
| Acquisition related adjustments | | 12,402 | | — | | 10,776 | | — | | (129) | | — | | 10,860 | | 33,909 |
| Balance, December 31, 2022 | | $461,443 | | $157,049 | | $15,860 | | $17,127 | | $12,136 | | $41,395 | | $10,860 | | $715,870 |
| Foreign currency translation | | — | | 14 | | (819) | | — | | — | | — | | — | | (805) |
| Acquisition related adjustments | | 22,932 | | — | | 2,925 | | — | | — | | — | | (1,245) | | 24,612 |
| Subsequent recognition of deferred tax assets | | — | | (1,873) | | — | | — | | — | | — | | — | | (1,873) |
| Balance, December 31, 2023 | | $484,375 | | $155,190 | | $17,966 | | $17,127 | | $12,136 | | $41,395 | | $9,615 | | $737,804 |
| (1)
| Includes the final 2016 measurement period adjustments associated with the acquisition of certain assets of Resort Advantage in late 2015.
|
The Company’s cumulative goodwill impairment as of December 31, 2017 was $221.3 million and was comprised of $146.3 million and $75.0 million recognized in 2016 and 2015, respectively, related to our Games segment.
88
Other Intangible Assets
Other intangible assets consist of the following (in thousands):
| | | At December 31, 2017 | | | At December 31, 2016 | |
| | Weighted Average | | | | | | | | | | | | | | | | | | | | | | | | |
| | Remaining Life | | | | | | Accumulated | | | Net Book | | | | | | | Accumulated | | | Net Book | |
| | (years) | | Cost | | | Amortization | | | Value | | | Cost | | | Amortization | | | Value | |
Other intangible assets | | | | | | | | | | | | | | | | | | | | | | | | | | |
Contract rights under placement fee agreements | | 4 | | $ | 57,231 | | | $ | 3,910 | | | $ | 53,321 | | | $ | 17,742 | | | $ | 6,281 | | | $ | 11,461 | |
Customer contracts | | 6 | | | 51,175 | | | | 43,638 | | | | 7,537 | | | | 50,975 | | | | 40,419 | | | | 10,556 | |
Customer relationships | | 8 | | | 231,100 | | | | 63,653 | | | | 167,447 | | | | 231,100 | | | | 42,688 | | | | 188,412 | |
Developed technology and software | | 2 | | | 249,064 | | | | 158,919 | | | | 90,145 | | | | 224,265 | | | | 126,721 | | | | 97,544 | |
Patents, trademarks and other | | 4 | | | 29,046 | | | | 23,185 | | | | 5,861 | | | | 27,771 | | | | 17,747 | | | | 10,024 | |
Total | | | | $ | 617,616 | | | $ | 293,305 | | | $ | 324,311 | | | $ | 551,853 | | | $ | 233,856 | | | $ | 317,997 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | At December 31, 2023 | | At December 31, 2022 |
| | Useful Life (Years) | | Cost | | Accumulated Amortization | | Net Book Value | | Cost | | Accumulated Amortization | | Net Book Value |
| Other intangible assets | | | | | | | | | | | | | | |
| Contract rights under placement fee agreements | | 2-7 | | $ | 57,821 | | | $ | 21,592 | | | $ | 36,229 | | | $ | 57,821 | | | $ | 12,252 | | | $ | 45,569 | |
| Customer relationships | | 3-14 | | 337,829 | | | 255,972 | | | 81,857 | | | 331,999 | | | 233,150 | | | 98,849 | |
| Developed technology and software | | 1-7 | | 453,453 | | | 340,286 | | | 113,167 | | | 401,087 | | | 309,285 | | | 91,802 | |
| Patents, trademarks, and other | | 2-18 | | 24,783 | | | 21,898 | | | 2,885 | | | 22,334 | | | 20,279 | | | 2,055 | |
| Total | | | | $ | 873,886 | | | $ | 639,748 | | | $ | 234,138 | | | $ | 813,241 | | | $ | 574,966 | | | $ | 238,275 | |
Amortization expense related to other intangible assets totaled approximately $69.5$60.0 million, $94.6$59.6 million, and $85.5$58.0 million for the years ended December 31, 2017, 20162023, 2022, and 2015,2021, respectively. We capitalized $29.4capitalized $49.4 million, $46.3 million, and $24.2$30.2 million of internalinternally-developed software development costs for the years ended December 31, 20172023, 2022, and 2016,2021, 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, 2017, 2016 and 2015.
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 | |
2018 | | $ | 66,650 | |
2019 | | | 53,922 | |
2020 | | | 46,283 | |
2021 | | | 32,485 | |
2022 | | | 30,004 | |
Thereafter | | | 77,694 | |
Total(1) | | $ | 307,038 | |
(1)
| For the year ended December 31, 2017, the Company had $17.3 million in other intangible assets which 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 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
89
received
We paid approximately $0.5 million and $31.5 million in placement fees for the reduction of floor space are first applied against the intangible asset for that particular placement fee agreement, if any,years ended December 31, 2022, and the remaining net book value of the intangible asset is prospectively amortized on a straight-line method over the remaining estimated useful life.2021, 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 $13.3 millionwhich we settled in October 2021. T
here were no imputed interest amounts recorded in connection with these payments for the years ended December 31, 2022 and 2021, respectively. There were no placement fees to this customerpaid for the year ended December 31, 2017. 2023.
On a quarterly basis, we evaluate our other intangible assets for potential impairment as part of our review process. During the fourth quarter of 2023, we recorded a partial write-down of the definite-lived customer relationships intangible asset associated with our acquisition of Intuicode, reflected in the Games segment. The impairment loss of approximately $11.7 million was included within Operating Expenses of our Statements of Operations. We paid approximately $11.3determined this asset was impaired by comparing its carrying value to our revised estimate of discounted future cash flows, which were negatively impacted by a certain large customer being acquired that generated lower than anticipated operating results. The customer relationships intangible asset was valued using Level 3 fair value inputs and had a revised cost basis of $0.5 million and $2.8 million to extend the terma remaining life of placement fee agreements with a customerfive years at December 31, 2023.
There was no material impairment identified for
certainany of
its locationsour other intangible assets for the years ended December 31,
20162022 and
2015, respectively.During2021.
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 |
| 2024 | $ | 61,061 | |
| 2025 | 44,143 | |
| 2026 | 32,446 | |
| 2027 | 13,755 | |
| 2028 | 4,897 | |
| Thereafter | 16,545 | |
Total (1) | $ | 172,847 | |
(1) For the year ended December 31,
2016, we foreclosed on2023, the
Bee Cave assets, evaluated its platform, and began to utilize these assetsCompany had $61.3 million in
connection with our social gaming strategy to deliver content from our existing game library. Consequently, we extinguished the note receivable and recorded $0.5 million of developed technology and software within other intangible assets
net on the Balance Sheets during the period.10.that had not yet been placed into service.
12. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The following table presents our accounts payable and accrued expenses (amounts in thousands):
| | | At December 31, | | | | At December 31, |
| | 2017 | | | 2016 | | | | 2023 | | 2022 |
Accounts payable and accrued expenses | | | | | | | | | Accounts payable and accrued expenses | | |
Trade accounts payable | | $ | 59,435 | | | $ | 55,352 | |
Placement fees(1) | | | 22,328 | | | | — | |
| Customer commissions payable | |
| Contract liabilities | |
| Accounts payable - trade | |
Payroll and related expenses | | | 14,178 | | | | 12,305 | |
Deferred and unearned revenues | | | 10,450 | | | | 9,222 | |
Cash access processing and related expenses | | | 8,932 | | | | 7,001 | |
Accrued interest | | | 5,766 | | | | 82 | |
Accrued taxes | | | 2,112 | | | | 2,587 | |
| Financial access processing and related expenses | |
| Operating lease liabilities | |
| Accrued income taxes | |
Contingent consideration and acquisition-related liabilities (1) | |
Other | | | 11,303 | | | | 7,842 | |
| Total accounts payable and accrued expenses | | $ | 134,504 | | | $ | 94,391 | |
| Total accounts payable and accrued expenses | |
| Total accounts payable and accrued expenses | |
| (1)
| Total placement fees liability was $39.1 million as of December 31, 2017. The remaining $16.8 million of non-current placement fees was included in other accrued expenses and liabilities in our Balance Sheet.
|
(1) Refer to “Note 5 — Business Combinations” for discussion on contingent consideration and acquisition-related liabilities.11.
The following table summarizes our indebtedness (in thousands):
| | At December 31, | |
| | 2017 | | | 2016 | |
Long-term debt | | | | | | | | |
Senior secured term loan | | $ | 815,900 | | | $ | 465,600 | |
Senior secured notes | | | — | | | | 335,000 | |
Senior unsecured notes | | | 375,000 | | | | 350,000 | |
Total debt | | | 1,190,900 | | | | 1,150,600 | |
Less: debt issuance costs and discount | | | (23,057 | ) | | | (28,720 | ) |
Total debt after debt issuance costs and discount | | | 1,167,843 | | | | 1,121,880 | |
Less: current portion of long-term debt | | | (8,200 | ) | | | (10,000 | ) |
Long-term debt, less current portion | | $ | 1,159,643 | | | $ | 1,111,880 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Maturity | | Interest | | At December 31, |
| | Date | | Rate | | 2023 | | 2022 |
| Long-term debt | | | | | | | | |
| $600 million Term Loan | | 2028 | | SOFR+2.50% | | $ | 586,500 | | | $ | 592,500 | |
| $125 million Revolver | | 2026 | | SOFR+2.50% | | — | | | — | |
| Senior Secured Credit Facilities | | | | | | 586,500 | | | 592,500 | |
| $400 million 2021 Unsecured Notes | | 2029 | | 5.00% | | 400,000 | | | 400,000 | |
| Total debt | | | | | | 986,500 | | | 992,500 | |
| Debt issuance costs and discount | | | | | | (12,035) | | | (14,505) | |
| Total debt after debt issuance costs and discount | | | | 974,465 | | | 977,995 | |
| Current portion of long-term debt | | | | | | (6,000) | | | (6,000) | |
| Total long-term debt, net of current portion | | | | $ | 968,465 | | | $ | 971,995 | |
90
Refinancing
On May 9, 2017
Credit Facilities
Our senior secured credit facilities consist of: (i) a seven-year $600 million senior secured term loan due 2028 issued at 99.75% of par (the “Term Loan”); and (ii) a $125 million senior secured revolving credit facility due 2026, which was undrawn at closing (the “Revolver” and together with the Term Loan, the “Credit Facilities”). The Company, as borrower, entered into the credit agreement dated as of August 3, 2021 (the “Closing Date”), Everi Payments, as borrower, and Holdings entered into a credit agreement withamong 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 “New(the “Original Credit Agreement”). The New
On June 23, 2023, the Company entered into the first amendment (the “Amendment”) to the Original Credit Agreement provides for: (i)(as amended, the “Amended Credit Agreement”), among Everi, as borrower, the lenders party thereto and Jefferies Finance LLC, as administrative agent, collateral agent, swing line lender and letter of credit issuer. Under the Amended Credit Agreement, the Secured Overnight Financing Rate (“SOFR”) replaced the Eurodollar Rate for all purposes under the Original Credit Agreement and under any other Loan Document (as defined therein) on July 1, 2023, when the ICE Benchmark Administration ceased to provide all available tenors of the Eurodollar Rate. In connection with such implementation of SOFR, the Company and Jefferies Finance LLC agreed to make conforming changes to the relevant provisions of the Original Credit Agreement, as reflected in the Amended Credit Agreement.
On November 2, 2023, the Company entered into the second amendment (the “Second Amendment”), effective November 9, 2023, to the Original Credit Agreement and the Amended Credit Agreement (as amended, the “Credit Agreement”), among Everi, as borrower, the lenders party thereto and Jefferies Finance LLC, as administrative agent, collateral agent, swing line lender and letter of credit issuer. Under the Amended Credit Agreement, capitalized terms not otherwise defined in this Second Amendment have the same meanings as specified in the Original Credit Agreement or the Amended Credit Agreement, as the context may require; and pursuant to the Amended Credit Agreement, the Borrower and the Administrative Agent jointly identified certain obvious errors of a $35.0 million, five-year senior secured revolving credit facility (the “New Revolvingtechnical nature in the Amended Credit Facility”);Agreement and (ii) an $820.0 million, seven-year senior secured term loan facility (the “New Term Loan Facility,” and togetherhave agreed to amend the Amended Credit Agreement to correct such errors. The Second Amendment did not have a material impact on our Financial Statements.
We elected the optional expedient to account for the modification to our Credit Facilities in accordance with ASC 470 as the modification was not substantial.
Legal fees were expensed as incurred in connection with the New Revolving Credit Facility,Amendment are reflected in operating expenses within the “New Credit Facilities”). Statements of Operations for the period ended December 31, 2023.
The fees associated withinterest rate per annum applicable to the New Credit Facilities included discountswill be, at the Company’s option, either the SOFR rate with a 0.50% floor plus a margin of approximately $4.1 million2.50%, or the base rate plus a margin of 1.50%. In addition, we pay a SOFR
adjustment recorded as interest expense that varies for the applicable interest period, with an adjustment for interest periods of one month of 0.1%, an adjustment for interest periods of two months of 0.3% and debtan adjustment for interest periods of three months of 0.4%.
The Revolver is available for general corporate purposes, including permitted acquisitions, working capital and the 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.
Our Revolver remained fully undrawn as of December 31, 2023.
The
proceeds fromCompany is required to make periodic payments on the
New Term Loan
Facility incurredin an amount equal to 0.25% per quarter of the initial aggregate principal, with the final principal repayment installment 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.,maturity date. Interest is due in arrears on each interest payment date applicable thereto and at such other times 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 2021may be specified 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 recordedCredit Agreement. As to any loan other than 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 termbase rate 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 onpayment dates shall be the approximately $818.0 million then outstanding balancelast day of the New Term Loan Facility. The maturity date for the New Term Loan Facility remains May 9, 2024,each interest period applicable to such loan and the maturity date (provided, however, that if any interest period for a SOFR loan exceeds three months, the New Revolving Credit Facility remains May 9, 2022, and no changes were made to 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.
New Credit Facilities
The New Term Loan Facility matures seven yearsrespective dates that fall every three months 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 selectedsuch interest period basedshall also be interest payment dates). As to any base rate loan, commencing on the Eurodollar Rate then in effect; provided that, iflast business day of December 2021, the Eurodollar Rate is below zero, then such rate willinterest payment dates shall 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%;last business day of each of March, June, September 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 FacilityDecember 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 are: (i) 3.50% in respect of Eurodollar Rate loans and (ii) 2.50% in respect of base rate loans.
91
maturity date.
Voluntary prepayments of the
term loanTerm Loan and the
revolving loansRevolver 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,
butand without premium or penalty, except that certain refinancings
or repricings of the
term loansTerm Loan 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
The 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’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 governing the New Credit Facilities also requires Holdings,the Company, together with its subsidiaries, to comply with a consolidated secured leverage ratio. At December 31, 2017, our consolidated secured leverage ratio was 3.59 to 1.00, with a maximum allowable ratio of 5.00 to 1.00. Our maximum consolidated secured leverage ratio will be 4.75 to of 4.25:1.00 as of the measurement date. The weighted average interest rate on the Term Loan was 7.59% for the year ended December 31, 2023.
Senior Unsecured Notes
Our Senior Unsecured Notes (the “2021 Unsecured Notes”) due 2029 had an outstanding balance of $400 million as of December 31, 2018, 4.50 to 1.00 as2022, for which interest accrues at a rate of 5.00% per annum and is payable semi-annually in arrears on each January 15 and July 15.
The fees associated with the 2021 Unsecured Notes included debt issuance costs of approximately $5.9 million incurred during the year ended 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.2021.
Compliance with Debt Covenants
We were in compliance with the covenants and terms of the
New Credit Facilities
as of December 31, 2017.Events of default under the New Credit Agreement governing the New Credit Facilities include customary events such as a cross-default provision with respect to other material debt. In addition, an event of default will occur if Holdings undergoes a change of control. This is defined to include the case where Holdings ceases to own 100% of the equity interests of Everi Payments, or where any person or group acquires a percentage of the economic or voting interests of Holdings’ capital stock of 35% or more (determined on a fully diluted basis).
We are required to repay the New Term Loan Facility in an amount equal to 0.25% per quarter of the initial aggregate principal, with the final principal repayment installment on the maturity date. Interest is due in arrears on each interest payment date applicable thereto and at such other times as may be specified in the New Credit Agreement. As to any loan other than a base rate loan, the interest payment dates shall be the last day of each interest period applicable to such loan and the maturity date (provided, however, that if any interest period for a Eurodollar Rate loan exceeds three months, the respective dates that fall every three months after the beginning of such interest period shall also be interest payment dates). As to any base rate loan, the interest payment dates shall be last business day of each March, June, September and December and the maturity date.
For the period from January 1, 2017 to the Closing Date, the Prior Credit Facility had an applicable weighted average interest rate of 6.43%. For the period from the Closing Date to December 31, 2017, the New Term Loan Facility had an applicable weighted average interest rate of 5.55%. Together, for the year ended December 31, 2017, the two facilities had a blended weighted average interest rate of 5.73%.
At December 31, 2017, we had approximately $815.9 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, 2017.
92
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.
Senior Unsecured Notes
In December 2014, we issued $350.0 million in aggregate principal amount of 10.0% Senior Unsecured Notes due 2022 (the “2014 Unsecured Notes”) under an indenture (as supplemented, the “2014 Notes Indenture”), dated December 19, 2014, between Everi Payments (as successor issuer), and Deutsche Bank Trust Company Americas, as trustee. The fees associated with the 2014 Unsecured Notes included original issue discounts of approximately $3.8 million and debt issuance costs of approximately $14.0 million. In December 2015, we completed an exchange offer in which all of 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. Interest on the 2017 Unsecured Notes accrues at a rate of 7.50% per annum and is payable semi-annually in arrears on each June 15 and December 15, commencing on June 15, 2018. The 2017 Unsecured Notes will mature on December 15, 2025. We incurred approximately $6.1 million of debt issuance costs and fees associated with the refinancing of our 2017 Unsecured Notes.
On December 5, 2017, together with the issuance of the 2017 Unsecured Notes, Everi Payments satisfied and discharged the 2014 Notes Indenture relating to the 2014 Unsecured Notes. To effect the satisfaction and discharge, Everi Payments issued an unconditional notice of redemption to Deutsche Bank Trust Company Americas, as trustee, of the redemption in full on January 15, 2018 (the “Redemption Date”) of all outstanding 2014 Unsecured Notes 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 deposited with the trustee funds sufficient to pay the redemption price of the 2014 Unsecured Notes of 107.5% of the principal amount thereof, plus accrued 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, along with an officer’s certificate of Everi Payments and an opinion of counsel certifying and opining that all conditions under the 2014 Notes Indenture to the satisfaction and discharge of 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 of December 5, 2017 (subject to certain exceptions). The 2014 Unsecured Notes were thereafter redeemed on the Redemption Date.
In connection with the issuance of the 2017 Unsecured Notes and the redemption of the 2014 Unsecured Notes, we incurred a $37.2 million loss on extinguishment of debt consisting of a $26.3 million make-whole premium 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.
We were in compliance with the terms of the 20172021 Unsecured Notes as of December 31, 2017.
93
2023.
The maturities of our borrowings at December 31,
20172023 are as follows (in thousands):
| | Amount | |
Maturities of borrowings | | | | |
2018 | | $ | 8,200 | |
2019 | | | 8,200 | |
2020 | | | 8,200 | |
2021 | | | 8,200 | |
2022 | | | 8,200 | |
Thereafter | | | 1,149,900 | |
Total | | $ | 1,190,900 | |
| | | | | |
| | Amount |
| Maturities of borrowings | |
| 2024 | $ | 6,000 | |
| 2025 | 6,000 | |
| 2026 | 6,000 | |
| 2027 | 6,000 | |
| 2028 | 562,500 | |
| Thereafter | 400,000 | |
| Total | $ | 986,500 | |
12.
14. 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 $13.3 million in placement fees to this customer for the year ended December 31, 2017.
Lease Obligations
We lease office facilities and operating equipment under cancelable and non-cancelable agreements. Total rent expense was approximately $6.8 million, $6.8 million and $5.9 million for the years ended December 31, 2017, 2016 and 2015, 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, 2017, the minimum aggregate rental commitment under all non‑cancelable operating leases were as follows (in thousands):
| | Amount | |
Minimum aggregate rental commitments | | | | |
2018 | | $ | 4,943 | |
2019 | | | 5,050 | |
2020 | | | 5,046 | |
2021 | | | 4,007 | |
2022 | | | 2,193 | |
Thereafter | | | 868 | |
Total | | $ | 22,107 | |
94
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, liquiditycondition or results of operations.
Gain Contingency Settlement
In January 2015,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 entered intoshould prevail.
Legal Contingencies
We evaluate matters and record an accrual for legal contingencies when it is both probable that a settlementliability 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 did not have any new material legal matters that were accrued as of December 31, 2023.
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. Discovery is closed. The court removed the case from the September trial calendar and requested briefs from the parties on relevant legal issues. Briefing was completed in December 2022. The parties are awaiting further guidance from the court. Due to the current stage of the litigation, we are unable to estimate the probability of the outcome of this matter or reasonably estimate the range of possible damages, if any.
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 connection with a lawsuit weNovember 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 parties participated in as plaintiffs,mediation on March 21, 2023. No settlement was reached at mediation. The parties filed a joint motion to set a firm trial date which the court granted. Trial is set on May 28, 2025. Due to the current stage of the litigation, we are unable to estimate the probability of the outcome of this matter or reasonably estimate the range of possible damages, if any.
Mary Parrish matter:
Mary Parrish v. Everi Holdings Inc., et al. is a civil action filed on December 28, 2021, against Everi Holdings and Everi FinTech in the District Court of Nevada, Clark County by Mary Parrish alleging violation of the Fair and Accurate Credit Transactions Act (FACTA) amendment to the Fair Credit Reporting Act (FCRA). Plaintiff’s complaint alleges she received a printed receipt for cash access services performed at an Everi Payments’ ATM which displayed more than four (4) digits of the account number. Plaintiff seeks statutory damages, punitive damages, injunctive relief, attorneys’ fees, and other relief. Everi filed a Petition for Removal to the United States District Court, District of Nevada. On May 4, 2023, the United States District Court entered an order remanding the case and the matter is now pending in the District Court of Nevada, Clark County. On October 20, 2023, the Clark County Court entered an Order denying Everi’s Motion to Dismiss. Thereafter, Everi filed a Petition for Writ of Mandamus with the Nevada Supreme Court appealing the Clark County court’s ruling.On December 15, 2023, the Nevada Supreme Court denied Everi’s Petition for Writ of Mandamus. Discovery is underway and the Clark County Court has scheduled a mandatory pre-trial case conference for March 31, 2024. Due to the current stage of the litigation, we are unable to estimate the probability of the outcome of this matter or reasonably estimate the range of possible damages, if any.
15. STOCKHOLDERS’ EQUITY
On May 3, 2023, our Board of Directors authorized and approved a new share repurchase program in an amount not to exceed $180.0 million pursuant to which we receivedmay purchase outstanding Company common stock in open market or privately negotiated transactions over a period of eighteen (18) months through November 3, 2024, in accordance with Company and recordedregulatory policies and trading plans established in accordance with Rules 10b5-1 and 10b-18 of the settlement proceedsSecurities Exchange Act of $14.4 million1934. The actual number of shares to be purchased will depend upon market conditions and is subject to available liquidity, general market and economic conditions, alternative uses for the capital and other factors. All shares purchased will be held in the first quarterCompany’s treasury for possible future use. There is no minimum number of 2015.shares that the Company is required to repurchase, and the program may be suspended or discontinued at any time without prior notice. This settlement is included as a reductionnew repurchase program supersedes and replaces, in its entirety, the previous share repurchase program approved in May 2022 for up to $150 million.
There were approximately 7.5 million and 5.0 million shares repurchased at an average price of
operating expenses in our Statements$13.40 and $16.93 per share for an aggregate amount of
Loss for$100.0 million and $84.3 million during the
yearyears ended December 31,
2015.13. SHAREHOLDERS’ EQUITY
2023 and 2022, respectively. The remaining availability under the May 2023 $180.0 million share repurchase program was $80.0 million as of December 31, 2023.
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, 20172023 and 2016,2022, we had no shares of preferred stock outstanding.
Common Stock.Subject to the preferences that may apply to shares of preferred stock that may be outstanding at the time, the holders of outstanding shares of common stock are entitled to receive dividends out of assets legally available at the times and in the amounts as our Board of Directors may from time to time determine. All dividends are non-cumulative. In the event of the liquidation, dissolution or winding up of Everi, the holders of common stock are entitled to share ratably in all assets remaining after the payment of liabilities, subject to the prior distribution rights of preferred stock, if any, then outstanding. Each stockholder is entitled to one vote for each share of common stock held on all matters submitted to a vote of stockholders. Cumulative voting for the election of directors is not provided for. The common stock is not entitled to preemptive rights and is not subject to conversion or redemption. There are no sinking fund provisions applicable to the common stock. Each outstanding share of common stock is fully paid and non-assessable.non-assessable. As of December 31, 20172023 and 2016,2022, we had 93,119,988123,178,882 and 90,952,185119,389,510 shares of common stock issued, respectively. Treasury Stock. EmployeesIn addition to open market purchases of common stock authorized under the Share Repurchase Program, 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 15,4570.6 million and 18,7170.7 million shares of common stock at an aggregate purchase price of $0.1approximately $9.2 million and $41,528$12.0 million for the years ended December 31, 20172023 and 2016,2022, respectively, to satisfy the minimummaximum applicable tax withholding obligations related to the vesting of such restricted stock awards.14.
16. 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, | |
| | 2017 | | | 2016 | | | 2015 | |
Weighted average shares | | | | | | | | | | | | |
Weighted average number of common shares outstanding - basic | | | 66,816 | | | | 66,050 | | | | 65,854 | |
Weighted average number of common shares outstanding - diluted(1) | | | 66,816 | | | | 66,050 | | | | 65,854 | |
| | | | | | | | | | | | | | | | | | | | |
| | | At December 31, |
| | | 2023 | | 2022 | | 2021 |
| Weighted average shares | | | | | | |
| Weighted average number of common shares outstanding — basic | | 87,176 | | | 90,494 | | 89,284 |
Potential dilution from equity awards (1) | | 4,809 | | | 7,013 | | | 10,683 | |
Weighted average number of common shares outstanding — diluted (1) | | 91,985 | | | 97,507 | | 99,967 |
(1)
| The Company was in a net loss position for the years ended December 31, 2017, 2016 and 2015; therefore, no potential dilution from the application of the treasury stock method was applicable. Equity awards to purchase approximately 16.0 million, 15.7 million and 14.2 million shares of common stock for the years ended December 31, 2017, 2016 and 2015, respectively, were excluded from the computation of diluted net loss per share, as their effect would have been anti-dilutive.
|
(1) There were 0.3 million and 0.1 million shares that were anti-dilutive under the treasury stock method for the years ended December 31, 2023 and 2022, respectively. There were an immaterial amount of shares that were anti-dilutive under the treasury stock method for the year ended December 31, 2021.95
15. SHARE‑BASED
17. SHARE-BASED COMPENSATION
Our 2014 Equity Incentive Plan (the “2014 Plan”)(as amended and our 2012 Equityrestated effective May 19, 2021, the “Equity Incentive Plan (as amended, the “2012 Plan””) areis 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. The 2014 Plan superseded the then current 2005 StockOur Equity Incentive Plan (the “2005 Plan”). The 2012 Plan was assumed in connection with our acquisition of Everi Games Holding and conformed to include similar provisions to those as set forth in the 2014 Plan. Our equity incentive plans areis 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:to the vesting provisions and exercise prices.prices, as applicable.
Generally, we grant the following
award types: (a)types of awards: (i) restricted stock units with either time- or performance-based criteria; and (ii) time-based
options, (b) market-based options and (c) restricted stock. These awards have varying vesting provisions and expiration periods. For the year ended December 31, 2017, we granted time- and market-based options.
Our time-based stock options generally vest at a rate of 25% per year We estimate forfeiture amounts based on each of the first four anniversaries of the grant dates and expire after a ten-year period.
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.
Our market-based stock options granted in 2015 vest if our average stock price in any period of 30 consecutive trading days meets certain target prices during a four-year period that commenced on the date of grant for these options. These options expire after a seven-year period.
historical patterns.
A summary of award activity is as follows (in thousands):
| | Stock Options | | | Restricted Stock | |
| | Granted | | | Granted | |
Outstanding, December 31, 2016 | | | 18,233 | | | | 80 | |
Granted | | | 4,338 | | | | 50 | |
Exercised options or vested shares | | | (2,037 | ) | | | (56 | ) |
Cancelled or forfeited | | | (1,403 | ) | | | — | |
Outstanding, December 31, 2017 | | | 19,131 | | | | 74 | |
| | | | | | | | | | | | | | |
| | Stock Options | | Restricted Stock Units |
| Outstanding, December 31, 2022 | | 6,793 | | | 2,709 | |
| Granted | | 103 | | | 1,555 | |
| Exercised options or vested shares | | (2,061) | | | (1,728) | |
| Canceled or forfeited | | (31) | | | (72) | |
| Outstanding, December 31, 2023 | | 4,804 | | | 2,464 | |
As
There are approximately 2.1 million awards of
December 31, 2017, the maximum number of sharesour common stock available for future equity
awardsgrants under
the 2012 Plan and the 2014 Plan is approximately 4.4 million shares of our
common stock. There are no shares available for futureexisting equity
awards under the 2005 Plan.96
incentive plan.
The fair value of our standard time-based options was determined as of the date of grant using the Black-Scholes option pricing
model withmodel. The assumptions used included a 3.5% and 2.9% risk-free interest rate, an expected life of 5.1 years and 4.9 years, historical volatility of 55.4% and 55.7%, and no expected dividend yield for options granted for the
following assumptions: | | Year ended |
| | December 31, |
| | 2017 | | | 2016 | | | 2015 | |
Risk-free interest rate | | 2 | % | | 1 | % | | 1 | % |
Expected life of options (in years) | | 6 | | | 5 | | | 4 | |
Expected volatility | | 54 | % | | 51 | % | | 43 | % |
Expected dividend yield | | — | % | | — | % | | — | % |
During 2016, certain executiveyears ended December 31, 2023 and director grants2022, respectively. There were valued under the Black-Scholes option pricing model that utilized different assumptions from those used for our standard time-based options. For theno time-based options granted on February 13, 2016,for the assumptions were: (a) risk-free interestyears ended December 31, 2021.
Our time-based stock options granted under our equity plans generally vest at a rate of 1%; (b) expected termeither 33% or 25% per year on each of six years; (c) expected volatility of 49%; and (d) no expected dividend yield. For the time-based options granted on February 25, 2016, the assumptions were: (a) risk-free interest rate of 1%; (b) expected term of five years; (c) expected volatility of 49%; and (d) no expected dividend yield.The fair values of market-based options granted in connection with the annual grants that occurred during the first quarter of 2017 and the second quarters of 2016 and 2015 were determined asthree or four anniversaries of the date of grant usingdates, and expire after a lattice-based option valuation model with the following assumptions:
ten-year period. | | Year ended |
| | December 31, |
| | 2017 | | | 2016 | | | 2015 | |
Risk-free interest rate | | 3 | % | | 2 | % | | 1 | % |
Measurement period (in years) | | 10 | | | 10 | | | 4 | |
Expected volatility | | 70 | % | | 68 | % | | 47 | % |
Expected dividend yield | | — | % | | — | % | | — | % |
For the market-based options granted during the third quarter of 2016, the assumptions were: (a) risk-free interest rate of 2%; (b) expected term of ten years; (c) expected volatility of 69%; and (d) no expected dividend yield. For the market-based options granted during the fourth quarter of 2016, the assumptions were: (a) risk-free interest rate of 2%; (b) expected term of ten years; (c) expected volatility of 70%; and (d) no expected dividend yield.
The following tables presenttable presents the optionoptions activity:
| | | | | | | | | | Weighted | | | | | |
| | Number of | | | Weighted Average | | | Average Life | | | Aggregate | |
| | Options | | | Exercise Price | | | Remaining | | | Intrinsic Value | |
| | (in thousands) | | | (per share) | | | (years) | | | (in thousands) | |
Outstanding, December 31, 2016 | | | 18,233 | | | $ | 6.02 | | | | 6.4 | | | $ | 2,387 | |
Granted | | | 4,338 | | | | 3.62 | | | | | | | | | |
Exercised | | | (2,037 | ) | | | 5.35 | | | | | | | | | |
Canceled or forfeited | | | (1,403 | ) | | | 8.79 | | | | | | | | | |
Outstanding, December 31, 2017 | | | 19,131 | | | $ | 5.34 | | | | 6.4 | | | $ | 45,887 | |
Vested and expected to vest, December 31, 2017 | | | 16,991 | | | $ | 5.36 | | | | 6.5 | | | $ | 40,636 | |
Exercisable, December 31, 2017 | | | 8,719 | | | $ | 6.51 | | | | 5.4 | | | $ | 12,200 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Number of Options
(in thousands) | | Weighted Average Exercise Price
(per Share) | | Weighted Average Life Remaining
(Years) | | Aggregate Intrinsic Value
(in thousands) |
| Outstanding, December 31, 2022 | | 6,793 | | | $ | 5.01 | | | 2.8 | | $ | 63,604 | |
| Granted | | 103 | | | 15.12 | | | | | |
| Exercised | | (2,061) | | | 7.17 | | | | | |
| Canceled or forfeited | | (31) | | | 8.32 | | | | | |
| Outstanding, December 31, 2023 | | 4,804 | | | 4.28 | | | 2.6 | | 34,350 | |
| Vested and expected to vest after, December 31, 2023 | | 4,794 | | | 4.26 | | | 2.6 | | 34,350 | |
| Exercisable, December 31, 2023 | | 4,654 | | | $ | 3.92 | | | 2.4 | | $ | 34,350 | |
97
The following table presents the options outstanding and exercisable by price range:
| | | | | | | | Options Outstanding | | | Options Exercisable | |
| | | | | | | | | | | | Weighted | | | | | | | | | | | | | | | | | | Options Outstanding | | Options Exercisable |
| | | | | | | | | | | | Average | | | Weighted | | | | | | | Weighted | |
| | | | | | | | Number | | | Remaining | | | Average | | | Number | | | Average | |
| | | | | | | | Outstanding | | | Contract | | | Exercise | | | Exercisable | | | Exercise | |
| | | | Number
Outstanding | | | | | | 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 | | | $ | 1.72 | | | | 3,177 | | | | 7.7 | | | $ | 1.48 | | | | 665 | | | $ | 1.48 | |
| 1.57 | |
| 3.29 | |
| 6.30 | |
| 7.88 | |
| 2.01 | | | | 2.78 | | | | 821 | | | | 7.2 | | | | 2.62 | | | | 606 | | | | 2.64 | | | | | | 4,804 | | | | | | | 4,654 | | | | | |
| 3.29 | | | | 3.29 | | | | 3,886 | | | | 8.6 | | | | 3.29 | | | | 6 | | | | 3.29 | |
| 3.41 | | | | 6.59 | | | | 3,222 | | | | 5.0 | | | | 5.87 | | | | 2,384 | | | | 5.63 | |
| 6.72 | | | | 7.61 | | | | 1,749 | | | | 4.7 | | | | 7.15 | | | | 1,407 | | | | 7.10 | |
| 7.74 | | | | 9.74 | | | | 6,276 | | | | 5.5 | | | | 8.15 | | | | 3,651 | | | | 8.42 | |
| | | | | | | | | 19,131 | | | | | | | | | | | | 8,719 | | | | | |
There were 4.3 million, 4.4 million and 6.5 million options granted for the years ended December 31, 2017, 2016 and 2015, respectively. The weighted average grant date fair value per share of the options granted was $1.98, $0.83 and $2.48 for the years ended December 31, 2017, 2016 and 2015, respectively.
The total intrinsic value of options exercised was
$5.3$18.3 million, $4.9 million, and $46.5 million for the
yearyears ended December 31,
2017. There were no options exercised in 2016,2023, 2022, and
the intrinsic value of options exercised for the year ended December 31, 2015 was $0.8 million.There was $7.9 million in2021, respectively.
The unrecognized non-cash compensation expense related to options expected to vest as of December 31, 2017. This cost2023 was $0.8 million which is expected to be recognized on a straight‑linestraight-line basis over a weighted average period of 3.52.1 years. We recorded $6.0 million in non‑cash compensation expense related to options granted that were expected to vest for the year ended and as of December 31, 2017. We received $10.9 million in cash proceeds from the exercise of options during 2017.There was $11.7 million inThe unrecognized non-cash compensation expense related to options expected to vest as of December 31, 2016.2022 and 2021 was not material.
We recorded approximately $0.4 million, $0.1 million and $0.3 million in non-cash compensation expense related to options granted that were expected to vest as of December 31, 2023, 2022 and 2021, respectively. We received approximately $14.0 million, $1.9 million and $18.2 million in cash proceeds from the exercise of options during 2023, 2022 and 2021, respectively.
Restricted Stock Units
The fair value of our restricted stock units awarded is based on the closing stock price of our common stock at the date of grant, except for certain awards with a share-based payment arrangements priced in relation to similar indexed securities. Awards with share-based payment arrangements priced in relation to similar indexed securities fair values were determined using a lattice model. The assumptions used include a risk-free interest rate of 3.7%, a useful life term of 2.7 years, historical volatility of 48.4%, and no expected dividend yield for those certain awards with a share based payment arrangement priced in relation to similar indexed securities granted for the year ended December 31, 2023. There were no awards with a share-based payment arrangements priced in relation to similar indexed securities for the years ended December 31, 2022 and 2021, respectively.
Time-based Awards
The time-based restricted stock units (“RSUs”) granted to executives and the employee base, during 2023, 2022 and 2021, generally vest at a rate of either 33% per year on each of the first three anniversaries of the dates of grant, or 100% on the anniversary of grant date ending after either 1 year, 2 years or 3 years.
The RSUs granted to independent members of our Board of Directors, during 2023, 2022 and 2021, vest on the one-year anniversary of the date of grant and settle on the earliest of the following events: (i) ten-year anniversary of the date of grant; (ii) death; (iii) the occurrence of a Change in Control (as defined in the Equity Incentive 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 2023 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, 2025, based on total operating income and modified based on the Company’s total
stockholder return ranking over the performance period in comparison to the Russel 3000 Index. 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. We record stock-based compensation expense over the required service period based on the amount of shares expected to vest pursuant to the achievement measures associated with the performance award.
The performance-based restricted stock units (“PSUs”) granted during 2022 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, 2024, based on certain revenue and adjusted operating 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. We record stock-based compensation expense over the required service period based on the amount of shares expected to vest pursuant to the achievement measures associated with the performance award.
The performance-based restricted stock units (“PSUs”) granted during 2021 have been evaluated by the Compensation Committee of our Board of Directors for the 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 determined independently of one another. The eligible awards will become vested on the third anniversary of the date of grant.
The following table presents our RSU and PSU 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, 2022 | | 2,709 | | | $ | 13.46 | | | 0.9 | | $ | 38,850 | |
| Granted | | 1,555 | | | 13.34 | | | | | |
| Vested | | (1,728) | | | 9.77 | | | | | |
| Forfeited | | (72) | | | 16.59 | | | | | |
| Outstanding, December 31, 2023 | | 2,464 | | | 15.88 | | | 1.2 | | 27,747 | |
| Vested and expected to vest after, December 31, 2023 | | 2,081 | | | $ | 16.47 | | | 1.1 | | $ | 23,453 | |
There was approximately $20.0 million in unrecognized compensation expense related to the awards expected to vest as of December 31, 2023. This cost is expected to be recognized on a straight-line basis over a weighted average period of 1.5 years. We recorded approximately $18.3 million in non-cash compensation expense related to these awards for the year ended December 31, 2023.
There were approximately 1.3 million and 1.0 million shares of these awards granted for the years ended December 31, 2022 and 2021, respectively. The weighted average grant date fair value per share of these awards granted was $16.08 and $6.08 for the years ended December 31, 2022 and 2021, respectively. There were 2.1 million and 1.6 million RSU awards that vested during the years ended December 31, 2022 and 2021, respectively. There was approximately $20.1 million and $23.3 million unrecognized compensation expense related to these awards expected to vest as of December 31, 2022 and 2021, respectively. This cost was expected to be recognized on a straight-line basis over a weighted average period of
2.1 years.1.2 years and 1.4 years, respectively. We recorded
$6.3approximately $19.7 million and
$7.4 million in non‑cash compensation expense related to options granted that were expected to vest as of December 31, 2016 and 2015, respectively. There were no proceeds received from the exercise of options during 2016, as no exercises occurred during the period, and we received $1.8 million in cash proceeds from the exercise of options for the year ended December 31, 2015.Restricted Stock
The following is a summary of non‑vested share awards for our time‑based restricted shares:
| | | | | | Weighted | |
| | Shares | | | Average Grant | |
| | Outstanding | | | Date Fair Value | |
| | (in thousands) | | | (per share) | |
Outstanding, December 31, 2016 | | | 80 | | | $ | 7.12 | |
Granted | | | 50 | | | | 6.84 | |
Vested | | | (56 | ) | | | 7.02 | |
Forfeited | | | — | | | | — | |
Outstanding, December 31, 2017 | | | 74 | | | $ | 7.00 | |
There were 50,000 shares of restricted stock granted for the year ended December 31, 2017. The total fair value of restricted stock vested was $0.4 million for the year ended December 31, 2017. There was $0.5 million in unrecognized compensation expense related to shares of time‑based restricted shares expected to vest as of December 31, 2017 and is expected to be recognized on a straight‑line basis over a weighted average period of 1.1 years. There were 56,578 shares of restricted stock that vested during 2017, and we recorded $0.4$20.6 million in non-cash compensation expense related to the restricted stock granted that was expected to vest during 2017.
98
There were no shares of restricted stock grantedRSU awards for the years ended December 31, 20162022 and 2015,2021, respectively. The total fair value of restricted stock vested was $0.2 million and $0.6 million for the years ended December 31, 2016 and 2015, respectively. There was $1.0 million and $2.0 million in unrecognized compensation expense related to shares of time‑based restricted shares expected to vest as of December 31, 2016 and 2015, respectively, and is expected to be recognized on a straight‑line basis over a weighted average period of 1.7 years and 2.4 years, respectively. There were 0.1 million shares and 0.2 million shares of restricted stock that vested during 2016 and 2015, respectively, and we recorded $0.5 million and $0.9 million in non‑cash compensation expense related to the restricted stock granted that was expected to vest during 2016 and 2015, respectively.
16.
Provision (Benefit) for Income Taxes
The following presents consolidated
lossincome before tax for domestic and foreign operations (in thousands):
| | Year Ended December 31, | |
| | 2017 | | | 2016 | | | 2015 | | | | Year Ended December 31, |
Consolidated loss before tax | | | | | | | | | | | | |
| | | | | 2023 | | 2022 | | 2021 |
| Consolidated income (loss) before tax | | Consolidated income (loss) before tax | | |
Domestic | | $ | (73,445 | ) | | $ | (225,538 | ) | | $ | (129,602 | ) |
Foreign | | | 1,378 | | | | 7,755 | | | | 6,519 | |
Total | | $ | (72,067 | ) | | $ | (217,783 | ) | | $ | (123,083 | ) |
The income tax
provision (benefit)
provision attributable to
loss from operationsthe income before tax consists of the following components (in thousands):
| | Year Ended December 31, | |
| | 2017 | | | 2016 | | | 2015 | | | | Year Ended December 31, |
Income tax (benefit) provision | | | | | | | | | | | | |
| | | | | 2023 | | 2022 | | 2021 |
| Income tax provision (benefit) | | Income tax provision (benefit) | | |
Domestic | | $ | (20,507 | ) | | $ | 30,400 | | | $ | (19,746 | ) |
Foreign | | | 343 | | | | 1,296 | | | | 1,635 | |
Total income tax (benefit) provision | | $ | (20,164 | ) | | $ | 31,696 | | | $ | (18,111 | ) |
Income tax (benefit) provision | | | | | | | | | | | | |
| Total income tax provision (benefit) | |
| Income tax provision (benefit) | |
| Current | |
| Current | |
Current | | $ | 461 | | | $ | 1,756 | | | $ | 1,767 | |
Deferred | | | (20,625 | ) | | | 29,940 | | | | (19,878 | ) |
Total income tax (benefit) provision | | $ | (20,164 | ) | | $ | 31,696 | | | $ | (18,111 | ) |
| Total income tax provision (benefit) | |
Effective Tax Rate
A reconciliation of the federal statutory rate and the effective income tax rate is as follows:
| | | Year Ended December 31, | | | | | Year Ended December 31, |
| | 2017 | | | 2016 | | | 2015 | | | | | 2023 | | 2022 | | 2021 |
Income tax reconciliation | | | | | | | | | | | | | | Income tax reconciliation | | |
Federal statutory rate | | | 35.0 | | % | | 35.0 | | % | | 35.0 | | % | Federal statutory rate | | 21.0 | % | | 21.0 | % | | 21.0 | % |
Foreign provision | | | 0.3 | | % | | 0.5 | | % | | 0.6 | | % | Foreign provision | | (0.4) | % | | (0.1) | % | | — | % |
State/province income tax | | | 2.4 | | % | | 0.8 | | % | | 1.1 | | % | State/province income tax | | 3.3 | % | | 3.3 | % | | 3.5 | % |
Non-deductible compensation cost | | | (2.0 | ) | % | | (0.5 | ) | % | | (1.1 | ) | % |
Adjustment to carrying value(1) | | | 31.2 | | % | | 0.2 | | % | | 0.6 | | % |
Research credit | | | 1.9 | | % | | 0.2 | | % | | 0.6 | | % |
Valuation allowance | | | (39.6 | ) | % | | (27.4 | ) | % | | 0.0 | | % |
Goodwill impairment | | | — | | % | | (23.5 | ) | % | | (21.3 | ) | % |
| Compensation deduction limitations | | Compensation deduction limitations | | 2.1 | % | | 2.9 | % | | 2.5 | % |
| Stock-based compensation expense | | Stock-based compensation expense | | (4.5) | % | | (2.5) | % | | (10.6) | % |
| Adjustments to carrying values | | Adjustments to carrying values | | 1.9 | % | | 0.3 | % | | 1.7 | % |
| Research and development credit | | Research and development credit | | (6.7) | % | | (2.2) | % | | (2.3) | % |
Valuation allowance(1) | | Valuation allowance(1) | | 1.1 | % | | — | % | | (67.2) | % |
Global intangible low-taxed income(2) | | Global intangible low-taxed income(2) | | — | % | | 0.4 | % | | 0.1 | % |
| Non-deductible expenses - other | | Non-deductible expenses - other | | 0.2 | % | | — | % | | 0.1 | % |
Other | | | (1.2 | ) | % | | 0.1 | | % | | (0.8 | ) | % | Other | | (0.7) | % | | 0.4 | % | | (0.2) | % |
Effective tax rate | | | 28.0 | | % | | (14.6 | ) | % | | 14.7 | | % | Effective tax rate | | 17.3 | % | | 23.5 | % | | (51.4) | % |
| (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”).
|
(1) We removed the full valuation allowance in the federal and certain state jurisdictions in the fourth quarter of 2021 and placed a full valuation allowance on Australia in the fourth quarter of 2023.99
(2) We had no global intangible low-taxed income inclusion in 2023 due to the high tax exception in some foreign jurisdictions and losses in others.
Deferred Income Taxes
The major
tax‑effectedtax-effected components of the deferred tax assets and liabilities are as follows (in thousands):
| | | Year Ended December 31, | | | | At December 31, |
| | 2017 | | | 2016 | | | 2015 | | | | 2023 | | 2022 | | 2021 |
Deferred income tax assets related to: | | | | | | | | | | | | | Deferred income tax assets related to: | | |
Net operating losses | | $ | 87,250 | | | $ | 98,664 | | | $ | 81,531 | |
| Tax credits | |
Capitalized research expenditures(1) | |
| Accrued and prepaid expenses | |
Stock compensation expense | | | 6,601 | | | | 11,559 | | | | 10,212 | |
Accounts receivable allowances | | | 1,117 | | | | 1,745 | | | | 1,444 | |
Accrued and prepaid expenses | | | 3,953 | | | | 6,276 | | | | 3,958 | |
Long-term debt | | | — | | | | 493 | | | | 300 | |
Other | | | 479 | | | | 1,399 | | | | 658 | |
Tax credits | | | 6,822 | | | | 6,394 | | | | 5,896 | |
Valuation allowance | | | (63,303 | ) | | | (61,012 | ) | | | (1,442 | ) |
Total deferred income tax assets | | $ | 42,919 | | | $ | 65,518 | | | $ | 102,557 | |
Deferred income tax liabilities related to: | | | | | | | | | | | | | Deferred income tax liabilities related to: | | |
Property, equipment and leased assets | | $ | 3,129 | | | $ | 13,216 | | | $ | 18,274 | |
Intangibles | | | 73,597 | | | | 106,307 | | | | 108,727 | |
| Other intangible assets | |
| Property and equipment | |
Long-term debt | | | 3,292 | | | | — | | | | — | |
Other | | | 1,108 | | | | 3,606 | | | | 3,200 | |
Total deferred income tax liabilities | | $ | 81,126 | | | $ | 123,129 | | | $ | 130,201 | |
Deferred income taxes, net | | $ | (38,207 | ) | | $ | (57,611 | ) | | $ | (27,644 | ) |
We adopted FASB ASU No. 2016-09, regarding several aspects of
(1) As required by the accounting2017 Tax Cuts and Jobs Act, effective January 1, 2022, our research and development expenditures were capitalized and amortized, which resulted in higher taxable income for share-based payment transactions, including the accounting for income taxes, in the current period on a prospective basis. As a result of the Company’s application of ASU No. 2016-09, certain excess tax benefits at the time of exercise (for2023 and 2022 with an option) or upon vesting (for restricted stock) are recognized as income tax benefits in the Statements of Loss. As of December 31, 2017, the adoption of ASU No. 2016-09 has not materially impacted our Financial Statements. However, it has increased the gross deferred tax assets in our Financial Statements by $4.6 million for excess tax benefits in previous years before it was offset by a corresponding valuation allowance. As a result of certain realization requirements under the prior years’ accounting guidance on share based payments, the tableequal amount of deferred tax assetsbenefit.
Net Operating Losses (“NOLs”) and
liabilities shown above does not include certain deferred tax assets that arose directly from tax deductions related to equity compensation in excess of compensation recognized for financial reporting at December 31, 2016 and 2015, respectively.The 2017 Tax Act was enacted on December 22, 2017. The 2017 Tax Act made significant changes toCredits Carry-forwards
We had no accumulated 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% taxable income limitation on the use of post-2017 NOLs
and a one-time transition tax on previously deferred earnings 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 Tax Act, net of associated foreign tax credits, which was completely offset by additional foreign tax credits carried forward. The foreign tax credits used to offset the transition tax relate to deemed foreign taxes paid on a 2010 Canadian dividend which we are now claiming as a foreign tax credit rather than a foreign tax deduction. Any remaining foreign tax credits not utilized by the transition tax has been fully offset by a valuation allowance.On December 22, 2017, the SEC staff issued Staff Accounting Bulletin 118 (“SAB 118”), which provides guidance on accounting for the tax effects of the 2017 Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the enactment date for companies to complete the accounting under Accounting Standards Codification (ASC) 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the 2017 Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the 2017 Tax Act is incomplete but for which they are able to determine a reasonable estimate, it must record a provisional amount in the financial statements. Provisional treatment is proper in light of anticipated additional guidance from various taxing authorities, the SEC, the FASB, and even the Joint Committee on Taxation. Provisional treatment is also necessary if the company is waiting for final financial information from domestic and foreign equity investments. If a company cannot determine a
100
provisional amount to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the 2017 Tax Act.
In accordance with the SAB 118 guidance, some of the income tax effects recorded in 2017 are provisional, including the one-time transition tax, the effect on our valuation allowance including the stricter limits on interest deductions, and the remeasurement of our deferred tax assets and liabilities. In addition, we are still evaluating the GILTI provisions of the 2017 Tax Act and its impact, if any, on our Consolidated Financial Statements as of December 31, 2017. The accounting for these income2023.
We had tax effects may be adjusted during 2018 as a resulteffected state NOL carry-forwards of continuing analysis of the 2017 Tax Act; additional implementation guidance from the IRS, state tax authorities, the SEC, the FASB, or the Joint Committee on Taxation; and new information from domestic or foreign equity affiliates.For all of our investments in foreign subsidiaries, a one-time tax has been provided on the mandatory deemed repatriation of post 1986 untaxed earnings and profits, in accordance with the 2017 Tax Act. Unrepatriated earnings were approximately $19.7ap
proximately $4.1 million as of December 31, 2017. Almost all2023, which will expire between 2025 and 2041. The determination and utilization of these earningsstate NOL carry-forwards are considered permanently reinvested,dependent upon apportionment percentages and other respective state laws, which may change from year to year. As of December 31, 2023, approximately $0.6 million of our valuation allowance relates to certain state NOL carry-forwards that we estimate are not more likely than not to be realized. We had tax effected Australia NOL carry-forwards of approximately $1.1 million as itof December 31, 2023, which can be carried forward indefinitely. As of December 31, 2023, there is management’s intention to reinvest foreign earnings in foreign operations. We project sufficient cash flow or sufficient borrowings available undera full valuation allowance on our Credit Facilities in the U.S. and thereforeAustralia net deferred tax assets as we do not needbelieve these assets are more-likely-than-not to repatriate these foreign earningsbe realized.
We had approximately $17.1 million, tax effected, of federal research and development credit carry-forwards as of December 31, 2023. The research and development credits are limited to finance U.S. operationsa 20-year carry-forward period and will expire starting in 2037. We also had approximately $0.5 million, tax effected, of federal solar tax credit carry-forward as of December 31, 2023. The solar tax credit is limited to a 22-year carry-forward period and will expire in 2045, at this time.which time, one-half of any unused credit can be deducted.
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.
During
2016 and 2017,the fourth quarter of 2023, we placed a full valuation allowance of $1.1 million on the Australia net deferred tax assets, among other foreign items, as we do not believe these assets meet the more-likely-than-not criteria for recognition. In evaluating our ability to realize these net deferred tax assets, we evaluated negative evidence noting that for the three-year
periodsperiod then ended, we reported
a cumulative net
losses.loss in Australia. Pursuant to accounting guidance, a cumulative loss in recent years is a significant piece of negative evidence that must be considered and is difficult to overcome without sufficient objectively verifiable, positive evidence.
As such, certain aspects 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 overcomeWe will reassess the
negative evidence.As a result of this evaluation, we increased our valuation allowance for deferred tax assets by $2.3 million (net of a reduction for the decrease in the US federal corporate tax rate) during 2017. The ultimate realization of deferred tax assets depends on having sufficient taxable incomeeach reporting period, and to the extent our financial results in the future years when the tax deductions associated withAustralia improve and it becomes more-likely-than-not the deferred tax assets become deductible. The establishment of aare realizable, we will be able to reduce the valuation allowance does not impact cash, nor doesin such period, as appropriate.
Based on an evaluation of the then-available positive and negative evidence, we determined it
preclude us from usingwas appropriate to establish a full valuation allowance on our
tax credits, loss carryforwardsfederal and
otherstates deferred tax assets
as of December 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. Based on our analysis, we removed the full valuation allowance in the
future.federal and certain state jurisdictions, contributing to a $67.9 million reduction 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 continue to believe the positive evidence outweighs the negative evidence as of December 31, 2023, and it is more likely than not that these deferred tax assets 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, | | | | At December 31, |
| | 2017 | | | 2016 | | | 2015 | | | | 2023 | | 2022 | | 2021 |
Balance at beginning of period | | $ | 61,012 | | | $ | 1,442 | | | $ | 2,319 | |
Charged to provision for income taxes | | | (2,263 | ) | | | 59,570 | | | | (877 | ) |
Other(1) | | | 4,554 | | | | — | | | | — | |
| Valuation allowance - (reversal) charge | |
| Balance at end of period | | $ | 63,303 | | | $ | 61,012 | | | $ | 1,442 | |
| Balance at end of period | |
| Balance at end of period | |
| (1)
| This amount has been recorded in retained deficit as a result of our adoption of ASU No. 2016-09.
|
We had $352.8 million, or $74.1 million, tax effected, of accumulated federal net operating losses as of December 31, 2017. The net operating losses can be carried forward and applied to offset taxable income for 20 years and will expire starting in 2022. We had $6.0 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, 2017. The research and development credits are limited to a 20 year carry forward period and will expire starting in 2029. The foreign tax
101
credits can be carried forward 10 years and will expire in 2020, if not utilized. Almost all of the $1.6 million of federal alternative minimum tax credit carry forwards in our December 31, 2016 financial statements have or will be refunded within the next 12 months, net of the IRS sequestration fee, and have been reclassified as a receivable. Any remaining alternative minimum tax credits will be refunded over the next five years in accordance with the 2017Unrecognized Tax Act. As of December 31, 2017, $53.9 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 $13.1 million as of December 31, 2017. The state net operating loss carry forwards will expire between 2018 and 2038. 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, 2017, $9.3 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, | |
| | 2017 | | | 2016 | | | 2015 | |
Unrecognized tax benefit | | | | | | | | | | | | |
Unrecognized tax benefit at the beginning of the period | | $ | 834 | | | $ | 729 | | | $ | 729 | |
Gross increases - tax positions in prior period | | | 103 | | | | 105 | | | | — | |
Gross decreases - tax positions in prior period | | | — | | | | — | | | | — | |
Gross increases - tax positions in current period | | | — | | | | — | | | | — | |
Settlements | | | — | | | | — | | | | — | |
Unrecognized tax benefit at the end of the period | | $ | 937 | | | $ | 834 | | | $ | 729 | |
| | | | | | | | | | | | | | | | | | | | |
| | | At December 31, |
| | | 2023 | | 2022 | | 2021 |
| Unrecognized tax benefit | | | | | | |
| Unrecognized tax benefit at beginning of period | | $ | 2,566 | | | $ | 2,151 | | | $ | 1,714 | |
| Gross increases — tax positions in prior period | | 1,189 | | | 415 | | | 437 | |
| Gross increases — tax positions in current period | | 782 | | | — | | | — | |
| Unrecognized tax benefit at end of period | | $ | 4,537 | | | $ | 2,566 | | | $ | 2,151 | |
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, 2017, the Company2023, we recorded $0.9approximately $4.5 million of unrecognized tax benefits, all of which would impact our effective tax rate, if recognized. We do not anticipate that our unrecognized tax benefits will materially change within the next 12 months. The Company has not accrued any penalties and interest for its unrecognized tax benefits. Other than the unrecognized tax benefit recorded, we believe that our income tax filing positions and deductions will be sustained upon audit, and we do not anticipate any other adjustments that will result in a material change to our financial position. We may, from time to time, be assessed interest or penalties by tax jurisdictions, although any such assessments historically have been minimal and immaterial to our financial results. Our policy for recording
interest and penalties associated with audits and unrecognized tax benefits is to record such items as a component of income tax in our Statements of
Loss.Operations.
Foreign Operations
We had unrepatriated foreign earnings of approximately $18.5 million as of December 31, 2023. 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.
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.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
2014.17.2020.
Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision-making group
in deciding how to allocate resources and in assessing performance.(the “CODM”). Our
chief operating decision-making groupCODM consists of the Chief Executive Officer, and the Chief Financial Officer.
This group manages the business,Our CODM allocates resources and measures profitability based on our operating
segments. The operating segments,
which are managed and reviewed separately, as each represents products
and services that can be sold separately to our customers.
102
Our chief operating decision-making group has determined the following to be the operating segments are monitored by management for which we conduct business: (a) Games and (b) Payments. performance against our internal forecasts.
We have reported our financial performance based on our segments in both the current and prior periods. EachOur CODM determined that our operating segments for conducting business are: (i) Games and (ii) FinTech:
•Everi Games provides gaming operators with gaming technology and entertainment products and services, including: (i) gaming machines, primarily comprising Class II, Class III and Historic Horse Racing (“HHR”) 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 these segments is monitored by our management for performance against its internal forecastNew York and is consistentsimilar technology in certain tribal jurisdictions; (iii) business-to-business (“B2B”) digital online gaming activities; and (iv) bingo solutions through consoles, integrated electronic gaming tablets and related systems.
•Everi FinTech provides gaming operators with our internal management reporting. The Games segment provides solutions directly to gaming establishments to offer their patrons gaming entertainment related experiencesfinancial technology products and services, including: leased gaming equipment; sales(i) financial access and maintenance related services of gaming equipment; gaming systems;supporting digital, cashless and ancillaryphysical cash options across mobile, assisted and self-service channels; (ii) loyalty and marketing software and tools, RegTech software solutions, other information-related products and services.
The Payments segment provides solutions directly to gaming establishments to offer their patrons cash access related services, and products, including:hardware maintenance services; and (iii) associated casino patron self-service hardware that utilizes our financial access, software and other services. We also develop and offer mobile-first applications aimed at enhancing patron engagement for customers in the casino, sports, entertainment and hospitality industries. Our solutions are secured using an end-to-end security suite to protect against cyber-related attacks allowing us to maintain appropriate levels of security. 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;purchases at casino cages, kiosk and mobile POS devices; accounts for the CashClub Wallet, check warranty services, self-service loyalty and fully integrated kioskskiosk maintenance services; self-service loyalty tools and maintenance services;promotion management software; compliance, audit, and data software; casino credit data and reporting servicesservices; marketing and promotional offering subscription-based services; and other ancillary offerings.
Corporate overhead expenses have been allocated to the segments either through specific identification or based on a reasonable methodology. In addition, we record depreciation and amortization expenses to the
appropriate operating segment.business segments.
Our business is predominantly domestic with no specific regional concentrations
that were material to our results of operations or financial condition, and no significant assets in foreign locations.
The accounting policies of the operating segments are generally the same as those described in the summary of significant accounting policies.
The following tables present segment information (in thousands):
| | For the Year Ended December 31, | |
| | 2017 | | | 2016 | | | 2015 | | | | For the Year Ended December 31, |
| | 2023 | | | | 2023 | | 2022 | | 2021 |
Games | | | | | | | | | | | | | Games | | |
| Revenue | |
| Gaming operations | |
| Gaming operations | |
| Gaming operations | |
| Gaming equipment and systems | |
Total revenues | | $ | 222,777 | | | $ | 213,253 | | | $ | 214,424 | |
Costs and expenses | | | | | | | | | | | | |
Cost of revenues (1) | |
Cost of revenues (1) | |
Cost of revenues (1) | |
| Gaming operations | |
| Gaming operations | |
| Gaming operations | |
| Gaming equipment and systems | |
Cost of revenues | | | 54,695 | | | | 50,308 | | | | 47,017 | |
Operating expenses | | | 42,780 | | | | 42,561 | | | | 36,154 | |
Research and development | | | 18,862 | | | | 19,356 | | | | 19,098 | |
Goodwill impairment | | | — | | | | 146,299 | | | | 75,008 | |
Depreciation | | | 40,428 | | | | 41,582 | | | | 37,716 | |
Amortization | | | 57,060 | | | | 79,390 | | | | 72,934 | |
Total costs and expenses | | | 213,825 | | | | 379,496 | | | | 287,927 | |
Operating income (loss) | | $ | 8,952 | | | $ | (166,243 | ) | | $ | (73,503 | ) |
| Operating income | |
| | For the Year Ended December 31, | |
| | 2017 | | | 2016 | | | 2015 | | | | For the Year Ended December 31, |
Payments | | | | | | | | | | | | |
| | | | | 2023 | | 2022 | | 2021 |
| FinTech | |
| Revenues | |
| Revenues | |
| Revenues | |
| Financial access services | |
| Financial access services | |
| Financial access services | |
| Software and other | |
| Hardware | |
Total revenues | | $ | 752,171 | | | $ | 646,203 | | | $ | 612,575 | |
Costs and expenses | | | | | | | | | | | | |
Cost of revenues (1) | |
Cost of revenues (1) | |
Cost of revenues (1) | |
| Financial access services | |
| Financial access services | |
| Financial access services | |
| Software and other | |
| Hardware | |
Cost of revenues | | | 583,850 | | | | 498,706 | | | | 463,380 | |
Operating expenses | | | 76,155 | | | | 76,148 | | | | 65,048 | |
| Research and development | |
Depreciation | | | 6,854 | | | | 8,413 | | | | 7,835 | |
Amortization | | | 12,445 | | | | 15,248 | | | | 12,539 | |
Total costs and expenses | | | 679,304 | | | | 598,515 | | | | 548,802 | |
Operating income | | $ | 72,867 | | | $ | 47,688 | | | $ | 63,773 | |
103
| | For the Year Ended December 31, | |
| | 2017 | | | 2016 | | | 2015 | |
Total Games and Payments | | | | | | | | | �� | | | |
Total revenues | | $ | 974,948 | | | $ | 859,456 | | | $ | 826,999 | |
Costs and expenses | | | | | | | | | | | | |
Cost of revenues | | | 638,545 | | | | 549,014 | | | | 510,397 | |
Operating expenses | | | 118,935 | | | | 118,709 | | | | 101,202 | |
Research and development | | | 18,862 | | | | 19,356 | | | | 19,098 | |
Goodwill impairment | | | — | | | | 146,299 | | | | 75,008 | |
Depreciation | | | 47,282 | | | | 49,995 | | | | 45,551 | |
Amortization | | | 69,505 | | | | 94,638 | | | | 85,473 | |
Total costs and expenses | | | 893,129 | | | | 978,011 | | | | 836,729 | |
Operating income (loss) | | $ | 81,819 | | | $ | (118,555 | ) | | $ | (9,730 | ) |
| | At December 31, | |
| | 2017 | | | 2016 | |
Total assets | | | | | | | | |
Games | | $ | 925,186 | | | $ | 894,213 | |
Payments | | | 611,888 | | | | 513,950 | |
Total assets | | $ | 1,537,074 | | | $ | 1,408,163 | |
| | | | | | | | | | | | | | | | | | | | |
| | | For the Year Ended December 31, |
| | | 2023 | | 2022 | | 2021 |
| Total Games and FinTech | | | | | | |
| Total revenues | | $ | 807,821 | | | $ | 782,519 | | | $ | 660,385 | |
| Costs and expenses | | | | | | |
Cost of revenues (1) | | 161,240 | | | 165,322 | | | 115,449 | |
| Operating expenses | | 260,931 | | | 216,959 | | | 188,900 | |
| Research and development | | 67,633 | | | 60,527 | | | 39,051 | |
| Depreciation | | 78,691 | | | 66,801 | | | 61,487 | |
| Amortization | | 60,042 | | | 59,558 | | | 57,987 | |
| Total costs and expenses | | 628,537 | | | 569,167 | | | 462,874 | |
| Operating income | | $ | 179,284 | | | $ | 213,352 | | | $ | 197,511 | |
(1) Exclusive of depreciation and amortization. | | | | | | | | | | | | | | |
| | | At December 31, |
| | | 2023 | | 2022 |
| Total assets | | | | |
| Games | | $ | 931,322 | | | $ | 911,907 | |
| FinTech | | 1,192,548 | | | 1,006,336 | |
| Total assets | | $ | 2,123,870 | | | $ | 1,918,243 | |
For the year ended December 31, 2023, cash paid for capital expenditures totaled $145.1 million, of which $117.0 million and $28.1 million was related to our Games and FinTech businesses, respectively. For the year ended December 31, 2022, cash paid for capital expenditures totaled $127.6 million, of which $96.0 million and $31.6 million, was related to our Games and FinTech businesses, respectively.
Major customers.For the years ended December 31, 2017, 20162023, 2022, and 2015,2021, no single customer accounted for more than 10% of our revenues. Our five largest customers accounted
20. ERROR CORRECTION OF AN IMMATERIAL PRIOR YEAR MISSTATEMENT
The Company determined that the placement fee arrangements were previously misclassified in its Statements of Cash Flows. Previously, these placement fee arrangements were reported as cash flows from investing activities, and they should have been presented as cash flows from operating activities for approximately 31%, 31%the fiscal years ended December 31, 2022 and 30%2021. The error has been corrected by adjusting each of the affected financial statement categories for these prior periods.
The following table summarizes the impact to our
total revenue in 2017, 2016 and 2015, respectively.104
18. SELECTED QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The unaudited selected quarterly resultsStatements of operations are as followsCash Flows (in thousands, except for per share amounts)*thousands):
| | Quarter | | | | | |
| | First | | | Second | | | Third | | | Fourth | | | Year | |
2017 | | | | | | | | | | | | | | | | | | | | |
Revenues | | $ | 237,537 | | | $ | 242,230 | | | $ | 247,322 | | | $ | 247,859 | | | $ | 974,948 | |
Operating income | | | 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 | ) | | $ | (0.38 | ) | | $ | (0.78 | ) |
Diluted loss per share | | $ | (0.05 | ) | | $ | (0.29 | ) | | $ | (0.06 | ) | | $ | (0.38 | ) | | $ | (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 | |
2016 | | | | | | | | | | | | | | | | | | | | |
Revenues | | $ | 205,769 | | | $ | 214,000 | | | $ | 222,177 | | | $ | 217,510 | | | $ | 859,456 | |
Operating income (loss) | | | 3,785 | | | | 6,060 | | | | 11,572 | | | | (139,972 | ) | | | (118,555 | ) |
Net loss | | | (13,151 | ) | | | (10,796 | ) | | | (8,254 | ) | | | (217,278 | ) | | | (249,479 | ) |
Basic loss per share | | $ | (0.20 | ) | | $ | (0.16 | ) | | $ | (0.12 | ) | | $ | (3.29 | ) | | $ | (3.78 | ) |
Diluted loss per share | | $ | (0.20 | ) | | $ | (0.16 | ) | | $ | (0.12 | ) | | $ | (3.29 | ) | | $ | (3.78 | ) |
Weighted average common shares outstanding | | | | | | | | | | | | | | | | | | | | |
Basic | | | 66,034 | | | | 66,041 | | | | 66,049 | | | | 66,074 | | | | 66,050 | |
Diluted | | | 66,034 | | | | 66,041 | | | | 66,049 | | | | 66,074 | | | | 66,050 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 |
| | As reported | | Adjustments | | As adjusted |
| Cash flows from operating activities | | | | | | | | | | | | |
| Changes in operating assets and liabilities: | | | | | | | | | | | | |
| Placement fee agreements | | $ | — | | | $ | — | | | $ | (547) | | | $ | (31,465) | | | $ | (547) | | | $ | (31,465) | |
| | | | | | | | | | | | |
| Net cash provided by (used in) operating activities | | 272,641 | | | 391,630 | | | (547) | | | (31,465) | | | 272,094 | | | 360,165 | |
| | | | | | | | | | | | |
| Cash flows from investing activities | | | | | | | | | | | | |
| Placement fee agreements | | (547) | | | (31,465) | | | 547 | | | 31,465 | | | — | | | — | |
| | | | | | | | | | | | |
| Net cash (used in) provided by investing activities | | (179,338) | | | (151,912) | | | 547 | | | 31,465 | | | (178,791) | | | (120,447) | |
| | | | | | | | | | | | |
| Cash, cash equivalents and restricted cash | | | | | | | | | | | | |
| Net (decrease) increase for the period | | (8,663) | | | 51,377 | | | — | | | — | | | (8,663) | | | 51,377 | |
| Balance, beginning of the period | | 303,726 | | | 252,349 | | | — | | | — | | | 303,726 | | | 252,349 | |
| Balance, end of the period | | $ | 295,063 | | | $ | 303,726 | | | $ | — | | | $ | — | | | $ | 295,063 | | | $ | 303,726 | |
*
| Rounding may cause variances.
|
19.
21. SUBSEQUENT EVENTS
In January 2018, an amendment
On February 28, 2024, the Company entered into definitive agreements with International Game Technology PLC (“IGT”) pursuant to which IGT will spin-off a newly created subsidiary, which will own IGT’s Global Gaming and PlayDigital businesses, with the Company acquiring the Global Gaming and PlayDigital businesses in a series of transactions. Upon the closing of the proposed transaction, under the terms of the agreements, IGT shareholders are expected to own approximately 54% of the combined company, with the Company’s existing stockholders expected to own approximately 46% of the combined company. The proposed transaction is expected to close in early 2025, subject to receipt of regulatory approvals, stockholder approvals, and other customary closing conditions.
On February 28, 2024, the Company and Ignite Rotate LLC, a subsidiary of IGT, entered into a debt commitment letter with the lenders specified therein, pursuant to which the lenders have committed to provide the Company and such subsidiary with $3.7 billion, together with a revolver of $0.5 billion, used to refinance the Company’s existing debt, distribute funds to IGT, and the remainder will be used to pay the combined company’s financing fees, subject to the agreement between Everi Games andsatisfaction of certain customary closing conditions including the New York State Gaming Commission was approved and became effective. Under this amendment, Everi Games will continue to provide and maintainconsummation of the central determinant system for the New York Lottery through December of 2019.105
proposed transaction described above.
Item 9. Changes in and Disagreements with
AccountantsAccountants 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, 2023. 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 material information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified 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
15(d)-15(f)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. Because ofU.S. generally accepted accounting principles (“GAAP”). Due to 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, 2017,2023, 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, 2017.2023.
On May 1, 2023 (the “Video King Closing Date”), the Company acquired certain strategic assets of VKGS LLC (“Video King”). The Company is permitted to exclude acquisitions from its report on internal controls over financial reporting for the first year after the acquisition when it is not possible to conduct an assessment of the acquired business. On this basis, the Company excluded Video King from its annual assessment of the effectiveness of internal control over financial reporting for the year ended December 31, 2023.
The total assets and total revenues generated by the above-mentioned acquisition that occurred in 2023 that were excluded from Management’s assessment represented approximately 3.0% and 2.3%, respectively, of the Company’s total assets and total revenues as of and for the year ended December 31, 2023.
Our independent registered public accounting firm,
BDO USA,Ernst & Young, 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.below.
Changes in Internal Control over Financial Reporting
during the Quarter Ended December 31, 2017There
Except as noted above, there were no changes toin 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, 20172023 that hashave materially affected, or isare reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information.
(a) None.
(b) Todd A. Valli, Senior Vice President, Corporate Finance and Tax & Chief Accounting Officer, on December 6, 2023 modified a Rule 10b5-1 trading arrangement intended to satisfy Rule 10b5-1(c). The informationarrangement was originally entered into on March 13, 2023 to purchase and sell 15,000 shares of Company common stock between June 14, 2023 and May 2, 2024, subject to certain limit orders, all of which shares were to be acquired upon the exercise of employee stock option awards that were set forth below is included herein forto expire on May 2, 2024. The modified Rule 10b5-1 trading arrangement was entered into on December 6, 2023 to purchase and sell 15,000 shares of Company common stock between March 6, 2024 and May 2, 2024, subject to certain limit orders, all of which shares are to be acquired upon the purposeexercise of providingemployee stock option awards that are set to expire on May 2, 2024.
There were no other Rule 10b5‑1 trading arrangements (as defined in Item 408(a) of Regulation S-K) or non-Rule 10b5-1 trading arrangements (as defined in Item 408(c) of Regulation S-K) adopted or terminated by any director or officer (as defined in Rule 16a‑1(f) under the
disclosure required under “Item 1.01 - Entry into a Material Definitive Agreement” of Form 8-K that was not filed within four business daysExchange Act) of the
reportable event.Entry into a Material Definitive Agreement.
OnCompany during the three months ended December 29, 2017, Everi Payments entered into a Sixth Amendment (the “Sixth Amendment”) to Contract Cash Solutions Agreement with Wells Fargo Bank, N.A. The Sixth Amendment, among other things, reduces the maximum amount of cash available under the Contract Cash Solutions Agreement from $425.0 million to $300.0 million and extends the term by one year from June 30, 2019 to June 30, 2020. For a summary of the Contract Cash
106
31, 2023.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
Not applicable.
Solutions Agreement, as amended by the Sixth Amendment, see “Note 4. Funding Agreements” within our Financial Statements included elsewhere in this Annual Report on Form 10-K.
The foregoing description and referenced summary do not purport to be complete and are qualified in their entirety by the text of the Sixth Amendment, a copy of which is filed as Exhibit 10.44 to this Annual Report on Form 10-K.
107
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders
To the Stockholders and
the Board of Directors
of Everi Holdings Inc. and subsidiaries
Las Vegas, Nevada
Opinion on Internal Control
overOver Financial Reporting
We have audited Everi Holdings Inc. and subsidiaries’
(the “Company’s”) internal control over financial reporting as of December 31,
2017,2023, based on criteria established in
Internal Control – Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission
(2013 framework) (the
“COSO criteria”)COSO criteria). In our opinion,
the CompanyEveri Holdings Inc. and subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31,
2017,2023, based on the COSO
criteria.criteria.
As indicated in the accompanying Management’s Report of Internal Control over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Video King, which is included in the 2023 consolidated financial statements of the Company and constituted 3.0% and 1.6% of total and net assets, respectively, as of December 31, 2023 and 2.3% and 4.3% of revenues and net income, respectively, for the year then ended. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of Video King.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(“PCAOB”)(PCAOB), the
2023 consolidated
balance sheetsfinancial statements of the Company and
subsidiaries as of December 31, 2017 and 2016, the related consolidated statements of loss comprehensive loss, stockholders’ (deficit) equity, and cash flows for each of the three years in the period ended December 31, 2017, and the related notes and our report dated
March 15, 2018February 29, 2023 expressed an unqualified opinion thereon.
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 onof Internal Control over Financial Reporting.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 the 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 includedrisk, and 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
overOver 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,Ernst & Young LLP
Las Vegas, Nevada
March 15, 2018
108
February 29, 2024
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 Class I 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 20182024 annual meeting of stockholders (the “2018“2024 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 – 2017— Compensation Committee Interlocks and Insider Participation,” “Board and Corporate Governance Matters — Director Compensation” andCompensation,” “Executive Compensation,” respectively,“Pay Ratio,” and “Pay Versus Performance’ in the 20182024 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 headingheadings “Equity Compensation Plan Information” and “Security Ownership of Certain Beneficial Owners and Management” in the 20182024 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“Certain Relationships and Related Transactions — Transactions with Related Persons,” respectively,” in the 20182024 Proxy Statement is incorporated herein by reference.
Item 14. Principal
AccountingAccountant 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
20182024 Proxy Statement is incorporated herein by reference.
109
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:
1. Financial Statements
| (a)
| The following documents are filed as part of this Annual Report on Form 10‑K:
| | | | | | | | | |
1.Financial Statements
2.Financial
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
3. See Item 15(b)
Exhibit
Number | | Exhibit Description | |
| | | |
3.1 | | | |
| | | |
3.2 | | | |
| | | |
3.3 | | | |
| | | |
3.4 | | | |
| | | |
4.1 | | | |
| | | |
| | | | | | | | | | | |
Exhibit
Number | | Exhibit Description | |
| 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 Inc.,FinTech, Everi Holdings, Inc., certain of its wholly owned subsidiaries, as guarantors, and Deutsche Bank Trust Company Americas, as trustee.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). | |
| | | |
10.1
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). | |
| | | |
10.2
10.7 | | 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). |
110
Exhibit
Number
| | Exhibit Description
|
| | | |
10.3
10.8 | | | |
| | | |
10.4
10.9 | | | |
| | | |
+10.5
10.10 | | |
| | |
10.6
| | Contract Cash Solutions Agreement, dated as of November 12, 2010, between Everi Payments and Wells FargoAmerican State Bank N.A. (incorporated by reference to Exhibit 10.11 of Holdings’ Annual Report on Form 10-K filed with the SEC on March 15, 2016).
|
| | |
10.7
| | Second Amendment to Contract Cash Solutions Agreement, dated as of June 4, 2012, between Everi Payments and Wells Fargo Bank, N.A. (incorporated by reference to Exhibit 10.1 of Holdings’ Current Report on Form 8-K filed with the SEC on June 7, 2012).
|
| | |
10.8
| | Third Amendment to Contract Cash Solutions Agreement, dated as of November 4, 2013, between Everi Payments and Wells Fargo Bank, N.A. (incorporated by reference to Exhibit 10.1 of Holdings’ Quarterly Report on Form 10-Q filed with the SEC on November 5, 2013).
|
| | |
10.9
| | Fourth Amendment to Contract Cash Solutions Agreement, dated as of January 29, 2015, between Everi Payments and Wells Fargo Bank, N.A. (incorporated by reference to Exhibit 10.1 of Holdings’ Current Report on Form 8-K filed with the SEC on July 1, 2015).
|
| | |
10.10
| | Fifth Amendment to Contract Cash Solutions Agreement, dated as of December 21, 2016, between Everi Payments and Wells Fargo Bank, N.A. (incorporated by reference to Exhibit 10.1 of Holdings’ Current Report on Form 8-K filed with the SEC on December 28, 2016).
|
| | |
+10.11
| | Sponsorship Agreement, dated February 11, 2011, between Everi PaymentsFinTech and American State Bank (incorporated by reference to Exhibit 10.54 of Everi Holdings’ Annual Report on Form 10-K filed with the SEC on March 14, 2011). | |
| | | |
| | | | | | | | | | | |
†10.12
Exhibit
Number | | Exhibit Description | |
| †10.11 | | | |
| | | |
†10.13 10.12 | | | |
| | | |
†10.14 10.13 | | | |
| | | |
†10.15 10.14 | | |
111
Exhibit
Number
| | Exhibit Description
|
| | | |
†10.16 10.15 | | | |
| | | |
†10.17 10.16 | | | |
| | | |
†10.18 10.17 | | | |
| | | |
†10.19 10.18 | | | |
| | | |
†10.20 10.19 | | | |
| | | |
†10.21 10.20 | | | |
| | | |
†10.22 10.21 | | | |
| | | |
†10.23 10.22 | | | |
| | | |
†10.24 10.23 | | | |
| | | |
†10.25 10.24 | | | |
| | | |
†10.26 10.25 | | | |
| | | |
†10.27 10.26 | | | |
| | | |
| | | | | | | | | | | |
†10.28
Exhibit
Number | | Exhibit Description | |
| †10.27 | | | |
| | | |
†10.29 10.28 | | |
112
Exhibit
Number
| | Exhibit Description
|
| | | |
†10.30 10.29 | | | |
| | | |
†10.31 10.30 | | | |
| | | |
†10.32 10.31 | | | |
| | | |
10.33
†10.32 | | Form of Indemnification Agreement between Holdings and each of its executive officers and directors (incorporated by reference to Exhibit 10.27 to Holdings’ Registration Statement on Form S-1 (Registration No. 333-123514) filed with the SEC on March 22, 2005).
|
| | |
10.34
| | Employment Agreement with Randy L. Taylor (effective as of August 5, 2014) (incorporated by reference to Exhibit 10.1 of Holdings’ Current Report on Form 8-K filed with the SEC on August 5, 2014).
|
| | |
10.35
| | Employment Agreement with Juliet A. Lim (effective as of August 5, 2014) (incorporated by reference to Exhibit 10.34 of Holdings’ Annual Report on Form 10-K filed with the SEC on March 16, 2015).
|
| | |
10.36
| | First Amendment to Employment Agreement with Juliet A. Lim (effective as of January 3, 2017) (incorporated by reference to Exhibit 10.45 of Holdings’ Annual Report on Form 10-K filed with the SEC on March 14, 2017).
|
| | |
10.37
| | Employment Agreement with David Lucchese (effective as of August 5, 2014) (incorporated by reference to Exhibit 10.2 of Holdings’ Current Report on Form 8-K filed with the SEC on August 5, 2014).
|
| | |
†10.38
| | First Amendment to Employment Agreement with David Lucchese (effective as of January 3, 2017) (incorporated by reference to Exhibit 10.47 of Holdings’ Annual Report on Form 10-K filed with the SEC on March 14, 2017).
|
| | |
10.39
| | Employment Agreement with Edward A. Peters (effective January 15, 2015) (incorporated by reference to Exhibit 10.1 of Holdings’ Current Report on Form 8-K filed with the SEC on January 22, 2015).
|
| | |
10.40
| | | |
| | | |
†10.41 10.33 | | | |
| | | |
†10.42 10.34 | | | |
| | | |
10.43
10.35 | | | |
| | | |
| †10.36 | | | |
| | | |
| †10.37 | | | |
| | | |
| †10.38 | |
| |
| | | |
| †10.39 | |
| |
| | | |
| †10.40 | |
| |
| | | |
| †10.41 | |
| |
113
| | | | | | | | | | | |
Exhibit
Number | | Exhibit Description | |
| | | |
*10.44
†10.42 | |
| |
| | | |
| †10.43 | |
| |
| | | |
| †10.44 | |
| |
| | | |
| †10.45 | |
| |
| | | |
| †10.46 | |
| |
| | | |
| †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 Wells Fargo Bank, N.A.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 | | | |
| | | | | | | | | | | |
Exhibit
Number | | Exhibit Description | |
| | | |
| †10.56 | | | |
| | | |
| †10.57 | | | |
| | | |
| †10.58 | | | |
| | | |
| †10.59 | | | |
| | | |
| †10.60 | | | |
| | | |
| †10.61 | | | |
| | | |
| †10.62 | | | |
| | | |
| †10.63 | | | |
| | | |
| +10.64 | | | |
| | | |
| +10.65 | | | |
| | | |
| 10.66 | | | |
| | | |
| +10.67 | | | |
| | | |
| †10.68 | | | |
| | | |
| †10.69 | | | |
| | | |
| 10.70 | | | |
| | | |
| *104 | | Filed herewith.
The cover page from the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, formatted in Inline XBRL (included as Exhibit 101). | |
| | | | | | | | |
| * | Filed herewith. | |
| ** | Furnished herewith. |
† | Management contracts or compensatory plans or arrangements. |
| + | Portions of the exhibit have been omitted pursuant to the rules and regulations of the SEC. |
+
| Confidential treatment has been granted for certain portions of this exhibit pursuant to Rule 24b-2 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.
SIGNATURES
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 16, 2018
| | | | | | | | | | |
| February 29, 2024 | | EVERI HOLDINGS INC. |
| (Date) | | | (Registrant) |
| | | |
| | By: | /s/ TODD A. VALLI |
| | | Todd A. Valli
Senior Vice President, Corporate Finance and Tax & Chief Accounting Officer (Principal(For the Registrant and as Principal Accounting Officer) |
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Michael D. Rumbolz, Randy L. Taylor,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 RANDY L. TAYLOR | | President and Chief Executive Officer and Director | | March 16, 2018
February 29, 2024 |
Michael D. Rumbolz
Randy L. Taylor | | (Principal Executive Officer) and Director | | |
| | | | |
/s/ RANDY L. TAYLOR MARK F. LABAY | | Executive Vice President, Chief Financial Officer | | March 16, 2018
February 29, 2024 |
Randy L. Taylor
Mark F. Labay | | (Principal Financial Officer) and Treasurer | | |
| | | | |
/s/ TODD A. VALLI | | Senior Vice President, Chief Accounting Officer | | March 16, 2018
February 29, 2024 |
Todd A. Valli | | (Principal Accounting Officer) | | |
| | | | |
/s/ E. MILES KILBURN MICHAEL D. RUMBOLZ | | ChairmanExecutive Chair of the Board and Director
| | March 16, 2018
February 29, 2024 |
E. Miles Kilburn
Michael D. Rumbolz | | Director | | |
| | | | |
| /s/ ATUL BALI | | Lead Independent Director | | February 29, 2024 |
| Atul Bali | | | | |
| | | | |
| /s/ GEOFFREY P. JUDGE | | Director | | Director
| March 16, 2018
February 29, 2024 |
Geoffrey P. Judge | | | | |
| | | | |
| | | | |
/s/ RONALD V. CONGEMI
| | Director
| | March 16, 2018
|
Ronald V. Congemi
| | | | |
| | | | |
/s/ EILEEN F. RANEY
| | Director
| | March 16, 2018
|
Eileen F. Raney
| | | | |
| | | | |
/s/ LINSTER W. FOX | | Director | | March 16, 2018
February 29, 2024 |
Linster W. Fox | | | | |
| | Director
| | March 16, 2018
|
| | | | |
| /s/ MAUREEN T. MULLARKEY | | Director | | February 29, 2024 |
| Maureen T. Mullarkey | | | | |
| | | | |
| /s/ SECIL TABLI WATSON | | Director | | February 29, 2024 |
| Secil Tabli Watson | | | | |
| | | | |
| /s/ PAUL FINCH | | Director | | February 29, 2024 |
| Paul Finch | | | | |
| | | | |
| /s/ DEBRA L. NUTTON | | Director | | February 29, 2024 |
| | | | |
| Debra L. Nutton | | | | |
115