Results of Operations
Year ended December 31, 2019 compared to the year ended December 31, 2018
The following table presents our Results of Operations as reported for the year ended December 31, 2019 compared to the year ended December 31, 2018 (amounts in thousands)*:
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|
Year Ended
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|
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|
|
|
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|
|
|
|
December 31, 2019
|
|
|
|
December 31, 2018
|
|
|
|
2019 vs 2018
|
|
|
|
|
|
$
|
|
%
|
|
|
$
|
|
%
|
|
$
|
|
%
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Games revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gaming operations
|
|
$
|
188,874
|
|
|
35
|
%
|
|
$
|
168,146
|
|
|
36
|
%
|
|
$
|
20,728
|
|
|
12
|
%
|
|
Gaming equipment and systems
|
|
90,919
|
|
|
17
|
%
|
|
87,038
|
|
|
18
|
%
|
|
3,881
|
|
|
4
|
%
|
|
Gaming other
|
|
3,326
|
|
|
1
|
%
|
|
3,794
|
|
|
1
|
%
|
|
(468)
|
|
|
(12)
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%
|
|
Games total revenues
|
|
283,119
|
|
|
53
|
%
|
|
258,978
|
|
|
55
|
%
|
|
24,141
|
|
|
9
|
%
|
|
FinTech revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash access services
|
|
164,741
|
|
|
31
|
%
|
|
156,806
|
|
|
34
|
%
|
|
7,935
|
|
|
5
|
%
|
|
Equipment
|
|
37,865
|
|
|
7
|
%
|
|
20,977
|
|
|
4
|
%
|
|
16,888
|
|
|
81
|
%
|
|
Information services and other
|
|
47,502
|
|
|
9
|
%
|
|
32,754
|
|
|
7
|
%
|
|
14,748
|
|
|
45
|
%
|
|
FinTech total revenues
|
|
250,108
|
|
|
47
|
%
|
|
210,537
|
|
|
45
|
%
|
|
39,571
|
|
|
19
|
%
|
|
Total revenues
|
|
533,227
|
|
|
100
|
%
|
|
469,515
|
|
|
100
|
%
|
|
63,712
|
|
|
14
|
%
|
|
Costs and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Games cost of revenues (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gaming operations
|
|
18,043
|
|
|
3
|
%
|
|
17,603
|
|
|
4
|
%
|
|
440
|
|
|
2
|
%
|
|
Gaming equipment and systems
|
|
50,826
|
|
|
10
|
%
|
|
47,121
|
|
|
9
|
%
|
|
3,705
|
|
|
8
|
%
|
|
Gaming other
|
|
3,025
|
|
|
—
|
%
|
|
3,285
|
|
|
1
|
%
|
|
(260)
|
|
|
(8)
|
%
|
|
Games total cost of revenues
|
|
71,894
|
|
|
13
|
%
|
|
68,009
|
|
|
14
|
%
|
|
3,885
|
|
|
6
|
%
|
|
FinTech cost of revenues (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash access services
|
|
14,236
|
|
|
3
|
%
|
|
9,717
|
|
|
2
|
%
|
|
4,519
|
|
|
47
|
%
|
|
Equipment
|
|
22,292
|
|
|
4
|
%
|
|
12,601
|
|
|
3
|
%
|
|
9,691
|
|
|
77
|
%
|
|
Information services and other
|
|
3,964
|
|
|
1
|
%
|
|
4,110
|
|
|
1
|
%
|
|
(146)
|
|
|
(4)
|
%
|
|
FinTech total cost of revenues
|
|
40,492
|
|
|
8
|
%
|
|
26,428
|
|
|
6
|
%
|
|
14,064
|
|
|
53
|
%
|
|
Operating expenses
|
|
162,184
|
|
|
30
|
%
|
|
142,298
|
|
|
30
|
%
|
|
19,886
|
|
|
14
|
%
|
|
Research and development
|
|
32,505
|
|
|
6
|
%
|
|
20,497
|
|
|
4
|
%
|
|
12,008
|
|
|
59
|
%
|
|
Depreciation
|
|
63,198
|
|
|
12
|
%
|
|
61,225
|
|
|
14
|
%
|
|
1,973
|
|
|
3
|
%
|
|
Amortization
|
|
68,937
|
|
|
13
|
%
|
|
65,245
|
|
|
14
|
%
|
|
3,692
|
|
|
6
|
%
|
|
Total costs and expenses
|
|
439,210
|
|
|
82
|
%
|
|
383,702
|
|
|
82
|
%
|
|
55,508
|
|
|
14
|
%
|
|
Operating income
|
|
94,017
|
|
|
18
|
%
|
|
85,813
|
|
|
18
|
%
|
|
8,204
|
|
|
10
|
%
|
* Rounding may cause variances.
(1) Exclusive of depreciation and amortization.
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|
Year Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
December 31, 2018
|
|
|
|
2019 vs 2018
|
|
|
|
|
|
$
|
|
%
|
|
|
$
|
|
%
|
|
$
|
|
%
|
|
Other expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net of interest income
|
|
77,844
|
|
|
15
|
%
|
|
83,001
|
|
|
18
|
%
|
|
(5,157)
|
|
|
(6)
|
%
|
|
Loss on extinguishment of debt
|
|
179
|
|
|
—
|
%
|
|
166
|
|
|
—
|
%
|
|
13
|
|
|
8
|
%
|
|
Total other expenses
|
|
78,023
|
|
|
15
|
%
|
|
83,167
|
|
|
18
|
%
|
|
(5,144)
|
|
|
(6)
|
%
|
|
Income before income tax
|
|
15,994
|
|
|
3
|
%
|
|
2,646
|
|
|
1
|
%
|
|
13,348
|
|
|
504
|
%
|
|
Income tax benefit
|
|
(523)
|
|
|
—
|
%
|
|
(9,710)
|
|
|
(2)
|
%
|
|
9,187
|
|
|
(95)
|
%
|
|
Net income
|
|
$
|
16,517
|
|
|
3
|
%
|
|
$
|
12,356
|
|
|
3
|
%
|
|
$
|
4,161
|
|
|
34
|
%
|
* Rounding may cause variances.
Total Revenues
Total revenues increased by approximately $63.7 million, or 14%, to approximately $533.2 million for the year ended December 31, 2019, as compared to the prior year period. Games revenues increased by approximately $24.1 million, or 9%, to approximately $283.1 million for the year ended December 31, 2019, as compared to the prior year period. This was primarily due to an increase in revenue from gaming operations resulting from both a higher average daily win per unit and an increase in the installed base of leased gaming machines, as well as an increase in equipment revenues due to higher gaming machine unit sales and an increase in our interactive revenues. FinTech revenues increased by approximately $39.6 million, or 19%, to approximately $250.1 million for the year ended December 31, 2019, as compared to the prior year period. This was primarily due to an increase in equipment revenues resulting from higher sales of our equipment and information services and other solutions, which included, among other sources, revenues of approximately $16.2 million from our player loyalty operations acquired during the year, as well as additional cash access services revenues associated with higher dollar and transaction volumes.
Costs and Expenses
Total costs and expenses increased by approximately $55.5 million, or 14%, to approximately $439.2 million for the year ended December 31, 2019, as compared to the same period in the prior year. This was primarily due to higher Games and FinTech costs and expenses. Cost of revenues from our Games segment increased by approximately $3.9 million, or 6%, to approximately $71.9 million for the year ended December 31, 2019, as compared to the prior year period. This was primarily due to higher variable costs directly related to the increased sales of gaming equipment. Cost of revenues from our FinTech segment increased by approximately $14.1 million, or 53%, to approximately $40.5 million for the year ended December 31, 2019, as compared to the prior year period. This was primarily due to the variable costs associated with the higher sales of our equipment and information services solutions, inclusive of the addition of the player loyalty business acquired during the year.
Operating expenses increased by approximately $19.9 million, or 14%, to approximately $162.2 million for the year ended December 31, 2019, as compared to the prior year period. Our Games segment operating expenses increased primarily due to higher payroll and related expenses, advertising costs related to our interactive operations, and additional trade show-related expenses. Our FinTech segment operating expenses increased primarily associated with the loss contingency recorded in connection with the FACTA-related matter and related legal fees, the player loyalty operations acquired during the year, and higher payroll and related expenses.
Research and development increased by approximately $12.0 million, or 59%, to approximately $32.5 million for the year ended December 31, 2019, as compared to the prior year period. This was primarily due to higher payroll and related expenses incurred by our FinTech and Games segments.
Depreciation increased by approximately $2.0 million, or 3%, to approximately $63.2 million for the year ended December 31, 2019, as compared to the prior year period, which was relatively consistent with the prior year.
Amortization increased by approximately $3.7 million, or 6%, to approximately $68.9 million for the year ended December 31, 2019, as compared to the prior year period. The increase was primarily driven by the amortization of the intangible assets acquired in connection with the player loyalty business for our FinTech segment.
Primarily as a result of the increase in revenue partially offset by the increased costs and expenses described above, operating income increased by approximately $8.2 million, or 10%, to approximately $94.0 million for the year ended December 31, 2019, as compared to the prior year. The operating income margin was consistent at 18% for the years ended December 31, 2019 and 2018.
Interest expense, net of interest income, decreased by approximately $5.2 million, or 6%, to approximately $77.8 million for the year ended December 31, 2019, as compared to the prior year period. This was primarily due to higher interest income earned during the current reporting period and our lower debt balances.
Loss on extinguishment of debt of approximately $0.2 million for the year ended December 31, 2019 in connection with the repricing of the Term Loan Facility completed in December 2019 was comparable to approximately $0.2 million recorded for the year ended December 31, 2018 related to the Term Loan Facility repricing completed in May 2018.
Income tax benefit was approximately $0.5 million for the year ended December 31, 2019, as compared to an income tax benefit of approximately $9.7 million in the prior year period. The income tax benefit for the year ended December 31, 2019 reflected an effective income tax rate of negative 3.3%, which was less than the statutory federal rate of 21.0%, primarily due to a partial decrease in our valuation allowance for deferred tax assets and a research credit. The tax benefit for the year ended December 31, 2018 reflected an effective income tax rate of negative 367.0% which was less than the statutory federal rate of 21.0%, primarily due to a partial decrease in our valuation allowance for deferred tax assets and a research credit. In addition, for the years ended December 31, 2019 and 2018, the partial decrease in our valuation allowance was primarily due to the book income as well as net operating losses for tax purposes, and the interest deduction limitation (deferred tax assets), which can be offset against our indefinite lived deferred tax liabilities.
Primarily as a result of the foregoing, our net income increased by approximately $4.2 million, or 34%, to a net income of approximately $16.5 million for the year ended December 31, 2019, as compared to the prior year period.
Year ended December 31, 2018 compared to year ended December 31, 2017:
The following table presents our Results of Operations as reported for the year ended December 31, 2018 compared to the year ended December 31, 2017 as reported and as adjusted for the retrospective impact of ASC 606 to reflect the prior period results on a net basis of presentation (amounts in thousands)*:
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|
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|
|
|
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|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018 As Reported vs
|
|
|
|
|
|
December 31, 2018
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
2017 As Adjusted
|
|
|
|
|
|
$
|
|
%
|
|
$
|
|
%
|
|
$
|
|
$
|
|
%
|
|
$
|
|
%
|
|
|
|
As Reported
|
|
|
|
As Reported
|
|
|
Adjustments
|
|
|
As Adjusted
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Games revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gaming operations
|
|
$
|
168,146
|
|
|
36
|
%
|
|
$
|
148,654
|
|
|
15
|
%
|
|
(565)
|
|
|
$
|
148,089
|
|
|
36
|
%
|
|
$
|
20,057
|
|
|
14
|
%
|
|
Gaming equipment and systems
|
|
87,038
|
|
|
18
|
%
|
|
70,118
|
|
|
7
|
%
|
|
—
|
|
|
70,118
|
|
|
17
|
%
|
|
16,920
|
|
|
24
|
%
|
|
Gaming other
|
|
3,794
|
|
|
1
|
%
|
|
4,005
|
|
|
1
|
%
|
|
—
|
|
|
4,005
|
|
|
1
|
%
|
|
(211)
|
|
|
(5)
|
%
|
|
Games total revenues
|
|
258,978
|
|
|
55
|
%
|
|
222,777
|
|
|
23
|
%
|
|
(565)
|
|
|
222,212
|
|
|
54
|
%
|
|
36,766
|
|
|
17
|
%
|
|
FinTech revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash access services
|
|
156,806
|
|
|
34
|
%
|
|
707,222
|
|
|
73
|
%
|
|
(563,637)
|
|
|
143,585
|
|
|
34
|
%
|
|
13,221
|
|
|
9
|
%
|
|
Equipment
|
|
20,977
|
|
|
4
|
%
|
|
13,258
|
|
|
1
|
%
|
|
—
|
|
|
13,258
|
|
|
3
|
%
|
|
7,719
|
|
|
58
|
%
|
|
Information services and other
|
|
32,754
|
|
|
7
|
%
|
|
31,691
|
|
|
3
|
%
|
|
—
|
|
|
31,691
|
|
|
8
|
%
|
|
1,063
|
|
|
3
|
%
|
|
FinTech total revenues
|
|
210,537
|
|
|
45
|
%
|
|
752,171
|
|
|
77
|
%
|
|
(563,637)
|
|
|
188,534
|
|
|
46
|
%
|
|
22,003
|
|
|
12
|
%
|
|
Total revenues
|
|
469,515
|
|
|
100
|
%
|
|
974,948
|
|
|
100
|
%
|
|
(564,202)
|
|
|
410,746
|
|
|
100
|
%
|
|
58,769
|
|
|
14
|
%
|
|
Costs and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Games cost of revenues (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gaming operations
|
|
17,603
|
|
|
4
|
%
|
|
15,741
|
|
|
2
|
%
|
|
(565)
|
|
|
15,176
|
|
|
4
|
%
|
|
2,427
|
|
|
16
|
%
|
|
Gaming equipment and systems
|
|
47,121
|
|
|
9
|
%
|
|
35,707
|
|
|
3
|
%
|
|
—
|
|
|
35,707
|
|
|
8
|
%
|
|
11,414
|
|
|
32
|
%
|
|
Gaming other
|
|
3,285
|
|
|
1
|
%
|
|
3,247
|
|
|
1
|
%
|
|
—
|
|
|
3,247
|
|
|
1
|
%
|
|
38
|
|
|
1
|
%
|
|
Games total cost of revenues
|
|
68,009
|
|
|
14
|
%
|
|
54,695
|
|
|
6
|
%
|
|
(565)
|
|
|
54,130
|
|
|
13
|
%
|
|
13,879
|
|
|
26
|
%
|
|
FinTech cost of revenues (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash access services
|
|
9,717
|
|
|
2
|
%
|
|
572,880
|
|
|
59
|
%
|
|
(563,637)
|
|
|
9,243
|
|
|
2
|
%
|
|
474
|
|
|
5
|
%
|
|
Equipment
|
|
12,601
|
|
|
3
|
%
|
|
7,717
|
|
|
1
|
%
|
|
—
|
|
|
7,717
|
|
|
2
|
%
|
|
4,884
|
|
|
63
|
%
|
|
Information services and other
|
|
4,110
|
|
|
1
|
%
|
|
3,253
|
|
|
—
|
%
|
|
—
|
|
|
3,253
|
|
|
1
|
%
|
|
857
|
|
|
26
|
%
|
|
FinTech total cost of revenues
|
|
26,428
|
|
|
6
|
%
|
|
583,850
|
|
|
60
|
%
|
|
(563,637)
|
|
|
20,213
|
|
|
5
|
%
|
|
6,215
|
|
|
31
|
%
|
|
Operating expenses
|
|
142,298
|
|
|
30
|
%
|
|
118,935
|
|
|
12
|
%
|
|
—
|
|
|
118,935
|
|
|
29
|
%
|
|
23,363
|
|
|
20
|
%
|
|
Research and development
|
|
20,497
|
|
|
4
|
%
|
|
18,862
|
|
|
2
|
%
|
|
—
|
|
|
18,862
|
|
|
5
|
%
|
|
1,635
|
|
|
9
|
%
|
|
Depreciation
|
|
61,225
|
|
|
14
|
%
|
|
47,282
|
|
|
5
|
%
|
|
—
|
|
|
47,282
|
|
|
11
|
%
|
|
13,943
|
|
|
29
|
%
|
|
Amortization
|
|
65,245
|
|
|
14
|
%
|
|
69,505
|
|
|
7
|
%
|
|
—
|
|
|
69,505
|
|
|
17
|
%
|
|
(4,260)
|
|
|
(6)
|
%
|
|
Total costs and expenses
|
|
383,702
|
|
|
82
|
%
|
|
893,129
|
|
|
92
|
%
|
|
(564,202)
|
|
|
328,927
|
|
|
80
|
%
|
|
54,775
|
|
|
17
|
%
|
|
Operating income
|
|
85,813
|
|
|
18
|
%
|
|
81,819
|
|
|
8
|
%
|
|
—
|
|
|
81,819
|
|
|
20
|
%
|
|
3,994
|
|
|
5
|
%
|
* Rounding may cause variances.
(1) Exclusive of depreciation and amortization.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018 As Reported vs
|
|
|
|
|
|
December 31, 2018
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
2017 As Adjusted
|
|
|
|
|
|
$
|
|
%
|
|
$
|
|
%
|
|
$
|
|
$
|
|
%
|
|
$
|
|
%
|
|
|
|
As Reported
|
|
|
|
As Reported
|
|
|
Adjustments
|
|
|
As Adjusted
|
|
|
|
|
|
|
|
Other expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net of interest income
|
|
83,001
|
|
|
18
|
%
|
|
102,136
|
|
|
11
|
%
|
|
—
|
|
|
102,136
|
|
|
24
|
%
|
|
(19,135)
|
|
|
(19)
|
%
|
|
Loss on extinguishment of debt
|
|
166
|
|
|
—
|
%
|
|
51,750
|
|
|
5
|
%
|
|
—
|
|
|
51,750
|
|
|
13
|
%
|
|
(51,584)
|
|
|
(100)
|
%
|
|
Total other expenses
|
|
83,167
|
|
|
18
|
%
|
|
153,886
|
|
|
16
|
%
|
|
—
|
|
|
153,886
|
|
|
37
|
%
|
|
(70,719)
|
|
|
(46)
|
%
|
|
Income before income tax
|
|
2,646
|
|
|
1
|
%
|
|
(72,067)
|
|
|
(7)
|
%
|
|
—
|
|
|
(72,067)
|
|
|
(18)
|
%
|
|
74,713
|
|
|
(104)
|
%
|
|
Income tax benefit
|
|
(9,710)
|
|
|
(2)
|
%
|
|
(20,164)
|
|
|
(2)
|
%
|
|
—
|
|
|
(20,164)
|
|
|
(5)
|
%
|
|
10,454
|
|
|
(52)
|
%
|
|
Net income
|
|
$
|
12,356
|
|
|
3
|
%
|
|
$
|
(51,903)
|
|
|
(5)
|
%
|
|
—
|
|
|
$
|
(51,903)
|
|
|
(13)
|
%
|
|
$
|
64,259
|
|
|
124
|
%
|
* Rounding may cause variances.
Total Revenues
Total revenues increased by approximately $58.8 million, or 14%, to approximately $469.5 million for the year ended December 31, 2018, as compared to the prior year period as adjusted for the net versus gross retrospective impact of ASC 606. This was primarily due to higher Games and FinTech revenue.
Games revenues increased by approximately $36.8 million, or 17%, to approximately $259.0 million for the year ended December 31, 2018, as compared to the prior year period as adjusted for the net versus gross retrospective impact of ASC 606. This was primarily due to an increase in both unit sales and average selling prices and an increase in average daily win per unit on a higher installed base of leased machines.
FinTech revenues increased by approximately $22.0 million, or 12%, to approximately $210.5 million for the year ended December 31, 2018, as compared to the prior year period as adjusted for the net versus gross retrospective impact of ASC 606. This was primarily due to higher dollar and transaction volumes from cash access services and increased equipment sales.
Costs and Expenses
Games cost of revenues increased by approximately $13.9 million, or 26%, to approximately $68.0 million for the year ended December 31, 2018, as compared to the prior year period as adjusted for the net versus gross retrospective impact of ASC 606. This was primarily due to the costs associated with the additional unit sales and an increase in costs related to our leased machines as a result of the increase in revenue.
FinTech cost of revenues increased by approximately $6.2 million, or 31%, to approximately $26.4 million for the year ended December 31, 2018, as compared to the prior year period as adjusted for the net versus gross retrospective impact of ASC 606. This was primarily due to the costs associated with the additional equipment sales.
Operating expenses increased by approximately $23.4 million, or 20%, to approximately $142.3 million for the year ended December 31, 2018, as compared to the same period in the prior year. This was primarily due to higher payroll and related expenses, consulting fees, advertising, promotion and trade show costs and software license fees for both our Games and FinTech segments. Our Games segment also incurred an increase in costs related to inventory disposals and leased assets impairment charges.
Research and development increased by approximately $1.6 million, or 9%, to approximately $20.5 million for the year ended December 31, 2018, as compared to the same period in the prior year. This was primarily due to higher payroll and related expenses for our Games segment.
Depreciation increased by approximately $13.9 million, or 29%, to approximately $61.2 million for the year ended December 31, 2018, as compared to the prior year period. This was primarily driven by the increase in the installed base of leased gaming machines and adjustments to the remaining useful lives of certain of the gaming fixed assets related to our Games segment.
Amortization decreased by approximately $4.3 million, or 6%, to approximately $65.2 million for the year ended December 31, 2018, as compared to the prior year period. This was primarily due to assets being fully amortized related to both our Games and FinTech segments.
Primarily as a result of the factors described above, operating income increased by approximately $4.0 million, or 5%, to approximately $85.8 million for the year ended December 31, 2018, as compared to the prior year as adjusted for the net versus gross retrospective impact of ASC 606. The operating income margin decreased from 20% to 18% for the year ended December 31, 2018, as adjusted for the net versus gross retrospective impact of ASC 606.
Interest expense, net of interest income, decreased by approximately $19.1 million, or 19%, to approximately $83.0 million for the year ended December 31, 2018, as compared to the prior year period. This was primarily due to lower interest expense as a result of our debt refinancing transactions in 2017 and an additional repricing of our Term Loan Facilities in 2018, partially offset by an increase in our cash usage fees in connection with our commercial cash arrangements and the impact of the London Interbank Offered Rate (“LIBOR”) increases during the past year.
Loss on extinguishment of debt was approximately $0.2 million for the year ended December 31, 2018 in connection with the repricing transaction completed in May 2018 as compared to approximately $51.8 million for the year ended December 31, 2017, which consisted of approximately $26.3 million make-whole premium related to the satisfaction and redemption of the 2014 Unsecured Notes, approximately $10.9 million for the write-off of related unamortized debt issuance costs and fees in the fourth quarter of 2017 and approximately $14.6 million for the unamortized deferred financing fees and discounts related to our extinguished term loan under the Prior Credit Facility (defined herein) and the redeemed Refinanced Secured Notes (defined herein) in the second quarter of 2017.
Income tax benefit was approximately $9.7 million for the year ended December 31, 2018, as compared to an income tax benefit of approximately $20.2 million in the prior year period. The income tax benefit for the year ended December 31, 2018 reflected an effective income tax rate of negative 367.0%, which was less than the statutory federal rate of 21.0%, primarily due to a partial decrease in our valuation allowance for deferred tax assets and a research credit. The partial decrease in our valuation allowance is primarily due to the net operating loss during the year and the interest deduction limitation (deferred tax assets) which can be offset against our indefinite lived deferred tax liabilities. The 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.
Primarily as a result of the foregoing, our net loss decreased by approximately $64.3 million, or 124%, to a net income of approximately $12.4 million for the year ended December 31, 2018, as compared to the prior year period.
Critical Accounting Policies
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 policies as those that are most important to the portrayal of the financial position and results of operations, and which require management to make its most difficult and subjective judgments, often as a result of the need to make estimates about matters that are inherently uncertain. Based on this definition, we have identified our critical accounting policies as those addressed below. We also have other key accounting policies that involve the use of estimates, judgments, and assumptions. Refer to “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” included elsewhere in this Annual Report on Form 10-K for a summary of these policies. We believe that our estimates and assumptions are reasonable, based upon information presently available; however, actual results may differ from these estimates under different assumptions or conditions.
Goodwill. We had approximately $681.6 million of goodwill, of which approximately $449.0 million was generated by our Games reporting unit, on our Balance Sheets at December 31, 2019 resulting from acquisitions of other businesses. We test for impairment annually on a reporting unit basis, at the beginning of our fourth fiscal quarter, or more often under certain circumstances. Our reporting units are identified as operating segments or one level below and we evaluate our reporting units at least annually. Refer to “Part II — Item 8 — Financial Statements and Supplementary Data — Notes to Consolidated Financial Statements — Note 10 — Goodwill and Other Intangible Assets” included elsewhere in this Annual Report on Form 10-K for a further discussion.
The annual evaluation of goodwill requires the use of different assumptions, estimates, or judgments in the goodwill impairment testing process, such as: the methodology, the estimated future cash flows of our reporting units, the discount rate used to present value such cash flows, and the market multiples of comparable companies. Management performs its annual forecasting process, which, among other factors, includes reviewing recent historical results, company-specific variables, and industry trends. This process is generally fluid throughout each year and considered in conjunction with the annual goodwill impairment evaluation. Changes in forecasted operations can materially affect these estimates, which could materially affect our results of operations. Our estimates of fair value require significant judgment and are based on assumptions we determined to be reasonable; however, they are unpredictable and inherently uncertain, including: estimates of future growth rates, operating margins, results of operations and financial condition, and assumptions about the overall economic climate as well as the competitive environment for our reporting units.
There can be no assurance that our estimates and assumptions made for purposes of our goodwill testing as of the time of testing will prove to be accurate predictions of the future. If our assumptions regarding business plans, competitive environments, anticipated growth rates, or expectations of results of operations and financial condition are not correct, we may be required to record goodwill impairment charges in future periods, whether in connection with our next annual impairment testing process, or earlier, in the event an indicator of impairment is present at such time during the year.
Recent Accounting Guidance
For a description of our recently adopted accounting guidance and recent accounting guidance not yet adopted, see “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 — Recent Accounting Guidance” included elsewhere in this Annual Report on Form 10-K.
Liquidity and Capital Resources
Overview
The following table presents selected information about our financial position (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
|
|
2019
|
|
2018
|
|
Balance sheet data
|
|
|
|
|
|
Total assets
|
|
$
|
1,629,223
|
|
|
$
|
1,548,261
|
|
|
Total borrowings
|
|
1,108,078
|
|
|
1,163,216
|
|
|
Total stockholders’ equity (deficit)
|
|
53,988
|
|
|
(108,895)
|
|
|
Cash available
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
289,870
|
|
|
$
|
297,532
|
|
|
Settlement receivables
|
|
70,282
|
|
|
82,359
|
|
|
Settlement liabilities
|
|
(234,087)
|
|
|
(334,198)
|
|
|
Net cash position (1)
|
|
126,065
|
|
|
45,693
|
|
|
Undrawn revolving credit facility
|
|
35,000
|
|
|
35,000
|
|
|
Net cash available (1)
|
|
$
|
161,065
|
|
|
$
|
80,693
|
|
(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 condition in accordance with GAAP. Accordingly, these measures should not be considered in isolation, or as a substitute for such information, and should be read in conjunction with, our cash and cash equivalents prepared in accordance with GAAP. We define (a) net cash position as cash and cash equivalents plus settlement receivables less settlement liabilities and (b) net cash available as net cash position plus undrawn amounts available under our Revolving Credit Facility (defined herein). We present our net cash position to illustrate the impact on our cash and cash equivalents of the timing of our receipt of payments for settlement receivables and the timing of our payments to customers for settlement liabilities.
We present net cash available in connection with our forecasting of cash flows and related requirements, both on a short-term and long-term basis.
Issuance of Common Stock
In December 2019, we filed with the SEC a registration statement for an undetermined amount of common stock, preferred stock, debt securities, warrants, and/or units that the Company may offer and sell in one or more offerings on terms to be decided at the time of sale, which will expire on December 4, 2022.
In December 2019, we issued and sold 11,500,000 shares of our common stock pursuant to a prospectus supplement under the automatic shelf registration statement, for which the aggregate net proceeds of approximately $122.4 million were utilized to pay down and reprice a portion of our existing indebtedness.
Cash Resources
Our cash balance, cash flows, and line of credit are expected to be sufficient to meet our recurring operating commitments and to fund our planned capital expenditures for the foreseeable future. Cash and cash equivalents at December 31, 2019 included cash in non-U.S. jurisdictions of approximately $33.8 million. Generally, these funds are available for operating and investment purposes within the jurisdiction in which they reside, and we can repatriate these foreign funds to the United States, subject to potential withholding tax obligations.
We expect that cash provided by operating activities will be sufficient for our operating and debt servicing needs during the foreseeable future. In addition, we have sufficient borrowings available under our senior secured revolving credit facility to meet further funding requirements. We monitor the financial strength of our lenders on an ongoing basis using publicly available information. Based upon our information, we believe there is not a likelihood that any of our lenders might not be able to honor their commitments under the Credit Agreement (defined below).
Our cash and cash equivalents were approximately $289.9 million and $297.5 million as of December 31, 2019 and 2018, respectively. Our net cash position after considering the impact of settlement receivables and settlement liabilities was approximately $126.1 million and $45.7 million as of December 31, 2019 and 2018, respectively. Our net cash available after considering the net cash position and undrawn amounts available under our Revolving Credit Facility was approximately $161.1 million and $80.7 million as of December 31, 2019 and December 31, 2018, respectively.
Cash Flows
The following table presents a summary of our cash flow activity for the years ended December 31, 2019, 2018 and 2017 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
Increase/(Decrease)
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
2019 vs 2018
|
|
2018 vs 2017
|
|
Cash flow activities
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
84,890
|
|
|
$
|
294,286
|
|
|
$
|
96,259
|
|
|
$
|
(209,396)
|
|
|
$
|
198,027
|
|
|
Net cash used in investing activities
|
|
(166,337)
|
|
|
(123,350)
|
|
|
(109,780)
|
|
|
(42,987)
|
|
|
(13,570)
|
|
|
Net cash provided by financing activities
|
|
77,613
|
|
|
11
|
|
|
22,394
|
|
|
77,602
|
|
|
(22,383)
|
|
|
Effect of exchange rates on cash
|
|
1,263
|
|
|
(1,370)
|
|
|
1,292
|
|
|
2,633
|
|
|
(2,662)
|
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase for the period
|
|
(2,571)
|
|
|
169,577
|
|
|
10,165
|
|
|
(172,148)
|
|
|
159,412
|
|
|
Balance, beginning of the period
|
|
299,181
|
|
|
129,604
|
|
|
119,439
|
|
|
169,577
|
|
|
10,165
|
|
|
Balance, end of the period
|
|
$
|
296,610
|
|
|
$
|
299,181
|
|
|
$
|
129,604
|
|
|
$
|
(2,571)
|
|
|
$
|
169,577
|
|
Cash flows provided by operating activities were approximately $84.9 million, $294.3 million, and $96.3 million for the years ended December 31, 2019, 2018, and 2017, respectively. Cash flows provided by operating activities decreased by approximately $209.4 million for the year ended December 31, 2019, as compared to the prior year period, primarily attributable to the changes in working capital associated with settlement receivables and settlement liabilities from our FinTech segment. Cash flows provided by operating activities increased by approximately $198.0 million for the year ended December 31, 2018, as compared to the prior year period. This was primarily attributable to the changes in working capital associated with settlement receivables and settlement liabilities from our FinTech segment.
Cash flows used in investing activities were approximately $166.3 million, $123.4 million, and $109.8 million for the years ended December 31, 2019, 2018, and 2017, respectively. Cash flows used in investing activities increased by approximately $43.0 million for the year ended December 31, 2019, as compared to the prior year period, primarily attributable to the acquisition of certain player loyalty related assets for our FinTech segment and an increase in capital expenditures. Cash flows used in investing activities increased by approximately $13.6 million for the year ended December 31, 2018, as compared to the prior year period. This was primarily attributable to an increase in capital expenditures, higher placement fee arrangements in our Games segment, and decreased sales of fixed assets.
Cash flows provided by financing activities were approximately $77.6 million, $11,000, and $22.4 million for the year ended December 31, 2019, 2018, and 2017 respectively. Cash flows provided by financing activities increased by approximately $77.6 million in the year ended December 31, 2019, as compared to the prior year period, primarily due to issuance and sale of our common stock under the automatic shelf registration statement and proceeds from the exercise of stock options, partially offset by repayments of our credit facility. Cash flows provided by financing activities decreased by approximately $22.4 million in the year ended December 31, 2018, as compared to the prior period, primarily attributable to fewer debt restructuring activities completed in 2018.
Long-Term Debt
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 to Consolidated Financial Statements — Note 12 — Long-Term Debt.”
Contractual Obligations
The following summarizes our contractual cash obligations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
2024
|
|
Thereafter
|
|
Contractual obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt obligations (1)
|
|
$
|
1,124,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
749,000
|
|
|
$
|
375,000
|
|
|
Estimated interest obligations (2)
|
|
321,844
|
|
|
64,487
|
|
|
63,064
|
|
|
63,064
|
|
|
63,064
|
|
|
40,899
|
|
|
27,266
|
|
|
Operating lease obligations (3)
|
|
16,669
|
|
|
6,473
|
|
|
5,296
|
|
|
2,996
|
|
|
1,400
|
|
|
432
|
|
|
72
|
|
|
Purchase obligations (4)
|
|
78,069
|
|
|
56,482
|
|
|
12,229
|
|
|
4,091
|
|
|
2,884
|
|
|
2,383
|
|
|
—
|
|
|
Asset acquisition obligations (5)
|
|
37,146
|
|
|
14,578
|
|
|
22,568
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total contractual obligations
|
|
$
|
1,577,728
|
|
|
$
|
142,020
|
|
|
$
|
103,157
|
|
|
$
|
70,151
|
|
|
$
|
67,348
|
|
|
$
|
792,714
|
|
|
$
|
402,338
|
|
(1) As a result of the principal payments made during 2019, we are no longer required to make quarterly principal payments on our Term Loan Facility (defined herein) with the final principal repayment installment being due on the maturity date.
(2)Estimated interest payments were computed using the interest rate in effect at December 31, 2019 multiplied by the principal balance outstanding. For our debt obligations, the weighted average rate assumed was approximately 5.37% until May 2024, when the weighted average rate would increase to 7.50% until the remaining debt is fully satisfied in December 2025.
(3)Our operating lease obligations primarily consist of real estate arrangements we enter into with third parties. For additional information see “Part II — Item 8 — Financial Statements and Supplementary Data — Notes to Consolidated Financial Statements — Note 3 — Leases.”
(4)Our purchase obligations primarily consist of open purchase orders related to both our Games and FinTech businesses.
(5)Represents our obligations under the asset purchase agreements with Atrient and MGT discussed in “Part II — Item 8 — Financial Statements and Supplementary Data — Notes to Consolidated Financial Statements — Note 4 — Business Combinations.”
Other Liquidity Needs and Resources
We need cash to support our foreign operations. Depending on the jurisdiction and the treaty between different foreign jurisdictions, our applicable withholding tax rates could vary significantly. If we expand our business into new foreign jurisdictions, we will rely on treaty-favored cross-border transfers of funds, the cash generated by our operations in those foreign jurisdictions, or alternate sources of working capital.
Off-Balance Sheet Arrangements
We have commercial arrangements with third-party vendors to provide cash for certain of our ATMs. For the use of these funds, we pay a cash usage fee on either the average daily balance of funds utilized multiplied by a contractually defined cash usage rate or the amounts supplied multiplied by a contractually defined cash usage rate. These cash usage fees, reflected as interest expense within the Statements of Operations, were approximately $7.2 million, $7.0 million, and $4.9 million for the years ended December 31, 2019, 2018, and 2017, respectively. We are exposed to interest rate risk to the extent that the applicable federal funds rate increases.
Under these agreements, the currency supplied by third-party vendors remain their sole property until the funds are dispensed. As these funds are not our assets, supplied cash is not reflected on our Balance Sheets. The outstanding balances of ATM cash utilized by us from the third-party vendors were approximately $292.6 million and $224.7 million as of December 31, 2019 and 2018, respectively.
Our primary commercial arrangement, the Contract Cash Solutions Agreement, as amended, with Wells Fargo Bank, N.A. provides us with cash in the maximum amount of $300.0 million with the ability to increase the amount by $75.0 million over a 5-day period for special occasions, such as the period around New Year’s Day. The agreement currently expires on June 30, 2022 and will automatically renew for additional one-year periods unless either party provides a 90-day written notice of its intent not to renew.
We are responsible for any losses of cash in the ATMs under this agreement and we self-insure for this risk. We incurred no material losses related to this self-insurance for the years ended December 31, 2019, 2018, and 2017.
Effects of Inflation
Our monetary assets that primarily consist of cash, receivables, inventory, as well as our non-monetary assets that are mostly comprised of goodwill and other intangible assets, are not significantly affected by inflation. We believe that replacement costs of equipment, furniture, and leasehold improvements will not materially affect our operations. However, the rate of inflation affects our operating expenses, such as those for salaries and benefits, armored carrier expenses, telecommunications expenses, and equipment repair and maintenance services, which may not be readily recoverable in the financial terms under which we provide our Games and FinTech products and services to gaming establishments.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
In the normal course of business, we are exposed to foreign currency exchange risk. We operate and conduct business in foreign countries and, as a result, are exposed to movements in foreign currency exchange rates. Our exposure to foreign currency exchange risk related to our foreign operations is not material to our results of operations, cash flows, or financial condition. At present, we do not hedge this risk; however, we continue to evaluate such foreign currency translation exposure.
In the normal course of business, we have commercial arrangements with third-party vendors to provide cash for certain of our ATMs. Under the terms of these agreements, we pay a monthly cash usage fee based upon the target federal funds rate. We are, therefore, exposed to interest rate risk to the extent that the applicable federal funds rate increases. The outstanding balance of ATM cash utilized by us from third-party vendors was approximately $292.6 million as of December 31, 2019; therefore, each 100 basis points increase in the target federal funds rate would have approximately a $2.9 million impact on income before tax over a 12-month period.
The Credit Facilities bear interest at rates that can vary over time. We have the option of having interest on the outstanding amounts under the Credit Facilities paid using a base rate or LIBOR. We have historically elected to pay interest based on LIBOR, and we expect to continue to do so for various maturities. The weighted average interest rate on the Credit Facilities was 5.26% for the year ended December 31, 2019. Based upon the outstanding balance on the Credit Facilities of approximately $749.0 million as of December 31, 2019, each 100 basis points increase in the applicable LIBOR would have approximately a $7.5 million impact on interest expense over a 12-month period. The interest rate for the 7.50% Senior Unsecured Notes due 2025 is fixed; therefore, an increase in LIBOR rates does not impact the related interest expense. At present, we do not hedge the risk related to the changes in the interest rate; however, we continue to evaluate such interest rate exposure.
We continue to evaluate the potential impact of the eventual replacement of the LIBOR benchmark interest rate, which is set to phase out by the end of 2021. Although we are not able to predict what will become a widely accepted benchmark in place of LIBOR, or what the exact impact of such a possible transition to such benchmark may be on our business, financial condition, and results of operations, our current expectation is this transition will not have a material impact on our business or results of operations.
Item 8. Financial Statements and Supplementary Data.
Index to Consolidated Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In this filing, we refer to: (a) our audited consolidated financial statements and notes thereto as our “Financial Statements;” (b) our audited Consolidated Statements of Operations and Comprehensive Income (Loss) as our “Statements of Operations;” and (c) our audited Consolidated Balance Sheets as our “Balance Sheets.”
1. BUSINESS
Everi Holdings Inc. (“Everi Holdings,” or “Everi”) is a holding company, the assets of which are the issued and outstanding shares of capital stock of each of Everi Payments Inc. (“Everi FinTech” or “FinTech”) and Everi Games Holding Inc., which owns all of the issued and outstanding shares of capital stock of Everi Games Inc. (“Everi Games” or “Games”). Unless otherwise indicated, the terms the “Company,” “we,” “us,” and “our” refer to Everi Holdings together with its consolidated subsidiaries.
Everi is a leading supplier of entertainment and technology solutions for the casino, interactive, and gaming industry. With a focus on both customers and players, Everi develops, sells, and leases games and gaming machines, gaming systems and services, and is an innovator and provider of core financial products and services, self-service player loyalty tools and promotion management software, and intelligence and regulatory compliance solutions. Everi’s mission is to provide casino operators with games that facilitate memorable player experiences, offer secure financial transactions for casinos and their patrons, and deliver software applications and self-service tools to improve casino operations efficiencies and fulfill regulatory compliance requirements.
Everi Holdings reports its results of operations within two operating segments: Games and FinTech.
Everi Games provides gaming operators with gaming technology products and services, including: (a) gaming machines, primarily comprising Class II and Class III slot machines, including TournEvent® machines, placed under participation or fixed-fee lease arrangements or sold to casino customers; (b) TournEvent® system software, licenses, and ancillary equipment; (c) providing and maintaining the central determinant systems for the video lottery terminals (“VLTs”) installed in the State of New York and similar technology in certain tribal jurisdictions; (d) business-to-consumer (“B2C”) and business-to-business (“B2B”) interactive gaming activities; and (e) managing our TournEvent of Champions® national slot tournament.
Everi FinTech provides gaming operators with financial technology products and services, including: (a) services and equipment that facilitate casino patron’s self-service access to cash at gaming facilities via Automated Teller Machine (“ATM”) cash withdrawals, credit card cash access transactions and point-of-sale (“POS”) debit card purchase and cash access transactions; (b) check warranty services; (c) self-service player loyalty enrollment and marketing equipment, including tools and promotion management software; (d) software and services that improve credit decision making, automate cashier operations, and enhance patron marketing activities for gaming establishments; (e) equipment that provides cash access and other cash handling efficiency-related services; and (f) compliance, audit, and data solutions.
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company. All intercompany transactions and balances have been eliminated in consolidation.
Business Combinations
When we acquire a business, we recognize the assets acquired and the liabilities assumed, at their acquisition date fair values. Goodwill 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, 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 (referred to as the measurement period). In addition, deferred tax assets, deferred tax liabilities, uncertain tax positions, and tax related valuation allowances assumed in connection with a business combination are initially estimated as of the acquisition date. We reevaluate these items quarterly based upon facts and circumstances that existed as of the acquisition date and any adjustments to its preliminary estimates are recorded to goodwill, in the period of identification, if identified within the measurement period.
Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the Statements of Operations.
Cash and Cash Equivalents
Cash and cash equivalents include cash and balances on deposit in banks and financial institutions. We consider highly liquid investments with maturities of three months or less at the time of purchase to be cash and cash equivalents. Such balances generally exceed the federal insurance limits; however, we periodically evaluate the creditworthiness of these institutions to minimize risk.
ATM Funding Agreements
We obtain all of the cash required to operate our ATMs through various ATM Funding Agreements. Some gaming establishments provide the cash utilized within the ATM (“Site-Funded”). The Site-Funded receivables generated for the amount of cash dispensed from transactions performed at our ATMs are owned by us and we are liable to the gaming establishment for the face amount of the cash dispensed. In our Balance Sheets, the amount of the receivable for transactions processed on these ATM transactions is included within settlement receivables and the amount due to the gaming establishment for the face amount of dispensing transactions is included within settlement liabilities.
For the non-Site-Funded locations, we enter into commercial arrangements with third party vendors to provide us the currency needed for normal operating requirements for our ATMs. For the use of these funds, we pay a cash usage fee based upon the target federal funds rate. Under these agreements, the currency supplied by the third-party vendors remains the sole property of these suppliers until cash is dispensed, at which time the third-party vendors obtain an interest in the corresponding settlement receivable. As the cash is an asset of these suppliers, it is therefore not reflected on our Balance Sheets. The usage fee for the cash supplied in these ATMs is included as interest expense in the Statements of Operations. Our rationale to record cash usage fees as interest expense is primarily due to the similar operational characteristics to a revolving line of credit, the fact that the fees are calculated on a financial index, and the fees are paid for access to a capital resource.
Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts related to our trade and other receivables and notes receivable that have been determined to have a high risk of uncollectibility. The allowance for doubtful accounts represents the Company’s best estimate of the amount of credit losses incurred. Management reviews its accounts and notes receivable on a quarterly basis to determine if any receivables will potentially be uncollectible. Management analyzes historical collection trends and changes in our customer payment patterns, concentration, and creditworthiness when evaluating the adequacy of our allowance for doubtful accounts. Based on the information available, management believes the allowance for doubtful accounts is adequate; however, actual write-offs may exceed the recorded allowance.
Settlement Receivables and Settlement Liabilities
We provide cash settlement services to gaming establishments related to our cash access services, which involve the movement of funds between various parties involved in these types of transactions. We receive reimbursement from the patron’s credit or debit card issuing financial institution for the amount owed to the gaming establishment plus the fee charged to the patron. These activities result in amounts due to us at the end of each business day that we generally recover over the next few business days, which are classified as settlement receivables on our Balance Sheets. In addition, cash settlement services result in amounts due to gaming establishments for the cash disbursed to patrons through the issuance of a negotiable instrument or through electronic settlement for the face amount provided to patrons that we generally remit over the next few business days, which are classified as settlement liabilities on our Balance Sheets.
Warranty Receivables
If a gaming establishment chooses to have a check warranted, it sends a request to our third-party check warranty service provider, asking whether it would be willing to accept the risk of cashing the check. If the check warranty provider accepts the risk and warrants the check, the gaming establishment negotiates the patron’s check by providing cash for the face amount of the check. If the check is dishonored by the patron’s bank upon presentment, the gaming establishment invokes the warranty, and the check warranty service provider purchases the check from the gaming establishment for the full check amount and then pursues collection activities on its own. In our Central Credit Check Warranty product under our agreement with the third-party service provider, we receive all of the check warranty revenue. We are exposed to risk for the losses associated with any warranted items that cannot be collected from patrons issuing the items. Warranty receivables are defined as any amounts paid by the third-party check warranty service provider to gaming establishments to purchase dishonored checks. Additionally, we pay a fee to the third-party check warranty service provider for its services.
The warranty receivables amount is recorded in trade and other receivables, net on our Balance Sheets. On a monthly basis, the Company evaluates the collectability of the outstanding balances and establishes a reserve for the face amount of the expected losses on these receivables. The warranty expense associated with this reserve is included within cost of revenues (exclusive of depreciation and amortization) on our Statements of Operations.
Inventory
Our inventory primarily consists of component parts as well as finished goods and work-in-progress. The cost of inventory includes cost of materials, labor, overhead and freight. The inventory is stated at the lower of cost or net realizable value and accounted for using the first in, first out method (“FIFO”).
Restricted Cash
Our restricted cash primarily consists of: (a) funds held in connection with certain customer agreements; (b) deposits held in connection with a sponsorship agreement; (c) WAP-related restricted funds; and (d) Internet-related cash access activities. The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the Balance Sheets that sum to the total of the same such amounts shown in the statement of cash flows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
Classification on our Balance Sheets
|
|
2019
|
|
2018
|
|
2017
|
|
Cash and cash equivalents
|
|
Cash and cash equivalents
|
|
$
|
289,870
|
|
|
$
|
297,532
|
|
|
$
|
128,586
|
|
|
Restricted cash — current
|
|
Prepaid expenses and other assets
|
|
6,639
|
|
|
1,548
|
|
|
917
|
|
|
Restricted cash — non-current
|
|
Other assets
|
|
101
|
|
|
101
|
|
|
101
|
|
|
Total
|
|
|
|
$
|
296,610
|
|
|
$
|
299,181
|
|
|
$
|
129,604
|
|
Property and Equipment
Property and equipment, which includes leased assets, are stated at cost, less accumulated depreciation, and are computed using the straight-line method over the lesser of the estimated life of the related assets, generally two to five years. Player terminals and related components and equipment are included in our rental pool. The rental pool can be further delineated as “rental pool – deployed,” which consists of assets deployed at customer sites under participation arrangements, and “rental pool – undeployed,” which consists of assets held by us that are available for customer use. Rental pool – undeployed consists of 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 Operations. Property, equipment and leased assets are reviewed for impairment whenever events or circumstances indicate that their carrying amounts may not be recoverable. Impairment is indicated when future cash flows, on an undiscounted basis, do not exceed the carrying value of the asset.
Placement Fee and Development Agreements
We enter into placement fee and, to a certain extent, development agreements to provide financing for the expansion of existing facilities, or for new gaming facilities. Funds provided under placement fee agreements are not reimbursed, while funds provided under development agreements are reimbursed to us, in whole, or in part. In return, the facility dedicates a percentage of its floor space to placement of our player terminals, and we receive a fixed percentage of those player terminals’ hold amounts per day over the term of the agreement, which is generally from 12 to 83 months. Certain of the agreements contain player terminal performance standards that could allow the facility to reduce a portion of our guaranteed floor space. In addition, certain development agreements allow the facilities to buy out floor space after advances that are subject to repayment have been repaid. The agreements typically provide for a portion of the amounts retained by the gaming facility for their share of the operating profits of the facility to be used to repay some or all of the advances recorded as notes receivable.
Goodwill
Goodwill represents the excess of the purchase price over the identifiable tangible and intangible assets acquired plus liabilities assumed arising from business combinations. We test for impairment annually on a reporting unit basis, at the beginning of our fourth fiscal quarter 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. 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. If the fair value of a reporting unit is less than its carrying amount, we will use the “Step 1” assessment to determine the impairment.
The annual evaluation of goodwill requires the use of estimates about future operating results of each reporting unit to determine its estimated fair value. Changes in forecasted operations can materially affect these estimates, which could materially affect our results of operations. The estimates of fair value require significant judgment and are based on assumptions we determined to be reasonable; however, that are unpredictable and inherently uncertain, including, estimates of future growth rates, operating margins, and assumptions about the overall economic climate as well as the competitive environment for our reporting units. There can be no assurance that our estimates and assumptions made for purposes of our goodwill testing as of the time of testing will prove to be accurate predictions of the future. If our assumptions regarding business plans, competitive environments or anticipated growth rates are not correct, we may be required to record goodwill impairment charges in future periods, whether in connection with our next annual impairment testing, or earlier, if an indicator of an impairment is present prior to our next annual evaluation.
Our reporting units are identified as operating segments or one level below. Reporting units must: (a) engage in business activities from which they earn revenues and incur expenses; (b) have operating results that are regularly reviewed by our segment management to ascertain the resources to be allocated to the segment and assess its performance; and (c) have discrete financial information available. As of December 31, 2019, our reporting units included: Games, Cash Access Services, Kiosk Sales and Service, Central Credit Services, Compliance Sales and Services, and Player Loyalty Sales and Services.
Other Intangible Assets
Other intangible assets are stated at cost, less accumulated amortization, and are computed primarily using the straight-line method. Other intangible assets consist primarily of: (a) customer contracts (rights to provide Games and FinTech services to gaming establishment customers), developed technology, trade names and trademarks, and contract rights acquired through business combinations; and (b) capitalized software development costs. Customer contracts require us to make renewal assumptions, which impact the estimated useful lives of such assets. Capitalized software development costs require us to make certain judgments as to the stages of development and costs eligible for capitalization. Capitalized software costs placed in service are amortized over their useful lives, generally not to exceed five years. We review intangible assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Such events or circumstances include, but are not limited to, a significant decrease in the fair value of the underlying business or market price of the asset, a significant adverse change in legal factors or business climate that could affect the value of an asset, or a current period operating or cash flow loss combined with a history of operating or cash flow losses. We group intangible assets for impairment analysis at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Recoverability of definite lived intangible assets is measured by a comparison of the carrying amount of the asset to future net cash flows expected to be generated by the asset, on an undiscounted basis and without interest or taxes. Any impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.
Debt Issuance Costs
Debt issuance costs incurred in connection with long-term borrowings are capitalized and amortized to interest expense based upon the related debt agreements using the straight-line method, which approximates the effective interest method. Debt issuance costs related to line-of-credit arrangements are included in other assets, non-current, on our Balance Sheets. All other debt issuance costs are included as contra-liabilities in long-term debt.
Revenue Recognition
Overview
The Company adopted ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”), on January 1, 2018 using the modified retrospective method. The reported results for the years ended December 31, 2019 and 2018 reflect the application of ASC 606, while the reported results for the year ended December 31, 2017 were prepared under ASC Topic 605, Revenue Recognition (“ASC 605”). In addition, certain of our revenue streams are recognized based on the criteria set forth in ASC 842, Leases (“ASC 842”).
We recognize revenue upon transferring control of goods or services to our customers in an amount that reflects the consideration we expect to receive in exchange for those goods or services. We enter into contracts with customers that include various performance obligations consisting of goods, services, or combinations of goods and services. Timing of the transfer of control varies based on the nature of the contract. We recognize revenue net of any sales and other taxes collected from customers, which are subsequently remitted to governmental authorities and are not included in revenues or operating expenses. We measure revenue based on the consideration specified in a contract with a customer and adjusted, as necessary.
We evaluate the composition of our revenues to ensure compliance with SEC Regulation S-X Section 210.5-3, which requires us to separately present certain categories of revenues that exceed the quantitative threshold on our Statements of Operations.
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 performance obligation in the combined arrangement, and the consideration will be allocated between the respective performance obligations. The SSP of our goods and services is generally determined based on observable prices, an adjusted market assessment approach, or an expected cost plus margin approach. We utilize a residual approach only when the SSP for performance obligations with observable prices has been established and the remaining performance obligation in the contract with a customer does not have an observable price as it is uncertain or highly variable and, therefore, is not discernible. We use our judgment to analyze the nature of the promises made and determine whether each is distinct or should be combined with other promises in the contract based on the level of integration and interdependency between the individual deliverables.
Disaggregation of Revenues
We disaggregate revenues based on the nature and timing of the cash flows generated by such revenues as presented in “Note 18 — Segment Information.”
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 cash collections differs from when revenue is recognized due to contracts containing specific performance obligations that are required to be met prior to a customer being invoiced. We generally record contract liabilities when cash is collected in advance of us satisfying performance obligations, including those that are satisfied over a period of time. Balances of our contract assets and contract liabilities may fluctuate due to timing of cash collections.
The following table summarizes our contract assets and contract liabilities arising from contracts with customers (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
2019
|
|
2018
|
|
Contract assets (1)
|
|
|
|
|
|
Balance at January 1
|
|
$
|
11,310
|
|
|
$
|
8,433
|
|
|
Balance at December 31
|
|
15,408
|
|
|
11,310
|
|
|
Increase
|
|
$
|
4,098
|
|
|
$
|
2,877
|
|
|
Contract liabilities (2)
|
|
|
|
|
|
Balance at January 1 — short-term
|
|
$
|
14,661
|
|
|
$
|
11,951
|
|
|
Balance at January 1 — long-term
|
|
809
|
|
|
446
|
|
|
Total
|
|
15,470
|
|
|
12,397
|
|
|
Balance at December 31 — short-term
|
|
29,150
|
|
|
14,661
|
|
|
Balance at December 31 — long-term
|
|
354
|
|
|
809
|
|
|
Total
|
|
29,504
|
|
|
15,470
|
|
|
Increase
|
|
$
|
14,034
|
|
|
$
|
3,073
|
|
(1) The current portion of contract assets is included within trade and other receivables, net and the non-current portion is included within other receivables in our Balance Sheets.
(2) The current portion of contract liabilities is included within accounts payable and accrued expenses, and the non-current portion is included within other accrued expenses and liabilities in our Balance Sheets.
We recognized approximately $14.2 million and $11.4 million in revenue that was included in the beginning contract liability balance during 2019 and 2018, respectively.
Games Revenues
Our products and services include electronic gaming devices, such as Native American Class II offerings and other electronic bingo products, Class III slot machine offerings, VLTs, B2C and B2B interactive gaming activities, accounting and central determinant systems, and other back office systems. We conduct our Games segment business based on results generated from the following major revenue streams: (a) Gaming Operations; (b) Gaming Equipment and Systems; and (c) Gaming Other.
Gaming Operations
We primarily provide: (a) leased gaming equipment, both Class II and Class III offerings, on a participation or a daily fixed-fee basis, including standard games and hardware and premium games and hardware, inclusive of local-area progressive, wide-area progressive (“WAP”), and TournEvent® machines; (b) accounting and central determinant systems; and (c) interactive gaming activities. 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 or 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 give rise to contract rights, which are amounts recorded to intangible assets for dedicated floor space resulting from such agreements. The gaming operations revenues generated by these arrangements are reduced by the accretion of contract rights, which represents the related amortization of the contract rights recorded in connection with 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 $143.2 million, $136.6 million, and $126.1 million in lease revenues for the years ended December 31, 2019, 2018, and 2017, 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.
Gaming operations also include revenues generated under our arrangement to provide the New York State Gaming Commission (the “NYSGC”) with a central determinant monitoring and accounting system for the VLTs in operation at licensed State of New York gaming facilities. Pursuant to our agreement with the NYSGC, we receive a portion of the network-wide net win (generally, cash-in less prizes paid) per day in exchange for provision and maintenance of the central determinant system and recognize revenue over time, based on the timing services are provided. We also provide the central determinant system technology to Native American tribes in other licensed jurisdictions, for which we receive a portion of the revenue generated from the VLTs connected to the system. These arrangements are generally short-term in nature with payments due monthly.
Gaming operations revenues include amounts generated by our interactive offering comprised of B2C and B2B activities. Our B2C operations offer games directly to consumers for play with virtual currency, which can be purchased through our web and mobile applications. Control transfers, and we recognize revenues from player purchases of virtual currency as it is consumed for game play, which is based on a historical data analysis. 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 timing services are provided.
Gaming Equipment and Systems
Gaming equipment and systems revenues are derived from the sale of some combination of: (a) gaming equipment and player terminals, including TournEvent® machines; (b) game content; (c) license fees; and (d) ancillary equipment, such as signage 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 extended payment terms up to 39 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. 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 terms of the contract. The performance obligations are generally satisfied at the same time or within a short period of time.
Gaming Other
Gaming other revenues are generated from fees paid by casino customers that participate in our TournEvent of Champions® national slot tournament. Casinos, in partnership with Everi, host slot tournaments, in which winners of the local and regional tournaments throughout the year then participate in a national tournament that results in the determination of a final champion. Revenues are recognized as earned over a period of time, based on the timing services are provided. These arrangements are generally short-term in nature with payment terms ranging from 30 to 90 days.
FinTech Revenues
Cash Access Services
Cash access services revenues are generally comprised of the following distinct performance obligations: cash advance, ATM, and check services. We do not control the cash advance and ATM services provided to a customer and, therefore, we are acting as an agent whose performance obligation is to arrange for the provision of these services. Our cash access services involve the movement of funds between the various parties associated with cash access transactions and give rise to settlement receivables and settlement liabilities, both of which are settled in days following the transaction.
Cash advance revenues are primarily comprised of transaction fees assessed to gaming patrons in connection with credit card cash access and POS debit card cash 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 cash access or POS debit card cash access transaction amount. In connection with these types of transactions, we report certain direct costs incurred as reductions to revenues on a net basis, which generally include: (a) commission expenses payable to casino operators; (b) interchange fees payable to the network associations; and (c) processing and related costs payable to other third-party partners.
ATM revenues are primarily 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. 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. In connection with these types of transactions, we report certain direct costs incurred as reductions to revenues on a net basis, which generally include: (a) commission expenses payable to casino operators; (b) interchange fees payable to the network associations; and (c) processing and related costs payable to other third-party partners.
Check services revenues are principally comprised of check warranty revenues and are generally based upon a percentage of the face amount of checks warranted. These fees are paid to us by gaming establishments.
For cash access services arrangements, since the customer simultaneously receives and consumes the benefits as the performance obligations occur, we recognize revenues as earned over a period of time using an output method depicting the transfer of control to the customer based on variable consideration, such as volume of transactions processed with variability generally resolved in the reporting period.
Equipment
Equipment revenues are derived from the sale of our cash 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. The cash access kiosk and related equipment sales contracts accounted for under ASC 842 were approximately $2.6 million in aggregate revenue for the year ended December 31, 2019. We did not have any cash access kiosk and related equipment sales transactions that qualified for sales type lease accounting treatment in 2018 or 2017.
Information Services and Other
Information services and other revenues include amounts derived from our cash access, loyalty kiosk, compliance, and loyalty related revenue streams from the sale of: (a) software licenses, software subscriptions, professional services, and certain other ancillary fees; (b) 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; (c) 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 (d) ancillary marketing, database, and Internet-based gaming-related activities.
Our software represents a functional right-to-use license, and the revenues are recognized as earned at a point in time. Subscription services are recognized over a period of time using an input method based on time elapsed as we transfer the control ratably by providing a stand-ready service. Professional services, training, and other revenues are recognized over a period of time as services are provided, thereby reflecting the transfer of control to the customer.
Cost of Revenues (Exclusive of Depreciation and Amortization)
The cost of revenues (exclusive of depreciation and amortization) represents the direct costs required to perform revenue generating transactions. The costs included within cost of revenues (exclusive of depreciation and amortization) are inventory and related costs associated with the sale of our fully integrated kiosks, electronic gaming machines and system sale, check cashing warranties, field service, and network operations personnel.
Advertising, Marketing, and Promotional Costs
We expense advertising, marketing, and promotional costs as incurred. Total advertising, marketing, and promotional costs, included in operating expenses in the Statements of Operations, were $5.0 million, $3.4 million, and $1.1 million for the years ended December 31, 2019, 2018, and 2017, respectively.
Research and Development Costs
We conduct research and development activities for both our Games and FinTech segments. Our Gaming research and development activities are primarily to develop gaming systems, game engines, casino data management systems, central determination and other electronic bingo-outcome determination systems, video lottery outcome determination systems, gaming platforms and gaming content, and to enhance our existing product lines. Our FinTech research and development activities are primarily to develop: (a) payments products, systems, and related capabilities such as security, encryption, and business rule engines that deliver differentiated patron experiences and integrate with our other products; (b) compliance products that increase efficiencies, profitability, enhance employee/patron relationships, and meet regulatory reporting requirements; and (c) loyalty products, systems, and features that attract, engage, and retain patrons in more intuitive and contextual ways than our competition.
Research and development costs consist primarily of salaries and benefits, consulting fees, certification and testing fees. Once the technological feasibility has been established, the project is capitalized until it becomes available for general release.
Research and development costs were $32.5 million, $20.5 million, and $18.9 million for the years ended December 31, 2019, 2018, and 2017, respectively.
Income Taxes
We are subject to income taxes in the United States as well as various states and foreign jurisdictions in which we operate. Due to the 2017 Tax Act, there is no U.S. federal tax on cash repatriation from foreign subsidiaries; however, we could be subject to foreign withholding tax and U.S. state income taxes. The 2017 Tax Act also subjects our foreign subsidiary earnings to the Global Intangible Low-Taxed Income (“GILTI”) tax provisions. Some items of income and expense are not reported in tax returns and our Financial Statements in the same year. The tax effect of such temporary differences is reported as deferred income taxes.
Our deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been included in our Financial Statements or income tax returns. Deferred tax assets and liabilities are determined based upon differences between financial statement carrying amounts of existing assets and their respective tax bases using enacted tax rates expected to apply to taxable income in years in which those temporary differences are expected to be recovered or settled. The effect on the income tax provision or benefit and deferred tax assets and liabilities for a change in rates is recognized in the Statements of Operations in the period that includes the enactment date.
When measuring deferred tax assets, certain estimates and assumptions are required to assess whether a valuation allowance should be established by evaluating both positive and negative factors in accordance with accounting guidance. This evaluation requires that we exercise judgment in determining the relative significance of each factor. The assessment of the valuation allowance involves significant estimates regarding future taxable income and when it is recognized, the amount and timing of taxable differences, the reversal of temporary differences and the implementation of tax-planning strategies. A valuation allowance is established based on the weight of available evidence, including both positive and negative indicators, if it is more likely than not that a portion, or all, of the deferred tax assets will not be realized. Greater weight is given to evidence that is objectively verifiable, most notably historical results. If we report a cumulative loss from continuing operations before income taxes for a reasonable period of time, this form of negative evidence is difficult to overcome. Therefore, we include certain aspects of our historical results in our forecasts of future taxable income, as we do not have the ability to solely rely on forecasted improvements in earnings to recover deferred tax assets. When we report a cumulative loss position, to the extent our results of operations improve, such that we have the ability to overcome the more likely than not accounting standard, we may be able to reverse the valuation allowance in the applicable period of determination. In addition, we rely on deferred tax liabilities in our assessment of the realizability of deferred tax assets if the temporary timing difference is anticipated to reverse
in the same period and jurisdiction and the deferred tax liabilities are of the same character as the temporary differences giving rise to the deferred tax assets.
We also follow generally accepted accounting principles (“GAAP”) to account for uncertainty in income taxes as recognized in our Financial Statements. The accounting standard creates a single model to address uncertainty in income tax positions and prescribes the minimum recognition threshold a tax position is required to meet before being recognized in our Financial Statements. The standard also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure, and transition.
Under this standard, we may recognize tax benefits from an uncertain position only if it is more likely than not that the position will be sustained upon examination by taxing authorities based on the technical merits of the issue. The amount recognized is the largest benefit that we believe has greater than a 50% likelihood of being realized upon settlement. Actual income taxes paid may vary from estimates depending upon changes in income tax laws, actual results of operations, and the final audit of tax returns by taxing authorities. Tax assessments may arise several years after tax returns have been filed.
Employee Benefits Plan
The Company provides a 401(k) Plan that allows employees to defer up to the lesser of the Internal Revenue Code prescribed maximum amount or 100% 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 401(k) Plan were $2.6 million, $2.2 million, and $2.3 million for the years ended December 31, 2019, 2018, and 2017, 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, settlement receivables, short-term trade and other receivables, settlement liabilities, accounts payable, and accrued expenses approximate fair value due to the short-term maturities of these instruments. The fair value of the long-term trade and loans receivable is estimated by discounting expected future cash flows using current interest rates at which similar loans would be made to borrowers with similar credit ratings and remaining maturities. As of December 31, 2019 and December 31, 2018, the fair value of notes receivable, net, approximated the carrying value due to contractual terms of trade and loans receivable generally being under 24 months. The fair value of our borrowings is estimated based on various inputs to determine a market price, such as: market demand and supply, size of tranche, maturity, and similar instruments trading in more active markets. The estimated fair value and outstanding balances of our borrowings are as follows (in thousands):
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Level of Hierarchy
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Fair Value
|
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Outstanding Balance
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|
December 31, 2019
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|
|
|
|
|
|
Term loan
|
2
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|
|
$
|
753,494
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|
|
$
|
749,000
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|
Senior unsecured notes
|
2
|
|
|
$
|
401,738
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|
|
$
|
375,000
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|
|
December 31, 2018
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|
|
|
|
|
|
Term loan
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2
|
|
|
$
|
784,479
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|
|
$
|
807,700
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|
Senior unsecured notes
|
2
|
|
|
$
|
354,863
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|
|
$
|
375,000
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|
The term loan and senior unsecured notes were reported at fair value using Level 2 inputs based on quoted market prices 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 the Statements of Operations. Translation adjustments on intercompany balances of a long-term investment nature are recorded as a component of accumulated other comprehensive loss on our Balance Sheets.
Use of Estimates
We have made estimates and judgments affecting the amounts reported in these financial statements and the accompanying notes in conformity with GAAP. The actual results may differ from these estimates.
Earnings Applicable to Common Stock
Basic earnings per share is calculated by dividing net income by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect the effect of potential common stock resulting from assumed stock option exercises and vesting of restricted stock unless it is anti-dilutive. To the extent we report a net loss from continuing operations in a particular period, no potential dilution from the application of the treasury stock method would be applicable.
Stock-Based Compensation
Stock-based compensation results in a cost that is measured at fair value on the grant date of an award. Generally, we issue grants that are classified as equity awards. However, if we issue grants that are considered liability awards, they are remeasured at fair value at the end of each reporting period until settlement with changes being recognized as stock-based compensation cost and a corresponding adjustment recorded to the liability, either immediately or during the remaining service period depending on the vested status of the award. Generally, with respect to stock option award 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 time-based stock option awards are measured at fair value on the grant date using the Black Scholes model. 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. The stock-based compensation cost is recognized on a straight-line basis over the vesting period of the awards.
Our market-based option awards granted in 2017 under our 2014 Plan (defined herein) and 2012 Plan (defined herein) vest at a rate of 25% per year on each of the first four anniversaries of the grant date, provided that as of the vesting date for each vesting tranche, the closing price of the Company’s shares on the New York Stock Exchange is at least a specified price hurdle, defined as a 25% premium for 2017 to the closing stock price on the grant date. If the price hurdle is not met as of the vesting date for a vesting tranche, then the vested tranche shall vest and become vested shares on the last day of a period of 30 consecutive trading days during which the closing price is at least the price hurdle.
The market-based option awards are measured at fair value on the grant date using a lattice model based on the median time horizon from the date of grant for these options to the vesting date for those paths that achieved the target threshold(s). The stock-based compensation cost is recognized on a straight-line basis over the median vesting periods calculated under such valuation model.
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 recognize a liability for acquisition-related costs when the expense is incurred. Acquisition-related costs include, but are not limited to: financial advisory, legal and debt fees; accounting, consulting, and professional fees associated with due diligence, valuation, and integration; severance; and other related costs and adjustments.
Reclassification of Prior Year Balances
Reclassifications were made to the prior-period Financial Statements to conform to the current period presentation, except for the adoption impact of the application of ASC 606 utilizing the modified retrospective transition method.
Recent Accounting Guidance
Recently Adopted Accounting Guidance
On January 1, 2019, we adopted ASU No. 2018-07, which expands the scope of Topic 718, Compensation — Stock Compensation (which currently only includes share-based payments to employees) to include share-based payments issued to non-employees for goods or services. Consequently, the accounting for share-based payments to non-employees and employees are substantially aligned. The adoption of this ASU did not have a material impact on our Financial Statements.
On January 1, 2019, we adopted ASU No. 2018-02, which provides an option to reclassify stranded tax effects within accumulated other comprehensive income to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act of 2017 (or portion thereof) is recorded. The adoption of this ASU did not have a material impact on our Financial Statements.
On January 1, 2019, we adopted the new lease accounting guidance, ASC 842. The guidance establishes a right-of-use (“ROU”) model that requires a lessee to record a lease ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. We made an accounting policy election where leases that are 12 months or less and do not include an option to purchase the underlying asset are not recorded on the balance sheet, similar to the operating lease accounting under ASC 840. We adopted the guidance using a modified retrospective approach utilizing the transition relief expedient method, whereby we continue to apply existing lease guidance during the comparative periods and apply the new lease requirements through a cumulative-effect adjustment in the period of adoption, rather than in the earliest period presented without adjusting historical financial statements. We elected the package of practical expedients permitted under the transition guidance within the new guidance that allowed us to carry forward the historical lease classification. Information related to leases as of December 31, 2019 is presented under Topic 842, while prior period amounts are not adjusted and continue to be reported under legacy guidance in Topic 840.
The most significant impact was the recognition of ROU assets and lease liabilities for operating leases, while our accounting for finance leases remained substantially unchanged.
We have provided additional information with respect to the new guidance in “Note 3 — Leases.”
Recent Accounting Guidance Not Yet Adopted
In December 2019, the FASB issued ASU No. 2019-12 simplifying the accounting for income taxes by removing specific exceptions to the general principles in Topic 740. It also improves consistent application of and simplifies GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The new standard is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. We are currently evaluating the impact of adopting this guidance on our Financial Statements.
In August 2018, the FASB issued ASU No. 2018-15, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The new standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. We are currently evaluating the impact of adopting this guidance on our Financial Statements; however, we do not expect it to be material.
In June 2016, the FASB issued ASU No. 2016-13, which provides updated guidance on how an entity should measure credit losses on financial instruments. Subsequently, in November 2018 the FASB issued ASU No. 2018-19, which clarified that receivables arising from operating leases are not within the scope of Subtopic 326-20, but should rather be accounted for in accordance with ASC 842. The new standard and related amendments are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. This guidance is expected to 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. This guidance replaces the current incurred loss measurement methodology with a current expected credit loss measurement methodology over the lifetime of the receivables. This guidance primarily impacts our trade and other receivables, including those related to revenues from contracts with customers that may contain contract assets with respect to performance obligations that are satisfied for which the customers have not yet been invoiced. We have completed our assessment of the anticipated impact of adopting this guidance from a segment management perspective, and our operations are not expected to be significantly impacted, both for short- and long-term accounts receivable: (a) Our FinTech business acts as a merchant of record for settlement transactions for our cash access related customers wherein cash is held by the Company; therefore, we generally have the ability to withhold the necessary funds from customers to satisfy the outstanding receivables associated with equipment, information and other products and services; and (b) Our Games business sells electronic gaming machines (“EGMs”) to gaming establishments on a relatively short-term basis and collections are reasonably certain based on historical experience. Furthermore, the material portion of long-term loans receivables balance is fully collaterized, and therefore, does not represent a risk of credit loss. We intend to adopt this guidance using a modified retrospective approach, however, we do not anticipate there being an adjustment to record in connection with implementing this guidance.
As of December 31, 2019, 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. LEASES
We determine if a contract is, or contains, a lease at the inception, or modification, of a contract based on whether the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Control over the use of an asset is predicated upon the notion that a lessee has both the right to (a) obtain substantially all of the economic benefit from the use of the asset; and (b) direct the use of the asset.
Operating lease ROU assets and liabilities are recognized based on the present value of minimum lease payments over the expected lease term at commencement date. Lease expense is recognized on a straight-line basis over the expected lease term. Our lease arrangements have both lease and non-lease components, and we have elected the practical expedient to account for the lease and non-lease elements as a single lease.
Certain of our lease arrangements contain options to renew with terms that generally have the ability to extend the lease term to a range of approximately 1 to 15 years. The exercise of lease renewal options is generally at our sole discretion. The expected lease terms include options to extend or terminate the lease when it is reasonably certain that we will exercise such option. The depreciable life of leased assets and leasehold improvements are limited by the expected term of such assets, unless there is a transfer of title or purchase option reasonably certain to be exercised.
Lessee
We enter into operating lease agreements for real estate purposes that generally consist of buildings for office space and warehouses for manufacturing purposes. Certain of our lease agreements consist of rental payments that are periodically adjusted for inflation. Our lease agreements do not contain material residual value guarantees or material restrictive covenants. Our lease agreements do not generally provide explicit rates of interest; therefore, we use our incremental collateralized borrowing rate, which is based on a fully collateralized and fully amortizing loan with a maturity date the same as the length of the lease that is based on the information available at the commencement date to determine the present value of lease payments. Leases with an expected term of 12 months or less (short-term) are not accounted for on our Balance Sheets.
Supplemental balance sheet information related to our operating leases is as follows (in thousands):
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Classification on our Balance Sheets
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At December 31, 2019
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Assets
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Operating lease ROU assets
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Other assets, non-current
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$
|
12,257
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Liabilities (1)
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Current operating lease liabilities
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Accounts payable and accrued expenses
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|
$
|
5,824
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Non-current operating lease liabilities
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Other accrued expenses and liabilities
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$
|
9,628
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(1) The amount of operating lease liabilities recorded on our Balance Sheets upon the adoption of ASC 842 was approximately $18.0 million.
Supplemental cash flow information related to leases is as follows (in thousands):
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Year Ended
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|
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December 31, 2019
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|
Cash paid for long- and short-term operating leases
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|
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$
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7,692
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Operating lease ROU assets obtained in exchange for lease obligations (1)
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|
$
|
16,533
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(1) The amounts include approximately $13.6 million of operating lease ROU assets obtained in exchange for existing lease obligations due to the adoption of ASC 842 (net of operating lease terminations occurring in 2019 in the amount of approximately $0.5 million), and approximately $2.5 million of operating lease ROU assets obtained in exchange for new lease obligations entered into during the year ended December 31, 2019. The amounts exclude amortization for the period.
Other information related to lease terms and discount rates is as follows:
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At December 31, 2019
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Weighted average remaining lease term (in years)
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2.96
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Weighted average discount rate
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5.25
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%
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Components of lease expense are as follows (in thousands):
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Year Ended
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December 31, 2019
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Lease Cost:
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|
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Operating lease cost (1)
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|
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$
|
4,907
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Variable lease cost
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|
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$
|
1,619
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(1) The amount includes approximately $4.3 million in non-cash lease expense.
Maturities of lease liabilities are summarized as follows as of December 31, 2019 (in thousands):
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Year ending December 31,
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Amount
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2020
|
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$
|
6,473
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2021
|
|
5,296
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2022
|
|
2,996
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|
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2023
|
|
1,400
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|
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2024
|
|
432
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|
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Thereafter
|
|
72
|
|
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Total future minimum lease payments
|
|
$
|
16,669
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|
|
Amount representing interest
|
|
1,217
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|
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Present value of future minimum lease payments
|
|
$
|
15,452
|
|
|
Current operating lease obligations
|
|
5,824
|
|
|
Long-term lease obligations
|
|
$
|
9,628
|
|
As previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 and under ASC 840, the previous lease accounting guidance, maturities of lease liabilities were as follows as of December 31, 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Year ending December 31,
|
|
Amount
|
|
2019
|
|
$
|
5,570
|
|
|
2020
|
|
5,680
|
|
|
2021
|
|
4,598
|
|
|
2022
|
|
2,799
|
|
|
2023
|
|
1,074
|
|
|
Thereafter
|
|
—
|
|
|
Total future minimum lease payments
|
|
$
|
19,721
|
|
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 EGMs installed at customer facilities. We receive recurring revenues based on a percentage of the net win per day generated by the leased gaming equipment or a fixed daily fee. Such revenues are generated daily and are limited to the lesser of the net win per day generated by the leased gaming equipment or the fixed daily fee and the lease payments that have been collected from the lessee. Certain of our leases have terms and conditions with options for a lessee to purchase the underlying assets. Refer to “Note 2 — Basis of Presentation and Summary of Significant Accounting Policies” for further discussion of lease revenues. The cost of property and equipment the Company is leasing to third-parties as of December 31, 2019 is approximately $196.6 million, which includes accumulated depreciation of approximately $106.9 million.
In addition, we generated lease revenue from sales-type leases in the FinTech segment in the amount of approximately $2.6 million for the year ended December 31, 2019. Our interest income recognized in connection with sales-type leases is immaterial.
Supplemental balance sheet information related to our sales-type leases is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classification on our Balance Sheets
|
|
At December 31, 2019
|
|
Assets
|
|
|
|
|
|
Net investment in sales-type leases — current
|
|
Trade and other receivables, net
|
|
$
|
874
|
|
|
Net investment in sales-type leases — non-current
|
|
Other receivables
|
|
$
|
1,288
|
|
4. BUSINESS COMBINATIONS
The following is a summary of business combinations completed during the year ended December 31, 2019.
Atrient, Inc.
On March 8, 2019, we acquired certain assets of Atrient, Inc. (“Atrient,” the “Seller”), a privately held company that develops and distributes hardware and software applications to gaming operators to enhance gaming patron loyalty, pursuant to an asset purchase agreement. This acquisition includes existing contracts with gaming operators, technology, and intellectual property that allow us to provide gaming operators with self-service enrollment, player loyalty and marketing equipment, a mobile application to offer a gaming operator’s patrons additional flexibility in accessing casino promotions, and a marketing platform that manages and delivers a gaming operator’s marketing programs through these patron interfaces. This acquisition expands our financial technology solutions offerings within our FinTech segment. Under the terms of the asset purchase agreement, we paid the Seller $20.0 million at the closing of the transaction and will pay an additional $10.0 million one year following the closing and another $10.0 million two years following the date of closing. In addition, we expect that an additional $10.0 million in contingent consideration will be earned by the Seller based upon the achievement of certain revenue targets over the first two years post-closing. We expect the total consideration for this acquisition, inclusive of the contingent consideration, to be approximately $50.0 million.
The total purchase consideration for certain assets of Atrient was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
Purchase consideration
|
|
|
|
Cash consideration paid at closing
|
|
$
|
20,000
|
|
|
Cash consideration to be paid in subsequent periods (at fair value)
|
|
18,528
|
|
|
Total cash consideration
|
|
38,528
|
|
|
Contingent consideration (at fair value)
|
|
9,028
|
|
|
Total purchase consideration
|
|
$
|
47,556
|
|
Cash consideration 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 of our Balance Sheets. The contingent consideration is comprised of a long-term component recorded in other accrued expenses and liabilities of our Balance Sheets.
The transaction was recorded using the acquisition method of accounting, which requires, among other things, that the assets acquired and liabilities assumed are recognized at their respective fair values as of the closing date of the transaction. The excess of the fair value of the purchase consideration over those fair value amounts was recorded as goodwill, which will be amortized over a period of 15 years for tax purposes. The goodwill recognized is primarily attributable to the income potential from the expansion of our footprint in the gaming space by enhancing our existing financial technology solution portfolio to add new touch-points for gaming patrons at customer locations and a new player loyalty and marketing-focused business line, assembled workforce, among other strategic benefits.
The information below summarizes the amounts of identifiable assets acquired and liabilities assumed, which reflects an adjustment of approximately $0.3 million from the preliminary allocation completed as of the closing date of the transaction. The adjustment related to the provisional amounts recognized for certain receivables, inventory, and liabilities for which we have subsequently obtained and evaluated more detailed information than what existed as of the closing date of the transaction (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
Current assets
|
|
$
|
3,146
|
|
|
Property and equipment, net
|
|
8
|
|
|
Goodwill
|
|
33,182
|
|
|
Other intangible assets, net
|
|
14,200
|
|
|
Other assets
|
|
239
|
|
|
Total assets
|
|
50,775
|
|
|
Accounts payable and accrued expenses
|
|
(3,085)
|
|
|
Other accrued expenses and liabilities
|
|
(134)
|
|
|
Total liabilities
|
|
(3,219)
|
|
|
Net assets acquired
|
|
$
|
47,556
|
|
Receivables acquired of approximately $1.8 million were short-term in nature and considered to be collectible, and therefore, the carrying amounts of these assets were determined to represent their fair values. Inventory acquired of approximately $1.3 million consisted of raw materials and finished goods and was fair valued based on the estimated net realizable value of these assets. Property and equipment acquired were not material in size or scope, and the carrying amounts of these assets represented their fair values. The operating lease ROU assets of approximately $0.2 million, which are included in other assets in our Balance Sheets, were recorded at their fair values based on the present value of future lease payments discounted in accordance with the policy disclosed in “Note 3 — Leases.”
Other intangible assets acquired of approximately $14.2 million were comprised of customer contracts and developed technology. The fair value of customer contracts of approximately $9.2 million was determined by applying the income approach utilizing the excess earnings methodology using Level 3 inputs in the hierarchy with a discount rate utilized of 17%. The fair value of developed technology of approximately $5.0 million was determined by applying the income approach utilizing the relief from royalty methodology using Level 3 inputs with a royalty rate of 15% and a discount rate utilized of 18%.
The following table summarizes acquired intangible assets (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful Life (Years)
|
|
Estimated Fair Value
|
|
Other Intangible Assets
|
|
|
|
|
|
Developed technology
|
|
3
|
|
$
|
5,000
|
|
|
Customer contracts
|
|
5
|
|
9,200
|
|
|
Total other intangible assets
|
|
|
|
$
|
14,200
|
|
The financial results included in our Statements of Operations since the acquisition date and for the year ended December 31, 2019 reflected revenues of approximately $16.0 million and net income of approximately $3.9 million. We incurred acquisition-related costs of approximately $0.2 million for the year ended December 31, 2019.
Micro Gaming Technologies, Inc.
On December 24, 2019, we acquired certain assets of Micro Gaming Technologies, Inc. (“MGT”), a privately held company that develops and distributes kiosks and software applications to gaming patrons to enhance patron loyalty, in an asset purchase agreement. The acquired assets consist of existing contracts with gaming operators, technology, and intellectual property intended to allow us to provide gaming operators with self-service patron loyalty functionality delivered through stand-alone kiosk equipment and a marketing platform that manages and delivers gaming operators marketing programs through these patron interfaces. This acquisition further expands our financial technology player loyalty offerings within our FinTech segment. Under the terms of the asset purchase agreement, we paid MGT $15.0 million at the closing of the transaction and we will remit an additional $5.0 million by April 1, 2020 with a final payment of $5.0 million two years following the date of closing. We expect the total consideration for this acquisition to be approximately $25.0 million. The acquisition did not have a significant impact on our results of operations or financial condition.
The total purchase consideration for certain assets of MGT was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
Purchase consideration
|
|
|
|
Cash consideration paid at closing
|
|
$
|
15,000
|
|
|
Cash consideration to be paid in subsequent periods (at fair value)
|
|
9,514
|
|
|
Total cash consideration
|
|
$
|
24,514
|
|
Cash consideration 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 of our Balance Sheets.
The transaction was recorded using the acquisition method of accounting, as described above, and the goodwill will be amortized over a period of 15 years for tax purposes. The goodwill recognized is primarily attributable to the income potential from further expansion of our footprint in the gaming space and from enhancement of our financial technology player loyalty offerings and marketing-focused business line, assembled workforce, among other strategic benefits.
The estimates and assumptions incorporated included the projected timing and amount of future cash flows and discount rates reflecting risk inherent in the future cash flows. The estimated fair values of assets acquired and liabilities assumed and resulting goodwill are subject to adjustment as the Company finalizes its purchase price accounting. The significant items for which a final fair value has not been determined include, but are not limited to: the valuation and estimated useful lives of intangible assets, contract liabilities, including deferred and unearned revenues, and deferred income taxes. We do not expect our fair value determinations to materially change; however, there may be differences between the amounts recorded at the closing date of the transaction and the final fair value analysis, which we expect to complete no later than the fourth quarter of 2020.
The 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
|
|
$
|
2,926
|
|
|
Property and equipment, net
|
|
25
|
|
|
Goodwill
|
|
7,888
|
|
|
Other intangible assets, net
|
|
16,600
|
|
|
Other assets
|
|
1,853
|
|
|
Total assets
|
|
29,292
|
|
|
Accounts payable and accrued expenses
|
|
(3,257)
|
|
|
Other accrued expenses and liabilities
|
|
(1,521)
|
|
|
Total liabilities
|
|
(4,778)
|
|
|
Net assets acquired
|
|
$
|
24,514
|
|
Receivables acquired of approximately $2.8 million were short-term in nature and considered to be collectible, and therefore, the carrying amounts of these assets were determined to represent their fair values. We did not acquire a material amount of inventory. Property and equipment and other assets acquired were not material in size or scope, and the carrying amounts of these assets represented their fair values. The operating lease ROU assets of approximately $1.8 million, which are included in other assets in our Balance Sheets, were recorded at their fair values based on the present value of future lease payments discounted in accordance with the policy disclosed in “Note 3 — Leases.”
Other intangible assets acquired of approximately $16.6 million were comprised of customer contracts, developed technology, and non-compete agreements. The fair value of customer contracts of approximately $11.6 million was determined by applying the income approach utilizing the excess earnings methodology using Level 3 inputs with a discount rate utilized of 23%. The fair value of developed technology of approximately $4.4 million was determined by applying the income approach utilizing the relief from royalty methodology with a royalty rate of 15% and a discount rate utilized of 24%. The fair value of non-compete agreements of approximately $0.6 million was determined by applying the income approach utilizing the with and without methodology with a discount rate of 23%.
The following table summarizes acquired intangible assets (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful Life (Years)
|
|
Estimated Fair Value
|
|
Other Intangible Assets
|
|
|
|
|
|
Customer contracts
|
|
8
|
|
$
|
11,600
|
|
|
Developed technology
|
|
3
|
|
4,400
|
|
|
Non-compete agreements
|
|
3
|
|
600
|
|
|
Total other intangible assets
|
|
|
|
$
|
16,600
|
|
The financial results included in our Statements of Operations since the acquisition date and for the year ended December 31, 2019 reflected revenues of approximately $0.2 million and a net result that was break even. We incurred MGT acquisition-related costs of approximately $0.1 million for the year ended December 31, 2019.
The unaudited pro forma financial data with respect to the revenue and earnings on a consolidated basis as if the Atrient and MGT acquisitions occurred on January 1, 2018 included revenues of approximately $550.8 million and $496.6 million and net income of approximately $16.4 million and $13.0 million for the years ended December 31, 2019 and 2018, respectively.
5. FUNDING AGREEMENTS
Commercial Cash Arrangements
We have commercial arrangements with third-party vendors to provide cash for certain of our ATMs. For the use of these funds, we pay a cash usage fee on either the average daily balance of funds utilized multiplied by a contractually defined cash usage rate or the amounts supplied multiplied by a contractually defined cash usage rate. These cash usage fees, reflected as interest expense within the Statements of Operations, were $7.2 million, $7.0 million, and $4.9 million for the years ended December 31, 2019, 2018, and 2017, respectively. We are exposed to interest rate risk to the extent that the applicable rates increase.
Under these agreements, the currency supplied by third party vendors remain their sole property until the funds are dispensed. As these funds are not our assets, supplied cash is not reflected in our Balance Sheets. The outstanding balances of ATM cash utilized by us from the third parties were approximately $292.6 million and $224.7 million as of December 31, 2019 and 2018, respectively.
Our primary commercial arrangement, the Contract Cash Solutions Agreement, as amended, is with Wells Fargo, N.A. (“Wells Fargo”). Wells Fargo provides us with cash in the maximum amount of $300 million with the ability to increase the amount by $75 million over a 5-day period for holidays, such as the period around New Year’s Day. The term of the agreement expires on June 30, 2022 and will automatically renew for additional one-year periods unless either party provides a 90-day written notice of its intent not to renew.
We are responsible for losses of cash in the ATMs under this agreement, and we self-insure for this type of risk. There were no material losses for the years ended December 31, 2019, 2018, and 2017.
Site-Funded ATMs
We operate ATMs at certain customers’ gaming establishments where the gaming establishment provides the cash required for the ATMs’ operational needs. We are required to reimburse the customer for the amount of cash dispensed from these site-funded ATMs. The site-funded ATM liability included within settlement liabilities in the accompanying Balance Sheets was approximately $157.3 million and $249.6 million as of December 31, 2019 and 2018, respectively.
Everi-Funded ATMs
We enter into agreements with international customers for certain of our ATMs whereby we provide the cash required to operate the ATMs. We supplied approximately $5.5 million and $4.8 million of our cash for these ATMs at December 31, 2019 and 2018, respectively, which represents an outstanding balance under such agreements at the end of the period. Such amounts are reported within settlement receivables line on our Balance Sheets.
Pre-funded Cash Access Agreements
Due to regulatory requirements in certain jurisdictions, some international gaming establishments require pre-funding of cash to cover the outstanding settlement amounts in order for us to provide cash access services to their properties. We enter into agreements with these gaming operators for which we supply our cash access services to their properties. Under these agreements, we maintain sole discretion to either continue or cease operations as well as discretion over the amounts pre-funded to the properties and may request amounts to be refunded to us, with appropriate notice to the operator, at any time. The initial pre-funded amounts and subsequent amounts from the settlement of transactions are deposited into a bank account that is to be used exclusively for cash access services, and we maintain the right to monitor the transaction activity in that account. The total amount of pre-funded cash outstanding was approximately $6.3 million and $6.1 million at December 31, 2019 and 2018, respectively, and is included in prepaid expenses and other assets line on our Balance Sheets.
6. TRADE AND OTHER RECEIVABLES
Trade and other receivables represent short-term credit granted to customers and long-term loans receivable in connection with our Games and FinTech equipment and compliance products. Trade and loans receivables generally do not require collateral. The balance of trade and loans receivables consists of outstanding balances owed to us by gaming establishments. Other receivables include income tax receivables and other miscellaneous receivables.
The balance of trade and other receivables consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
|
|
2019
|
|
2018
|
|
Trade and other receivables, net
|
|
|
|
|
|
Games trade and loans receivables
|
|
$
|
55,457
|
|
|
$
|
53,011
|
|
|
FinTech trade and loans receivables
|
|
35,325
|
|
|
18,890
|
|
|
Insurance settlement receivable (1)
|
|
7,650
|
|
|
—
|
|
|
Other receivables
|
|
3,977
|
|
|
1,333
|
|
|
Net investment in sales-type leases (2)
|
|
2,162
|
|
|
—
|
|
|
Total trade and other receivables, net
|
|
$
|
104,571
|
|
|
$
|
73,234
|
|
|
Non-current portion of receivables
|
|
|
|
|
|
Games trade and loans receivables
|
|
(2,117)
|
|
|
(2,922)
|
|
|
FinTech trade and loans receivables
|
|
(13,256)
|
|
|
(5,925)
|
|
|
Net investment in sales-type leases (2)
|
|
(1,288)
|
|
|
—
|
|
|
Total non-current portion of receivables
|
|
$
|
(16,661)
|
|
|
$
|
(8,847)
|
|
|
Total trade and other receivables, current portion
|
|
$
|
87,910
|
|
|
$
|
64,387
|
|
(1) Refer to “Note 13 — Commitments and Contingencies” for a discussion on the insurance settlement receivable.
(2) Refer to “Note 3 — Leases” for a discussion on net investment in sales-type leases recorded on the Balance Sheets as a result of the implementation of ASC 842.
At least quarterly, we evaluate the collectability of the outstanding balances and establish a reserve for the amount of the expected losses on our receivables. The allowance for doubtful accounts for trade receivables was approximately $5.8 million and $6.4 million as of December 31, 2019 and 2018, respectively, and included approximately $4.9 million and $3.2 million of check warranty reserves, respectively. The provision for doubtful customer accounts receivables is generally included within operating expenses in the Statements of Operations.
A summary activity of the reserve for check warranty losses is as follows (in thousands):
|
|
|
|
|
|
|
|
|
Amount
|
|
Balance, December 31, 2016
|
$
|
2,695
|
|
|
Warranty expense provision
|
9,418
|
|
|
Charge-offs against reserve
|
(9,404)
|
|
|
Balance, December 31, 2017
|
2,709
|
|
|
Warranty expense provision
|
9,819
|
|
|
Charge-offs against reserve
|
(9,366)
|
|
|
Balance, December 31, 2018
|
3,162
|
|
|
Warranty expense provision
|
14,751
|
|
|
Charge-offs against reserve
|
(13,012)
|
|
|
Balance, December 31, 2019
|
$
|
4,901
|
|
7. INVENTORY
Our inventory primarily consists of component parts as well as work-in-progress, and finished goods. The cost of inventory includes cost of materials, labor, overhead, and freight, and is accounted for using the FIFO method. The inventory is stated at the lower of cost or net realizable value.
Inventory consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
|
|
2019
|
|
2018
|
|
Inventory
|
|
|
|
|
|
Component parts, net of reserves of $2,007 and $1,468 at December 31, 2019 and December 31, 2018, respectively
|
|
$
|
24,864
|
|
|
$
|
23,197
|
|
|
Work-in-progress
|
|
94
|
|
|
280
|
|
|
Finished goods
|
|
1,616
|
|
|
926
|
|
|
Total inventory
|
|
$
|
26,574
|
|
|
$
|
24,403
|
|
8. PREPAID AND OTHER ASSETS
Prepaid expenses and other assets include the balance of prepaid expenses, deposits, debt issuance costs on our Revolving Credit Facility (defined herein), restricted cash, operating lease ROU assets, and other assets. The current portion of these assets is included in prepaid expenses and other assets and the non-current portion is included in other assets, both of which are contained within the Balance Sheets.
The balance of the current portion of prepaid and other assets consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
|
|
2019
|
|
2018
|
|
Prepaid expenses and other assets
|
|
|
|
|
|
Prepaid expenses
|
|
$
|
11,272
|
|
|
$
|
8,351
|
|
|
Deposits
|
|
8,501
|
|
|
8,241
|
|
|
Restricted cash(1)
|
|
6,639
|
|
|
1,548
|
|
|
Other
|
|
1,484
|
|
|
2,119
|
|
|
Total prepaid expenses and other assets
|
|
$
|
27,896
|
|
|
$
|
20,259
|
|
(1) Refer to “Note 2 — Basis of Presentation and Summary of Significant Accounting Policies” for discussion on the composition of the restricted cash balance.
The balance of the non-current portion of other assets consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
|
|
2019
|
|
2018
|
|
Other assets
|
|
|
|
|
|
Operating lease ROU assets(1)
|
|
$
|
12,257
|
|
|
$
|
—
|
|
|
Prepaid expenses and deposits
|
|
7,378
|
|
|
5,289
|
|
|
Debt issuance costs of revolving credit facility
|
|
460
|
|
|
654
|
|
|
Other
|
|
244
|
|
|
309
|
|
|
Total other assets
|
|
$
|
20,339
|
|
|
$
|
6,252
|
|
(1) Refer to “Note 3 — Leases” for discussion on operating lease ROU assets recorded on the Balance Sheets as a result of the implementation of ASC 842.
9. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2019
|
|
|
|
|
|
At December 31, 2018
|
|
|
|
|
|
|
|
Useful Life (Years)
|
|
Cost
|
|
Accumulated Depreciation
|
|
Net Book Value
|
|
Cost
|
|
Accumulated Depreciation
|
|
Net Book Value
|
|
Property and equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental pool - deployed
|
|
2-4
|
|
$
|
196,571
|
|
|
$
|
106,888
|
|
|
$
|
89,683
|
|
|
$
|
183,309
|
|
|
$
|
105,038
|
|
|
$
|
78,271
|
|
|
Rental pool - undeployed
|
|
2-4
|
|
31,901
|
|
|
22,970
|
|
|
8,931
|
|
|
23,825
|
|
|
14,680
|
|
|
9,145
|
|
|
FinTech equipment
|
|
3-5
|
|
29,947
|
|
|
22,114
|
|
|
7,833
|
|
|
27,285
|
|
|
21,000
|
|
|
6,285
|
|
|
Leasehold and building improvements
|
|
Lease Term
|
|
11,815
|
|
|
8,150
|
|
|
3,665
|
|
|
11,857
|
|
|
6,938
|
|
|
4,919
|
|
|
Machinery, office, and other equipment
|
|
2-5
|
|
48,860
|
|
|
30,103
|
|
|
18,757
|
|
|
46,322
|
|
|
28,654
|
|
|
17,668
|
|
|
Total
|
|
|
|
$
|
319,094
|
|
|
$
|
190,225
|
|
|
$
|
128,869
|
|
|
$
|
292,598
|
|
|
$
|
176,310
|
|
|
$
|
116,288
|
|
Depreciation expense related to property and equipment totaled approximately $63.2 million, $61.2 million, and $47.3 million for the years ended December 31, 2019, 2018, and 2017, respectively.
10. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
Goodwill represents the excess of the purchase price over the identifiable tangible and intangible assets acquired plus liabilities assumed arising from business combinations. Refer to “Note 2 — Basis of Presentation and Summary of Significant Accounting Policies” for a description of how we account for goodwill, and how we measure goodwill for impairment.
Goodwill Testing
For the goodwill impairment test conducted in 2019, we utilized the “Step 1” approach, which required a comparison of the carrying amount of each reporting unit to its estimated fair value. To estimate the fair value of our reporting units, we used a combination of an income valuation approach and a market valuation approach. The income valuation approach is based on a discounted cash flow (“DCF”) analysis. This method involves estimating the after-tax net cash flows attributable to a reporting unit and then discounting the after-tax net cash flows to a present value using a risk-adjusted discount rate. Assumptions used in the DCF require the exercise of significant judgment, including, but not limited to: appropriate discount rates and terminal values, growth rates and the amount and timing of expected future cash flows. The projected cash flows are based on our most recent annual budget and projected years thereafter. Our budgets and projected after tax net cash flows are based on estimates of 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 after tax net cash flow projections used in the DCF are based on estimates of the weighted average cost of capital (“WACC”) of market participants relative to each respective reporting unit. The market valuation 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, 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.
We had approximately $681.6 million and $640.5 million of goodwill on our Balance Sheets as of December 31, 2019 and 2018, respectively, resulting from acquisitions of other businesses.
In connection with our annual goodwill impairment testing process for 2019 and 2018, we determined that no impairment adjustments were necessary. The fair value exceeded the carrying amount for each of the reporting units.
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
|
|
Player Loyalty Sales and Services
|
|
Total
|
|
Goodwill
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2017
|
|
$
|
449,041
|
|
|
$
|
157,098
|
|
|
$
|
5,745
|
|
|
$
|
17,127
|
|
|
$
|
11,578
|
|
|
$
|
—
|
|
|
$
|
640,589
|
|
|
Foreign translation adjustment
|
|
—
|
|
|
(52)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(52)
|
|
|
Balance, December 31, 2018
|
|
$
|
449,041
|
|
|
$
|
157,046
|
|
|
$
|
5,745
|
|
|
$
|
17,127
|
|
|
$
|
11,578
|
|
|
$
|
—
|
|
|
$
|
640,537
|
|
|
Foreign translation adjustment
|
|
—
|
|
|
28
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
28
|
|
|
Acquisitions (1)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
41,070
|
|
|
41,070
|
|
|
Balance, December 31, 2019
|
|
$
|
449,041
|
|
|
$
|
157,074
|
|
|
$
|
5,745
|
|
|
$
|
17,127
|
|
|
$
|
11,578
|
|
|
$
|
41,070
|
|
|
$
|
681,635
|
|
(1) Refer to “Note 4 — Business Combinations” for a discussion on the acquisitions.
Other Intangible Assets
Other intangible assets consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2019
|
|
|
|
|
|
At December 31, 2018
|
|
|
|
|
|
|
|
Weighted Average Remaining Life (Years)
|
|
Cost
|
|
Accumulated Amortization
|
|
Net Book Value
|
|
Cost
|
|
Accumulated Amortization
|
|
Net Book Value
|
|
Other intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract rights under placement fee agreements
|
|
4
|
|
$
|
58,516
|
|
|
$
|
20,888
|
|
|
$
|
37,628
|
|
|
$
|
57,440
|
|
|
$
|
12,178
|
|
|
$
|
45,262
|
|
|
Customer contracts
|
|
6
|
|
71,975
|
|
|
49,477
|
|
|
22,498
|
|
|
51,175
|
|
|
46,162
|
|
|
5,013
|
|
|
Customer relationships
|
|
6
|
|
231,100
|
|
|
105,584
|
|
|
125,516
|
|
|
231,100
|
|
|
84,619
|
|
|
146,481
|
|
|
Developed technology and software
|
|
1
|
|
314,343
|
|
|
224,274
|
|
|
90,069
|
|
|
277,243
|
|
|
190,886
|
|
|
86,357
|
|
|
Patents, trademarks, and other
|
|
2
|
|
19,682
|
|
|
16,206
|
|
|
3,476
|
|
|
29,168
|
|
|
24,884
|
|
|
4,284
|
|
|
Total
|
|
|
|
$
|
695,616
|
|
|
$
|
416,429
|
|
|
$
|
279,187
|
|
|
$
|
646,126
|
|
|
$
|
358,729
|
|
|
$
|
287,397
|
|
Amortization expense related to other intangible assets totaled approximately $68.9 million, $65.2 million, and $69.5 million for the years ended December 31, 2019, 2018, and 2017, respectively. We capitalized $43.7 million, $33.3 million, and $29.4 million of internally-developed software costs for the years ended December 31, 2019, 2018, and 2017, 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, 2019, 2018, and 2017.
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
|
|
2020
|
$
|
81,949
|
|
|
2021
|
54,369
|
|
|
2022
|
37,067
|
|
|
2023
|
27,799
|
|
|
2024
|
22,104
|
|
|
Thereafter
|
31,495
|
|
|
Total (1)
|
$
|
254,783
|
|
(1) For the year ended December 31, 2019, the Company had $24.4 million in other intangible assets that had not yet been placed into service.
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 the agreements to reduce our floor space at these facilities. Any proceeds received for the reduction of floor space are first applied against the intangible asset for that particular placement fee agreement, if any, and the remaining net book value of the intangible asset is prospectively amortized on a straight-line method over its remaining estimated useful life.
We paid approximately $17.7 million, $22.7 million, and $13.3 million in placement fees for the years ended December 31, 2019, 2018, and 2017, respectively. The payments made in 2019 and 2018 included approximately $0.6 million and $2.1 million of imputed interest, respectively.
11. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The following table presents our accounts payable and accrued expenses (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
|
|
2019
|
|
2018
|
|
Accounts payable and accrued expenses
|
|
|
|
|
|
Trade accounts payable
|
|
$
|
93,529
|
|
|
$
|
70,796
|
|
|
Contract liabilities
|
|
29,150
|
|
|
14,661
|
|
|
Payroll and related expenses
|
|
18,058
|
|
|
15,055
|
|
|
Litigation accrual (1)
|
|
14,000
|
|
|
—
|
|
|
Operating lease liabilities (2)
|
|
5,824
|
|
|
—
|
|
|
Cash access processing and related expenses
|
|
5,511
|
|
|
4,160
|
|
|
Other
|
|
3,253
|
|
|
4,529
|
|
|
Accrued interest
|
|
1,347
|
|
|
1,374
|
|
|
Accrued taxes
|
|
1,846
|
|
|
1,917
|
|
|
Placement fees
|
|
585
|
|
|
16,746
|
|
|
Total accounts payable and accrued expenses
|
|
$
|
173,103
|
|
|
$
|
129,238
|
|
(1) Refer to “Note 13 — Commitments and Contingencies” for discussion on this legal matter.
(2) Refer to “Note 3 — Leases” for discussion on operating lease liabilities recorded on the Balance Sheets as a result of the implementation of ASC 842.
12. LONG-TERM DEBT
The following table summarizes our indebtedness (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
|
|
2019
|
|
2018
|
|
Long-term debt
|
|
|
|
|
|
|
|
|
Senior secured term loan
|
|
|
$
|
749,000
|
|
|
$
|
807,700
|
|
|
Senior unsecured notes
|
|
|
375,000
|
|
|
375,000
|
|
|
Total debt
|
|
|
1,124,000
|
|
|
1,182,700
|
|
|
Debt issuance costs and discount
|
|
|
(15,922)
|
|
|
(19,484)
|
|
|
Total debt after debt issuance costs and discount
|
|
|
1,108,078
|
|
|
1,163,216
|
|
|
Current portion of long-term debt
|
|
|
—
|
|
|
(8,200)
|
|
|
Long-term debt, less current portion
|
|
|
$
|
1,108,078
|
|
|
$
|
1,155,016
|
|
Refinancing and Repricing Activities
On May 9, 2017 (the “Closing Date”), Everi FinTech, as borrower, and Everi 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 “Credit Agreement”). The Credit Agreement provides for: (a) a $35.0 million, five-year senior secured revolving credit facility (the “Revolving Credit Facility”); and (b) an $820.0 million, seven-year senior secured term loan facility (the “Term Loan Facility,” and together with the Revolving Credit Facility, the “Credit Facilities”). The fees associated with the Credit Facilities included discounts of approximately $4.1 million and debt issuance costs of approximately $15.5 million. All borrowings under the 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 Term Loan Facility incurred on the Closing Date were used to: (a) refinance: (i) Everi FinTech’s 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 (ii) Everi FinTech’s 7.25% Senior Secured Notes due 2021 in the aggregate original principal amount of $335.0 million (the “Refinanced Secured Notes”); and (b) 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 Credit Agreement (the “First Amendment”) which, among other things, reduced the interest rate on the approximately $818.0 million then-outstanding balance of the Term Loan Facility; however, it did not change the maturity dates for the Term Loan Facility or the Revolving Credit Facility or the financial covenants or other debt repayments terms set forth in the Credit Agreement. We expensed approximately $3.0 million of third-party debt issuance costs and fees associated with the repricing of the Term Loan Facility in connection with the debt modification.
On May 17, 2018, we entered into a Second Amendment (the “Second Amendment”) to the Credit Agreement, which reduced the interest rate on the $813.9 million outstanding balance of the senior secured term loan under the Credit Agreement by 50 basis points to LIBOR + 3.00% from LIBOR + 3.50% with the LIBOR floor unchanged at 1.00%. The senior secured term loan under the Credit Agreement will be subject to a prepayment premium of 1.00% of the principal amount repaid for any voluntary prepayment or mandatory prepayment with proceeds of debt that has a lower effective yield than the repriced term loan or any amendment to the repriced term loan that reduces the interest rate thereon, in each case, to the extent occurring within six months of the effective date of the Second Amendment. No changes were made to the maturity date, financial covenants, or other debt repayment terms. We expensed approximately $1.3 million of third-party debt issuance costs and fees associated with the repricing of the Term Loan Facility in connection with the debt modification.
On December 12, 2019, we entered into a third amendment (the “Third Amendment”) to the Credit Agreement, which provided, among other things: (a) a reduction in the interest rate by 25 basis points to LIBOR + 2.75% from LIBOR + 3.00%; and (b) the addition of a prepayment premium applicable to the repriced Term Loan Facility of 1.00% of the principal amount thereof that is repaid in respect of (i) any voluntary prepayment or mandatory prepayment with proceeds of debt that has a lower effective yield than the repriced Term Loan Facility or (ii) any amendment to the repriced Term Loan Facility that reduces the interest rate thereon, in each case, to the extent occurring within six months after the effective date of the Third Amendment. The maturity date for the Credit Agreement remains May 9, 2024, and no changes were made to the financial covenants or other debt repayment terms. We expensed approximately $0.7 million of third-party debt issuance costs and fees associated with the repricing of the Term Loan Facility in connection with the debt modification.
Credit Facilities
The Term Loan Facility matures seven years after the Closing Date and the Revolving Credit Facility matures five years after the Closing Date. The 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 Revolving Credit Facility is, at Everi FinTech’s 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 Term Loan Facility also is, at Everi FinTech’s 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: (a) the prime lending rate announced by the administrative agent; (b) the federal funds effective rate from time to time plus 0.50%; and (c) 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 Revolving Credit Facility and the Term Loan Facility were: (a) 4.50% in respect of Eurodollar Rate loans and (ii) 3.50% in respect of base rate loans. The applicable margins for the Term Loan Facility from and after the effectiveness of the First Amendment on the Repricing Closing Date through the effectiveness of the Second Amendment were: (a) 3.50% in respect of Eurodollar Rate loans and (b) 2.50% in respect of base rate loans. The applicable margins for the Term Loan Facility from and after the effectiveness of the Second Amendment are: (a) 3.00% in respect of Eurodollar Rate loans and (b) 2.00% in respect of base rate loans. The applicable margins for the Term Loan Facility from and after the effectiveness of the Third Amendment are: (a) 2.75% in respect of Eurodollar Rate loans and (b) 1.75% 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 Credit Agreement governing the Credit Facilities, with prior notice, however, without premium or penalty, except that certain refinancings of the term loans within six months after the Repricing Closing Date will be subject to a prepayment premium of 1.00% of the principal amount repaid.
Subject to certain exceptions, the obligations under the Credit Facilities are secured by substantially all of the present and subsequently acquired assets of each of Everi FinTech, Everi Holdings, and the subsidiary guarantors party thereto including: (a) a perfected first priority pledge of all the capital stock of Everi FinTech and each domestic direct, wholly owned material restricted subsidiary held by Everi Holdings, Everi FinTech, or any such subsidiary guarantor; and (b) a perfected first priority security interest in substantially all other tangible and intangible assets of Everi Holdings, Everi FinTech, 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 Credit Facilities are unconditionally guaranteed by Everi Holdings and such subsidiary guarantors.
The Credit Agreement governing the Credit Facilities contains certain covenants that, among other things, limit Everi 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 Credit Agreement governing the Credit Facilities also requires Everi Holdings, together with its subsidiaries, to comply with a consolidated secured leverage ratio. At December 31, 2019, our consolidated secured leverage ratio was 2.71 to 1.00, with a maximum allowable ratio of 4.50 to 1.00. Our maximum consolidated secured leverage will be reduced to 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 Credit Facilities as of December 31, 2019.
Events of default under the Credit Agreement governing the 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 Everi Holdings undergoes a change of control. This is defined to include the case where Everi Holdings ceases to own 100% of the equity interests of Everi FinTech, or where any person or group acquires a percentage of the economic or voting interests of Everi Holdings’ capital stock of 35% or more (determined on a fully diluted basis).
Interest is due in arrears on each interest payment date applicable thereto and at such other times as may be specified in the 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 year ended December 31, 2019, the Term Loan Facility had an applicable weighted average interest rate of 5.26%.
At December 31, 2019, we had approximately $749.0 million of borrowings outstanding under the Term Loan Facility and no borrowings outstanding under the Revolving Credit Facility. We had $35.0 million of additional borrowing availability under the Revolving Credit Facility as of December 31, 2019.
Refinanced Senior Secured Notes
In connection with entering into the Credit Agreement, on May 9, 2017, Everi FinTech 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.
Upon the issuance of the Refinanced Secured Notes on April 15, 2015, the Company issued to CPPIB Credit Investments III Inc. a warrant to acquire 700,000 shares of Holdings’ common stock, with an exercise price equal to $9.88 per share, representing a 30% premium to the volume-weighted average price of Holdings’ common stock for the ten trading days prior to the issuance of the warrant. Upon issuance, the warrant was valued at approximately $2.2 million during the quarter ended June 30, 2015 using a modified Black-Scholes model and was accounted for as a debt discount, of which the unamortized portion was subsequently written off upon redemption of the Refinanced Secured Notes. The warrant was not impacted by the May 9, 2017 redemption of the Refinanced Secured Notes and expires on the sixth anniversary of the date of issuance. The number of shares issuable pursuant to the warrant and the warrant exercise price are subject to adjustment for stock splits, reverse stock splits, stock dividends, mergers and certain other events.
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, dated December 19, 2014, between Everi FinTech (as successor issuer), and Deutsche Bank Trust Company Americas, as trustee (as supplemented, the “2014 Notes Indenture”). 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, dated December 5, 2017, among Everi FinTech (as issuer), Everi Holdings and certain of its direct and indirect domestic subsidiaries as guarantors, and Deutsche Bank Trust Company Americas, as trustee (the “2017 Notes Indenture”). 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 FinTech satisfied and discharged the 2014 Notes Indenture relating to the 2014 Unsecured Notes. To effect the satisfaction and discharge, Everi FinTech 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 FinTech 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 FinTech 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 FinTech 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.
On December 5, 2019, Everi FinTech issued a consent solicitation statement (the “Consent Solicitation”) seeking consent from holders of the 2017 Unsecured Notes to modify the definition of “Public Equity Offering” in the 2017 Notes Indenture. In connection with the Consent Solicitation, on December 5, 2019, Everi FinTech issued a conditional notice of redemption with respect to $84.5 million in aggregate principal amount of the 2017 Unsecured Notes. The redemption was conditioned upon: (a) the issuance by the Company of common stock in a registered equity offering; and (b) the execution of a supplemental indenture reflecting the proposed terms contained in the Consent Solicitation. The redemption was subsequently completed on January 6, 2020.
The registered equity offering closed on December 10, 2019, and the Company received the requisite number of consents in response to the Consent Solicitation on December 12, 2019. As a result, a first supplemental indenture was entered into, dated December 13, 2019, by and among Everi FinTech, the Company, certain of its wholly owned subsidiaries, as guarantors, and Deutsche Bank Trust Company Americas, as trustee, to modify the 2017 Notes Indenture to include public equity offerings by parent companies of Everi FinTech, including the Company, as Public Equity Offerings for purposes of the 2017 Notes Indenture (the “First Supplemental Indenture”). No other changes were made to the terms and conditions of the 2017 Notes Indenture.
We were in compliance with the terms of the 2017 Unsecured Notes as of December 31, 2019.
Principal Repayments
The maturities of our borrowings at December 31, 2019 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
Amount
|
|
Maturities of borrowings
|
|
|
2020
|
$
|
—
|
|
|
2021
|
—
|
|
|
2022
|
—
|
|
|
2023
|
—
|
|
|
2024
|
749,000
|
|
|
Thereafter
|
375,000
|
|
|
Total
|
$
|
1,124,000
|
|
13. COMMITMENTS AND CONTINGENCIES
We are involved in various legal proceedings in the ordinary course of our business. While we believe resolution of the claims brought against us, both individually and in aggregate, will not have a material adverse impact on our financial condition or results of operations, litigation of this nature is inherently unpredictable. Our views on these legal proceedings, including those described below, may change in the future. We intend to vigorously defend against these actions, and ultimately believe we should prevail.
Legal Contingencies
We evaluate matters and record an accrual for legal contingencies when it is both probable that a liability has been incurred and the amount or range of the loss may be reasonably estimated. We evaluate legal contingencies at least quarterly and, as appropriate, establish new accruals or adjust existing accruals to reflect: (a) the facts and circumstances known to us at the time, including information regarding negotiations, settlements, rulings, and other relevant events and developments; (b) the advice and analyses of counsel; and (c) the assumptions and judgment of management. Legal costs associated with such proceedings are expensed as incurred. Due to the inherent uncertainty of legal proceedings as a result of the procedural, factual, and legal issues involved, the outcomes of our legal contingencies could result in losses in excess of amounts we have accrued.
We accrued approximately $14.0 million for the legal contingencies as of December 31, 2019 in connection with FACTA-related matters based on settlement negotiations with various parties. We expect to recover within the next year approximately $7.7 million of the amount accrued at December 31, 2019 from our insurance providers, for which we recorded an insurance settlement receivable included within trade and other receivables, net on our Balance Sheets as of December 31, 2019, as recovery is deemed to be probable. As a result, we recorded approximately $6.3 million as a loss contingency in operating expenses on our Statements of Operations for the year ended December 31, 2019. We did not have legal matters that were accrued as of December 31, 2018.
FACTA-related matters:
Geraldine Donahue, et. al. v. Everi FinTech, et. al. (“Donahue”), is a putative class action matter filed on December 12, 2018, in Cook County, Illinois. The original defendant was dismissed and the Company was substituted as defendant on April 22, 2019. Plaintiff, on behalf of himself and others similarly situated, alleges that Everi FinTech and the Company have violated certain provisions of FACTA. Plaintiff seeks an award of statutory damages, attorney’s fees, and costs. The parties have reached an agreement in principle for settlement of this matter, which will include settlement and resolution of all the FACTA-related matters pending against the Company and Everi FinTech. The settlement requires court approval, which the parties are in the process of working to obtain.
Oneeb Rehman, et. al. v. Everi FinTech and Everi Holdings, is a putative class action matter pending in the U.S. District Court for the Southern District of Florida, Ft. Lauderdale Division filed on October 16, 2018. The original defendant was dismissed and the Company was substituted as defendant on April 22, 2019. Plaintiff, on behalf of himself and others similarly situated, alleges that Everi FinTech and the Company have violated certain provisions of FACTA. Plaintiff seeks an award of statutory damages, attorney’s fees, and costs. This matter is encompassed in the settlement of the Donahue matter, and will be dismissed upon court approval of the settlement in Donahue.
Mat Jessop, et. al. v. Penn National Gaming, Inc., is a putative class action matter filed on October 15, 2018, pending in the U.S. District Court for the Middle District of Florida, Orlando Division. Everi FinTech was added as a defendant on December 21, 2018. Penn National Gaming, Inc. (“Penn National”) was dismissed by the Court with prejudice on October 28, 2019, leaving only claims against Everi FinTech. Plaintiff, on behalf of himself and others similarly situated, alleges that Everi FinTech has been unjustly enriched through the charging of service fees for transactions conducted at Penn National facilities. Plaintiff seeks injunctive relief against both parties, and an award of statutory damages, attorney’s fees, and costs. This matter is encompassed in the settlement of the Donahue matter, and will be dismissed upon court approval of the settlement in Donahue.
NRT matter:
NRT Technology Corp., et. al. v. Everi Holdings Inc., et. al., is a civil action filed on April 30, 2019 against the Company and Everi FinTech in the United States District Court for the District of Delaware 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 plaintiffs. Plaintiffs seek compensatory damages, trebled damages and injunctive and declaratory relief. We are currently unable to determine the probability of the outcome of this legal matter or estimate the range of reasonably possible loss, if any.
In addition, we have commitments with respect to certain lease obligations and installment payments under asset purchase agreements with Atrient and MGT discussed in “Note 3 — Leases” and “Note 4 — Business Combinations,” respectively.
14. SHAREHOLDERS’ EQUITY
Preferred Stock. Our amended and restated certificate of incorporation, as amended, allows our Board of Directors, without further action by stockholders, to issue up to 50,000,000 shares of preferred stock in one or more series and to fix the designations, powers, preferences, privileges and relative participating, optional, or special rights as well as the qualifications, limitations or restrictions of the preferred stock, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences. As of December 31, 2019 and 2018, we had no shares of preferred stock outstanding.
Common Stock. Subject to the preferences that may apply to shares of preferred stock that may be outstanding at the time, the holders of outstanding shares of common stock are entitled to receive dividends out of assets legally available at the times and in the amounts as our Board of Directors may from time to time determine. All dividends are non-cumulative. In the event of the liquidation, dissolution or winding up of Everi, the holders of common stock are entitled to share ratably in all assets remaining after the payment of liabilities, subject to the prior distribution rights of preferred stock, if any, then outstanding. Each stockholder is entitled to one vote for each share of common stock held on all matters submitted to a vote of stockholders. Cumulative voting for the election of directors is not provided for. The common stock is not entitled to preemptive rights and is not subject to conversion or redemption. There are no sinking fund provisions applicable to the common stock. Each outstanding share of common stock is fully paid and non-assessable. As of December 31, 2019 and 2018, we had 109,492,754 and 95,099,532 shares of common stock issued, respectively.
Treasury Stock. Employees may direct us to withhold vested shares of restricted stock to satisfy the minimum statutory withholding requirements applicable to their restricted stock vesting. We repurchased or withheld from restricted stock awards 95,734 and 17,552 shares of common stock at an aggregate purchase price of approximately $1.1 million and $0.1 million for the years ended December 31, 2019 and 2018, respectively, to satisfy the minimum applicable tax withholding obligations related to the vesting of such restricted stock awards.
Issuance of Common Stock. In December 2019, we filed with the Securities and Exchange Commission a registration statement for an undetermined amount of common stock, preferred stock, debt securities, warrants, and/or units that the Company may offer and sell in one or more offerings on terms to be decided at the time of sale, which will expire on December 4, 2022. In December 2019, we issued and sold 11,500,000 shares of our common stock pursuant to a prospectus supplement under the automatic shelf registration statement and used the aggregate net proceeds of approximately $122.4 million to pay down a portion of Term Loan Facility and to redeem a portion of the 2017 Unsecured Notes. Refer to “Note 12 — Long-Term Debt” and “Note 20 — Subsequent Events” for further discussion.
15. WEIGHTED AVERAGE SHARES OF COMMON STOCK
The weighted average number of common stock outstanding used in the computation of basic and diluted earnings per share is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
Weighted average shares
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding - basic
|
|
72,376
|
|
69,464
|
|
66,816
|
|
Potential dilution from equity awards (1)
|
|
6,859
|
|
4,332
|
|
—
|
|
Weighted average number of common shares outstanding - diluted (1)
|
|
79,235
|
|
73,796
|
|
66,816
|
(1)The potential dilution excludes the weighted average effect of equity awards to purchase approximately 0.5 million and 7.5 million shares of common stock for the years ended December 31, 2019 and 2018, as the application of the treasury stock method, as required, makes them anti-dilutive. The Company was in a net loss position for the year ended December 31, 2017; therefore, no potential dilution from the application of the treasury stock method was applicable. Equity awards to purchase approximately 16.0 million shares of common stock for the year ended December 31, 2017 were excluded from the computation of diluted net loss per share, as their effect would have been anti-dilutive.
16. SHARE-BASED COMPENSATION
Equity Incentive Awards
Our 2014 Equity Incentive Plan (as amended and restated effective May 22, 2018, the “Amended and Restated 2014 Plan”) and our 2012 Equity Incentive Plan (as amended, the “2012 Plan”) are used to attract and retain key personnel to provide additional incentives to employees, directors, and consultants, and to promote the success of our business. Our equity incentive plans are administered by the Compensation Committee of our Board of Directors, which has the authority to select individuals who are to receive equity incentive awards and to specify the terms and conditions of grants of such awards, including, but not limited to the vesting provisions and exercise prices, as applicable.
Generally, we grant the following types of awards: (a) time-based options; (b) market-based options; (c) time-based restricted stock; and (d) restricted stock units (“RSUs”) with either time- or performance-based criteria. We estimate forfeiture amounts based on historical patterns.
A summary of award activity is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options Granted
|
|
Restricted Stock Awards Granted
|
|
Restricted Stock Units Granted
|
|
Outstanding, December 31, 2018
|
|
15,674
|
|
|
8
|
|
|
1,797
|
|
|
Granted
|
|
—
|
|
|
—
|
|
|
2,045
|
|
|
Exercised options or vested shares
|
|
(2,595)
|
|
|
(8)
|
|
|
(298)
|
|
|
Canceled or forfeited
|
|
(1,110)
|
|
|
—
|
|
|
(93)
|
|
|
Outstanding, December 31, 2019
|
|
11,969
|
|
|
—
|
|
|
3,451
|
|
There are approximately 2.7 million awards of our common stock available for future equity grants under our existing equity incentive plans.
Stock Options
Our time-based stock options granted under our equity plans generally vest at a rate of 25% per year on each of the first four anniversaries of the grant dates, and expire after a ten-year period.
Our market-based options granted in 2017 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% premium for 2017 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, the vested tranche shall vest and become vested shares on the last day of a period of 30 consecutive trading days during which the closing price is at least the price hurdle. These options expire after a ten-year period.
There were no market-based or time-based option awards granted during the year ended December 31, 2019. There were no market-based option awards granted during the year ended December 31, 2018. There were market-based and time-based option awards granted during the year ended December 31, 2017.
The fair values of our standard time-based options were determined as of the date of grant using the Black-Scholes option pricing model with the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
2018
|
|
2017
|
|
Risk-free interest rate
|
|
3
|
%
|
|
2
|
%
|
|
Expected life of options (in years)
|
|
6
|
|
6
|
|
Expected volatility
|
|
53
|
%
|
|
54
|
%
|
|
Expected dividend yield
|
|
—
|
|
|
—
|
|
The fair values of our market-based options were determined as of the date of grant using a lattice-based option valuation model with the following assumptions (we did not grant market-based option awards subsequent to December 31, 2017):
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
Risk-free interest rate
|
|
3
|
%
|
|
Measurement period (in years)
|
|
10
|
|
Expected volatility
|
|
70
|
%
|
|
Expected dividend yield
|
|
—
|
|
The following table presents the options activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Options
(in thousands)
|
|
Weighted Average Exercise Price
(per Share)
|
|
Weighted Average Life Remaining
(Years)
|
|
Aggregate Intrinsic Value
(in thousands)
|
|
Outstanding, December 31, 2018
|
|
15,674
|
|
|
$
|
5.39
|
|
|
6.0
|
|
$
|
17,733
|
|
|
Granted
|
|
—
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
(2,595)
|
|
|
6.05
|
|
|
|
|
|
|
Canceled or forfeited
|
|
(1,110)
|
|
|
7.41
|
|
|
|
|
|
|
Outstanding, December 31, 2019
|
|
11,969
|
|
|
$
|
5.06
|
|
|
5.5
|
|
$
|
100,143
|
|
|
Vested and expected to vest, December 31, 2019
|
|
11,794
|
|
|
$
|
5.09
|
|
|
5.5
|
|
$
|
98,358
|
|
|
Exercisable, December 31, 2019
|
|
9,368
|
|
|
$
|
5.63
|
|
|
5.1
|
|
$
|
73,060
|
|
The following table presents the options outstanding and exercisable by price range:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
|
|
|
Options Exercisable
|
|
|
|
|
|
|
|
Number
Outstanding
|
|
Weighted
Average
Remaining
Contract
|
|
Weighted
Average
Exercise
|
|
Number
Exercisable
|
|
Weighted
Average
Exercise
|
|
Range of Exercise Prices
|
|
|
|
(in thousands)
|
|
Life (Years)
|
|
Prices
|
|
(in thousands)
|
|
Price
|
|
$
|
1.46
|
|
|
$
|
1.57
|
|
|
1,987
|
|
|
6.4
|
|
$
|
1.47
|
|
|
1,334
|
|
|
$
|
1.47
|
|
|
1.72
|
|
|
2.78
|
|
|
875
|
|
|
6.3
|
|
2.50
|
|
|
761
|
|
|
2.55
|
|
|
3.29
|
|
|
3.29
|
|
|
2,988
|
|
|
7.2
|
|
3.29
|
|
|
1,302
|
|
|
3.29
|
|
|
3.41
|
|
|
7.09
|
|
|
2,111
|
|
|
3.3
|
|
5.86
|
|
|
2,078
|
|
|
5.86
|
|
|
7.10
|
|
|
7.77
|
|
|
1,924
|
|
|
5.2
|
|
7.67
|
|
|
1,857
|
|
|
7.67
|
|
|
7.88
|
|
|
9.74
|
|
|
2,084
|
|
|
4.2
|
|
8.90
|
|
|
2,036
|
|
|
8.91
|
|
|
|
|
|
|
11,969
|
|
|
|
|
|
|
9,368
|
|
|
|
As stated above, we had no options granted for the year ended December 31, 2019. There were 20,000 and 4.3 million options granted for the years ended December 31, 2018 and 2017, respectively. The weighted average grant date fair value per share of the options granted was $4.15 and $1.98 for the years ended December 31, 2018 and 2017, respectively. The total intrinsic value of options exercised was $9.1 million, $6.5 million, and $5.3 million for the years ended December 31, 2019, 2018, and 2017, respectively.
There was approximately $1.4 million in unrecognized compensation expense related to options expected to vest as of December 31, 2019. This cost was expected to be recognized on a straight-line basis over a weighted average period of 1.0 year. We recorded approximately $2.4 million in non-cash compensation expense related to options granted that were expected to vest as of December 31, 2019. We received approximately $15.7 million in cash proceeds from the exercise of options during 2019.
There was approximately $3.4 million and $7.9 million in unrecognized compensation expense related to options expected to vest as of December 31, 2018 and 2017, respectively. This cost was expected to be recognized on a straight-line basis over a weighted average period of 2.8 years and 3.5 years for the years ended December 31, 2018 and 2017, respectively. We recorded approximately $5.1 million and $6.0 million in non-cash compensation expense related to options granted that were expected to
vest as of December 31, 2018 and 2017, respectively. We received approximately $9.6 million and $10.9 million in cash proceeds from the exercise of options during 2018 and 2017, respectively.
Restricted Stock Awards
The following table presents our time-based restricted stock activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Outstanding
(in thousands)
|
|
Weighted Average Grant Date Fair Value
(per Share)
|
|
Outstanding, December 31, 2018
|
|
8
|
|
|
$
|
6.66
|
|
|
Granted
|
|
—
|
|
|
—
|
|
|
Vested
|
|
(8)
|
|
|
6.66
|
|
|
Forfeited
|
|
—
|
|
|
—
|
|
|
Outstanding, December 31, 2019
|
|
—
|
|
|
$
|
—
|
|
There were no shares of restricted stock granted for the years ended December 31, 2019 and 2018, and 50,000 shares of restricted stock granted for the year ended December 31, 2017. The total fair value of restricted stock vested was approximately $0.1 million, $0.5 million, and $0.4 million for the years ended December 31, 2019, 2018, and 2017, respectively.
There was no remaining unrecognized compensation expense related to shares of restricted stock expected to vest as of December 31, 2019. There were 8,330 shares of restricted stock that vested during 2019, and we recorded $48,203 in non-cash compensation expense related to the restricted stock granted that was expected to vest.
There was $31,952 and approximately $0.5 million in unrecognized compensation expense related to shares of restricted stock expected to vest as of December 31, 2018 and 2017, respectively. This cost was expected to be recognized on a straight-line basis over a weighted average period of 0.3 years and 1.1 years, respectively. There were 65,501 shares and 56,578 shares of restricted stock that vested during 2018 and 2017, respectively, and we recorded approximately $0.4 million in non-cash compensation expense related to the restricted stock granted that was expected to vest during 2018 and 2017.
Restricted Stock Units
The fair value of each RSU grant is based on the market value of our common stock at the time of grant.
The time-based RSUs granted during 2019 vest at a rate of either 25% per year on each of the first four anniversaries of the grant dates or 100% at the end the 2 years following the grant date.
The performance-based RSUs granted during 2019 will be evaluated by the Compensation Committee of our Board of Directors after a performance period, beginning on the date of grant through December 31, 2021, based on certain revenue and free cash flow growth rate metrics, with achievement of each measure to be determined independently of one another. If the performance criteria of the metrics are approved, the eligible awards will become vested on the third anniversary of the grant dates.
The time-based RSUs granted during 2019 to independent members of our Board of Directors vest in equal installments on each of the first three anniversary dates of the grant date and settle on the earliest of the following events: (a) May 1, 2029 or November 4, 2019; (b) death; (c) the occurrence of a Change in Control (as defined in the Amended and Restated 2014 Plan), subject to qualifying conditions; or (d) the date that is six months following the separation from service, subject to qualifying conditions.
The performance-based RSUs granted during 2018 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, 2020, based on certain revenue and Adjusted EBITDA growth rate metrics, with achievement of each measure to be determined independently of one another. If the performance criteria of the metrics are approved, the eligible awards will become vested on the third anniversary of the grant dates.
The time-based RSUs granted during 2018 to independent members of our Board of Directors vest in equal installments on each of the first three anniversary dates of the grant date and settle on the earliest of the following events: (a) March 7, 2028; (b) death; (c) the occurrence of a Change in Control (as defined in the Amended and Restated 2014 Plan), subject to qualifying conditions; or (d) the date that is six months following the separation from service, subject to qualifying conditions.
The following table presents our RSU 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, 2018
|
|
1,797
|
|
|
$
|
7.49
|
|
|
2.0
|
|
$
|
9,254
|
|
|
Granted
|
|
2,045
|
|
|
10.16
|
|
|
|
|
|
|
|
Vested
|
|
(298)
|
|
|
7.42
|
|
|
|
|
|
|
|
Forfeited
|
|
(93)
|
|
|
8.62
|
|
|
|
|
|
|
|
Outstanding, December 31, 2019
|
|
3,451
|
|
|
$
|
9.05
|
|
|
1.7
|
|
$
|
46,342
|
|
|
Vested and expected to vest, December 31, 2019
|
|
2,480
|
|
|
$
|
8.99
|
|
|
1.5
|
|
$
|
33,306
|
|
There were approximately 2.0 million shares of RSU awards granted during the year ended December 31, 2019. There were approximately 0.3 million RSUs that vested during the year ended December 31, 2019. There was approximately $14.1 million in unrecognized compensation expense related to RSU awards expected to vest as of December 31, 2019. This cost is expected to be recognized on a straight-line basis over a weighted average period of 2.5 years. We recorded approximately $5.7 million in non-cash compensation expense related to RSU awards for the year ended December 31, 2019.
There was approximately 1.9 million and no shares of RSU granted for the years ended December 31, 2018 and 2017, respectively. There were no RSUs that vested during the years ended December 31, 2018 and 2017. There was approximately $6.7 million and no unrecognized compensation expense related to RSU awards expected to vest as of December 31, 2018 and 2017, respectively. The unrecognized compensation expense related to RSU awards expected to vest as of December 31, 2018 was expected to be recognized on a straight-line basis over a weighted average period of 3.0 years. We recorded approximately $1.8 million in non-cash compensation expense related to RSU awards for the year ended December 31, 2018.
In February 2020, the Compensation Committee of our Board of Directors authorized an award of RSUs to be granted to key members of management during the quarter ending March 31, 2020 based on the results of operations for the year ended December 31, 2019. The award met the definition of a liability-classified award with 2019 being the service period. As a result, the Company recorded compensation cost and corresponding share-based liability of approximately $1.7 million representing the fair value of the award at December 31, 2019 measured using the same valuation technique as for our equity-classified awards. The award is expected to be fully vested six months from the grant date and will be settled in shares of common stock.
17. INCOME TAXES
The following presents consolidated loss before tax for domestic and foreign operations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
Consolidated income (loss) before tax
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
11,709
|
|
|
$
|
1,227
|
|
|
$
|
(73,445)
|
|
|
Foreign
|
|
4,285
|
|
|
1,419
|
|
|
1,378
|
|
|
Total
|
|
$
|
15,994
|
|
|
$
|
2,646
|
|
|
$
|
(72,067)
|
|
The income tax (benefit) provision attributable to loss from operations before tax consists of the following components (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
Income tax (benefit) provision
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
(1,238)
|
|
|
$
|
(10,166)
|
|
|
$
|
(20,507)
|
|
|
Foreign
|
|
715
|
|
|
456
|
|
|
343
|
|
|
Total income tax benefit
|
|
$
|
(523)
|
|
|
$
|
(9,710)
|
|
|
$
|
(20,164)
|
|
|
Income tax (benefit) provision
|
|
|
|
|
|
|
|
Current
|
|
$
|
1,071
|
|
|
$
|
633
|
|
|
$
|
461
|
|
|
Deferred
|
|
(1,594)
|
|
|
(10,343)
|
|
|
(20,625)
|
|
|
Total income tax benefit
|
|
$
|
(523)
|
|
|
$
|
(9,710)
|
|
|
$
|
(20,164)
|
|
A reconciliation of the federal statutory rate and the effective income tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
Income tax reconciliation
|
|
|
|
|
|
|
|
Federal statutory rate
|
|
21.0
|
%
|
|
21.0
|
%
|
|
35.0
|
%
|
|
Foreign provision
|
|
2.5
|
%
|
|
6.8
|
%
|
|
0.3
|
%
|
|
State/province income tax
|
|
(1.6)
|
%
|
|
12.4
|
%
|
|
2.4
|
%
|
|
Non-deductible compensation cost
|
|
(5.3)
|
%
|
|
(7.7)
|
%
|
|
(2.0)
|
%
|
|
Adjustment to carrying value (1)
|
|
6.8
|
%
|
|
6.2
|
%
|
|
31.2
|
%
|
|
Research credit
|
|
(18.8)
|
%
|
|
(76.3)
|
%
|
|
1.9
|
%
|
|
Valuation allowance
|
|
(11.9)
|
%
|
|
(344.9)
|
%
|
|
(39.6)
|
%
|
|
Global intangible low-taxed income
|
|
2.7
|
%
|
|
9.1
|
%
|
|
—
|
%
|
|
Non-deductible expenses - other
|
|
1.2
|
%
|
|
7.2
|
%
|
|
(0.5)
|
%
|
|
Other
|
|
0.1
|
%
|
|
(0.8)
|
%
|
|
(0.7)
|
%
|
|
Effective tax rate
|
|
(3.3)
|
%
|
|
(367.0)
|
%
|
|
28.0
|
%
|
(1) The adjustment to carrying value in 2017 is due primarily to the federal tax rate change in the Tax Cuts and Jobs Act of 2017 (“2017 Tax Act”).
The major tax-effected components of the deferred tax assets and liabilities are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
Deferred income tax assets related to:
|
|
|
|
|
|
|
|
Net operating losses
|
|
$
|
97,613
|
|
|
$
|
97,190
|
|
|
$
|
87,250
|
|
|
Stock compensation expense
|
|
6,802
|
|
|
7,264
|
|
|
6,601
|
|
|
Accounts receivable allowances
|
|
1,415
|
|
|
1,582
|
|
|
1,117
|
|
|
Accrued and prepaid expenses
|
|
7,869
|
|
|
3,639
|
|
|
3,953
|
|
|
Other
|
|
1,880
|
|
|
1,319
|
|
|
479
|
|
|
Tax credits
|
|
12,116
|
|
|
9,244
|
|
|
6,822
|
|
|
Interest limitation
|
|
3,738
|
|
|
2,738
|
|
|
—
|
|
|
Valuation allowance
|
|
(51,522)
|
|
|
(53,156)
|
|
|
(63,303)
|
|
|
Total deferred income tax assets
|
|
$
|
79,911
|
|
|
$
|
69,820
|
|
|
$
|
42,919
|
|
|
Deferred income tax liabilities related to:
|
|
|
|
|
|
|
|
Property and equipment
|
|
$
|
23,012
|
|
|
$
|
3,855
|
|
|
$
|
3,129
|
|
|
Other intangible assets
|
|
76,279
|
|
|
89,865
|
|
|
73,597
|
|
|
Long-term debt
|
|
2,680
|
|
|
3,614
|
|
|
3,292
|
|
|
Other
|
|
4,341
|
|
|
353
|
|
|
1,108
|
|
|
Total deferred income tax liabilities
|
|
$
|
106,312
|
|
|
$
|
97,687
|
|
|
$
|
81,126
|
|
|
Deferred income taxes, net
|
|
$
|
(26,401)
|
|
|
$
|
(27,867)
|
|
|
$
|
(38,207)
|
|
The 2017 Tax Act was enacted on December 22, 2017. The 2017 Tax Act made significant changes to the federal tax law, including a reduction in the federal income tax rate from 35% to 21% effective January 1, 2018, stricter limits on deduction of interest, an 80% taxable income limitation on the use of a post-2017 net operating loss (“NOL”), 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 approximately a $22.5 million reduction in our income tax expense in 2017. We computed our transition tax liability of approximately $1.3 million due to the 2017 Tax Act, net of associated foreign tax credits, which was completely offset by additional foreign tax credits carried forward. Any remaining foreign tax credits not utilized by the transition tax were fully offset by a valuation allowance.
On December 22, 2017, the SEC staff issued Staff Accounting Bulletin 118 (“SAB 118”), which provided guidance on accounting for the tax effects of the 2017 Tax Act. In accordance with the SAB 118 guidance, some of the income tax effects recorded in 2017 and through December 22, 2018 were provisional, including the one-time transition tax, the effect on our valuation allowance including the stricter limits on interest deductions, the GILTI provisions of the 2017 Tax Act, and the remeasurement of our deferred tax assets and liabilities. During 2018, we recognized insignificant adjustments to the provisional amounts recorded at December 31, 2017 and included these adjustments as a component of income tax expense from continuing operations.
As of December 31, 2019, we had excess cash in our United Kingdom (the “UK”) subsidiary of approximately $3.0 million, which is not needed to fund the UK operations. Thus, we have decided to repatriate this amount which did not require the provision of any associated withholding or other taxes. The rest of our unrepatriated earnings were approximately $19.0 million as of December 31, 2019. 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 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.
The 2017 Tax Act subjects a U.S. corporation to current tax on the GILTI earned by certain foreign subsidiaries and a base erosion anti-avoidance tax (“BEAT”). Our foreign subsidiaries’ earnings for the periods after December 31, 2017 have been subject to U.S. federal income tax via the newly enacted GILTI provision. We have elected to recognize the taxes on GILTI and BEAT as a period expense in the period the taxes are incurred.
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 allowance to reduce the book value of our deferred tax assets to amounts that are estimated on a more likely than not basis to be realized. This assessment requires judgment and is performed on the basis of the weight of all available evidence, both positive and negative, with greater weight placed on information that is objectively verifiable such as historical performance.
We evaluated negative evidence noting that we reported cumulative net losses for the three-year periods ended as of December 31, 2019, 2018, and 2017. 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 overcome the negative evidence. However, based on our current year activity and the changes in the 2017 Tax Act, we decreased our valuation allowance for deferred tax assets by approximately $1.6 million during 2019. The decrease in our valuation allowance was primarily due to the book income during the year, as well as the current year NOL, and the interest deduction limitation (deferred tax assets) which can be offset against our indefinite lived deferred tax liabilities. The ultimate realization of deferred tax assets depends on having sufficient taxable income in the future years when the tax deductions associated with the deferred tax assets become deductible. The establishment of a valuation allowance does not impact cash, nor does it preclude us from using our tax credits, loss carry-forwards and other deferred tax assets in the future.
The following is a tabular reconciliation of the total amounts of deferred tax asset valuation allowance (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
Balance at beginning of period
|
|
$
|
53,156
|
|
|
$
|
63,303
|
|
|
$
|
61,012
|
|
|
Charged to provision for income taxes
|
|
(1,634)
|
|
|
(9,125)
|
|
|
(2,263)
|
|
|
Other (1)
|
|
—
|
|
|
(1,022)
|
|
|
4,554
|
|
|
Balance at end of period
|
|
$
|
51,522
|
|
|
$
|
53,156
|
|
|
$
|
63,303
|
|
(1) For 2017, the amount was recorded as a result of our adoption of ASU No. 2016-09 effective January 1, 2017. For 2018, the amount was recorded as a result of our adoption of ASC 606 effective January 1, 2018.
We had approximately $402.8 million, or $84.6 million, tax effected, of accumulated federal NOLs as of December 31, 2019, which may be carried forward and applied to offset taxable income for 20 years and will expire starting in 2025 (for losses incurred prior to 2018). NOLs incurred after 2017 of approximately $44.8 million, or $9.4 million, tax effected, are carried forward indefinitely to offset taxable income. We had approximately $11.5 million, tax effected, of federal research and development credit carry-forwards and approximately $0.5 million, tax effected, of foreign tax credit carry-forwards as of December 31, 2019. The research and development credits are limited to a 20 year carry-forward period and will expire starting in 2029. The foreign tax credits may be carried forward 10 years and will expire in 2020, if not utilized. Our alternative minimum tax credits of approximately $0.1 million at December 31, 2019 are expected to be refunded over the next four years in accordance with the 2017 Tax Act. We also have a receivable for approximately $0.1 million related to alternative minimum tax credits for which a refund is expected to be requested on our federal tax return for the year ended December 31, 2019. As of December 31, 2019, approximately $44.9 million of our valuation allowance relates to federal NOL carry-forwards and credits that we estimate are not more likely than not to be realized.
We had tax effected state NOL carry-forwards of approximately $13.0 million as of December 31, 2019, which will expire between 2020 and 2039. The determination and utilization of these state NOL carry-forwards are dependent upon apportionment percentages and other respective state laws, which may change from year to year. As of December 31, 2019, approximately $6.5 million of our valuation allowance relates to certain state NOL carry-forwards that we estimate are not more likely than not to be realized. The remaining valuation allowance of approximately $0.1 million relates to foreign NOLs.
The following is a tabular reconciliation of the total amounts of unrecognized tax benefits (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
Unrecognized tax benefit
|
|
|
|
|
|
|
|
Unrecognized tax benefit at the beginning of the period
|
|
$
|
1,062
|
|
|
$
|
937
|
|
|
$
|
834
|
|
|
Gross increases - tax positions in prior period
|
|
373
|
|
|
125
|
|
|
103
|
|
|
Unrecognized tax benefit at the end of the period
|
|
$
|
1,435
|
|
|
$
|
1,062
|
|
|
$
|
937
|
|
We analyzed filing positions in the federal, state, and foreign jurisdictions in which we are required to file income tax returns, as well as the open tax years in these jurisdictions. As of December 31, 2019, we recorded approximately $1.4 million of unrecognized tax benefits, all of which would impact our effective tax rate, if recognized. We do not anticipate that our unrecognized tax benefits will materially change within the next 12 months. The Company has not accrued any penalties and interest for its unrecognized tax benefits. Other than the unrecognized tax benefit recorded, we believe that our income tax filing positions and deductions will be sustained upon audit, and we do not anticipate other adjustments that will result in a material change to our financial position. We may, from time to time, be assessed interest or penalties by tax jurisdictions, although any such assessments historically have been minimal and immaterial to our financial results. Our policy for recording interest and penalties associated with audits and unrecognized tax benefits is to record such items as a component of income tax in our Statements of Operations.
We are subject to taxation in the U.S. and various states and foreign jurisdictions. We have a number of federal and state income tax years still open for examination as a result of our net operating loss carry-forwards. Accordingly, we are subject to examination for both U.S. federal and some of the state tax returns for the years 2005 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 2016.
18. SEGMENT INFORMATION
Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision-making group (the “CODM”). Our CODM consists of the Chief Executive Officer and the Chief Financial Officer. Our CODM allocates resources and measures profitability based on our operating segments, which are managed and reviewed separately, as each represents products and services that can be sold separately to our customers. Our segments are monitored by management for performance against our internal forecasts.
We have reported our financial performance based on our segments in both the current and prior periods. Our CODM determined that our operating segments for conducting business are: (a) Games and (b) FinTech:
•The Games segment provides solutions directly to gaming establishments to offer their patrons gaming entertainment- related experiences including: leased gaming equipment; sales of gaming equipment; gaming systems; interactive solutions; and ancillary products and services.
•The FinTech segment provides solutions directly to gaming establishments to offer their patrons cash access-related services and products, including: access to cash at gaming facilities via ATM cash withdrawals; credit card cash access transactions and POS debit card cash access transactions; check warranty services; kiosks for cash access and other services; self-service enrollment, player loyalty and marketing equipment; maintenance services; compliance, audit, and data software; casino credit data and reporting services, and other ancillary offerings.
Corporate overhead expenses have been allocated to the segments either through specific identification or based on a reasonable methodology. In addition, we record depreciation and amortization expenses to the business segments.
Our business is predominantly domestic with no specific regional concentrations and no significant assets in foreign locations.
The following tables present segment information (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
Games
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
Gaming operations
|
|
$
|
188,874
|
|
|
$
|
168,146
|
|
|
$
|
148,654
|
|
|
Gaming equipment and systems
|
|
90,919
|
|
|
87,038
|
|
|
70,118
|
|
|
Gaming other
|
|
3,326
|
|
|
3,794
|
|
|
4,005
|
|
|
Total revenues
|
|
$
|
283,119
|
|
|
$
|
258,978
|
|
|
$
|
222,777
|
|
|
Costs and expenses
|
|
|
|
|
|
|
|
Cost of revenues (1)
|
|
|
|
|
|
|
|
Gaming operations
|
|
18,043
|
|
|
17,603
|
|
|
15,741
|
|
|
Gaming equipment and systems
|
|
50,826
|
|
|
47,121
|
|
|
35,707
|
|
|
Gaming other
|
|
3,025
|
|
|
3,285
|
|
|
3,247
|
|
|
Cost of revenues
|
|
71,894
|
|
|
68,009
|
|
|
54,695
|
|
|
Operating expenses
|
|
61,522
|
|
|
57,244
|
|
|
42,780
|
|
|
Research and development
|
|
24,954
|
|
|
20,497
|
|
|
18,862
|
|
|
Depreciation
|
|
56,882
|
|
|
55,058
|
|
|
40,428
|
|
|
Amortization
|
|
57,491
|
|
|
55,099
|
|
|
57,060
|
|
|
Total costs and expenses
|
|
272,743
|
|
|
255,907
|
|
|
213,825
|
|
|
Operating income
|
|
$
|
10,376
|
|
|
$
|
3,071
|
|
|
$
|
8,952
|
|
(1) Exclusive of depreciation and amortization.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
FinTech
|
|
|
|
|
|
|
|
Revenues (1)
|
|
|
|
|
|
|
|
Cash access services
|
|
$
|
164,741
|
|
|
$
|
156,806
|
|
|
$
|
707,222
|
|
|
Equipment
|
|
37,865
|
|
|
20,977
|
|
|
13,258
|
|
|
Information services and other
|
|
47,502
|
|
|
32,754
|
|
|
31,691
|
|
|
Total revenues
|
|
$
|
250,108
|
|
|
$
|
210,537
|
|
|
$
|
752,171
|
|
|
Costs and expenses
|
|
|
|
|
|
|
|
Cost of revenues (2)
|
|
|
|
|
|
|
|
Cash access services
|
|
14,236
|
|
|
9,717
|
|
|
572,880
|
|
|
Equipment
|
|
22,292
|
|
|
12,601
|
|
|
7,717
|
|
|
Information services and other
|
|
3,964
|
|
|
4,110
|
|
|
3,253
|
|
|
Cost of revenues
|
|
40,492
|
|
|
26,428
|
|
|
583,850
|
|
|
Operating expenses
|
|
100,662
|
|
|
85,054
|
|
|
76,155
|
|
|
Research and development
|
|
7,551
|
|
|
—
|
|
|
—
|
|
|
Depreciation
|
|
6,316
|
|
|
6,167
|
|
|
6,854
|
|
|
Amortization
|
|
11,446
|
|
|
10,146
|
|
|
12,445
|
|
|
Total costs and expenses
|
|
166,467
|
|
|
127,795
|
|
|
679,304
|
|
|
Operating income
|
|
$
|
83,641
|
|
|
$
|
82,742
|
|
|
$
|
72,867
|
|
(1) On January 1, 2018, we adopted ASC 606 and our results prior to 2018 were not recast to reflect the new revenue recognition standard under the modified retrospective method. We previously reported costs and expenses related to our cash access services as a cost of revenues. Under ASC 606, such costs are reflected as reductions to cash access services revenues on a net basis of presentation.
(2) Exclusive of depreciation and amortization.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
|
Total Games and FinTech
|
|
|
|
|
|
|
|
Total revenues (1)
|
|
$
|
533,227
|
|
|
$
|
469,515
|
|
|
$
|
974,948
|
|
|
Costs and expenses
|
|
|
|
|
|
|
|
Cost of revenues (2)
|
|
112,386
|
|
|
94,437
|
|
|
638,545
|
|
|
Operating expenses
|
|
162,184
|
|
|
142,298
|
|
|
118,935
|
|
|
Research and development
|
|
32,505
|
|
|
20,497
|
|
|
18,862
|
|
|
Depreciation
|
|
63,198
|
|
|
61,225
|
|
|
47,282
|
|
|
Amortization
|
|
68,937
|
|
|
65,245
|
|
|
69,505
|
|
|
Total costs and expenses
|
|
439,210
|
|
|
383,702
|
|
|
893,129
|
|
|
Operating income
|
|
$
|
94,017
|
|
|
$
|
85,813
|
|
|
$
|
81,819
|
|
(1) On January 1, 2018, we adopted ASC 606 and our results prior to 2018 were not recast to reflect the new revenue recognition standard under the modified retrospective method. We previously reported costs and expenses related to our cash access services as a cost of revenues. Under ASC 606, such costs are reflected as reductions to cash access services revenues on a net basis of presentation.
(2) Exclusive of depreciation and amortization.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
|
|
2019
|
|
2018
|
|
Total assets
|
|
|
|
|
|
|
Games
|
|
$
|
902,888
|
|
|
$
|
912,849
|
|
|
FinTech
|
|
726,335
|
|
|
635,412
|
|
|
Total assets
|
|
$
|
1,629,223
|
|
|
$
|
1,548,261
|
|
Major customers. For the years ended December 31, 2019, 2018, and 2017, no single customer accounted for more than 10% of our revenues. Our five largest customers accounted for approximately 14%, 22%, and 31% of our total revenue in 2019, 2018, and 2017, respectively.
19. SELECTED QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The unaudited selected quarterly results of operations are as follows (in thousands, except for per share amounts)*.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
Year
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
123,775
|
|
|
$
|
129,706
|
|
|
$
|
134,569
|
|
|
$
|
145,177
|
|
|
$
|
533,227
|
|
|
Operating income
|
|
25,872
|
|
|
24,879
|
|
|
27,293
|
|
|
15,973
|
|
|
94,017
|
|
|
Net income (loss)
|
|
5,860
|
|
|
5,486
|
|
|
9,315
|
|
|
(4,144)
|
|
|
16,517
|
|
|
Basic earnings (loss) per share
|
|
$
|
0.08
|
|
|
$
|
0.08
|
|
|
$
|
0.13
|
|
|
$
|
(0.05)
|
|
|
$
|
0.23
|
|
|
Diluted earnings (loss) per share
|
|
$
|
0.08
|
|
|
$
|
0.07
|
|
|
$
|
0.12
|
|
|
$
|
(0.05)
|
|
|
$
|
0.21
|
|
|
Weighted average common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
70,334
|
|
|
71,477
|
|
|
72,251
|
|
|
75,387
|
|
|
72,376
|
|
|
Diluted
|
|
75,256
|
|
|
79,158
|
|
|
79,125
|
|
|
75,387
|
|
|
79,235
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
111,001
|
|
|
$
|
118,682
|
|
|
$
|
120,330
|
|
|
$
|
119,502
|
|
|
$
|
469,515
|
|
|
Operating income
|
|
24,491
|
|
|
22,597
|
|
|
21,510
|
|
|
17,215
|
|
|
85,813
|
|
|
Net income
|
|
4,609
|
|
|
1,475
|
|
|
2,069
|
|
|
4,203
|
|
|
12,356
|
|
|
Basic earnings per share
|
|
$
|
0.07
|
|
|
$
|
0.02
|
|
|
$
|
0.03
|
|
|
$
|
0.06
|
|
|
$
|
0.18
|
|
|
Diluted earnings per share
|
|
$
|
0.06
|
|
|
$
|
0.02
|
|
|
$
|
0.03
|
|
|
$
|
0.06
|
|
|
$
|
0.17
|
|
|
Weighted average common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
68,686
|
|
|
69,203
|
|
|
69,750
|
|
|
70,196
|
|
|
69,464
|
|
|
Diluted
|
|
73,285
|
|
|
73,440
|
|
|
74,594
|
|
|
74,024
|
|
|
73,796
|
|
|
|
|
|
|
|
|
|
*
|
Rounding may cause variances.
|
20. SUBSEQUENT EVENTS
On January 6, 2020, Everi FinTech completed a partial redemption payment of approximately $84.5 million of aggregate principal with respect to the 2017 Unsecured Notes. The total outstanding balance of the 2017 Unsecured Notes following the partial redemption was approximately $290.5 million.
In February 2020, our Board of Directors authorized and approved a new share repurchase program granting us the authority to repurchase an amount not to exceed $10.0 million of outstanding Company common stock with no minimum number of shares that the Company is required to repurchase. This new repurchase program will commence in the first quarter of 2020 and authorizes us to buy our common stock from time to time in open market transactions, block trades or in private transactions in accordance with trading plans established in accordance with Rules 10b5-1 and 10b-18 of the Securities Exchange Act of 1934, as amended, or by a combination of such methods, including compliance with the Company’s finance agreements. The share repurchase program is subject to available liquidity, general market and economic conditions, alternate uses for the capital and other factors, and may be suspended or discontinued at any time without prior notice.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.