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11: R2 Unaudited Condensed Consolidated Statements of HTML 138K
Operations and Comprehensive Income
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13: R4 Unaudited Condensed Consolidated Balance Sheets HTML 43K
(Parenthetical)
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Cash Flows
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Stockholders? Equity
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Accounting Policies
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Accounting Policies (Policies)
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Accounting Policies (Tables)
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ACCOUNTING POLICIES - Contract Asset and Liability
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ACCOUNTING POLICIES - Additional Information
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ACCOUNTING POLICIES - Schedule of Cash (Details)
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ACCOUNTING POLICIES - Estimated Fair Value and
Outstanding Balances of Borrowings (Details)
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Consideration (Details)
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Assets Acquired and Liabilities Assumed (Details)
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Intangible Assets (Details)
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(Exact name of registrant as specified in its charter)
iDelaware
i20-0723270
(State
or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
i7250 S. Tenaya Way, iSuite
100
iLas Vegas
iNevada
i89113
(Address
of principal executive offices)
(Zip Code)
(i800) i833-7110
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b)
of the Act:
Title of each class
Trading symbol(s)
Name of each exchange on which registered
iCommon Stock, $0.001 par value
iEVRI
iNew
York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYesx No ¨
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYesx No ¨
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
iLarge
accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
¨
Smaller reporting company
i☐
Emerging
growth company
i☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes i☐ No x
As of July 29, 2022, there were i89,849,846
shares of the registrant’s $0.001 par value per share common stock outstanding.
Trade
and other receivables, net of allowances for credit losses of $i5,284 and $i5,161 at June 30,
2022 and December 31, 2021, respectively
i108,726
i104,822
Inventory
i49,163
i29,233
Prepaid
expenses and other current assets
i38,895
i27,299
Total
current assets
i494,085
i552,638
Non-current
assets
Property and equipment, net
i127,131
i119,993
Goodwill
i707,258
i682,663
Other
intangible assets, net
i236,112
i214,594
Other
receivables
i20,997
i13,982
Deferred
tax assets, net
i9,475
i32,121
Other
assets
i28,945
i19,659
Total
non-current assets
i1,129,918
i1,083,012
Total
assets
$
i1,624,003
$
i1,635,650
LIABILITIES
AND STOCKHOLDERS’ EQUITY
Current liabilities
Settlement liabilities
$
i204,199
$
i291,861
Accounts
payable and accrued expenses
i208,200
i173,933
Current
portion of long-term debt
i6,000
i6,000
Total
current liabilities
i418,399
i471,794
Non-current
liabilities
Long-term debt, less current portion
i973,760
i975,525
Other
accrued expenses and liabilities
i29,215
i13,831
Total
non-current liabilities
i1,002,975
i989,356
Total
liabilities
i1,421,374
i1,461,150
Commitments
and contingencies (Note 13)
i
i
Stockholders’ equity
Convertible
preferred stock, $ii0.001/ par value,
ii50,000/ shares authorized and
iino/ shares outstanding at June 30,
2022 and December 31, 2021, respectively
i—
i—
Common
stock, $ii0.001/ par value, ii500,000/
shares authorized and i119,109 and i90,761 shares issued and outstanding at June 30, 2022, respectively, and i116,996
and i91,313 shares issued and outstanding at December 31, 2021, respectively
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In this filing, we refer to: (i) our unaudited condensed consolidated financial statements and notes thereto as our “Financial Statements;” (ii) our Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income as our “Statements of Operations;” and (iii) our Unaudited Condensed Consolidated
Balance Sheets as our “Balance Sheets.”
1. iBUSINESS
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 supplier of entertainment and technology solutions for the casino and digital gaming industry. The Company develops game content and gaming machines, gaming systems and services for land-based and iGaming operators. The Company is also a provider of financial technology solutions that power the casino floor, including products and services that facilitate cash and cashless financial transactions, self-service player loyalty tools and applications,
and regulatory and intelligence software.
Everi reports its financial performance, and organizes and manages its operations, across the following itwo business segments: (i) Games and (ii) Financial Technology Solutions (“FinTech”).
Everi Games provides gaming operators with gaming technology and entertainment products and services, including: (i) gaming machines, primarily comprising Class II, Class III and Historic Horse Racing (“HHR”) slot machines placed under
participation or fixed-fee lease arrangements or sold to casino customers; (ii) providing and maintaining the central determinant systems for the video lottery terminals (“VLTs”) installed in the State of New York and similar technology in certain tribal jurisdictions; and (iii) business-to-business (“B2B”) digital online gaming activities.
Everi FinTech provides gaming operators with financial technology products and services, including: (i) financial access and related services supporting digital, cashless and physical cash options across mobile, assisted and self-service channels; (ii) loyalty and marketing software and tools, regulatory and compliance (“RegTech”) software solutions, other information-related products and services, and hardware maintenance services; and (iii) associated casino patron self-service hardware that utilizes our financial access, software and other
services. Our services operate as part of an end-to-end security suite to protect against cyber-related attacks and maintain the necessary secured environments to maintain compliance with applicable regulatory requirements. These solutions include: access to cash and cashless funding at gaming facilities via Automated Teller Machine (“ATM”) debit withdrawals, credit card financial access transactions, and point of sale (“POS”) debit card purchases at casino cages, kiosk and mobile POS devices; accounts for the CashClub Wallet, check warranty services, self-service loyalty and fully integrated kiosk maintenance services; self-service loyalty tools and promotion management software; compliance, audit, and data software; casino credit data and reporting services; marketing and promotional offering subscription-based services; and other ancillary offerings.
Impact of the Coronavirus Disease 2019 (“COVID-19”)
Pandemic
The COVID-19 pandemic negatively impacted the global economy, disrupted global supply chains, and created significant volatility in the financial markets. Initially, it lowered equity market valuations and raised the cost of borrowing funds, increased unemployment levels, and caused temporary, and in certain cases, permanent closures of many businesses. The gaming industry was not immune to these factors as our casino customers closed their gaming establishments in the first quarter of 2020. As the initial impacts from the COVID-19 pandemic subsided, most of our casino customers began to reopen their operations over the remainder of 2020 and throughout 2021. While some of our customers’ locations have permanently ceased operations, nearly all of our customer base has resumed operations as of June 30, 2022. In addition, the impacts of employment constraints and supply
chain disruptions continue to challenge our customers and us.
Since the onset of COVID-19, we have implemented measures to mitigate our exposure throughout the global pandemic. While many pandemic impacts have subsided, further uncertainty still challenges our customers and us as a result of COVID-19 and the resurgence of its variants. We continue to evaluate our business strategies and monitor the impacts of the global pandemic, employment constraints and supply chain disruptions on our results of operations and financial condition, and make adjustments to our business, accordingly.
8
Our revenues for the second quarter of 2022 exceeded the second quarter of 2021. While gaming industry conditions
have improved significantly compared to 2020, it is unclear if customer capital allocations will return and remain at pre-COVID levels. With macro-economic and pandemic-related challenges still in effect, we expect that demand and supply for our products and services could be tempered in the short-term, to the extent gaming activity decreases at our customers’ locations, or fails to increase at expected rates, and to the extent our customers decide to continue to restrict their capital spending as a result of uncertainty in the industry, or that supply chain disruptions might impact customer deliveries or otherwise.
The impact of the COVID-19 pandemic also exacerbates the risks disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021 (the “Annual Report”), including, but not limited to: our ability to generate revenues and, earn profits, our ability
to service existing and attract new customers and maintain our overall competitiveness in the market; the potential for significant fluctuations in demand for our products and services; overall trends in the gaming industry impacting our business, and potential volatility in our stock price, among other concerns.
2. iBASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
i
Basis of Presentation
Our unaudited condensed consolidated financial statements included herein have been prepared by us pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Some of the information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) have been condensed or omitted pursuant to such rules and regulations, although we believe the disclosures are adequate
to make the information presented not misleading. In the opinion of management, all adjustments (which include normal recurring adjustments) necessary for a fair statement of results for the interim periods have been made. The results for the three and six months ended June 30, 2022 are not necessarily indicative of results to be expected for the full fiscal year. The Financial Statements should be read in conjunction with the consolidated financial statements and notes thereto included in the most recently filed Annual Report.
We evaluate the composition of our revenues to maintain compliance with SEC Regulation S-X Section 210.5-3, which requires us to separately present certain categories of revenues that exceed the quantitative threshold on our Statements of Operations.
i
Revenue
Recognition
Overview
We evaluate the recognition of revenue based on the criteria set forth in Accounting Standards Codification (“ASC”) 606 — Revenue from Contracts with Customers and ASC 842 — Leases, as appropriate. We recognize revenue upon transferring control of goods or services to our customers in an amount that reflects the consideration we expect to receive in exchange for those goods or services. We enter into contracts with customers that include various performance obligations consisting of goods, services, or combinations of goods and services. Timing of the transfer of control varies based on the nature of the contract.
We recognize revenue net of any sales and other taxes collected from customers, which are subsequently remitted to governmental authorities and are not included in revenues or operating expenses. We measure revenue based on the consideration specified in a contract with a customer and adjusted, as necessary.
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.”
Since our contracts may include multiple performance obligations, there is often a timing difference between cash collections and the satisfaction of such performance obligations and revenue recognition. Such arrangements are evaluated to determine whether contract assets and liabilities exist. We generally record contract assets when the timing of billing differs from when revenue is recognized due to contracts containing specific performance obligations that are required to be met prior to a customer being invoiced. We generally record contract
liabilities when cash is collected in advance of us satisfying performance obligations, including those that are satisfied over a period of time. Balances of our contract assets and contract liabilities may fluctuate due to timing of cash collections.
i
The following table summarizes our contract
assets and contract liabilities arising from contracts with customers (in thousands):
(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 $i21.1
million and $i18.0 million in revenue that was included in the beginning contract liability balance during the six months ended June 30, 2022 and 2021, respectively.
Games Revenues
Our products and services include electronic gaming devices, such as
Native American Class II offerings and other electronic bingo products, Class III slot machine offerings, HHR offerings, VLTs, B2B digital online gaming activities, accounting and central determinant systems, and other back office systems. We conduct our Games segment business based on results generated from the following major revenue streams: (i) Gaming Operations; (ii) Gaming Equipment and Systems; and (iii) Gaming Other.
We recognize our Gaming Operations revenue based on criteria set forth in ASC 842 or ASC 606, as applicable. The amount of lease revenue included in our Gaming Operations revenues and recognized under ASC 842 was approximately $i49.5
million and $i96.6 million for the three and six months ended June 30, 2022, respectively, and $i51.7
million and $i92.5 million for the three and six months ended June 30, 2021, respectively.
10
FinTech Revenues
Our FinTech products and services include solutions that we offer to gaming establishments to provide their patrons
with financial access and funds-based services supporting digital, cashless and physical cash options across mobile, assisted and self-service channels along with related loyalty and marketing tools, and other information-related products and services. In addition, our services operate as part of an end-to-end security suite to protect against cyber-related attacks and maintain the necessary secured environments to maintain compliance with applicable regulatory requirements. These solutions include: access to cash and cashless funding at gaming facilities via ATM debit withdrawals, credit card financial access transactions, and POS debit card purchases at casino cages, kiosk and mobile POS devices; accounts for the CashClub Wallet, check warranty services, self-service loyalty and fully integrated kiosk maintenance services; self-service loyalty tools and promotion management software; compliance, audit, and data software; casino credit data and
reporting services; marketing and promotional offering subscription-based services; and other ancillary offerings. We conduct our FinTech segment business based on results generated from the following major revenue streams: (i) Financial Access Services; (ii) Software and Other; and (iii) Hardware.
Hardware revenues are derived from the sale of our financial access and loyalty kiosks and related equipment and are accounted for under ASC 606, unless such transactions meet the definition of a sales type or direct financing lease, which are accounted for under ASC 842. We did not have any material financial access kiosk and related equipment sales contracts accounted for under ASC 842 during the three and six months ended June 30, 2022 and 2021.
iRestricted
Cash
Our restricted cash primarily consists of: (i) funds held in connection with certain customer agreements; (ii) funds held in connection with a sponsorship agreement; (iii) wide area progressive (“WAP”)-related restricted funds; and (iv) financial access activities related to cashless balances held on behalf of patrons. iiThe
following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the Balance Sheets that sum to the total of the same such amounts shown in the statement of cash flows for the six months ended June 30, 2022 (in thousands)./
We continually evaluate the collectability of outstanding balances and maintain an allowance for credit losses related to our trade and other receivables and notes receivable that have been determined to have a high risk of uncollectability, which represents our best estimates of the current expected credit losses to be incurred in the future. To derive our estimates, we analyze historical collection trends and changes in our customer payment patterns, current and expected conditions and market trends along with our operating forecasts, concentration, and creditworthiness when evaluating the adequacy of our allowance for credit losses. In addition, with respect to our check warranty receivables, we are exposed to risk for the losses associated with warranted items that cannot be collected from patrons issuing these items. We evaluate the collectability of the outstanding balances and establish a reserve for
the face amount of the current expected credit losses related to these receivables. Account balances are charged against the provision when the Company believes it is probable the receivable will not be recovered. The provision for doubtful accounts receivable is included within operating expenses and the check warranty loss reserves are included within financial access services cost of revenues in the Statements of Operations.
i
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 an impairment exists. To the extent the carrying amount of a reporting unit
is less than its estimated fair value, an impairment charge is recorded.
11
The evaluation of impairment of goodwill requires the use of estimates about future operating results. Changes in forecasted operations can materially affect these estimates, which could materially affect our results of operations and financial condition. The estimates of expected future cash flows require significant judgment and are based on assumptions we determined to be reasonable; however, they are unpredictable and inherently uncertain, including, estimates of future growth rates, operating margins and assumptions about the overall economic climate as well as the competitive environment within which we operate. There can be no assurance that our estimates and assumptions made for purposes
of our impairment assessments as of the time of evaluation will prove to be accurate predictions of the future. If our assumptions regarding business plans, competitive environments, or anticipated growth rates are not correct, we may be required to record non-cash impairment charges in future periods, whether in connection with our normal review procedures periodically, or earlier, if an indicator of an impairment is present prior to such evaluation.
Our reporting units are identified as operating segments or one level below. Reporting units must: (i) engage in business activities from which they earn revenues and incur expenses; (ii) have operating results that are regularly reviewed by our segment management to ascertain the resources to be allocated to the segment and assess its performance; and (iii) have discrete financial information available. As of June 30, 2022, our
reporting units included: (i) Games; (ii) Financial Access Services; (iii) Kiosk Sales and Services; (iv) Central Credit Services; (v) Compliance Sales and Services; and (vi) Loyalty Sales and Services.
i
Fair Values of Financial Instruments
The fair value of a financial instrument represents the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Fair value estimates are made at a specific point
in time, based upon relevant market information about the financial instrument.
The carrying amount of cash and cash equivalents, restricted cash, settlement receivables, short-term trade and other receivables, settlement liabilities, accounts payable, and accrued expenses approximate fair value due to the short-term maturities of these instruments. The fair value of the long-term trade and loans receivable is estimated by discounting expected future cash flows using current interest rates at which similar loans would be made to borrowers with similar credit ratings and remaining maturities. The fair value of long-term accounts payable is estimated by discounting the total obligation using the appropriate interest rates. As of June 30, 2022 and December 31, 2021, the fair value of trade and loans receivable approximated
the carrying value due to contractual terms generally being slightly over ii12/ 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. iThe estimated fair value and outstanding balances of our borrowings are as follows (dollars in thousands):
Our
borrowings’ fair values were determined using Level 2 inputs based on quoted market prices for these securities.
Reclassification of Prior Year Balances
Certain amounts in the accompanying consolidated financial statements and accompanying notes have been reclassified to be consistent with the current year presentation. These reclassifications had no effect on net income for the prior periods.
The adoption of this ASU did not have a material effect on our Financial Statements or on our disclosures.
Recent Accounting Guidance Not Yet Adopted
As of June 30, 2022, we do not anticipate recently issued accounting guidance to have a significant future impact on our consolidated financial statements.
/
3. iiLEASES/
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 (i) obtain substantially all of the economic benefit from the use of the asset; and (ii) direct the use of the asset.
Operating lease right-of-use (“ROU”) assets and liabilities are recognized based on the 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 one to iten 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 is 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 initial term of 12 months or less (short-term) are not accounted for on our Balance Sheets. As of June 30, 2022 and December 31, 2021, our finance leases were not material.
13
i
Supplemental balance sheet
information related to our operating leases is as follows (in thousands):
We generate lease revenues primarily from our gaming operations activities, and the majority of our leases are month-to-month leases.
Under these arrangements, we retain ownership of the electronic gaming machines (“EGMs”) installed at customer facilities. We receive recurring revenues based on a percentage of the net win per day generated by the leased gaming equipment or a fixed daily fee. Such revenues are generated daily and are limited to the lesser of the net win per day generated by the leased gaming equipment or the fixed daily fee and the lease payments that have been collected from the lessee. Certain of our leases have terms and conditions with options for a lessee to purchase the underlying assets. Refer to "Note 9 - Property and Equipment" for details of our rental pool assets cost and accumulated depreciation.
We did iino/t
have material sales transactions that qualified for sales-type lease accounting treatment during the three and six months ended June 30, 2022 and 2021. Our interest income recognized in connection with sales-type leases executed in the prior periods was not material.
i
Supplemental balance sheet information related to our sales-type leases is as follows (in thousands):
We account for business combinations in accordance with ASC 805 — Business Combinations, which requires that the identifiable assets acquired and liabilities assumed be recorded at their estimated fair values on the acquisition date separately from goodwill, which is the excess of the fair value of the purchase price over the fair values of these identifiable assets and liabilities. We include the results of operations of an acquired business as of the acquisition
date.
ecash Holdings Pty Limited
On March 1, 2022 (the “Closing Date”), the Company acquired the stock of ecash Holdings Pty Limited and wholly-owned subsidiaries Global Payment Technologies Australia Pty Limited, and ACN 121 187 068 Pty Limited (collectively “ecash”), a privately owned, Australia-based developer and provider of innovative cash handling and financial payment solutions for the broader gaming industry in Australia, Asia, Europe, and the United States. The acquisition of ecash’s products and services represents a strategic extension of Everi’s current suite of financial technology solutions within
the FinTech segment. The acquisition provides Everi with a complementary portfolio of new customer locations throughout Australia, the United States, and other geographies.
Under the terms of the stock purchase agreement, we paid the seller AUD$i20 million (approximately USD$i15 million)
on the Closing Date of the transaction and we will pay an additional AUD$i6.5 million ione
year following the Closing Date and another AUD$i6.5 million itwo
years following the Closing Date. In addition, we paid approximately AUD$i8.7 million (approximately USD$i6.0 million)
for the excess net working capital during the quarter ended June 30, 2022.
15
Pursuant to the arrangement, there is an earn-out provision of up to AUD$i10 million, to the extent certain growth targets are achieved. The payment, if any, is subject
to certain employment restrictions and will be accounted for as compensation expense in accordance with GAAP.
The acquisition did not have a significant impact on our results of operations or financial condition for the three and six months ended June 30, 2022.
i
The total preliminary purchase consideration for ecash was as follows (in
thousands, at fair value):
Amount in USD
Purchase consideration
Cash consideration paid at closing
$
i14,980
Cash
consideration to be paid post-closing
i15,905
Total purchase consideration
$
i30,885
/
Cash
consideration to be paid is comprised of a short-term component that is recorded in accounts payable and accrued expenses and a long-term component payable within itwo years recorded in other accrued expenses and liabilities of our Balance Sheets.
The transaction was accounted for using the acquisition method of accounting, which requires, among other things, the assets acquired and liabilities assumed be recognized at their respective fair values as of the acquisition date. The excess of the purchase price over those
fair values was recorded as goodwill, which will be amortized over a period of i15 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 financial technology solution portfolio to add new markets and business lines and an assembled workforce, among other strategic benefits.
The estimates and assumptions used include the projected timing and amount of future cash flows and discount rates reflecting risk inherent in the future
cash flows. The estimated fair values of assets acquired and liabilities assumed and resulting goodwill are subject to adjustment as the Company finalizes its purchase price accounting. The 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, 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 and the final fair value analysis, which we expect to complete no later than the first quarter of 2023.
i
The
information below reflects the amounts of identifiable assets acquired and liabilities assumed (in thousands):
Amount in USD*
Current assets
$
i13,630
Property
and equipment
i1,218
Other intangible assets
i11,600
Goodwill
i11,081
Other
assets
i726
Total Assets
i38,255
Accounts
payable and accrued expenses
i7,160
Other accrued expenses and liabilities
i210
Total
liabilities
i7,370
Net assets acquired
$
i30,885
_______________________
*Reflects
a measurement period adjustment of approximately $i0.4 million from the initial allocation as of the closing date of the transaction.
/
16
Current
assets acquired included approximately $i2.8 million in cash. Trade receivables acquired of approximately $i5.7 million
were short-term in nature and considered to be collectible, and therefore, the carrying amounts of these assets represented their fair values. Inventory acquired of approximately $i5.0 million consisted of raw materials and finished goods and was recorded at fair value based on the estimated net realizable value of these assets. Property, equipment, and leased assets acquired were not material in size or scope, and the carrying
amounts of these assets approximated their fair values.
i
The following table summarizes preliminary values of acquired intangible assets (dollars in thousands):
Useful
Life (Years)
Estimated Fair Value (USD)
Other Intangible Assets
Trade name
i3
$
i700
Developed
technology
i3
i3,600
Customer
relationships
i9
i7,300
Total
other intangible assets
$
i11,600
/
The
fair value of intangible assets was determined by applying the income approach. Other intangible assets acquired of approximately $i11.6 million were comprised of customer relationships, developed technology and trade name. The fair value of customer relationships of approximately $i7.3 million
was determined by applying the income approach utilizing the excess earnings methodology using Level 3 inputs in the fair value hierarchy including a discount rate of i17%. The fair value of developed technology of approximately $i3.6 million
was determined by applying the income approach utilizing the relief from royalty methodology using Level 3 inputs with a royalty rate of i7.5% and a discount rate of i17%.
The fair value of trade name of approximately $i0.7 million was determined by applying the income approach utilizing the relief from royalty methodology using Level 3 inputs with a royalty rate of i2%
and a discount rate of i17%.
The financial results included in our Statements of Operations since the acquisition date and through June 30, 2022 reflected revenues of approximately $i5.4 million
and net loss of approximately $i0.2 million. We incurred acquisition-related costs of approximately $i0.2 million
for the six months ended June 30, 2022.
Intuicode Gaming Corporation
On April 30, 2022 (the “Closing Date”), the Company acquired the stock of Intuicode Gaming Corporation (“Intuicode”), a privately owned game development and engineering firm focused on HHR games. The acquisition of Intuicode provides Everi with additional HHR expertise that will help the Company accelerate its growth in the expanding HHR market that will benefit the Games segment.
Under the terms of the stock purchase agreement, we paid the seller $i12.5 million
on the Closing Date of the transaction and a net working capital payment of $i1.6 million during the three months ended June 30, 2022. In addition, we expect to pay approximately $i13.0 million
in contingent consideration based upon the achievement of certain revenue targets on the first and second anniversaries of the Closing Date. We expect the total consideration for this acquisition, inclusive of contingent consideration, to be approximately $i27.1 million.
The acquisition did not have a significant impact on our results of operations or financial condition for the three and six months ended June 30,
2022.
The total preliminary purchase consideration for Intuicode was as follows (in thousands, at fair value):
Amount in USD
Purchase consideration
Cash consideration paid at closing
$
i12,500
Cash
consideration to be paid post-closing
i1,595
Total cash consideration
i14,095
Contingent
consideration (at fair value)
i12,150
Total purchase consideration
$
i26,245
17
The
fair value of the contingent consideration was based on Level 3 inputs utilizing a discounted cash flow methodology. The estimates and assumptions included projected future revenues of the acquired business and a discount rate of approximately i5%. Contingent consideration to be paid is comprised of a short-term component that is recorded in accounts payable and accrued expenses and a long-term component payable within itwo
years recorded in other accrued expenses and liabilities of our Balance Sheets.
The transaction was accounted for using the acquisition method of accounting, which requires, among other things, the assets acquired and liabilities assumed be recognized at their respective fair values as of the acquisition date. The excess of the purchase price over those fair values was recorded as goodwill, which will be amortized over a period of i15 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 accelerating our entry into and growth in the expanding HHR market and business line, assembled workforce, among other strategic benefits.
The estimates and assumptions used include the projected timing and amount of future cash flows and discount rates reflecting risk inherent in the future cash flows. The estimated fair values of assets acquired and liabilities assumed and resulting goodwill are subject to adjustment as the Company finalizes its purchase price accounting. The 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, 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 and the final fair value analysis, which we expect to complete no later than the second quarter of 2023.
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 in USD
Current assets
$
i3,944
Property
and equipment
i157
Other intangible assets
i18,600
Goodwill
i10,422
Total
Assets
i33,123
Accounts payable and accrued expenses
i2,407
Deferred
tax liabilities
i4,471
Total liabilities
i6,878
Net
assets acquired
$
i26,245
Current assets acquired included approximately $i2.1 million
in cash. Trade receivables acquired of approximately $i0.6 million were short-term in nature and considered to be collectible, and therefore, the carrying amounts of these assets represented their fair values. Inventory acquired of approximately $i0.4 million
consisted of raw materials and finished goods and was recorded at fair value based on the estimated net realizable value of these assets. Property, equipment, and leased assets acquired were not material in size or scope, and the carrying amounts of these assets approximated their fair values.
The following table summarizes preliminary values of acquired intangible assets (dollars in thousands):
Useful Life (Years)
Estimated Fair Value (USD)
Other
Intangible Assets
Trade name
i10
$
i400
Developed
technology
i2
i3,200
Customer
relationships
i9
i15,000
Total
other intangible assets
$
i18,600
18
The
fair value of intangible assets was determined by applying the income approach. Other intangible assets acquired of approximately $i18.6 million were comprised of customer relationships, developed technology and trade name. The fair value of customer relationships of approximately $i15.0 million
was determined by applying the income approach utilizing the excess earnings methodology using Level 3 inputs in the hierarchy with a discount rate of i40%. The fair value of developed technology of approximately $i3.2 million
was determined by applying the income approach utilizing the relief from royalty methodology using Level 3 inputs with a royalty rate of i25% and a discount rate of i35%.
The fair value of trade name of approximately $i0.4 million was determined by applying the income approach utilizing the relief from royalty methodology using Level 3 inputs with a royalty rate of i1%
and a discount rate of i40%.
The financial results included in our Statements of Operations since the acquisition date and through June 30, 2022 reflected revenues of approximately $i1.3 million
and net income of approximately $i0.2 million. We incurred acquisition-related costs of approximately $ii0.1/ million
for the three and six months ended June 30, 2022.
Pro-forma financial information (unaudited)
The unaudited pro forma financial data includes the historical operating results of the Company and the itwo acquired businesses prior to the acquisitions as if the transactions occurred on January 1, 2021. The unaudited
pro forma results include increases to depreciation and amortization expense based on the purchased intangible assets and costs directly attributable to the acquisitions.The unaudited pro forma results do not purport to be indicative of results of operations as of the date hereof, for any period ended on the date hereof, or for any other future date or period; nor do they give effect to synergies, cost savings, fair market value adjustments and other changes expected as a result of the acquisitions.
The unaudited pro forma financial data on a consolidated basis as if the ecash and Intuicode acquisitions occurred on January 1, 2021 included revenue of approximately $i198.2 million
and $i382.9 million and net income of approximately $i31.3 million and $i63.8 million,
respectively, for the three and six months ended June 30, 2022, and revenue of approximately $i180.3 million and $i329.2 million
and net income of approximately $i36.7 million and $i58.1 million, respectively, for the three
and six months ended June 30, 2021.
5. iFUNDING AGREEMENTS
We have commercial arrangements with third-party vendors to provide cash for certain of our fund dispensing devices. For the use of these funds, we pay a usage fee on either the average daily balance of funds utilized multiplied by a contractually
defined usage rate or the amounts supplied multiplied by a contractually defined usage rate. These fund usage fees, reflected as interest expense within the Statements of Operations, were approximately $i1.7 million and $i2.7 million for
the three and six months ended June 30, 2022, respectively, and $i0.9 million and $i1.6 million for the three and six months ended June 30,
2021, respectively. We are exposed to interest rate risk to the extent that the applicable rates increase.
Under these agreements, the currency supplied by third party vendors remains their sole property until the funds are dispensed. As these funds are not our assets, supplied cash is not reflected in our Balance Sheets. The outstanding balance of funds provided from the third parties were approximately $i403.7 million and $i401.8
million as of June 30, 2022 and December 31, 2021, 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 up to $i300 million with the ability to increase the amount as defined within the agreement
or otherwise permitted by the vault cash provider. The term of the agreement expires on June 30, 2024 and will automatically renew for additional ione-year periods unless either party provides a ininety-day written
notice of its intent not to renew.
We are responsible for losses of cash in the fund dispensing devices under this agreement, and we self-insure for this type of risk. There were no material losses for the three and six months ended June 30, 2022 and 2021.
6. iTRADE
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.
19
i
The
balance of trade and other receivables consisted of the following (in thousands):
Our inventory primarily consists of component parts as well as work-in-progress and finished goods. The cost of inventory includes cost of materials, labor, overhead and freight, and is accounted for using the first in, first out method. The inventory is stated at the lower of cost or net realizable value.
i
Inventory
consisted of the following (in thousands):
Prepaid expenses and other assets include the balance of prepaid expenses, deposits, debt issuance costs on our New Revolver (as defined below), restricted cash, operating lease ROU assets, and other assets. The current portion of these assets is included in prepaid expenses and other current assets and the non-current portion is included in other assets, both of which are contained within the Balance Sheets.
i
The
balance of the current portion of prepaid expenses and other assets consisted of the following (in thousands):
Depreciation
expense related to property and equipment totaled approximately $i15.7 million and $i30.9 million for the three and six months ended June 30, 2022, respectively, and $i15.9 million
and $i32.1 million for the three and six months ended June 30, 2021, respectively.
21
10. iGOODWILL
AND OTHER INTANGIBLE ASSETS
Goodwill
Goodwill represents the excess of the purchase price over the identifiable tangible and intangible assets acquired plus liabilities assumed arising from business combinations. The balance of goodwill was approximately $i707.3 million and $i682.7 million at
June 30, 2022 and December 31, 2021, respectively. We have the following reporting units: (i) Games; (ii) Financial Access Services; (iii) Kiosk Sales and Services; (iv) Central Credit Services; (v) Compliance Sales and Services; and (vi) Loyalty Sales and Services.
In accordance with ASC 350 (“Intangibles—Goodwill and Other”), we test goodwill at the reporting unit level, which is identified as an operating segment or one level below, for impairment on an annual basis and between annual tests if events and circumstances indicate it is more likely than not that the fair value of a reporting unit is less than its carrying amount.
We test our goodwill for impairment on October 1 each year, or more frequently if events or changes in circumstances indicate that it is more likely
than not that the fair value of a reporting unit 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. To the extent the carrying amount of a reporting unit is less than its estimated fair value, an impairment charge is recorded.
There was iiiino///
impairment identified for our goodwill for the three and six months ended June 30, 2022 and 2021.
Other Intangible Assets
i
Other intangible assets consist of the following (dollars in thousands):
Amortization
expense related to other intangible assets was approximately $i14.6 million and $i28.3 million for the three and six months ended June 30,
2022, respectively, and $i14.4 million and $i29.1 million for the three and six months ended June 30,
2021, respectively.
We evaluate our other intangible assets for potential impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. During the three and six months ended June 30, 2022 and 2021, there were iiiino///
material write-downs of intangible assets.
22
11. iACCOUNTS PAYABLE AND ACCRUED EXPENSES
i
The
following table presents our accounts payable and accrued expenses (in thousands):
Contingent
consideration and acquisition-related liabilities
i10,922
i—
Accrued
interest
i9,302
i9,273
Operating
lease liabilities
i6,268
i5,663
Financial
access processing and related expenses
i5,402
i3,619
Accrued
taxes
i4,027
i2,756
Repurchase
of shares
i3,039
i—
Other
i4,462
i4,291
Total
accounts payable and accrued expenses
$
i208,200
$
i173,933
/
12.
iLONG-TERM DEBT
i
The following table summarizes our outstanding indebtedness (dollars in thousands):
Maturity
Interest
At
June 30,
At December 31,
Date
Rate
2022
2021
Long-term debt
$i600
million New Term Loan
2028
LIBOR+i2.50%
$
i595,500
$
i598,500
$i125
million New Revolver
2026
LIBOR+i2.50%
i—
i—
Senior
secured credit facilities
i595,500
i598,500
$i400
million 2021 Unsecured Notes
2029
i5.00%
i400,000
i400,000
Total
debt
i995,500
i998,500
Debt
issuance costs and discount
(i15,740)
(i16,975)
Total
debt after debt issuance costs and discount
i979,760
i981,525
Current
portion of long-term debt
(i6,000)
(i6,000)
Total
long-term debt, net of current portion
$
i973,760
$
i975,525
/
New
Credit Facilities
Our Senior Secured Credit Facilities consist of: (i) a iseven-year $i600 million senior secured term loan due 2028 issued at i99.75%
of par (the “New Term Loan”); and (ii) a $i125 million senior secured revolving credit facility due 2026, which was undrawn at closing (the “New Revolver” and together with the New Term Loan, the “New Credit Facilities”). The Company, as borrower, entered into the credit agreement dated as of August
3, 2021 (the “Closing Date”), among the Company, the lenders party thereto and Jefferies Finance LLC, as administrative agent, collateral agent, swing line lender and a letter of credit issuer (the “New Credit Agreement”).
The interest rate per annum applicable to the New Credit Facilities will be, at the Company’s option, either the Eurodollar rate with a i0.50%
LIBOR floor plus a margin of i2.50% or the base rate plus a margin of i1.50%.
The
New Revolver is available for general corporate purposes, including permitted acquisitions, working capital and the issuance of letters of credit. Borrowings under the New Revolver are subject to the satisfaction of customary conditions, including the absence of defaults and the accuracy of representations and warranties. Our New Revolver remained fully undrawn as of June 30, 2022.
23
The Company is required to make periodic payments on the New Term Loan in an amount equal to i0.25%
per quarter of the initial aggregate principal, with the final principal repayment installment on the maturity date. Interest is due in arrears on each interest payment date applicable thereto and at such other times as may be specified in the New Credit Agreement. As to any loan other than a base rate loan, the interest payment dates shall be the last day of each interest period applicable to such loan and the maturity date (provided, however, that if any interest period for a Eurodollar Rate loan exceeds three months, the respective dates that fall every three months after the beginning of such interest period shall also be interest payment dates). As to any base rate loan, commencing on the last business day of December 2021, the interest payment dates shall be last business day of each of March, June, September and December and the maturity date.
Voluntary prepayments of the New Term Loan and the New Revolver and voluntary
reductions in the unused commitments are permitted in whole or in part, in minimum amounts as set forth in the New Credit Agreement governing the New Credit Facilities, with prior notice, and without premium or penalty, except that certain refinancings or repricings of the New Term Loan within isix months after the Closing Date was subject to a prepayment premium of i1.00%
of the principal amount repaid.
The New Credit Agreement contains certain covenants that, among other things, limit the Company’s ability, and the ability of certain of its subsidiaries, to incur additional indebtedness, sell assets or consolidate or merge with or into other companies, pay dividends or repurchase or redeem capital stock, make certain investments, issue capital stock of subsidiaries, incur liens, prepay, redeem or repurchase subordinated debt, and enter into certain types of transactions with its affiliates. The New Credit Agreement also requires the
Company, together with its subsidiaries, to comply with a maximum consolidated secured leverage ratio of i4.25:1.00 as of the measurement date.
The weighted average interest rate on the New Term Loan was i3.21%
and i3.11% for the three and six months ended June 30, 2022, respectively.
Senior Unsecured Notes
Our Senior Unsecured Notes (the “2021 USN”) had an outstanding balance of approximately $i400.0
million as of June 30, 2022, for which interest accrues at a rate of i5.00% per annum and is payable semi-annually in arrears on each January 15 and July 15.
Compliance with Debt Covenants
We were in compliance with the covenants and terms of the New Credit Facilities and the Senior Unsecured Notes as of June 30, 2022.
13.
iCOMMITMENTS AND CONTINGENCIES
We are involved in various legal proceedings in the ordinary course of our business. While we believe resolution of the claims brought against us, both individually and in the aggregate, will not have a material adverse impact on our financial condition or results of operations, litigation of this nature is inherently unpredictable. Our views on these legal proceedings, including those described below, may change in the future. We intend to vigorously defend
against these actions, and ultimately believe we should prevail.
Legal Contingencies
We evaluate matters and record an accrual for legal contingencies when it is both probable that a liability has been incurred and the amount or range of the loss may be reasonably estimated. We evaluate legal contingencies at least quarterly and, as appropriate, establish new accruals or adjust existing accruals to reflect: (i) the facts and circumstances known to us at the time, including information regarding negotiations, settlements, rulings, and other relevant events and developments; (ii) the advice and analyses of counsel; and (iii) the assumptions and judgment of management. Legal costs associated with such proceedings are expensed as incurred. Due to the inherent uncertainty of legal proceedings as a result
of the procedural, factual, and legal issues involved, the outcomes of our legal contingencies could result in losses in excess of amounts we have accrued.
FACTA-related matter:
Geraldine Donahue, et al. v. Everi Payments Inc., et al. (“Donahue”) is a putative class action matter filed on December 12, 2018, in the Circuit Court of Cook County, Illinois County Division, Chancery Division. The original defendant was dismissed and Everi Holdings and FinTech (the “Defendants”) were substituted as the defendants on April 22, 2019. The plaintiff, on behalf of herself and others similarly situated, alleges that Everi Holdings and Everi FinTech (i) have violated certain provisions of FACTA by their
failure, as agent to the original defendant, to properly truncate patron credit card numbers when printing financial access receipts as required under FACTA, and (ii) have been unjustly enriched through the charging of service fees for
24
transactions conducted at the original defendant’s facilities. The plaintiff sought an award of statutory damages, attorneys’ fees, and costs. The parties settled this matter on a nationwide class basis. On December 3, 2020, the court entered the Final Order and Judgment approving the settlement and dismissing all claims asserted against the Defendants with prejudice. Everi Holdings and Everi FinTech have paid all funds required pursuant to the settlement. Distributions were made to class
members and remaining unclaimed funds were distributed to nonprofit charitable organizations in compliance with the court’s October 4, 2021 approval. Defense counsel for Everi Payments Inc. has asked the court provide a final closing order/entry as this matter is now closed.
NRT matter:
NRT Technology Corp., et al. v. Everi Holdings Inc., et al. is a civil action filed on April 30, 2019 against Everi Holdings and Everi FinTech in the United States District Court for the District of Delaware by NRT Technology Corp. and NRT Technology, Inc., alleging monopolization of the market for unmanned, integrated kiosks in violation of federal antitrust laws, fraudulent procurement of patents on functionality related to
such unmanned, integrated kiosks and sham litigation related to prior litigation brought by Everi FinTech (operating as Global Cash Access Inc.) against the plaintiff entities. The plaintiffs are seeking compensatory damages, treble damages, and injunctive and declaratory relief. Discovery is closed and this case is currently set for trial on September 26, 2022. Due to the early stages of the litigation, we are currently unable to estimate the probability of the outcome of this matter or reasonably estimate the range of possible damages, if any.
Zenergy Systems, LLC matter:
Zenergy Systems, LLC v. Everi Payments Inc. is a civil action filed on May 29, 2020, against Everi FinTech in the United
States District Court for the District of Nevada, Clark County by Zenergy Systems, LLC, alleging breach of contract, breach of a non-disclosure agreement, conversion, breach of the covenant of good faith and fair dealing, and breach of a confidential relationship related to a contract with Everi FinTech that expired in November 2019. The plaintiff is seeking compensatory and punitive damages. Everi FinTech has counterclaimed against Zenergy alleging breach of contract, breach of implied covenant of good faith and fair dealing, and for declaratory relief. The case is set for trial in February 2023. Due to the early stages of the litigation, we are currently unable to estimate the probability of the
outcome of this matter or reasonably estimate the range of possible damages, if any.
Sadie Saavedra matter:
Sadie Saavedra, et al. v. Everi Payments Inc., et al. is a civil action filed on August 30, 2021, against Everi Holdings and Everi FinTech in the United States District Court, Central District of California (Western Division) by Sadie Saavedra, individually and on behalf of a class of similarly situated individuals, alleging violations of the Unfair Competition Law (California Business & Professions Code § 17200) and unjust enrichment. The plaintiffs allege that certain of Everi’s ATMs screen are deceptive and designed to maximize the number of transaction fees and mislead consumers into incurring fees for transactions. The plaintiffs are
seeking restitution, injunctive relief and attorneys’ fees. On April 11, 2022, the Court entered an Order granting the Motion to Dismiss on behalf of Everi Holdings and Everi FinTech. The Plaintiff did not file a timely appeal, and as a result, this matter is closed.
Sightline Payments matter:
Sightline Payments LLC v. Everi Holdings Inc., et al. is a civil action filed on September 30, 2021, against Everi Holdings, Everi FinTech, Everi Games Holding Inc., and Everi Games (collectively referred here as “Everi”) in the United States District Court, Western District of Texas (Waco Division) by Sightline Payments LLC alleging patent infringement in violation of 35 U.S.C. § 271
et seq. The plaintiff’s complaint alleges that Everi’s CashClub Wallet product infringes on certain patents owned by the plaintiff. The plaintiff is seeking compensatory damages. Everi filed a Motion to Dismiss or Transfer for Lack of Venue. On June 1, 2022, the Court granted Everi’s Motion to Dismiss ruling that the Western District of Texas was not the proper venue for an action against Everi Fintech, Everi Holdings and Everi Games. The Court granted plaintiff 14 days to file an amended complaint as to Everi Games Holding Inc. Plaintiff did not file an amended complaint. On June 23, 2022, the plaintiff, Sightline Payments LLC, filed a Notice of Appeal of the Court’s Dismissal Order. We are in the early stages of litigation and currently unable to determine the probability of the outcome or estimate the range of reasonably possible loss, if any, in this matter. Due to
the early stages of the litigation, we are currently unable to estimate the probability of the outcome of this matter or reasonably estimate the range of possible damages, if any.
Mary Parrish matter:
Mary Parrish v. Everi Holdings Inc., et al. is a civil action filed on December 28, 2021, against Everi Holdings and Everi FinTech in the District Court of Nevada, Clark County by Mary Parrish alleging violation of the Fair and Accurate Credit
25
Transactions Act (FACTA) amendment to the Fair Credit Reporting Act (FCRA). Plaintiff’s complaint alleges she received
a printed receipt for cash access services performed at an Everi Payments’ ATM which displayed more than four (4) digits of the account number. Plaintiff seeks statutory damages, punitive damages, injunctive relief, attorneys’ fees, and other relief. Everi filed a Petition for Removal to the United States District Court, District of Nevada. Thereafter, Everi filed a Motion to Dismiss, which is pending in the United States District Court. Due to the early stages of the litigation, we are currently unable to estimate the probability of the outcome of this matter or reasonably estimate the range of possible damages, if any.
In addition, we have commitments with respect to certain lease obligations discussed in “Note 3 — Leases” and installment payments under our purchase agreements
discussed in “Note 4 — Business Combinations.”
14. iSTOCKHOLDERS’ EQUITY
On May 4, 2022, our Board of Directors authorized and approved a new share repurchase
program in an amount not to exceed $i150.0 million pursuant to which we may purchase outstanding Company common stock in open market or privately negotiated transactions over a period of eighteen (i18)
months through November 4, 2023, in accordance with Company and regulatory policies and trading plans established in accordance with Rules 10b5-1 and 10b-18 of the Securities Exchange Act of 1934. The actual number of shares to be purchased will depend upon market conditions and is subject to available liquidity, general market and economic conditions, alternative uses for the capital and other factors. All shares purchased will be held in the Company’s treasury for possible future use. As of June 30, 2022, Everi had approximately i90.8
million shares issued and outstanding, net of i28.3 million shares held in the Company’s treasury. There is no minimum number of shares that the Company is required to repurchase, and the program may be suspended or discontinued at any time without prior notice. This new repurchase program supersedes and replaces, in its entirety, the previous share repurchase program.
There
were i2.0 million shares repurchased during the three months ended June 30, 2022 at an average price of $i16.68
per share for an aggregate amount of $i33.3 million. The remaining availability under the May 2022 $i150.0 million share
repurchase program was $i116.7 million as of June 30, 2022. There were iino/
share repurchases during the three and six months ended June 30, 2021.
15. iWEIGHTED AVERAGE SHARES OF COMMON STOCK
i
The
weighted average number of common stock shares outstanding used in the computation of basic and diluted earnings per share is as follows (in thousands):
Weighted average number of common shares outstanding - basic
i91,710
i88,722
i91,560
i87,858
Potential
dilution from equity awards(1)
i6,996
i11,308
i7,689
i11,146
Weighted
average number of common shares outstanding - diluted(1)
i98,706
i100,030
i99,249
i99,004
(1) There
were i0.5 million shares that were anti-dilutive under the treasury stock method for the three months ended June 30, 2022 and an iimmaterial
number of shares that were anti-dilutive for the six months ended June 30, 2022 under the treasury stock method. There were ino shares that were anti-dilutive under the treasury stock method for the three months ended June 30, 2021, and there were approximately i0.2
million shares of common stock that were anti-dilutive under the treasury stock method for the six months ended June 30, 2021.
/
16. iSHARE-BASED
COMPENSATION
Equity Incentive Awards
Generally, we grant the following types of awards: (i) restricted stock units with either time- or performance-based criteria; (ii) time-based options; and (iii) market-based options. We estimate forfeiture amounts based on historical patterns.
26
i
A summary of award
activity is as follows (in thousands):
There
are approximately i3.9 million awards of our common stock available for future equity grants under our existing equity incentive plans as of June 30, 2022.
17. iINCOME
TAXES
The income tax provision for the three and six months ended June 30, 2022, reflected an effective income tax rate of i23.0% and i23.3%,
respectively, which was greater than the statutory federal rate of i21.0%, primarily due to state taxes, compensation deduction limitations and an accrual for a foreign withholding tax, partially offset by both a research credit and the benefit from stock option exercises. The income tax provision for the three and six months ended June 30, 2021 reflected an effective income tax rate of i1.1%
and i2.7%, which was less than the statutory federal rate of i21.0%, primarily due to a decrease in our
valuation allowance for our deferred tax assets and the benefit from stock option exercises.
We have analyzed filing positions in all of the federal, state, and foreign jurisdictions where we are required to file income tax returns, as well as all open tax years in these jurisdictions. As of June 30, 2022, we recorded approximately $i2.2 million of unrecognized tax benefits, all
of which would impact our effective tax rate, if recognized. We do not anticipate that our unrecognized tax benefits will materially change within the next 12 months. We have not accrued any penalties and interest for our unrecognized tax benefits. We may, from time to time, be assessed interest or penalties by tax jurisdictions, although any such assessments historically have been minimal and immaterial to our financial results. Our policy for recording interest and penalties associated with audits and unrecognized tax benefits is to record such items as a component of income tax in our Statements of Operations.
18. iSEGMENT
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 generally 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: (i) Games and (ii) FinTech:
•Everi
Games primarily provides gaming operators with gaming technology products and services, including: (i) gaming machines, primarily comprising Class II and Class III and HHR slot machines placed under participation or fixed-fee lease arrangements or sold to casino customers; (ii) provision and maintenance of the central determinant systems for the VLTs installed in the State of New York and similar technology in certain tribal jurisdictions; and (iii) B2B digital online gaming activities.
•Everi FinTech provides gaming operators with financial technology and entertainment products and services, including: (i) financial access and related services supporting digital, cashless and physical cash options across mobile, assisted and self-service channels; (ii) loyalty and marketing software and tools, RegTech software solutions, other information-related products and services, and hardware maintenance services;
and (iii) associated casino patron self-service hardware that utilizes our financial access, software and other services.
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.
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i
The
following tables present segment information (in thousands)*:
Major
Customers. No single customer accounted for more than 10% of our revenues for the three and six months ended June 30, 2022 and 2021. Our five largest customers accounted for approximately i15% and i14%
of our revenues for the three and six months ended June 30, 2022, respectively, and ii17/%
for the three and six months ended June 30, 2021, respectively.
19. iSUBSEQUENT EVENTS
As of the filing date, we had not identified, and were not aware of, any subsequent event for the period.
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Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
In this filing, we refer to: (i) our unaudited condensed consolidated financial statements and notes thereto as our “Financial Statements”; (ii) our Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income as our “Statements of Operations”; (iii) our Unaudited Condensed Consolidated Balance Sheets as our “Balance Sheets”; and (iv) our Management’s Discussion and Analysis of Financial Condition and Results of Operations as our “Results of Operations.”
Cautionary Information Regarding Forward-Looking Statements
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains “forward-looking” statements within
the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Private Securities Litigation Reform Act of 1995, as do other materials or oral statements we release to the public. Forward-looking statements are neither historical facts nor assurances of future performance, but instead are based only on our current beliefs, expectations, and assumptions regarding the future of our business, plans and strategies, projections, anticipated events and trends, the economy, and other future conditions, as of the date on which this report is filed. Forward-looking statements often, but do not always, contain words such as “expect,”“anticipate,”“aim to,”“designed to,”“intend,”“plan,”“believe,”“goal,”“target,”“future,”“assume,”“estimate,”“indication,”“seek,”“project,”“may,”“can,”“could,”“should,”“favorably positioned,” or “will” and other words and terms of similar meaning.
Forward-looking statements are subject to inherent risks, uncertainties, and changes in circumstances that are often difficult to predict and many of which are beyond our control, including, but not limited to, statements regarding: trends, developments, and uncertainties impacting our business, including our ability to withstand: global supply chain disruption; inflationary impact on supply chain costs; changes in global market, business and regulatory conditions arising as a result of the COVID-19 global pandemic, including any related public health confidence and availability of discretionary spending income of casino patrons as well as expectations for the re-opening of casinos;
product innovations that address customer needs in a new and evolving operating environment; to regain or maintain revenue, earnings, and cash flow momentum, and to enhance shareholder value in the long-term; trends in gaming establishment and patron usage of our products; benefits realized by using our products and services; benefits and/or costs associated with mergers, acquisitions, and/or strategic alliances; product development, including the release of new game features, additional games, and system releases in the future; regulatory approvals; gaming and financial regulatory and legal, card association, and statutory compliance and changes; the implementation of new or amended card association and payment network rules or interpretations; consumer collection activities; competition (including consolidations); tax liabilities; goodwill impairment charges; international expansion; resolution of litigation or government investigations; our dividend policy; new customer
contracts and contract renewals; financial performance and results of operations (including revenue, expenses, margins, earnings, cash flow, and capital expenditures); inflationary impact on labor costs and retention; interest rates and interest expense; borrowings and debt repayments; and equity incentive activity and compensation expense.
We undertake no obligation to update or publicly revise any forward-looking statements as a result of new information, future developments or otherwise. All subsequent written or oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by this section.
You are advised, however, to consult any further disclosures we make on related subjects in our reports and other filings with the Securities and Exchange Commission (the “SEC”).
Our actual results and financial condition may differ materially from those indicated in forward-looking statements, and important factors that could cause them to do so include, but are not limited to, the following: our ability to generate profits in the future and to create incremental value for shareholders; our ability to withstand inflationary and other factors that pressure discretionary consumer spending; our ability to execute on mergers, acquisitions and/or strategic alliances, including our ability to integrate and operate such acquisitions or alliances consistent with our forecasts in order to achieve future growth; our ability to execute on key initiatives and deliver ongoing improvements;
expectations regarding growth for the Company’s installed base and daily win per unit; expectations regarding placement fee arrangements; inaccuracies in underlying operating assumptions; the impact of the ongoing Coronavirus Disease 2019 (“COVID-19”) global pandemic on our business, operations and financial condition, including (i) actions taken by international, federal, state, tribal and municipal governmental and regulatory agencies to contain the COVID-19 public health emergency or mitigate its impact, (ii) the direct and indirect economic effects of COVID-19 and measures to contain it, including directives, orders or similar actions by international, federal, state, tribal and municipal governmental and regulatory agencies to regulate freedom of movement and business operations such as travel restrictions, border closures, business closures, limitations on public gatherings,
quarantines and shelter-in-place orders as well as re-opening safety protocols; changes in global market, business, and regulatory conditions arising as a result of the COVID-19 global pandemic; our history of net losses and our ability to generate profits in the future; our leverage and the related covenants that restrict our operations; our ability to generate sufficient cash to service all of our indebtedness, fund working capital, and capital expenditures; our ability to withstand unanticipated impacts of a pandemic
30
outbreak of uncertain duration; our ability to withstand the loss of revenue during the closure of our customers’ facilities; our ability to maintain our current customers; expectations regarding customers’ preferences and demands
for future product and service offerings; the overall growth of the gaming industry, if any; our ability to replace revenue associated with terminated contracts; margin degradation from contract renewals; our ability to comply with the Europay, MasterCard, and Visa global standard for cards equipped with security chip technology; our ability to successfully introduce new products and services, including third-party licensed content; gaming establishment and patron preferences; failure to control product development costs and create successful new products; anticipated sales performance; our ability to prevent, mitigate, or timely recover from cybersecurity breaches, attacks, and compromises; national and international economic and industry conditions; changes in gaming regulatory, card
association, and statutory requirements; regulatory and licensing difficulties, competitive pressures and changes in the competitive environment; operational limitations; gaming market contraction; changes to tax laws; uncertainty of litigation outcomes; interest rate fluctuations; business prospects; unanticipated expenses or capital needs; technological obsolescence and our ability to adapt to evolving technologies; our ability to comply with our debt covenants and service outstanding debt; employee turnover and retention; our ability to comply with regulatory requirements under the Payment Card Industry (“PCI”) Data Security Standards and maintain our certified status; and those other risks and uncertainties discussed in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December
31, 2021 (the “Annual Report”).
This Quarterly Report on Form 10-Q should be read in conjunction with our Annual Report and the information included in our other press releases, reports, and other filings with the SEC. Understanding the information contained in these filings is important in order to fully understand our reported financial results and our business outlook for future periods.
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Overview
Everi is a leading supplier of imaginative entertainment
and trusted technology solutions for the casino and digital gaming industry. Everi’s mission is to lead the gaming industry through the power of people, imagination and technology. Focused on player engagement and assisting our casino customers operate more efficiently, the Company develops entertaining game content and gaming machines, gaming systems and services for land-based and iGaming operators. The Company is also a preeminent and comprehensive provider of trusted financial technology solutions that power the casino floor while improving operational efficiencies and fulfilling regulatory compliance requirements, including products and services that facilitate convenient and secure cash and cashless financial transactions, self-service player loyalty tools and applications, and regulatory and
intelligence software.
Everi reports its financial performance, and organizes and manages its operations, across the following two business segments: (i) Games and (ii) Financial Technology Solutions (“FinTech”).
Everi Games provides gaming operators with gaming technology and entertainment products and services, including: (i) gaming machines, primarily comprising Class II, Class III and Historic Horse Racing (“HHR”) slot machines placed under participation or fixed-fee lease arrangements or sold to casino customers; (ii) providing and maintaining the central determinant systems for the video lottery terminals (“VLTs”) installed in the State of New York and similar technology in certain tribal jurisdictions; and (iii) business-to-business (“B2B”) digital online gaming activities.
Everi
FinTech provides gaming operators with financial technology products and services, including: (i) financial access and related services supporting digital, cashless and physical cash options across mobile, assisted and self-service channels; (ii) loyalty and marketing software and tools, regulatory and compliance (“RegTech”) software solutions, other information-related products and services, and hardware maintenance services; and (iii) associated casino patron self-service hardware that utilizes our financial access, software and other services. Our services operate as part of an end-to-end security suite to protect against cyber-related attacks and maintain the necessary secured environments to maintain compliance with applicable regulatory requirements. These solutions include: access to cash and cashless funding at gaming facilities via Automated Teller Machine (“ATM”) debit withdrawals, credit card financial access transactions, and point of sale (“POS”)
debit card purchases at casino cages, kiosk and mobile POS devices; accounts for the CashClub Wallet, check warranty services, self-service loyalty and fully integrated kiosk maintenance services; self-service loyalty tools and promotion management software; compliance, audit, and data software; casino credit data and reporting services; marketing and promotional offering subscription-based services; and other ancillary offerings.
Impact of the COVID-19 Pandemic
The COVID-19 pandemic negatively impacted the global economy, disrupted global supply chains, and created significant volatility in the financial markets. Initially, it lowered equity market valuations and raised the cost of borrowing funds, increased unemployment levels, and caused temporary, and in certain cases, permanent closures of many
businesses. The gaming industry was not immune to these factors as our casino customers closed their gaming establishments in the first quarter of 2020. As the initial impacts from the COVID-19 pandemic subsided, most of our casino customers began to reopen their operations over the remainder of 2020 and throughout 2021. While some of our customers’ locations have permanently ceased operations, nearly all of our customer base has resumed operations as of June 30, 2022. In addition, the impacts of employment constraints and supply chain disruptions continue to challenge our customers and us.
Since the onset of COVID-19, we have implemented measures to mitigate our exposure throughout the global pandemic. While many pandemic impacts have subsided, further uncertainty still challenges our customers and us as a result of COVID-19 and the
resurgence of its variants. We continue to evaluate our business strategies and monitor the impacts of the global pandemic, employment constraints and supply chain disruptions on our results of operations and financial condition, and make adjustments to our business, accordingly.
Our revenues for the second quarter of 2022 exceeded the second quarter of 2021. While gaming industry conditions have improved significantly compared to 2020, it is unclear if customer capital allocations will return and remain at pre-COVID levels. With macro-economic and pandemic-related challenges still in effect, we expect that demand and supply for our products and services could be tempered in the short-term, to the extent gaming activity decreases at our customers’ locations, or fails to increase at expected rates, and to the extent our customers decide to continue to restrict their capital spending as a result
of uncertainty in the industry, or that supply chain disruptions might impact customer deliveries or otherwise.
The impact of the COVID-19 pandemic also exacerbates the risks disclosed in our Annual Report, including, but not limited to: our ability to generate revenues and, earn profits, our ability to service existing and attract new customers and maintain our
32
overall competitiveness in the market; the potential for significant fluctuations in demand for our products and services; overall trends in the gaming industry impacting our business, and potential volatility in our stock price, among other concerns.
Additional Items Impacting Comparability of
Results of Operations
Our Financial Statements included in this report reflect the following additional items impacting the comparability of results of operations:
•During the second quarter of 2022, our Board of Directors authorized and approved a new share repurchase program in an amount not to exceed $150.0 million pursuant to which we may purchase outstanding Company common stock in open market or privately negotiated transactions over a period of eighteen (18) months through November 4, 2023. There were 2.0 million shares repurchased during the three months ended June 30, 2022 at an average price of $16.68 per share for an aggregate amount of $33.3 million. The remaining availability under the
May 2022 $150.0 million share repurchase program was $116.7 million as of June 30, 2022.
•During the first half of 2022, we acquired the stock of ecash Holdings Pty Limited and wholly-owned subsidiaries (collectively “ecash”) and Intuicode Gaming Corporation (“Intuicode”), and made an initial cash payment of $15.0 million and $12.5 million at the closing of each transaction, respectively. The acquisitions did not have a material impact on our results of operations as of and for the period ended June 30, 2022.
•In
2021, we decreased our valuation allowance for our deferred tax assets by approximately $67.9 million, of which $63.5 million was released during the fourth quarter of 2021, due to the removal of the full valuation allowance on our federal and certain states deferred tax assets.
•During the third quarter of 2021, we completed a refinancing of our prior credit facilities and entered into a credit agreement and a letter of credit (the “New Credit Agreement”). The New Credit Agreement provides for: (i) a seven-year $600 million senior secured term loan due 2028 issued at 99.75% of par (the “New Term Loan”); and (ii) a $125 million senior secured revolving credit facility due 2026, which was undrawn at closing (the “New Revolver” and together with the New Term Loan, the “New Credit Facilities”). The fees associated with the New Credit Facilities
were approximately $13.9 million, which included discounts of approximately $1.5 million.
•During the third quarter of 2021, we completed a refinancing of our 7.50% senior unsecured notes due in 2025 (the “2017 Unsecured Notes”) with an offering of $400 million in aggregate principal, issued at par, of 5.00% senior unsecured notes due 2029 (the “2021 Unsecured Notes”). The fees associated with the 2021 Unsecured Notes included debt issuance costs of approximately $5.9 million.
•During the third quarter of 2021, in connection with these refinancing and repayment activities, the total fees were approximately $40.6 million, comprised of approximately $20.8 million of early redemption penalties and make-whole interest associated with the prior debt
instruments and approximately $19.8 million of capitalized debt issuance costs attributable to the new debt instruments.
•During the third quarter of 2021, in connection with these refinancing and repayment activities, we recorded a loss on extinguishment of debt of approximately $34.4 million, comprised of cash charges of approximately $20.8 million for prepayment penalties and make-whole interest and non-cash charges of approximately $13.6 million related to the write-off of unamortized debt issuance costs and discounts associated with the prior credit facility (the “Prior Term Loan”), the prior incremental term loan facility (the “Prior Incremental Term Loan”) and the 2017 Unsecured Notes.
As a result of these events, together with any impacts of COVID-19, employment
constraints and supply chain disruptions, our results of operations and earnings per share in the periods covered by our Financial Statements may not be directly comparable.
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Trends and Developments Impacting our Business
In addition to the factors discussed above, we refer to Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Trends and Developments Impacting our Business” in our Annual Report, which is incorporated herein by reference.
The following table presents our Results of Operations as reported for the three months ended June 30, 2022 compared to the three months ended June 30, 2021 (amounts in thousands)*:
We continued to experience a certain level of recovery from the global pandemic, as a result, our revenues, costs and expenses were stronger in the current year period, as compared to the same period in the prior year.
Revenues
Total revenues increased by approximately $24.6 million, or 14%, to approximately $197.2 million for the three months ended June 30, 2022, as compared to the same period in the prior year. This was primarily due to the higher Games and FinTech revenues described below.
Games revenues increased by approximately $13.0 million, or 13%, to approximately $112.3 million for the three months ended June 30,
2022, as compared to the same period in the prior year. This was primarily due to: (i) an increase in the number of machines sold with a higher average selling price per unit, which resulted in additional gaming equipment revenues; (ii) the contributions from the newly acquired historical horse racing development company, Intuicode, reflected mostly in our gaming operations revenues, and also in our gaming equipment revenues; and (iii) an increase in in our online digital solutions as a result of growth in the customer base, which were reflected in our gaming operations revenues.
FinTech revenues increased by approximately $11.6 million, or 16%, to approximately $84.9 million for the three months ended June 30, 2022, as compared to the same period in the prior year. This was primarily due to: (i) an increase in both transaction and dollar volumes
attributable to new and renewed business from our financial access services revenues; (ii) contributions from the newly acquired Australian cash handling and financial payment solutions company, ecash, reflected mostly in our hardware revenues, and also in our software and financial access services revenues; and (iii) an increase in unit sales of our kiosks reflected in our hardware revenues.
Costs and Expenses
Total costs and expenses increased by approximately $24.5 million, or 21%, to approximately $142.7 million for the three months ended June 30, 2022, as compared to the same period in the prior year. This was primarily due to higher Games and FinTech costs and expenses described below.
Games cost of revenues increased
by approximately $8.9 million, or 43%, to approximately $29.5 million for the three months ended June 30, 2022, as compared to the same period in the prior year. This was primarily due to the additional variable costs associated with the higher unit sales from our gaming equipment and systems activities and increased supply chain related costs. There were also additional costs associated with our installed base from our gaming operations activities.
FinTech cost of revenues increased by approximately $3.4 million, or 32%, to approximately $13.7 million for the three months ended June 30, 2022, as compared to the same period in the prior year. This was primarily due to additional variable costs associated with the higher unit sales from our hardware revenues, increased supply chain
related costs and additional check warranty expenses from a greater volume of check approvals within our financial access services activities.
Operating expenses increased by approximately $6.9 million, or 14%, to approximately $55.1 million for the three months ended June 30, 2022, as compared to the same period in the prior year. This was primarily due to higher payroll and related expenses from employees acquired through acquisitions completed during the year in our Games and FinTech segments and organic employee increases to support the growth of our operations. We also incurred higher employee travel costs resulting from more normalized operations of our customers in our Games and FinTech segments.
Research and development expenses increased by approximately $5.3 million,
or 60%, to approximately $14.1 million for the three months ended June 30, 2022, as compared to the same period in the prior year. This increase was primarily the result of the growth in our operations and the continued investment in new products in our Games and FinTech segments.
Primarily as a result of the factors described above, our operating income increased by approximately $0.2 million, or 0.3%, as compared to the same period in the prior year. The operating income margin was 29% for the three months ended June 30, 2022 compared to 32% for the same period in the prior year.
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Interest
expense, net of interest income, decreased by approximately $5.5 million, or 31%, to approximately $12.3 million for the three months ended June 30, 2022, as compared to the same period in the prior year. This was primarily due to interest savings achieved from a refinancing of our prior credit facilities and unsecured note in the third quarter of 2021 that resulted in a lower amount of principal outstanding and a lower borrowing rate.
The income tax provision was $9.7 million for the three months ended June 30, 2022, an increase of approximately $9.3 million, as compared to $0.4 million for the same period in the prior year. The income tax provision reflected an effective income tax rate of 23.0% for the three months ended June 30, 2022, which was greater than the statutory
federal rate of 21.0%, primarily due to state taxes and compensation deduction limitations, partially offset by both a research credit and the benefit from stock option exercises. The income tax provision reflected an effective income tax rate of 1.1% for the same period in the prior year, which was less than the statutory federal rate of 21.0%, primarily due to a decrease in our valuation allowance due to book income during the period, and the benefit from stock option exercises.
Primarily as a result of the factors described above, we had net income of approximately $32.5 million for the three months ended June 30, 2022. We had net income of approximately $36.2 million for the three months ended June 30, 2021.
The following table presents our Results of Operations as reported for the six months ended June 30, 2022 compared to the six months ended June 30, 2021 (amounts in thousands)*:
We continued to experience a certain level of recovery from the global pandemic, and as a result, our revenues, costs and expenses were stronger in the current year period, as compared to the same period in the prior year.
Revenues
Total revenues increased by approximately $61.1 million, or 20%, to approximately $372.8 million for the six months ended June 30, 2022, as compared to the same period in the prior year. This was primarily due to the higher Games and FinTech revenues described below.
Games revenues increased by approximately $35.2 million, or 20%, to approximately $210.7 million for the six months ended June 30,
2022, as compared to the same period in the prior year. This was primarily due to: (i) an increase in the number of machines sold with a higher average selling price per unit, which resulted in additional gaming equipment revenues; (ii) an increase in the number of units in our installed base from our gaming operations revenues; (iii) the contributions from the newly acquired historical horse racing development company, Intuicode, reflected mostly in our gaming operations revenues, and also in our gaming equipment revenues; and (iv) an increase in in our online digital solutions as a result of growth in the customer base, which were reflected in our gaming operations revenues.
FinTech revenues increased by approximately $25.9 million, or 19%, to approximately $162.2 million for the six months ended June 30, 2022,
as compared to the same period in the prior year. This was primarily due to contributions that included: (i) an increase in both transaction and dollar volumes attributable to new and renewed business from our financial access services revenues; (ii) contributions from the newly acquired Australian cash handling and financial payment solutions company, ecash, reflected mostly in our hardware revenues, and also in our software and financial access services revenues; and (iii) an increase in unit sales of our kiosks reflected in our hardware revenues.
Costs and Expenses
Total costs and expenses increased by approximately $48.6 million, or 22%, to approximately $265.7 million for the six months ended June 30, 2022, as compared to the same period in the prior year. This was primarily due to higher Games and FinTech
costs and expenses described below.
Games cost of revenues increased by approximately $16.6 million, or 47%, to approximately $52.3 million for the six months ended June 30, 2022, as compared to the same period in the prior year. This was primarily due to the additional variable costs associated with the higher unit sales from our gaming equipment and systems activities and increased supply chain related costs. There were also additional costs associated with our installed base from our gaming operations activities.
FinTech cost of revenues increased by approximately $5.9 million, or 35%, to approximately $22.8 million for the six months ended June 30,
2022, as compared to the same period in the prior year. This was primarily due to additional variable costs associated with the higher unit sales from our hardware revenue, increased supply chain related costs and additional check warranty expenses from a greater volume of check approvals within our financial access services activities.
Operating expenses increased by approximately $18.7 million, or 22%, to approximately $104.9 million for the six months ended June 30, 2022, as compared to the same period in the prior year. This was primarily due to higher payroll and related expenses from employees acquired through acquisitions completed during the year in our Games and FinTech segments and organic employee increases to support the growth of our operations. We also incurred higher employee travel costs resulting from more
normalized operations of our customers in our Games and FinTech segments. In addition, the increase also included higher legal expenses for certain ongoing litigation and the legal costs incurred in connection with acquisition activity during the period. The prior year operating expenses were partially offset by the recovery of a settlement from a dispute with an insurance carrier for a payment associated with the Fair and Accurate Credit Transactions Act legal matter of approximately $1.9 million in our FinTech segment.
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Research and development expenses increased by
approximately $9.4 million, or 55%, to approximately $26.6 million for the six months ended June 30, 2022, as compared to the same period in the prior year. This increase was primarily the result of the growth in our operations and the continued investment in new products in our Games and FinTech segments.
Primarily as a result of the factors described above, our operating income increased by approximately $12.6 million, or 13%, as compared to the same period in the prior year. The operating income margin was 29% for the six months ended June 30, 2022 compared to 30% for the same period in the prior year.
Interest expense, net of interest income, decreased by approximately $12.6 million, or 35%, to approximately $23.6 million
for the six months ended June 30, 2022, as compared to the same period in the prior year. This was primarily due to interest savings achieved from a refinancing of our prior credit facilities and unsecured note in the third quarter of 2021 that resulted in a lower amount of principal outstanding and a lower borrowing rate.
The income tax provision was $19.5 million for the six months ended June 30, 2022, an increase of approximately $17.9 million, as compared to $1.6 million for the same period in the prior year. The income tax provision reflected an effective income tax rate of 23.3% for the six months ended June 30, 2022, which was greater than the statutory federal rate of 21.0%, primarily due to state taxes, compensation deduction limitations and an accrual for a foreign
withholding tax, partially offset by both a research credit and the benefit from stock option exercises. The income tax provision reflected an effective income tax rate of 2.7% for the same period in the prior year, which was less than the statutory federal rate of 21.0%, primarily due to a decrease in our valuation allowance due to book income during the period, and the benefit from stock option exercises.
Primarily as a result of the factors described above, we had net income of approximately $64.0 million for the six months ended June 30, 2022. We had net income of approximately $56.7 million for the six months ended June 30, 2021.
Critical Accounting Estimates
The
preparation of our financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires us to make estimates and assumptions that affect our reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities in our Financial Statements. The SEC has defined critical accounting estimates as those that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the financial condition or results of operations of the registrant.
There were no material changes to our critical accounting estimates as compared to those disclosed in our Annual Report.
The following table presents an unaudited reconciliation of cash and cash equivalents per GAAP to net cash position
and net cash available (in thousands):
At June 30,
At December 31
2022
2021
Balance sheet data
Total assets
$
1,624,003
$
1,635,650
Total
borrowings
$
979,760
$
981,525
Total stockholders’ equity
$
202,629
$
174,500
Cash available
Cash and cash equivalents
$
238,106
$
302,009
Settlement
receivables
59,195
89,275
Settlement liabilities
(204,199)
(291,861)
Net cash position(1)
93,102
99,423
Undrawn revolving credit facility
125,000
125,000
Net
cash available(1)
$
218,102
$
224,423
(1) Non-GAAP measure. In order to enhance investor understanding of our cash balance, we are providing in this Quarterly Report on Form 10-Q Net Cash Position and Net Cash Available, which are not measures of our financial performance or position under GAAP. Accordingly, these measures should not be considered in isolation or as a substitute for GAAP measures, and should be read in conjunction with our balance sheets prepared in accordance with GAAP. We define our (i) Net Cash Position as cash and cash equivalents plus settlement receivables less settlement liabilities; and (ii) Net Cash Available as Net
Cash Position plus undrawn amounts available under our Revolving Credit Facility. Our Net Cash Position and Net Cash Available change substantially based upon the timing of our receipt of funds for settlement receivables and payments we make to customers for our settlement liabilities. We present these non-GAAP measures as we monitor these amounts in connection with forecasting of cash flows and future cash requirements, both on a short-term and long-term basis.
Cash Resources
As of June 30, 2022, 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 on both a short- and long-term basis. Cash and cash equivalents at June 30, 2022
included cash in non-U.S. jurisdictions of approximately $26.7 million. Generally, these funds are available for operating and investment purposes within the jurisdiction in which they reside, and we may from time to time consider repatriating these foreign funds to the United States, subject to potential withholding tax obligations, based on operating requirements.
We expect that cash provided by operating activities will also be sufficient for our operating and debt servicing needs during the foreseeable future on both a short- and long-term basis. 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 available information, we believe our lenders should be able to honor their
commitments under the Credit Agreement (defined in“Note 12 — Long-term Debt”).
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Sources and Uses of Cash
The following table presents a summary of our cash flow activity (in thousands):
Six
Months Ended June 30,
$ Change
2022
2021
2022 vs 2021
Cash flow activities
Net cash provided by operating activities
$
74,235
$
163,518
$
(89,283)
Net
cash used in investing activities
(93,774)
(64,215)
(29,559)
Net cash used in financing activities
(44,161)
(10,409)
(33,752)
Effect of exchange rates on cash and cash equivalents
(450)
67
(517)
Cash,
cash equivalents and restricted cash
Net (decrease) increase for the period
(64,150)
88,961
(153,111)
Balance, beginning of the period
303,726
252,349
51,377
Balance,
end of the period
$
239,576
$
341,310
$
(101,734)
Cash flows provided by operating activities decreased by approximately $89.3 million for the six months ended June 30, 2022, as compared to the same period in the prior year. This was primarily attributable to changes in working capital associated with settlement receivables and liabilities from our FinTech segment, partially offset by changes in our deferred income taxes as we decreased the valuation
allowance on our deferred tax assets impacting our Games and FinTech segments and an increase in net income earned in our Games and FinTech segments.
Cash flows used in investing activities increased by approximately $29.6 millionfor the six months ended June 30, 2022, as compared to the same period in the prior year. This was primarily attributable to the acquisition activities and an increase in capital expenditures in our Games and FinTech segments.
Cash flows used in financing activities increased by approximately $33.8 million for the six months ended June 30, 2022, as compared to the same period in the prior year. This was primarily attributable to the repurchase of shares in the open
market.
Long-Term Debt
Our New Revolver remained fully undrawn as of June 30, 2022.
For additional information regarding our credit agreement and other debt as well as interest rate risk refer to Part I, Item 3: Quantitative and Qualitative Disclosures About Market Risk, “Note 12 — Long-Term Debt” in Part I, Item 1: Financial Statements.
Contractual Obligations
There
were no material changes to our commitments under contractual obligations as compared to those disclosed in our Annual Report, other than an increase to certain purchase obligations of approximately $42.8 million from those disclosed in our Annual Report and obligations discussed in “Note 3 — Leases,”“Note 4 — Business Combinations,” and “Note 12 — Long-Term Debt” in Part I, Item 1: Financial Statements.We expect that cash provided by operating activities will be sufficient to meet such obligations during the foreseeable future.
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 in “Note 13 — Commitments and Contingencies” in Part I, Item 1: Financial Statements, may change in the future. We intend to vigorously defend against these actions, and ultimately believe we should
prevail.
42
Off-Balance Sheet Arrangements
In the normal course of business, 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 Consolidated Statements of Operations and Comprehensive Income, were approximately $1.7 million and $2.7 million for the three and six months ended June 30, 2022, respectively, and $0.9 million and $1.6 million
for the three and six months ended June 30, 2021, respectively. The cash usage fees increased in the current reporting period as compared to the same period in the prior year as a result of elevated funds dispensing volumes at our customer locations as the operational impacts from the pandemic began to lessen and higher interest rates. 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 funds provided by the third-party vendors were approximately $403.7 million and $401.8 million as of June 30, 2022 and December 31,
2021, 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 million with the ability to increase the amount as defined within the agreement or otherwise permitted by the vault cash provider. The agreement currently expires on June 30, 2024 and will automatically renew for additional one-year periods unless either party provides a ninety-day written notice of its intent not to renew.
We are responsible for any losses of cash in the fund dispensing devices under this agreement and we self-insure for this risk. We incurred no material losses related to this self-insurance for the three and six months ended June 30,
2022 and 2021.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There have been no material changes in our reported market risks or risk management policies since the filing of our Annual Report.
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 exposure; however, we
continue to evaluate such foreign currency exchange risk.
In the normal course of business, we have commercial arrangements with third-party vendors to provide cash for certain of our fund dispensing devices. Under the terms of these agreements, we pay a monthly fund usage fee that is generally based upon the target federal funds rate. We are, therefore, exposed to interest rate risk to the extent that the target federal funds rate increases. The outstanding balance of funds provided by the third-party vendors was approximately $403.7 million as of June 30, 2022; therefore, each 100 basis points increase in the target federal funds rate would have approximately a $4.0 million impact on income before tax over a 12-month period.
The New Credit Facilities bear interest at rates that can vary over time. We have the option of paying interest
on the outstanding amounts under the New Credit Facilities 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 New Term Loan, which includes a 50 basis point floor, was 3.21% and 3.11% for the three and six months ended June 30, 2022. Based upon the outstanding balance of the New Term Loan of $595.5 million as of June 30, 2022, each 100 basis points increase in the applicable LIBOR would have a combined impact of approximately $6.0 million on interest expense over a 12-month period.
The interest rate is fixed at 5.00% for the Unsecured Notes due 2029; therefore, an increase in LIBOR does not impact the related interest expense.
At
present, we do not hedge the risk related to the changes in the interest rate; however, we continue to evaluate such interest rate exposure.
We continue to evaluate the potential impact of the eventual replacement of the LIBOR benchmark. We expect to utilize the replacement rate commonly referred to as the secured overnight financing rate (“SOFR”), which is the anticipated benchmark in place of LIBOR, and we do not expect the transition to SOFR to have a material impact on our business, financial condition and results of operations.
43
Item 4. Controls and Procedures.
Evaluation
of Disclosure Controls and Procedures
Our management, with the participation of the principal executive officer and the principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of June 30, 2022 such that material information required to be disclosed by us in the reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms, and (ii) accumulated and communicated to management,
including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting during the Quarter Ended June 30, 2022
Except as noted below, there were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
On March 1, 2022, the
Company acquired the stock of ecash Holdings Pty Limited and wholly-owned subsidiaries Global Payment Technologies Australia Pty Limited, and ACN 121 187 068 Pty Limited (collectively “ecash”). On April 30, 2022, the Company acquired the stock of Intuicode Gaming Corporation (“Intuicode”). Refer to Item 1, “Note 4 — Business Combinations” for a discussion of the acquisitions and related financial data. We are in the process of integrating ecash and Intuicode into our internal control over financial reporting. As a result of these integration activities, certain controls will be evaluated and may be changed.
We refer you to documents filed by us with the SEC; specifically, “Item 1A. Risk Factors” in our Annual Report, which identify material factors that make an investment in us speculative
or risky and could materially affect our business, financial condition and future results. We also refer you to the factors and cautionary language set forth in the section entitled “Cautionary Information Regarding Forward-Looking Statements” in “Item 2. Management’s Discussion and Analysis of Financial Conditions and Results of Operations” of this Quarterly Report on Form 10-Q. This Quarterly Report on Form 10-Q, including the accompanying Financial Statements, should be read in conjunction with such risks and other factors for a full understanding of our operations and financial condition. The risks described in our Annual Report are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business,
financial condition or operating results. The risk factors included in our Annual Report have not materially changed.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Issuer Purchases and Withholding of Equity Securities
Total Number of
Shares Purchased
or Withheld
(in thousands)
Average Price Purchased or Withheld per Share (3)
Total Number of
Shares Purchased as
Part of Publicly Announced Plans or
Programs (4)
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (4)
(in thousands)
Share Repurchases
4/1/22
- 4/30/22
—
(1)
$
—
—
$
—
5/1/22 - 5/31/22
678.3
(1)
$
16.61
678.3
138,734.3
6/1/22
- 6/30/22
1,320.8
(1)
$
16.71
1,320.8
116,663.6
Sub-total
1,999.1
$
16.68
1,999.1
$
116,663.6
Tax
Withholdings
4/1/22 - 4/30/22
6.0
(2)
$
19.78
—
$
—
5/1/22 - 5/31/22
635.5
(2)
$
17.27
—
—
6/1/22
- 6/30/22
5.2
(2)
$
16.53
—
—
Sub-total
646.7
$
17.29
—
$
—
Total
2,645.8
$
16.83
1,999.1
$
116,663.6
(1)
Represents the number of shares repurchased during the three months ended June 30, 2022 pursuant to the share repurchase program that our Board of Directors has authorized and approved giving us the authority to repurchase up to $150 million of our outstanding common stock over an 18-month period, which commenced in the second quarter of 2022. This share repurchase program supersedes all prior share repurchase programs. Refer to "Note 14 — Stockholders' Equity” in Part I, Item 1: Financial Statements for additional details.
(2) Represents the shares of common stock that were withheld from restricted stock awards to satisfy the applicable
tax withholding obligations incident to the vesting of such restricted stock awards. There are no limitations on the number of shares of common stock that may be withheld from restricted stock awards to satisfy the tax withholding obligations incident to the vesting of restricted stock awards.
(3) Represents the average price per share of common stock purchased or withheld on the date of withholding.
(4) There were 2.0 million shares repurchased during the three months ended June 30, 2022 at an average price of $16.68 per share for an aggregate amount of $33.3 million. The remaining availability under the May 2022 $150.0 million share repurchase program was $116.7 million as of June 30, 2022. There were no share
repurchases during the three and six months ended June 30, 2021.
XBRL Instance Document - – this instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2022, formatted in Inline XBRL (included as Exhibit 101).
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
