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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One) | | | | | |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2023
OR | | | | | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 001-32622
EVERI HOLDINGS INC.
(Exact name of registrant as specified in its charter) | | | | | | | | |
Delaware | | 20-0723270 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | |
7250 S. Tenaya Way, Suite 100 | | |
Las Vegas | | |
Nevada | | 89113 |
(Address of principal executive offices) | | (Zip Code) |
(800) 833-7110
(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 |
Common Stock, $0.001 par value | EVRI | New 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. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. | | | | | | | | | | | | | | |
Large accelerated filer | ☒ | | Accelerated filer | ☐ |
Non-accelerated filer | ☐ | | Smaller reporting company | ☐ |
| | | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of November 3, 2023, there were 85,566,565 shares of the registrant’s $0.001 par value per share common stock outstanding.
TABLE OF CONTENTS
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| | | | Page |
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PART I: FINANCIAL INFORMATION | | |
| | | | |
Item 1: | | Financial Statements | | |
| | | | |
| | Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income for the three and nine months ended September 30, 2023 and 2022 | | |
| | | | |
| | Unaudited Condensed Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022 | | |
| | | | |
| | Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2023 and 2022 | | |
| | | | |
| | Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, 2023 and 2022 | | |
| | | | |
| | Notes to Unaudited Condensed Consolidated Financial Statements | | |
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Item 2: | | Management’s Discussion and Analysis of Financial Condition and Results of Operations | | |
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Item 3: | | Quantitative and Qualitative Disclosures About Market Risk | | |
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Item 4: | | Controls and Procedures | | |
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PART II: OTHER INFORMATION | | |
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Item 1: | | Legal Proceedings | | |
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Item 1A: | | Risk Factors | | |
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Item 2: | | Unregistered Sales of Equity Securities and Use of Proceeds | | |
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Item 3: | | Defaults Upon Senior Securities | | |
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Item 4: | | Mine Safety Disclosures | | |
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Item 5: | | Other Information | | |
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Item 6: | | Exhibits | | |
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Signatures | | | | |
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements.
EVERI HOLDINGS INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(In thousands, except earnings per share amounts)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
Revenues | | | | | | | |
Games revenues | | | | | | | |
Gaming operations | $ | 78,400 | | | $ | 75,020 | | | $ | 231,490 | | | $ | 219,437 | |
Gaming equipment and systems | 33,138 | | | 37,500 | | | 100,554 | | | 103,766 | |
Games total revenues | 111,538 | | | 112,520 | | | 332,044 | | | 323,203 | |
FinTech revenues | | | | | | | |
Financial access services | 57,158 | | | 53,296 | | | 169,032 | | | 154,051 | |
Software and other | 24,838 | | | 22,192 | | | 73,048 | | | 59,056 | |
Hardware | 13,066 | | | 16,310 | | | 41,665 | | | 40,846 | |
FinTech total revenues | 95,062 | | | 91,798 | | | 283,745 | | | 253,953 | |
Total revenues | 206,600 | | | 204,318 | | | 615,789 | | | 577,156 | |
Costs and expenses | | | | | | | |
Games cost of revenues(1) | | | | | | | |
Gaming operations | 10,363 | | | 6,557 | | | 25,557 | | | 18,674 | |
Gaming equipment and systems | 18,239 | | | 22,545 | | | 58,629 | | | 62,721 | |
Games total cost of revenues | 28,602 | | | 29,102 | | | 84,186 | | | 81,395 | |
FinTech cost of revenues(1) | | | | | | | |
Financial access services | 2,925 | | | 2,760 | | | 8,521 | | | 7,405 | |
Software and other | 1,484 | | | 1,163 | | | 4,830 | | | 2,984 | |
Hardware | 8,904 | | | 10,771 | | | 27,926 | | | 27,074 | |
FinTech total cost of revenues | 13,313 | | | 14,694 | | | 41,277 | | | 37,463 | |
Operating expenses | 61,014 | | | 56,354 | | | 181,596 | | | 161,230 | |
Research and development | 16,120 | | | 16,803 | | | 48,853 | | | 43,386 | |
Depreciation | 19,902 | | | 17,444 | | | 58,373 | | | 48,342 | |
Amortization | 15,202 | | | 15,303 | | | 43,739 | | | 43,582 | |
Total costs and expenses | 154,153 | | | 149,700 | | | 458,024 | | | 415,398 | |
Operating income | 52,447 | | | 54,618 | | | 157,765 | | | 161,758 | |
Other expenses | | | | | | | |
Interest expense, net of interest income | 19,925 | | | 14,880 | | | 58,031 | | | 38,522 | |
Total other expenses | 19,925 | | | 14,880 | | | 58,031 | | | 38,522 | |
Income before income tax | 32,522 | | | 39,738 | | | 99,734 | | | 123,236 | |
Income tax provision | 5,879 | | | 10,329 | | | 17,629 | | | 29,784 | |
Net income | 26,643 | | | 29,409 | | | 82,105 | | | 93,452 | |
Foreign currency translation loss | (1,602) | | | (2,639) | | | (1,670) | | | (4,665) | |
Comprehensive income | $ | 25,041 | | | $ | 26,770 | | | $ | 80,435 | | | $ | 88,787 | |
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(1) Exclusive of depreciation and amortization.
EVERI HOLDINGS INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME - CONTINUED
(In thousands, except earnings per share amounts)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
Earnings per share | | | | | | | |
Basic | $ | 0.31 | | | $ | 0.33 | | | $ | 0.93 | | | $ | 1.03 | |
Diluted | $ | 0.29 | | | $ | 0.30 | | | $ | 0.88 | | | $ | 0.95 | |
Weighted average common shares outstanding | | | | | | | |
Basic | 87,221 | | | 90,014 | | | 87,925 | | | 91,039 | |
Diluted | 91,245 | | | 96,436 | | | 93,162 | | | 98,306 | |
See notes to unaudited condensed consolidated financial statements.
EVERI HOLDINGS INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value amounts)
| | | | | | | | | | | |
| At September 30, | | At December 31, |
| 2023 | | 2022 |
ASSETS | | | |
Current assets | | | |
Cash and cash equivalents | $ | 209,378 | | | $ | 293,394 | |
Settlement receivables | 239,513 | | | 263,745 | |
Trade and other receivables, net of allowances for credit losses of $5,177 and $4,855 at September 30, 2023 and December 31, 2022, respectively | 111,513 | | | 118,895 | |
Inventory | 73,439 | | | 58,350 | |
Prepaid expenses and other current assets | 46,259 | | | 38,822 | |
Total current assets | 680,102 | | | 773,206 | |
Non-current assets | | | |
Property and equipment, net | 137,670 | | | 133,645 | |
Goodwill | 740,097 | | | 715,870 | |
Other intangible assets, net | 251,050 | | | 238,275 | |
Other receivables | 30,582 | | | 27,757 | |
Deferred tax assets, net | 528 | | | 1,584 | |
Other assets | 24,343 | | | 27,906 | |
Total non-current assets | 1,184,270 | | | 1,145,037 | |
Total assets | $ | 1,864,372 | | | $ | 1,918,243 | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Current liabilities | | | |
Settlement liabilities | $ | 410,891 | | | $ | 467,903 | |
Accounts payable and accrued expenses | 200,258 | | | 217,424 | |
Current portion of long-term debt | 4,500 | | | 6,000 | |
Total current liabilities | 615,649 | | | 691,327 | |
Non-current liabilities | | | |
Deferred tax liabilities, net | 19,220 | | | 5,994 | |
Long-term debt, less current portion | 969,347 | | | 971,995 | |
Other accrued expenses and liabilities | 16,622 | | | 31,286 | |
Total non-current liabilities | 1,005,189 | | | 1,009,275 | |
Total liabilities | 1,620,838 | | | 1,700,602 | |
Commitments and contingencies (Note 12) | | | |
Stockholders’ equity | | | |
Convertible preferred stock, $0.001 par value, 50,000 shares authorized and no shares outstanding at September 30, 2023 and December 31, 2022, respectively | — | | | — | |
Common stock, $0.001 par value, 500,000 shares authorized and 123,147 and 86,024 shares issued and outstanding at September 30, 2023, respectively, and 119,390 and 88,036 shares issued and outstanding at December 31, 2022, respectively | 123 | | | 119 | |
Additional paid-in capital | 556,287 | | | 527,465 | |
Retained earnings (accumulated deficit) | 60,839 | | | (21,266) | |
Accumulated other comprehensive loss | (5,867) | | | (4,197) | |
Treasury stock, at cost, 37,122 and 31,353 shares at September 30, 2023 and December 31, 2022, respectively | (367,848) | | | (284,480) | |
Total stockholders’ equity | 243,534 | | | 217,641 | |
Total liabilities and stockholders’ equity | $ | 1,864,372 | | | $ | 1,918,243 | |
See notes to unaudited condensed consolidated financial statements.
EVERI HOLDINGS INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) | | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2023 | | 2022 |
Cash flows from operating activities | | | |
Net income | $ | 82,105 | | | $ | 93,452 | |
Adjustments to reconcile net income to cash provided by operating activities: | | | |
Depreciation | 58,373 | | | 48,342 | |
Amortization | 43,739 | | | 43,582 | |
Non-cash lease expense | 4,167 | | | 3,599 | |
Amortization of financing costs and discounts | 2,140 | | | 2,140 | |
Loss on sale or disposal of assets | 459 | | | 420 | |
Accretion of contract rights | 7,005 | | | 7,367 | |
Provision for credit losses | 8,861 | | | 7,286 | |
Deferred income taxes | 12,270 | | | 28,042 | |
Reserve for inventory obsolescence | 1,466 | | | 659 | |
Stock-based compensation | 14,185 | | | 15,012 | |
Changes in operating assets and liabilities: | | | |
Settlement receivables | 24,219 | | | 12,251 | |
Trade and other receivables | (2,583) | | | (23,845) | |
Inventory | (13,444) | | | (23,026) | |
Prepaid expenses and other assets | (4,299) | | | (26,388) | |
Settlement liabilities | (56,995) | | | (59,432) | |
Accounts payable and accrued expenses | (20,655) | | | 17,453 | |
Net cash provided by operating activities | 161,013 | | | 146,914 | |
Cash flows from investing activities | | | |
Capital expenditures | (97,523) | | | (92,225) | |
Acquisitions, net of cash acquired | (59,405) | | | (33,250) | |
Proceeds from sale of property and equipment | 145 | | | 115 | |
Placement fee agreements | — | | | (547) | |
Net cash used in investing activities | (156,783) | | | (125,907) | |
Cash flows from financing activities | | | |
Repayments of term loan | (6,000) | | | (4,500) | |
Proceeds from exercise of stock options | 13,935 | | | 1,586 | |
Treasury stock - equity award activities, net of shares withheld | (8,126) | | | (11,815) | |
Treasury stock - repurchase of shares | (73,938) | | | (49,351) | |
Payment of contingent consideration, acquisition | (10,451) | | | — | |
Net cash used in financing activities | (84,580) | | | (64,080) | |
Effect of exchange rates on cash and cash equivalents | (583) | | | (1,106) | |
Cash, cash equivalents and restricted cash | | | |
Net decrease for the period | (80,933) | | | (44,179) | |
Balance, beginning of the period | 295,063 | | | 303,726 | |
Balance, end of the period | $ | 214,130 | | | $ | 259,547 | |
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Supplemental cash disclosures | | | |
Cash paid for interest | $ | 69,003 | | | $ | 42,070 | |
Cash paid for income tax, net | 5,076 | | | 846 | |
Supplemental non-cash disclosures | | | |
Accrued and unpaid capital expenditures | $ | 2,401 | | | $ | 5,511 | |
Transfer of leased gaming equipment to inventory | 5,550 | | | 7,758 | |
See notes to unaudited condensed consolidated financial statements.
EVERI HOLDINGS INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock— Series A | | Additional | | | | Accumulated Other | | | | Total Stockholders’ |
| | Number of Shares | | Amount | | Paid-in Capital | | Retained Earnings | | Comprehensive Loss | | Treasury Stock | | Equity |
| | | | | | | | | | | | | | |
Balance, January 1, 2023 | | 119,390 | | | $ | 119 | | | $ | 527,465 | | | $ | (21,266) | | | $ | (4,197) | | | $ | (284,480) | | | $ | 217,641 | |
Net income | | — | | | — | | | — | | | 28,066 | | | — | | | — | | | 28,066 | |
Foreign currency translation | | — | | | — | | | — | | | — | | | (186) | | | — | | | (186) | |
Stock-based compensation expense | | — | | | — | | | 4,825 | | | — | | | — | | | — | | | 4,825 | |
Exercise of options | | 702 | | | 1 | | | 5,233 | | | — | | | — | | | — | | | 5,234 | |
Restricted stock vesting, net of shares withheld | | 53 | | | — | | | — | | | — | | | — | | | (333) | | | (333) | |
Balance, March 31, 2023 | | 120,145 | | | $ | 120 | | | $ | 537,523 | | | $ | 6,800 | | | $ | (4,383) | | | $ | (284,813) | | | $ | 255,247 | |
Net income | | — | | | — | | | — | | | 27,396 | | | — | | | — | | | 27,396 | |
Foreign currency translation | | — | | | — | | | — | | | — | | | 118 | | | — | | | 118 | |
Stock-based compensation expense | | — | | | — | | | 4,828 | | | — | | | — | | | — | | | 4,828 | |
Exercise of options | | 494 | | | — | | | 2,353 | | | — | | | — | | | — | | | 2,353 | |
Restricted stock vesting, net of shares withheld | | 1,656 | | | 2 | | | — | | | — | | | — | | | (7,738) | | | (7,736) | |
Repurchase of shares | | — | | | — | | | — | | | — | | | — | | | (40,023) | | | (40,023) | |
Balance, June 30, 2023 | | 122,295 | | | $ | 122 | | | $ | 544,704 | | | $ | 34,196 | | | $ | (4,265) | | | $ | (332,574) | | | $ | 242,183 | |
Net income | | — | | | — | | | — | | | 26,643 | | | — | | | — | | | 26,643 | |
Foreign currency translation | | — | | | — | | | — | | | — | | | (1,602) | | | — | | | (1,602) | |
Stock-based compensation expense | | — | | | — | | | 4,532 | | | — | | | — | | | — | | | 4,532 | |
Exercise of options, net of shares withheld | | 841 | | | 1 | | | 7,052 | | | — | | | — | | | (1,056) | | | 5,997 | |
Restricted stock vesting, net of shares withheld | | 11 | | | — | | | (1) | | | — | | | — | | | (55) | | | (56) | |
Repurchase of shares | | — | | | — | | | — | | | — | | | — | | | (34,163) | | | (34,163) | |
Balance, September 30, 2023 | | 123,147 | | | $ | 123 | | | $ | 556,287 | | | $ | 60,839 | | | $ | (5,867) | | | $ | (367,848) | | | $ | 243,534 | |
See notes to unaudited condensed consolidated financial statements.
EVERI HOLDINGS INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY - CONTINUED
(In thousands)
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| | Common Stock— Series A | | Additional | | | | Accumulated Other | | | | Total Stockholders’ |
| | Number of Shares | | Amount | | Paid-in Capital | | Accumulated Deficit | | Comprehensive Loss | | Treasury Stock | | Equity |
| | | | | | | | | | | | | | |
Balance, January 1, 2022 | | 116,996 | | | $ | 117 | | | $ | 505,757 | | | $ | (141,755) | | | $ | (1,455) | | | $ | (188,164) | | | $ | 174,500 | |
Net income | | — | | | — | | | — | | | 31,522 | | | — | | | — | | | 31,522 | |
Foreign currency translation | | — | | | — | | | — | | | — | | | 580 | | | — | | | 580 | |
Stock-based compensation expense | | — | | | — | | | 4,811 | | | — | | | — | | | — | | | 4,811 | |
Exercise of options | | 164 | | | — | | | 699 | | | — | | | — | | | — | | | 699 | |
Restricted stock vesting, net of shares withheld | | 61 | | | — | | | — | | | — | | | — | | | (400) | | | (400) | |
Balance, March 31, 2022 | | 117,221 | | | $ | 117 | | | $ | 511,267 | | | $ | (110,233) | | | $ | (875) | | | $ | (188,564) | | | $ | 211,712 | |
Net income | | — | | | — | | | — | | | 32,521 | | | — | | | — | | | 32,521 | |
Foreign currency translation | | — | | | — | | | — | | | — | | | (2,606) | | | — | | | (2,606) | |
Stock-based compensation expense | | — | | | — | | | 5,500 | | | — | | | — | | | — | | | 5,500 | |
Exercise of options | | 5 | | | — | | | 20 | | | — | | | — | | | — | | | 20 | |
Restricted stock vesting, net of shares withheld | | 1,883 | | | 2 | | | (2) | | | — | | | — | | | (11,182) | | | (11,182) | |
Repurchase of shares | | — | | | — | | | — | | | — | | | — | | | (33,336) | | | (33,336) | |
Balance, June 30, 2022 | | 119,109 | | | $ | 119 | | | $ | 516,785 | | | $ | (77,712) | | | $ | (3,481) | | | $ | (233,082) | | | $ | 202,629 | |
Net income | | — | | | — | | | — | | | 29,409 | | | — | | | — | | | 29,409 | |
Foreign currency translation | | — | | | — | | | — | | | — | | | (2,639) | | | — | | | (2,639) | |
Stock-based compensation expense | | — | | | — | | | 4,701 | | | — | | | — | | | — | | | 4,701 | |
Exercise of options | | 115 | | | — | | | 867 | | | — | | | — | | | — | | | 867 | |
Restricted stock vesting, net of shares withheld | | 34 | | | — | | | — | | | — | | | — | | | (233) | | | (233) | |
Repurchase of shares | | — | | | — | | | — | | | — | | | — | | | (16,015) | | | (16,015) | |
Balance, September 30, 2022 | | 119,258 | | | $ | 119 | | | $ | 522,353 | | | $ | (48,303) | | | $ | (6,120) | | | $ | (249,330) | | | $ | 218,719 | |
See notes to unaudited condensed consolidated financial statements.
EVERI HOLDINGS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In this filing, we refer to: (i) our unaudited condensed consolidated financial statements and notes thereto as our “Financial Statements;” (ii) our Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income as our “Statements of Operations;” and (iii) our Unaudited Condensed Consolidated Balance Sheets as our “Balance Sheets.”
1. BUSINESS
Everi Holdings Inc. (“Everi Holdings,” or “Everi”) is a holding company, the assets of which are the issued and outstanding shares of capital stock of each of Everi Payments Inc. (“Everi FinTech” or “FinTech”) and Everi Games Holding Inc., which owns all of the issued and outstanding shares of capital stock of Everi Games Inc. (“Everi Games” or “Games”). Unless otherwise indicated, the terms the “Company,” “we,” “us,” and “our” refer to Everi Holdings together with its consolidated subsidiaries.
Everi develops and offers products and services that provide gaming entertainment, improve our customers’ patron engagement, and help our casino customers operate their businesses more efficiently. We develop and supply entertaining game content, gaming machines and gaming systems and services for land-based and iGaming operators. Everi is a provider of financial technology solutions that power casino floors, provide operational efficiencies, and help fulfill regulatory requirements. The Company also develops and supplies player loyalty tools and mobile-first applications that enhance patron engagement for our customers and venues in the casino, sports, entertainment and hospitality industries. In addition, the Company provides bingo solutions through its consoles, electronic gaming tablets and related systems.
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; (iii) business-to-business (“B2B”) digital online gaming activities; and (iv) bingo solutions through consoles, integrated electronic gaming tablets and related systems.
Everi FinTech provides gaming operators with financial technology products and services, including: (i) financial access and related services supporting digital, cashless and physical cash options across mobile, assisted and self-service channels; (ii) loyalty and marketing software and tools, regulatory and compliance (“RegTech”) software solutions, other information-related products and services, and hardware maintenance services; and (iii) associated casino patron self-service hardware that utilizes our financial access, software and other services. We also develop and offer mobile-first applications aimed at enhancing patron engagement for customers in the casino, sports, entertainment, and hospitality industries. Our solutions are secured using an end-to-end security suite to protect against cyber-related attacks, allowing us to maintain appropriate levels of security. These solutions include: access to cash and cashless funding at gaming facilities via Automated Teller Machine (“ATM”) 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.
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Our Financial Statements included herein have been prepared by us pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Some of the information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) have been condensed or omitted pursuant to such rules and regulations, although we believe the disclosures are adequate to make the information presented not misleading. In the opinion of management, all adjustments (which include normal recurring adjustments) necessary for a fair statement of results for the interim periods have been made. The results for the three and nine months ended September 30, 2023 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 on Form 10-K for the year ended December 31, 2022 (the “Annual Report”).
Restricted Cash
Our restricted cash primarily consists of: (i) funds held in connection with certain customer agreements; (ii) funds held in connection with a sponsorship agreement; (iii) wide-area progressive (“WAP”)-related restricted funds; and (iv) funds held for CashClub Wallet accounts. The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the Balance Sheets that sum to the total of the same such amounts shown in the statement of cash flows for the nine months ended September 30, 2023 (in thousands).
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| Classification on our Balance Sheets | | At September 30, 2023 | | At December 31, 2022 |
Cash and cash equivalents | Cash and cash equivalents | | $ | 209,378 | | | $ | 293,394 | |
Restricted cash - current | Prepaid expenses and other current assets | | 4,651 | | | 1,568 | |
Restricted cash - non-current | Other assets | | 101 | | | 101 | |
Total | | | $ | 214,130 | | | $ | 295,063 | |
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. As of September 30, 2023 and December 31, 2022, the fair value of trade and loans receivable approximated the carrying value due to contractual terms generally being slightly over 12 months. The fair value of our borrowings is estimated based on various inputs to determine a market price, such as: market demand and supply, size of tranche, maturity, and similar instruments trading in more active markets. The estimated fair value and outstanding balances of our borrowings are as follows (in thousands):
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| Level of Hierarchy | | Fair Value | | Outstanding Balance |
September 30, 2023 | | | | | |
$600 million Term Loan | 2 | | $ | 586,500 | | | $ | 586,500 | |
$400 million Unsecured Notes | 2 | | $ | 345,000 | | | $ | 400,000 | |
December 31, 2022 | | | | | |
$600 million Term Loan | 2 | | $ | 588,560 | | | $ | 592,500 | |
$400 million Unsecured Notes | 2 | | $ | 346,000 | | | $ | 400,000 | |
The fair values of our borrowings were determined using Level 2 inputs based on quoted market prices for these securities.
Reclassification of Balances
Certain amounts in the accompanying Financial Statements have been reclassified to be consistent with the current year presentation. These reclassifications had no effect on net income for the prior periods.
Recent Accounting Guidance
As of September 30, 2023, no recent accounting guidance is expected to have a significant impact on our Financial Statements.
3. REVENUES
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
Contract Balances
Since our contracts may include multiple performance obligations, there is often a timing difference between cash collections and the satisfaction of such performance obligations and revenue recognition. Such arrangements are evaluated to determine whether contract assets and liabilities exist. We generally record contract assets when the timing of billing differs from when revenue is recognized due to contracts containing specific performance obligations that are required to be met prior to a customer being invoiced. We generally record contract liabilities when cash is collected in advance of us satisfying performance obligations, including those that are satisfied over a period of time. Balances of our contract assets and contract liabilities may fluctuate due to timing of cash collections.
The following table summarizes our contract assets and contract liabilities arising from contracts with customers (in thousands):
| | | | | | | | | | | | | | |
| | 2023 | | 2022 |
Contract assets(1) | | | | |
Balance, beginning of period | | $ | 22,417 | | | $ | 15,221 | |
Balance, end of period | | 22,001 | | | 22,812 | |
(Decrease) increase | | $ | (416) | | | $ | 7,591 | |
| | | | |
Contract liabilities(2) | | | | |
Balance, beginning of period | | $ | 53,419 | | | $ | 36,615 | |
Balance, end of period | | 55,722 | | | 46,706 | |
Increase | | $ | 2,303 | | | $ | 10,091 | |
(1) Contract assets are included within trade and other receivables, net and other receivables in our Balance Sheets.
(2) Contract liabilities are included within accounts payable and accrued expenses and other accrued expenses and liabilities in our Balance Sheets.
We recognized approximately $38.6 million and $25.1 million in revenue that was included in the beginning contract liabilities balance during the nine months ended September 30, 2023 and 2022, respectively.
Games Revenues
Our products and services include electronic gaming devices, such as Native American Class II offerings and other electronic bingo products, Class III slot machine offerings, HHR offerings, integrated electronic bingo gaming tablets, VLTs installed in the State of New York and similar technology in certain tribal jurisdictions, B2B digital online gaming activities, accounting and central determinant systems, and other back-office systems. We conduct our Games segment business based on results generated from the following major revenue streams: (i) Gaming Operations; and (ii) Gaming Equipment and Systems.
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 $52.7 million and $153.4 million for the three and nine months ended September 30, 2023, respectively, and $51.4 million and $148.0 million for the three and nine months ended September 30, 2022, respectively.
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. We also develop and offer mobile-first applications aimed at enhancing patron engagement for customers in the casino, sports, entertainment, and hospitality industries. In addition, our services operate as part of an end-to-end security suite to protect against cyber-related attacks, allowing us to maintain appropriate levels of security. These solutions include: access to cash and cashless funding at gaming facilities via ATM 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 nine months ended September 30, 2023 and 2022.
4. LEASES
Lessee
Balance sheet information related to our operating leases is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Classification on our Balance Sheets | | At September 30, 2023 | | At December 31, 2022 |
Assets | | | | | | |
Operating lease right-of-use (“ROU”) assets | | Other assets, non-current | | $ | 13,804 | | | $ | 17,169 | |
Liabilities | | | | | | |
Current operating lease liabilities | | Accounts payable and accrued expenses | | $ | 6,605 | | | $ | 6,507 | |
Non-current operating lease liabilities | | Other accrued expenses and liabilities | | $ | 10,332 | | | $ | 14,738 | |
Supplemental cash flow information related to leases is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
Cash paid for: | | | | | | | |
Long-term operating leases | $ | 1,902 | | | $ | 1,855 | | | $ | 5,476 | | | $ | 5,165 | |
Short-term operating leases | $ | 496 | | | $ | 398 | | | $ | 1,341 | | | $ | 1,205 | |
Right-of-use assets obtained in exchange for lease obligations: | | | | | | | |
Operating leases | $ | — | | | $ | 997 | | | $ | 852 | | | $ | 7,448 | |
Other information related to lease terms and discount rates is as follows: | | | | | | | | | | | | | | |
| | At September 30, 2023 | | At December 31, 2022 |
Weighted Average Remaining Lease Term (in years): | | | | |
Operating leases | | 2.7 | | 3.4 |
Weighted Average Discount Rate: | | | | |
Operating leases | | 4.79 | % | | 4.72 | % |
Components of lease expense are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2023 | | 2022 | | 2023 | | 2022 |
Operating Lease Cost: | | | | | | | | |
Operating lease cost | | $ | 1,632 | | | $ | 1,663 | | | $ | 4,668 | | | $ | 4,492 | |
Variable lease cost | | $ | 401 | | | $ | 259 | | | $ | 1,026 | | | $ | 902 | |
Maturities of lease liabilities are summarized as follows as of September 30, 2023 (in thousands):
| | | | | | | | |
Year Ending December 31, | | Amount |
2023 (excluding the nine months ended September 30, 2023) | | $ | 1,879 | |
2024 | | 7,054 | |
2025 | | 5,978 | |
2026 | | 2,200 | |
2027 | | 608 | |
Thereafter | | 359 | |
Total future minimum lease payments | | 18,078 | |
Less: Amount representing interest | | 1,141 | |
Present value of future minimum lease payments | | 16,937 | |
Less: Current operating lease obligations | | 6,605 | |
Long-term lease obligations | | $ | 10,332 | |
The Company entered into a real estate lease that had not yet commenced as of September 30, 2023 with a term of ten years and future minimum lease payments of approximately $27.3 million.
5. BUSINESS COMBINATIONS
We account for business combinations in accordance with ASC 805 — Business Combinations, which requires that the identifiable assets acquired and liabilities assumed be recorded at their estimated fair values on the acquisition date separately from goodwill, which is the excess of the fair value of the purchase price over the fair values of these identifiable assets and liabilities. We include the results of operations of an acquired business starting from the acquisition date.
eCash Holdings Pty Limited
On March 1, 2022 (the “eCash Closing Date”), the Company acquired the stock of eCash Holdings Pty Limited (“eCash”). Under the terms of the stock purchase agreement, we paid the seller AUD$20 million (approximately USD$15 million) on the eCash Closing Date and we paid the seller additional consideration of AUD$5.0 million (approximately USD$3.4 million) approximately one year following the eCash Closing Date, with a final expected payment of AUD$6.5 million to be paid approximately two years following the eCash Closing Date. In addition, we paid approximately AUD$8.7 million (approximately USD$6.0 million) for the excess net working capital during the second quarter of 2022. We finalized our measurement period adjustments and recorded approximately $2.3 million primarily related to deferred taxes during the quarter ending March 31, 2023. The acquisition did not have a significant impact on our results of operations or financial condition.
Intuicode Gaming Corporation
On April 30, 2022 (the “Intuicode Closing Date”), the Company acquired the stock of Intuicode Gaming Corporation (“Intuicode”), a privately owned game development and engineering firm focused on HHR games. Under the terms of the stock purchase agreement, we paid the seller $12.5 million on the Intuicode Closing Date of the transaction, a net working capital payment of $1.6 million during the second quarter of 2022 and $6.4 million based on the achievement of a certain revenue target one year following the Intuicode Closing Date. In addition, we expect to make a final payment of $4.6 million based on the achievement of a certain revenue target two years following the Intuicode Closing Date. We finalized our measurement period adjustments and recorded approximately $1.3 million primarily related to the final payment and deferred taxes during the quarter ended June 30, 2023. The acquisition did not have a significant impact on our results of operations or financial condition.
Venuetize, Inc.
On October 14, 2022 (the “Venuetize Closing Date”), the Company acquired certain strategic assets of Venuetize, Inc. (“Venuetize”), a privately owned innovator of mobile-first technologies that provide an advanced guest engagement and m-commerce platform for the sports, entertainment and hospitality industries. Under the terms of the asset purchase agreement, we paid the seller $18.2 million on the Venuetize Closing Date. In addition, we expect to pay approximately $2.8 million in contingent consideration based upon the achievement of certain revenue targets on the twelve-month, twenty-four month and thirty-month anniversaries of the Venuetize Closing Date. We expect the total consideration for this acquisition to be approximately $21.0 million. The acquisition did not have a significant impact on our results of operations or financial condition.
The fair value of the contingent consideration was based on Level 3 inputs utilizing a discounted cash flow methodology. The estimates and assumptions included projected future revenues of the acquired business and a discount rate of approximately 7%. Contingent consideration to be paid is comprised of a short-term component that is recorded in accounts payable and accrued expenses and a long-term component payable within two years recorded in other accrued expenses and liabilities in our Balance Sheets. The change in fair value of the contingent consideration during the period ended September 30, 2023 was not material.
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 included, 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 Venuetize Closing Date and the final fair value analysis, which we expect to complete no later than the fourth quarter of 2023.
VKGS LLC
On May 1, 2023 (the “Video King Closing Date”), the Company acquired certain strategic assets of VKGS LLC (“Video King”), a privately owned leading provider of integrated electronic bingo gaming tablets, video gaming content, instant win games and systems. Under the terms of the purchase agreement, we paid the seller approximately $61.0 million, inclusive of a net working capital payment on the Video King Closing Date. We also made an additional net working capital payment of $0.3 million post-closing, early in the third quarter of 2023. In addition, we expect to pay approximately $0.2 million related to an indemnity holdback, which is scheduled for release on the eighteen-month anniversary of the Video King Closing Date. The acquisition did not have a significant impact on our results of operations or financial condition.
The total preliminary purchase consideration for Video King was as follows (in thousands, at fair value):
| | | | | |
| Amount |
Purchase consideration | |
Cash consideration paid at closing(1) | $ | 61,013 | |
Cash consideration to be paid post-closing | 466 | |
Total purchase consideration | $ | 61,479 | |
(1) Current assets acquired included approximately $1.9 million in cash.
The transaction was accounted for using the acquisition method of accounting, which requires, among other things, the assets acquired and liabilities assumed be recognized at their respective fair values as of the acquisition date. The excess of the purchase price over those fair values was recorded as goodwill, which will be amortized for tax purposes. The goodwill recognized is primarily attributable to the income potential from the expansion of our footprint in the gaming space by accelerating our entry into and growth in the electronic bingo market and business line, and assembled workforce, among other strategic benefits.
The estimates and assumptions used include the projected timing and amount of future cash flows and discount rates reflecting risk inherent in the future cash flows. The estimated fair values of assets acquired and liabilities assumed and resulting goodwill are subject to adjustment as the Company finalizes its purchase price accounting. The 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, inventory 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 Video King Closing Date and the final fair value analysis, which we expect to complete no later than the second quarter of 2024.
The information below reflects the preliminary amounts of identifiable assets acquired and liabilities assumed as of the closing date of the transaction (in thousands):
| | | | | |
| Amount |
Current assets | $ | 7,715 | |
Property and equipment | 4,485 | |
Other intangible assets | 25,770 | |
Goodwill(1) | 24,267 | |
Other assets | 763 | |
Total Assets | 63,000 | |
Accounts payable and accrued expenses | 1,193 | |
Other accrued expenses and liabilities | 328 | |
Total liabilities | 1,521 | |
Net assets acquired | $ | 61,479 | |
(1) Reflects a measurement period adjustment of approximately $0.2 million from the initial allocation as of the closing date of the transaction.
Current assets acquired included approximately $1.9 million in cash. Trade receivables acquired of approximately $2.0 million were short-term in nature and considered to be collectible, and therefore, the carrying amounts of these assets represented their fair values. Inventory acquired of approximately $3.4 million consisted of raw materials and finished goods and was recorded at fair value based on the estimated net realizable value of these assets. Property, equipment and leased assets acquired were not material, 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 |
Other Intangible Assets | | | |
Trade name | 10 | | $ | 950 | |
Developed technology | 7 | | 7,300 | |
Customer relationships | 14 | | 17,520 | |
Total other intangible assets | | | $ | 25,770 | |
The fair value of intangible assets was determined by applying the income approach. Other intangible assets acquired of approximately $25.8 million were comprised of customer relationships, developed technology and trade name. The fair value of customer relationships of approximately $17.5 million was determined by applying the income approach utilizing the excess earnings methodology based on Level 3 inputs in the hierarchy with a discount rate of 14% and estimated attrition rates. The fair value of developed technology of approximately $7.3 million was determined by applying the income approach utilizing the relief from royalty methodology based on Level 3 inputs with a royalty rate of 10% and a discount rate of 14%. The fair value of trade name of approximately $1.0 million was determined by applying the income approach utilizing the relief from royalty methodology based on Level 3 inputs with a royalty rate of 1% and a discount rate of 15%.
The financial results included in our Statements of Operations since the acquisition date and through September 30, 2023 reflected revenues of approximately $11.3 million and net income of approximately $2.2 million. We incurred acquisition-related costs of approximately $0.4 million for the nine months ended September 30, 2023.
Pro-forma financial information (unaudited)
The unaudited pro forma financial data includes the historical operating results of the Company and the four acquired businesses prior to the acquisitions as if the transactions occurred on January 1, 2022. The unaudited pro
forma results include increases to depreciation and amortization expense based on the purchased intangible assets and costs directly attributable to the acquisitions. The unaudited pro forma results do not purport to be indicative of results of operations as of the date hereof, for any period ended on the date hereof, or for any other future date or period; nor do they give effect to synergies, cost savings, fair market value adjustments and other changes expected as a result of the acquisitions.
The unaudited pro forma financial data on a consolidated basis as if the eCash, Intuicode, Venuetize and Video King acquisitions occurred on January 1, 2022 would reflect the following (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
Unaudited pro forma consolidated financial data | | | | | | | |
Revenues | $ | 206,601 | | | $ | 212,239 | | | $ | 625,017 | | | $ | 611,005 | |
Net income | $ | 26,646 | | | $ | 26,538 | | | $ | 81,911 | | | $ | 84,261 | |
6. FUNDING 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 $5.1 million and $15.3 million for the three and nine months ended September 30, 2023, respectively, and $2.7 million and $5.5 million for the three and nine months ended September 30, 2022, respectively. We are exposed to interest rate risk to the extent that the applicable rates increase.
Under these agreements, the currency supplied by third party vendors remain their sole property until the funds are dispensed. As these funds are not our assets, supplied cash is not reflected in our Balance Sheets. The outstanding balance of funds provided from the third parties were approximately $329.8 million and $444.6 million as of September 30, 2023 and December 31, 2022, 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 $300 million with the ability to increase the amount permitted by the vault cash provider. The term of the agreement 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 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 nine months ended September 30, 2023 and 2022.
7. TRADE AND OTHER RECEIVABLES
Trade and other receivables represent short-term credit granted to customers and long-term loans receivable in connection with our Games and FinTech equipment and software, and compliance products. Trade and loans receivable generally do not require collateral.
The balance of trade and loans receivable consists of outstanding balances owed to us by gaming operators. Other receivables include income tax receivables and other miscellaneous receivables.
The balance of trade and other receivables consisted of the following (in thousands):
| | | | | | | | | | | |
| At September 30, | | At December 31, |
| 2023 | | 2022 |
Trade and other receivables, net | | | |
Games trade and loans receivable | $ | 69,216 | | | $ | 78,200 | |
FinTech trade and loans receivable | 47,575 | | | 39,925 | |
Contract assets(1) | 22,001 | | | 22,417 | |
Other receivables | 3,303 | | | 6,110 | |
| | | |
Total trade and other receivables, net | 142,095 | | | 146,652 | |
| | | |
Non-current portion of receivables | | | |
| | | |
Games trade and loans receivable | 568 | | | 1,382 | |
FinTech trade and loans receivable | 20,728 | | | 16,519 | |
Contract assets(1) | 9,286 | | | 9,856 | |
| | | |
Total non-current portion of receivables | 30,582 | | | 27,757 | |
| | | |
Total trade and other receivables, current portion | $ | 111,513 | | | $ | 118,895 | |
Allowance for Credit Losses
The activity in our allowance for credit losses for the nine months ended September 30, 2023 and 2022 is as follows (in thousands):
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2023 | | 2022 |
Beginning allowance for credit losses | $ | (4,855) | | | $ | (5,161) | |
Provision | (8,861) | | | (7,286) | |
Charge-offs, net of recoveries | 8,539 | | | 6,470 | |
Ending allowance for credit losses | $ | (5,177) | | | $ | (5,977) | |
8. INVENTORY
Our inventory primarily consists of component parts as well as work-in-progress and finished goods. The cost of inventory includes cost of materials, labor, overhead and freight, and is accounted for using the first in, first out method. The inventory is stated at the lower of cost or net realizable value.
Inventory consisted of the following (in thousands):
| | | | | | | | | | | |
| At September 30, | | At December 31, |
| 2023 | | 2022 |
Inventory | | | |
Component parts | $ | 56,251 | | | $ | 48,688 | |
Work-in-progress | 2,635 | | | 323 | |
Finished goods | 14,553 | | | 9,339 | |
Total inventory | $ | 73,439 | | | $ | 58,350 | |
9. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | At September 30, 2023 | | At December 31, 2022 |
| Useful Life (Years) | | Cost | | Accumulated Depreciation | | Net Book Value | | Cost | | Accumulated Depreciation | | Net Book Value |
Property and equipment | | | | | | | | | | | | | |
Rental pool - deployed | 2-5 | | $ | 298,902 | | | $ | 213,920 | | | $ | 84,982 | | | $ | 279,524 | | | $ | 188,369 | | | $ | 91,155 | |
Rental pool - undeployed | 2-5 | | 37,236 | | | 29,080 | | | 8,156 | | | 30,378 | | | 23,930 | | | 6,448 | |
FinTech equipment | 1-5 | | 37,663 | | | 26,618 | | | 11,045 | | | 36,442 | | | 24,167 | | | 12,275 | |
Leasehold and building improvements | Lease Term | | 23,094 | | | 11,579 | | | 11,515 | | | 13,666 | | | 10,689 | | | 2,977 | |
Machinery, office, and other equipment | 1-5 | | 62,166 | | | 40,194 | | | 21,972 | | | 55,246 | | | 34,456 | | | 20,790 | |
Total | | | $ | 459,061 | | | $ | 321,391 | | | $ | 137,670 | | | $ | 415,256 | | | $ | 281,611 | | | $ | 133,645 | |
Depreciation expense related to property and equipment totaled approximately $19.9 million and $58.4 million for the three and nine months ended September 30, 2023, respectively and $17.4 million and $48.3 million for the three and nine months ended September 30, 2022, respectively.
10. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
Goodwill represents the excess of the purchase price over the identifiable tangible and intangible assets acquired plus liabilities assumed arising from business combinations. The balance of goodwill was approximately $740.1 million and $715.9 million at September 30, 2023 and December 31, 2022, respectively. We have the following reporting units: (i) Games; (ii) Financial Access Services; (iii) Kiosk Sales and Services; (iv) Central Credit Services; (v) Compliance Sales and Services; (vi) Loyalty Sales and Services; and (vii) Mobile Technologies.
Other Intangible Assets
Other intangible assets consist of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | At September 30, 2023 | | At December 31, 2022 |
| Useful Life (Years) | | Cost | | Accumulated Amortization | | Net Book Value | | Cost | | Accumulated Amortization | | Net Book Value |
Other intangible assets | | | | | | | | | | | | | |
Contract rights under placement fee agreements | 2-7 | | $ | 57,821 | | | $ | 19,257 | | | $ | 38,564 | | | $ | 57,821 | | | $ | 12,252 | | | $ | 45,569 | |
Customer relationships | 3-14 | | 349,136 | | | 250,030 | | | 99,106 | | | 331,999 | | | 233,150 | | | 98,849 | |
Developed technology and software | 1-7 | | 442,238 | | | 332,064 | | | 110,174 | | | 401,087 | | | 309,285 | | | 91,802 | |
Patents, trademarks, and other | 2-18 | | 24,747 | | | 21,541 | | | 3,206 | | | 22,334 | | | 20,279 | | | 2,055 | |
Total | | | $ | 873,942 | | | $ | 622,892 | | | $ | 251,050 | | | $ | 813,241 | | | $ | 574,966 | | | $ | 238,275 | |
Amortization expense related to other intangible assets was approximately $15.2 million and $43.7 million for the three and nine months ended September 30, 2023, respectively and $15.3 million and $43.6 million for the three and nine months ended September 30, 2022, respectively.
11. LONG-TERM DEBT
The following table summarizes our indebtedness (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Maturity | | Interest | | At September 30, | | At December 31, |
| | Date | | Rate | | 2023 | | 2022 |
Long-term debt | | | | | | | | |
$600 million Term Loan | | 2028 | | SOFR+2.50% | | $ | 586,500 | | | $ | 592,500 | |
$125 million Revolver | | 2026 | | SOFR+2.50% | | — | | | — | |
Senior Secured Credit Facilities | | | | | | 586,500 | | | 592,500 | |
$400 million Unsecured Notes | | 2029 | | 5.00% | | 400,000 | | | 400,000 | |
Total debt | | | | | | 986,500 | | | 992,500 | |
Debt issuance costs and discount | | | | | | (12,653) | | | (14,505) | |
Total debt after debt issuance costs and discount | | | | | | 973,847 | | | 977,995 | |
Current portion of long-term debt | | | | | | (4,500) | | | (6,000) | |
Total long-term debt, net of current portion | | | | | | $ | 969,347 | | | $ | 971,995 | |
Credit Facilities
Our senior secured credit facilities consist of: (i) a seven-year $600 million senior secured term loan due 2028 issued at 99.75% of par (the “Term Loan”); and (ii) a $125 million senior secured revolving credit facility due 2026, which was undrawn at closing (the “Revolver” and together with the Term Loan, the “Credit Facilities”). The Company, as borrower, entered into the credit agreement dated as of August 3, 2021 (the “Closing Date”), 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 “Original Credit Agreement”).
On June 23, 2023, the Company entered into the first amendment (the “Amendment”) to the Original Credit Agreement (as amended, the “Amended Credit Agreement”), among Everi, as borrower, the lenders party thereto and Jefferies Finance LLC, as administrative agent, collateral agent, swing line lender and letter of credit issuer.
Under the Amended Credit Agreement, the Secured Overnight Financing Rate (“SOFR”) replaced the Eurodollar Rate for all purposes under the Original Credit Agreement and under any other Loan Document (as defined therein) on July 1, 2023, when the ICE Benchmark Administration ceased to provide all available tenors of the Eurodollar Rate. In connection with such implementation of SOFR, the Company and Jefferies Finance LLC agreed to make conforming changes to the relevant provisions of the Original Credit Agreement, as reflected in the Amended Credit Agreement.
We elected the optional expedient to account for the modification to our Credit Facilities in accordance with ASC 470 as if the modification was not substantial.
Legal fees were expensed as incurred in connection with the Amendment are reflected in operating expenses within the Statements of Operations for the nine months ended September 30, 2023.
The interest rate per annum applicable to the Credit Facilities will be, at the Company’s option, either the SOFR with a 0.50% floor plus a margin of 2.50% or the base rate plus a margin of 1.50%. Our Revolver remained fully undrawn as of September 30, 2023.
The weighted average interest rate on the Term Loan was 7.86% and 7.47% for the three and nine months ended September 30, 2023, respectively.
Senior Unsecured Notes
Our senior unsecured notes (the “2029 Unsecured Notes”) had an outstanding balance of $400.0 million as of September 30, 2023 that accrues interest at a rate of 5.00% 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 Credit Facilities and the 2029 Unsecured Notes as of September 30, 2023.
12. COMMITMENTS AND CONTINGENCIES
We are involved in various legal proceedings in the ordinary course of our business. While we believe resolution of the claims brought against us, both individually and in 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.
NRT matter:
NRT Technology Corp., et al. v. Everi Holdings Inc., et al. is a civil action filed on April 30, 2019 against Everi Holdings and Everi FinTech in the United States District Court for the District of Delaware by NRT Technology Corp.
and NRT Technology, Inc., alleging monopolization of the market for unmanned, integrated kiosks in violation of federal antitrust laws, fraudulent procurement of patents on functionality related to such unmanned, integrated kiosks and sham litigation related to prior litigation brought by Everi FinTech (operating as Global Cash Access Inc.) against the plaintiff entities. The plaintiffs are seeking compensatory damages, treble damages, and injunctive and declaratory relief. Discovery is closed. The court removed the case from the September trial calendar and requested briefs from the parties on relevant legal issues. Briefing was completed in December 2022. The parties are awaiting further guidance from the court. Due to the current stage of the litigation, we are unable to estimate the probability of the outcome of this matter or reasonably estimate the range of possible damages, if any.
Zenergy Systems, LLC matter:
Zenergy Systems, LLC v. Everi Payments Inc. is a civil action filed on May 29, 2020, against Everi FinTech in the United States District Court for the District of Nevada, Clark County by Zenergy Systems, LLC, alleging breach of contract, breach of a non- disclosure agreement, conversion, breach of the covenant of good faith and fair dealing, and breach of a confidential relationship related to a contract with Everi FinTech that expired in 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 parties participated in mediation on March 21, 2023. No settlement was reached at mediation. The parties filed a joint motion to set a firm trial date which the court granted on October 9, 2023. We are awaiting notification from the court on the new trial date. Due to the current stage of the litigation, we are unable to estimate the probability of the outcome of this matter or reasonably estimate the range of possible damages, if any.
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 to herein as the “Everi Parties”) 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 the Everi Parties’ CashClub Wallet product infringes on certain patents owned by the plaintiff. The plaintiff is seeking compensatory damages. The Everi Parties filed a Motion to Dismiss or Transfer for Lack of Venue. On June 1, 2022, the court granted the Everi Parties’ 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. On June 23, 2022, the plaintiff, Sightline Payments LLC, filed an appeal of the District Court’s Order. Oral argument on the appeal was scheduled for October 3, 2023, before the U.S. Court of Appeals for the Federal Circuit. On September 29, 2023 counsel for the Plaintiff Sightline informed Everi’s counsel that Sightline would be voluntarily dismissing the appeal. A joint stipulation was filed and on September 29, 2023, the appellate court entered an order dismissing the appeal. This matter is now closed.
Sightline USPTO matters:
In a case related to the Sightline Payments matter, in February and March 2022, Everi Payments Inc. filed five Petitions for Inter Partes Review (“IPR”) with the Patent Trial and Appeal Board (the “PTAB”) of the United States Patent and Trademark Office seeking invalidation of certain claims of U.S. Patent Nos. 8,708,809, 8,998,708, 9,196,123, 9,466,176, and 9,785,926 owned by Sightline Partners LLC. In August and September 2022, decisions by the PTAB were issued granting the IPRs. Briefing and discovery are closed. Oral argument was held on June 14, 2023. Between August 30, 2023 and September 20, 2023, the PTAB issued five (5) Final Written Decisions ruling in favor of Everi and holding that all of the patent claims asserted by Sightline against Everi were “unpatentable” as obvious, thus, invalidating those claims.
Mary Parrish matter:
Mary Parrish v. Everi Holdings Inc., et al. is a civil action filed on December 28, 2021, against Everi Holdings and Everi FinTech in the District Court of Nevada, Clark County by Mary Parrish alleging violation of the Fair and Accurate Credit Transactions Act (FACTA) amendment to the Fair Credit Reporting Act (FCRA). Plaintiff’s complaint alleges she received a printed receipt for cash access services performed at an Everi Payments’ ATM which
displayed more than four (4) digits of the account number. Plaintiff seeks statutory damages, punitive damages, injunctive relief, attorneys’ fees, and other relief. Everi filed a Petition for Removal to the United States District Court, District of Nevada. Thereafter, Everi filed a Motion to Dismiss. On May 4, 2023, the United States District Court entered an order remanding the case back to the District Court of Nevada, Clark County and denying the Motion to Dismiss. The matter is now pending in the District Court of Nevada, Clark County. On July 25, 2023, Everi filed a Motion to Dismiss in the Clark County case. On October 20, 2023, the Clark County Court entered an Order denying the Motion to Dismiss. Due to the current stage of the litigation, we are unable to estimate the probability of the outcome of this matter or reasonably estimate the range of possible damages, if any.
13. STOCKHOLDERS’ EQUITY
On May 3, 2023, our Board of Directors authorized and approved a new share repurchase program in an amount not to exceed $180 million, pursuant to which we may purchase outstanding Company common stock in open market or privately negotiated transactions over a period of eighteen (18) months through November 3, 2024, in accordance with Company and regulatory policies and trading plans established in accordance with Rules 10b5-1 and 10b-18 of the Securities Exchange Act of 1934. The actual number of shares to be purchased will depend upon market conditions and is subject to available liquidity, general market and economic conditions, alternative uses for the capital and other factors. All shares purchased will be held in the Company’s treasury for possible future use. As of September 30, 2023, Everi had approximately 86.0 million shares issued and outstanding, net of 37.1 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 2.4 million and 5.1 million shares repurchased at an average price of $13.88 and $14.36 per share for an aggregate amount of $33.9 million and $73.9 million during the three and nine months ended September 30, 2023, respectively, and 0.9 million and 2.9 shares repurchased at an average price of $17.29 and $16.87 per share for an aggregate amount of $16.0 million and $49.4 million during the three and nine months ended September 30, 2022, respectively. Under the existing $180.0 million share repurchase program, the remaining availability was $106.1 million as of September 30, 2023.
14. WEIGHTED AVERAGE SHARES OF COMMON STOCK
The weighted average number of common stock outstanding used in the computation of basic and diluted earnings per share is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
Weighted average shares | | | | | | | |
Weighted average number of common shares outstanding - basic | 87,221 | | | 90,014 | | | 87,925 | | | 91,039 | |
Potential dilution from equity awards(1) | 4,024 | | | 6,422 | | | 5,237 | | | 7,267 | |
Weighted average number of common shares outstanding - diluted(1) | 91,245 | | | 96,436 | | | 93,162 | | | 98,306 | |
(1) There were 0.6 million and 0.2 million shares that were anti-dilutive under the treasury stock method for the three and nine months ended September 30, 2023, respectively and 0.2 million and 0.1 million number of shares that were anti-dilutive under the treasury stock method for the three and nine months ended September 30, 2022, respectively.
15. SHARE-BASED COMPENSATION
Equity Incentive Awards
Generally, we grant the following types of awards: (i) restricted stock units with either time- or performance-based criteria; and (ii) time-based options. We estimate forfeiture amounts based on historical patterns.
A summary of award activity is as follows (in thousands):
| | | | | | | | | | | |
| Stock Options | | Restricted Stock Units |
Outstanding, December 31, 2022 | 6,793 | | | 2,709 | |
Granted | 103 | | | 1,537 | |
Exercised options or vested shares | (2,037) | | | (1,720) | |
Canceled or forfeited | (28) | | | (54) | |
Outstanding, September 30, 2023 | 4,831 | | | 2,472 | |
There were approximately 2.1 million awards of our common stock available for future equity grants under our existing equity incentive plan as of September 30, 2023.
16. INCOME TAXES
The income tax provision for the three and nine months ended September 30, 2023, reflected an effective income tax rate of 18.1% and 17.7%, respectively, which was less than the statutory federal rate of 21.0%, primarily due to a research credit and the benefit from equity award activities, partially offset by state taxes and compensation deduction limitations. The income tax provision for the three and nine months ended September 30, 2022, reflected an effective income tax rate of 26.0% and 24.2%, respectively, which was greater than the statutory federal rate of 21.0%, primarily due to state taxes, compensation deduction limitations, a net operating loss limitation and an accrual for a foreign withholding tax, partially offset by both a research credit and the benefit from equity award activities.
We have analyzed our positions in the federal, state and foreign jurisdictions where we are required to file income tax returns, as well as the open tax years in these jurisdictions. As of September 30, 2023, we recorded approximately $2.7 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.
17. SEGMENT INFORMATION
Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision-making group (the “CODM”). Our CODM generally consists of the Chief Executive Officer and the Chief Financial Officer. Our CODM determined that our operating segments for conducting business are: (i) Games and (ii) FinTech. 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. Refer to “Note 1 — Business” for additional information regarding our operating segments. 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 that were material to our results of operations or financial condition, and we had no significant assets in foreign locations.
The following tables present segment information (in thousands)*:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
Games | | | | | | | |
Revenues | | | | | | | |
Gaming operations | $ | 78,400 | | | $ | 75,020 | | | $ | 231,490 | | | $ | 219,437 | |
Gaming equipment and systems | 33,138 | | | 37,500 | | | 100,554 | | | 103,766 | |
Total revenues | 111,538 | | | 112,520 | | | 332,044 | | | 323,203 | |
Costs and expenses | | | | | | | |
Cost of revenues(1) | | | | | | | |
Gaming operations | 10,363 | | | 6,557 | | | 25,557 | | | 18,674 | |
Gaming equipment and systems | 18,239 | | | 22,545 | | | 58,629 | | | 62,721 | |
Total cost of revenues | 28,602 | | | 29,102 | | | 84,186 | | | 81,395 | |
Operating expenses | 22,805 | | | 19,860 | | | 64,574 | | | 57,886 | |
Research and development | 10,065 | | | 11,298 | | | 31,890 | | | 28,395 | |
Depreciation | 17,492 | | | 15,006 | | | 50,997 | | | 41,321 | |
Amortization | 11,153 | | | 11,472 | | | 32,304 | | | 31,744 | |
Total costs and expenses | 90,117 | | | 86,738 | | | 263,951 | | | 240,741 | |
Operating income | $ | 21,421 | | | $ | 25,782 | | | $ | |