10-Q 1 evri-10q_20170930.htm 10-Q evri-10q_20170930.htm

 

 

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,  2017

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)

 

Registrant’s telephone number, including area code:

(800) 833-7110

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes    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

(Do not check if a smaller reporting company)

Smaller reporting company

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes   No 

As of November 1, 2017, there were 67,366,979 shares of the registrant’s $0.001 par value per share common stock outstanding.

 

 

 

 

 


 

 

TABLE OF CONTENTS

 

 

 

 

 

Page

 

 

 

 

 

PART I: FINANCIAL INFORMATION

 

3

 

 

 

 

 

Item 1:

 

Financial Statements

 

3

 

 

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Loss and Comprehensive Loss for the three and nine months ended September 30, 2017 and 2016

 

3

 

 

 

 

 

 

 

Unaudited Condensed Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016

 

4

 

 

 

 

 

 

 

Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016

 

5

 

 

 

 

 

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

7

 

 

 

 

 

Item 2:

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

34

 

 

 

 

 

Item 3:

 

Quantitative and Qualitative Disclosures about Market Risk

 

47

 

 

 

 

 

Item 4:

 

Controls and Procedures

 

48

 

 

 

 

 

PART II: OTHER INFORMATION

 

48

 

 

 

 

 

Item 1:

 

Legal Proceedings

 

48

 

 

 

 

 

Item 1A:

 

Risk Factors

 

48

 

 

 

 

 

Item 2:

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

49

 

 

 

 

 

Item 3:

 

Defaults Upon Senior Securities

 

49

 

 

 

 

 

Item 4:

 

Mine Safety Disclosures

 

49

 

 

 

 

 

Item 5:

 

Other Information

 

49

 

 

 

 

 

Item 6:

 

Exhibits

 

50

 

 

 

 

 

Signatures

 

 

 

51

 

2


 

PART I: FINANCIAL INFORMATION

Item 1. Financial Statements.

EVERI HOLDINGS INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS

(In thousands, except loss per share amounts)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Games

 

$

55,452

 

 

$

56,218

 

 

$

165,832

 

 

$

158,660

 

Payments

 

 

191,870

 

 

 

165,959

 

 

 

561,257

 

 

 

483,286

 

Total revenues

 

 

247,322

 

 

 

222,177

 

 

 

727,089

 

 

 

641,946

 

Costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Games cost of revenue (exclusive of

   depreciation and amortization)

 

 

13,820

 

 

 

15,467

 

 

 

39,503

 

 

 

36,871

 

Payments cost of revenue (exclusive of

   depreciation and amortization)

 

 

149,838

 

 

 

127,211

 

 

 

436,104

 

 

 

373,366

 

Operating expenses

 

 

29,463

 

 

 

26,996

 

 

 

87,235

 

 

 

87,735

 

Research and development

 

 

4,545

 

 

 

4,460

 

 

 

13,706

 

 

 

14,499

 

Depreciation

 

 

12,539

 

 

 

12,367

 

 

 

34,765

 

 

 

37,172

 

Amortization

 

 

17,322

 

 

 

24,104

 

 

 

52,086

 

 

 

70,887

 

Total costs and expenses

 

 

227,527

 

 

 

210,605

 

 

 

663,399

 

 

 

620,530

 

Operating income

 

 

19,795

 

 

 

11,572

 

 

 

63,690

 

 

 

21,416

 

Other expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net of interest income

 

 

23,368

 

 

 

24,815

 

 

 

72,306

 

 

 

74,548

 

Loss on extinguishment of debt

 

 

 

 

 

 

 

 

14,615

 

 

 

 

Total other expenses

 

 

23,368

 

 

 

24,815

 

 

 

86,921

 

 

 

74,548

 

Loss before income tax

 

 

(3,573

)

 

 

(13,243

)

 

 

(23,231

)

 

 

(53,132

)

Income tax provision (benefit)

 

 

716

 

 

 

(4,989

)

 

 

3,623

 

 

 

(20,930

)

Net loss

 

 

(4,289

)

 

 

(8,254

)

 

 

(26,854

)

 

 

(32,202

)

Foreign currency translation

 

 

602

 

 

 

(394

)

 

 

1,710

 

 

 

(1,314

)

Comprehensive loss

 

$

(3,687

)

 

$

(8,648

)

 

$

(25,144

)

 

$

(33,516

)

Loss per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.06

)

 

$

(0.12

)

 

$

(0.40

)

 

$

(0.49

)

Diluted

 

$

(0.06

)

 

$

(0.12

)

 

$

(0.40

)

 

$

(0.49

)

Weighted average common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

66,897

 

 

 

66,049

 

 

 

66,449

 

 

 

66,041

 

Diluted

 

 

66,897

 

 

 

66,049

 

 

 

66,449

 

 

 

66,041

 

 

See notes to unaudited condensed consolidated financial statements.

 

3


 

EVERI HOLDINGS INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value amounts)

 

 

 

At September 30,

 

 

At December 31,

 

 

 

2017

 

 

2016

 

ASSETS

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

108,471

 

 

$

119,051

 

Settlement receivables

 

 

127,443

 

 

 

128,821

 

Trade and other receivables, net of allowances for doubtful accounts of $5,427 and $4,701 at September 30, 2017 and December 31, 2016, respectively

 

 

44,971

 

 

 

56,651

 

Inventory

 

 

23,790

 

 

 

19,068

 

Prepaid expenses and other assets

 

 

22,538

 

 

 

18,048

 

Total current assets

 

 

327,213

 

 

 

341,639

 

Non-current assets

 

 

 

 

 

 

 

 

Property, equipment and leased assets, net

 

 

109,399

 

 

 

98,439

 

Goodwill

 

 

640,593

 

 

 

640,546

 

Other intangible assets, net

 

 

338,074

 

 

 

317,997

 

Other receivables

 

 

2,876

 

 

 

2,020

 

Other assets

 

 

7,450

 

 

 

7,522

 

Total non-current assets

 

 

1,098,392

 

 

 

1,066,524

 

Total assets

 

$

1,425,605

 

 

$

1,408,163

 

LIABILITIES AND STOCKHOLDERS’ DEFICIT

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Settlement liabilities

 

$

197,494

 

 

$

239,123

 

Accounts payable and accrued expenses

 

 

126,625

 

 

 

94,391

 

Current portion of long-term debt

 

 

8,200

 

 

 

10,000

 

Total current liabilities

 

 

332,319

 

 

 

343,514

 

Non-current liabilities

 

 

 

 

 

 

 

 

Deferred tax liability

 

 

60,785

 

 

 

57,611

 

Long-term debt, less current portion

 

 

1,130,671

 

 

 

1,111,880

 

Other accrued expenses and liabilities

 

 

25,634

 

 

 

2,951

 

Total non-current liabilities

 

 

1,217,090

 

 

 

1,172,442

 

Total liabilities

 

 

1,549,409

 

 

 

1,515,956

 

Commitments and contingencies (Note 12)

 

 

 

 

 

 

 

 

Stockholders’ deficit

 

 

 

 

 

 

 

 

Common stock, $0.001 par value, 500,000 shares authorized and 91,918 and 90,952 shares issued at September 30, 2017 and December 31, 2016, respectively

 

 

92

 

 

 

91

 

Convertible preferred stock, $0.001 par value, 50,000 shares authorized and 0 shares outstanding at September 30, 2017 and December 31, 2016, respectively

 

 

 

 

 

 

Additional paid-in capital

 

 

273,906

 

 

 

264,755

 

Accumulated deficit

 

 

(221,152

)

 

 

(194,299

)

Accumulated other comprehensive loss

 

 

(399

)

 

 

(2,109

)

Treasury stock, at cost, 24,872 and 24,867 shares at September 30, 2017 and December 31, 2016, respectively

 

 

(176,251

)

 

 

(176,231

)

Total stockholders’ deficit

 

 

(123,804

)

 

 

(107,793

)

Total liabilities and stockholders’ deficit

 

$

1,425,605

 

 

$

1,408,163

 

 

See notes to unaudited condensed consolidated financial statements.

4


 

EVERI HOLDINGS INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(26,854

)

 

$

(32,202

)

Adjustments to reconcile net loss to cash provided by operating

   activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

86,851

 

 

 

108,059

 

Amortization of financing costs

 

 

4,567

 

 

 

5,023

 

Loss on sale or disposal of assets

 

 

1,580

 

 

 

2,554

 

Accretion of contract rights

 

 

5,845

 

 

 

6,521

 

Provision for bad debts

 

 

7,946

 

 

 

7,192

 

Deferred income taxes

 

 

3,174

 

 

 

(22,259

)

Write-down of assets

 

 

 

 

 

4,289

 

Reserve for obsolescence

 

 

46

 

 

 

942

 

Loss on extinguishment of debt

 

 

14,615

 

 

 

 

Stock-based compensation

 

 

5,125

 

 

 

4,146

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Settlement receivables

 

 

1,569

 

 

 

9,158

 

Trade and other receivables

 

 

2,767

 

 

 

(1,386

)

Inventory

 

 

(5,314

)

 

 

6,315

 

Prepaid and other assets

 

 

(3,337

)

 

 

2,912

 

Settlement liabilities

 

 

(41,799

)

 

 

(22,000

)

Accounts payable and accrued expenses

 

 

12,981

 

 

 

6,544

 

Net cash provided by operating activities

 

 

69,762

 

 

 

85,808

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(70,057

)

 

 

(67,025

)

Acquisitions, net of cash acquired

 

 

 

 

 

(694

)

Proceeds from sale of fixed assets

 

 

4

 

 

 

4,608

 

Placement fee agreements

 

 

(13,132

)

 

 

(11,187

)

Changes in restricted cash

 

 

(149

)

 

 

88

 

Net cash used in investing activities

 

 

(83,334

)

 

 

(74,210

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Repayments of new credit facility

 

 

(2,050

)

 

 

 

Repayments of prior credit facility

 

 

(465,600

)

 

 

(21,900

)

Repayments of secured notes

 

 

(335,000

)

 

 

 

Proceeds from current credit facility

 

 

820,000

 

 

 

 

Debt issuance costs and discounts

 

 

(19,748

)

 

 

(480

)

Proceeds from exercise of stock options

 

 

4,046

 

 

 

 

Purchase of treasury stock

 

 

(21

)

 

 

(17

)

Net cash provided by (used in) financing activities

 

 

1,627

 

 

 

(22,397

)

Effect of exchange rates on cash

 

 

1,365

 

 

 

(743

)

Cash and cash equivalents

 

 

 

 

 

 

 

 

Net decrease for the period

 

 

(10,580

)

 

 

(11,542

)

Balance, beginning of the period

 

 

119,051

 

 

 

102,030

 

Balance, end of the period

 

$

108,471

 

 

$

90,488

 

 

See notes to unaudited condensed consolidated financial statements.

5


 

 

 

 

Nine Months Ended September 30,

 

 

 

2017

 

 

2016

 

Supplemental cash disclosures

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

59,894

 

 

$

55,465

 

Cash paid for income tax

 

$

760

 

 

$

1,124

 

Cash refunded for income tax

 

$

200

 

 

$

92

 

Supplemental non-cash disclosures

 

 

 

 

 

 

 

 

Accrued and unpaid capital expenditures

 

$

4,736

 

 

$

1,427

 

Accrued and unpaid placement fees

 

$

39,074

 

 

$

 

Accrued and unpaid contingent liability for acquisitions

 

$

 

 

$

(3,169

)

Transfer of leased gaming equipment to inventory

 

$

6,093

 

 

$

6,222

 

 

 

 

See notes to unaudited condensed consolidated financial statements.

 

 

 

6


 

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 Loss and Comprehensive Loss as our “Statements of Loss,” (iii) our Unaudited Condensed Consolidated Balance Sheets as our “Balance Sheets,” and our Unaudited Condensed Consolidated Statements of Cash Flows as our “Cash Flows.”

1.

BUSINESS

Everi Holdings Inc. (formerly known as Global Cash Access Holdings, Inc.) (“Everi Holdings,” “Holdings” or “Everi”) is a holding company, the assets of which are the issued and outstanding shares of capital stock of each of Everi Games Holding Inc. (formerly known as Multimedia Games Holding Company, Inc.) (“Everi Games Holding”), which owns all of the issued and outstanding shares of capital stock of Everi Games Inc. (formerly known as Multimedia Games, Inc.) (“Everi Games” or “Games”) and Everi Payments Inc. (formerly known as Global Cash Access, Inc.) (“Everi Payments” or “Payments”). Unless otherwise indicated, the terms the “Company,” “we,” “us” and “our” refer to Holdings together with its consolidated subsidiaries.

Everi is dedicated to providing video and mechanical reel gaming content and technology solutions, integrated gaming payments solutions and compliance and efficiency software to casino operators. Everi Games provides: (a) comprehensive content, electronic gaming units and systems for Native American and commercial casinos, including both Wide-Area Progressive (“WAP”) systems and the TournEvent® slot tournament solution; and (b) the central determinant system for the video lottery terminals installed in the State of New York. Everi Payments provides: (a) access to cash at gaming facilities via Automated Teller Machine (“ATM”) cash withdrawals, credit card cash access transactions, point of sale (“POS”) debit card transactions, and check verification and warranty services; (b) fully integrated gaming industry kiosks that provide cash access and related services; (c) products and services that improve credit decision making, automate cashier operations and enhance patron marketing activities for gaming establishments; (d) compliance, audit and data solutions; and (e) online payment processing solutions for gaming operators in states that offer intrastate, Internet-based gaming and lottery activities.

2.

BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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 nine months ended September 30, 2017 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 our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

There have been no changes to our basis of presentation and significant accounting policies since the most recent filing of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

Fair Values of Financial Instruments

The fair value of a financial instrument represents the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Fair value estimates are made at a specific point in time, based upon relevant market information about the financial instrument.

The carrying amount of cash and cash equivalents, settlement receivables, trade receivables, other receivables, settlement liabilities, accounts payable and accrued expenses approximates fair value due to the short-term maturities of

7


 

these instruments. The fair value of our borrowings are 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).

 

 

 

Level of

Hierarchy

 

Fair Value

 

 

Outstanding

Balance

 

September 30, 2017

 

 

 

 

 

 

 

 

 

 

Term loan

 

2

 

$

826,130

 

 

$

817,950

 

Senior unsecured notes

 

1

 

$

378,875

 

 

$

350,000

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

Term loan

 

1

 

$

451,632

 

 

$

465,600

 

Senior secured notes

 

3

 

$

324,950

 

 

$

335,000

 

Senior unsecured notes

 

1

 

$

350,000

 

 

$

350,000

 

 

The term loan facility was reported at fair value using a Level 2 input as there were quoted prices in markets that were not considered active as of September 30, 2017. The senior unsecured notes were reported at fair value using a Level 1 input as there were quoted prices in markets that were considered active as of September 30, 2017.

The term loan was reported at fair value using a Level 1 input as there were quoted prices in markets that were considered active as of December 31, 2016. The senior secured notes were reported at fair value using a Level 3 input as there was no market activity or observable inputs as of December 31, 2016. The senior unsecured notes were reported at fair value using a Level 1 input as there were quoted prices in markets that were considered active as of December 31, 2016.

Reclassification of Prior Year Balances

Reclassifications were made to the prior-period Financial Statements to conform to the current period presentation.

Recent Accounting Guidance

Recently Adopted Accounting Guidance

In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-04, which provides updated guidance on the goodwill impairment test and the method by which an entity recognizes an impairment charge. These amendments eliminate Step 2 from the current goodwill impairment process and require that an entity recognize an impairment charge equal to the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to that reporting unit. Additionally, a company should also take into consideration income tax effects from tax deductible goodwill on the carrying amount of a reporting unit when recording an impairment loss. The new standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. This guidance will be applied using a prospective approach. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We adopted this guidance in the current period. As no indicators of impairment were identified for our goodwill during the three and nine months ended September 30, 2017, this ASU did not impact our Financial Statements.

In March 2016, the FASB issued ASU No. 2016-09, which simplifies several aspects of the accounting for share-based payment transactions, including the accounting for income taxes, statutory tax withholding requirements and classification on the statement of cash flows. The new standard is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. This guidance will be applied either prospectively, retrospectively or using a modified retrospective transition method, depending on the area covered in this update. Early adoption is permitted. We adopted this guidance in the current period on a prospective basis. As of September 30, 2017, the adoption of ASU No. 2016-09 has not materially impacted our Financial Statements. With respect to forfeitures, the Company will continue to estimate the number of awards expected to be forfeited in accordance with our existing accounting policy. In addition, our Cash Flows present excess tax benefits as operating activities in the current period, as the prior period was not adjusted.

In July 2015, the FASB issued ASU No. 2015-11, which provides guidance on the measurement of inventory value. The amendments require an entity to measure in scope inventory at the lower of cost and net realizable value. Net realizable

8


 

value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Subsequent measurement is unchanged for inventory measured using last-in, first-out (“LIFO”) or the retail inventory method. The amendments do not apply to inventory that is measured using LIFO or the retail inventory method. The amendments apply to all other inventory, which includes inventory that is measured using first-in, first-out (“FIFO”) or average cost. The pronouncement is effective for annual periods beginning after December 15, 2016, and interim periods within those fiscal years, and early adoption is permitted. We adopted this guidance in the current period. This ASU did not have a material impact on our Financial Statements.

Recent Accounting Guidance Not Yet Adopted

In May 2017, the FASB issued ASU No. 2017-09 to clarify which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting under Topic 718. An entity is required to account for the effects of a modification unless all of the following conditions are met: (i) the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or value using an alternative measurement method) of the original award immediately before the original award is modified. If the modification does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not required to estimate the value immediately before and after the modification; (ii) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; and (iii) the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The new standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted in the first period of the year this guidance is adopted. We are currently evaluating the impact of adopting this guidance on our Financial Statements.

In January 2017, the FASB issued ASU No. 2017-01, which clarifies the definition of a business. The amendments affect all companies and other reporting organizations that must determine whether they have acquired or sold a business. The amendments are intended to help companies and other organizations evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The new standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. This guidance will be applied using a prospective approach as of the beginning of the first period of adoption. Early adoption is permitted for acquisitions, or disposals that occur before the issuance date or effectiveness date of the amendments when the transaction has not been reported in financial statements that have been issued or made available for issuance. We are currently evaluating the impact of adopting this guidance on our Financial Statements.

In October 2016, the FASB issued ASU No. 2016-18, which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. As a result, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments do not provide a definition of restricted cash or restricted cash equivalents. The new standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. This guidance will be applied using a retrospective approach to each period presented. Early adoption is permitted and adoption in an interim period should reflect adjustments as of the beginning of the fiscal year that includes that interim period. We are currently evaluating the impact of adopting this guidance on our Financial Statements.

In October 2016, the FASB issued ASU No. 2016-16, which provides updated guidance on the recognition of the income tax consequences of intra-entity transfers of assets other than inventory when the transfer occurs, and this eliminates the exception for an intra-entity transfer of such assets. The new standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. This guidance will be applied using a modified retrospective approach through a cumulative-effective adjustment directly to retained earnings as of the beginning of the period of adoption. Early adoption is permitted during the first interim period of the year this guidance is adopted. We are currently evaluating the impact of adopting this guidance on our Financial Statements.

In August 2016, the FASB issued ASU No. 2016-15, which provides updated guidance on the classification of certain cash receipts and cash payments in the statement of cash flows. The new standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. This guidance will be applied using a

9


 

retrospective approach. If it is impracticable to apply the amendments retrospectively for some of the issues within this ASU, the amendments for those issues would be applied prospectively as of the earliest date practicable. Early adoption is permitted including adoption in an interim period. We are currently evaluating the impact of adopting this guidance on our Financial Statements.

In June 2016, the FASB issued ASU No. 2016-13, which provides updated guidance on credit losses for financial assets measured at amortized cost basis and available-for sale debt securities. The new standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. This guidance will be applied using a modified retrospective approach for the cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective and using a prospective approach for debt securities for which any other-than-temporary impairment had been recognized before the effective date. Early adoption is permitted for fiscal years beginning after December 15, 2018. We are currently evaluating the impact of adopting this guidance on our Financial Statements.

In February 2016, the FASB issued ASU No. 2016-02, which provides guidance on the accounting treatment of leases. The ASU establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either financing or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years and early adoption is permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. While we are currently assessing the impact of this ASU on our Financial Statements, we expect the primary impact to our consolidated financial position upon adoption will be the recognition, on a discounted basis, of our minimum commitments under noncancelable operating leases on our Balance Sheets, which will result in the recording of right of use assets and lease obligations and are currently discussed in “Note 12 — Commitments and Contingencies.”

In May 2014, the FASB issued ASU No. 2014-09, which creates FASB Accounting Standards Codification (“ASC”) Topic 606, “Revenue from Contracts with Customers” and supersedes ASC Topic 605, “Revenue Recognition”. The guidance replaces industry-specific guidance and establishes a single five-step model to identify and recognize revenue. The core principle of the guidance is that an entity should recognize revenue upon transfer of control of promised goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. Additionally, the guidance requires the entity to disclose further quantitative and qualitative information regarding the nature and amount of revenues arising from contracts with customers, as well as other information about the significant judgments and estimates used in recognizing revenues from contracts with customers. The guidance in ASU 2014-09 was further updated by ASU 2016-08 in March 2016, which provides clarification on the implementation of the principal versus agent considerations in ASU 2014-09. In April 2016, the FASB issued ASU 2016-10, which provides clarification on the implementation of performance obligations and licensing in ASU 2014-09. In May 2016, the FASB issued ASU 2016-11, which amends guidance provided in two SEC Staff Announcements at the March 3, 2016 Emerging Issues Task Force meeting over various topics relating to ASU 606. In May 2016, the FASB issued ASU 2016-12, which clarified various topics in ASU 606. In December 2016, the FASB issued ASU 2016-20, which clarified additional topics in ASU 606. This guidance was originally effective for interim and annual reporting periods beginning after December 15, 2016. However, in August 2015, the FASB issued ASU No. 2015-14, which extended the effective date to interim and annual periods beginning after December 15, 2017. Early application is permitted only as of annual reporting periods beginning after December 15, 2015, including interim reporting periods within that reporting period. This guidance may be adopted retrospectively or under a modified retrospective method where the cumulative effect is recognized at the date of initial application.

10


 

We have performed a review of the requirements of the standard and identified our major revenue streams and the anticipated impact to each of them:

 

Major Revenue Stream

 

Preliminary Expected Impact Upon Adoption

 

 

 

Games Segment:

 

 

 

 

 

Game Sales

 

We expect revenue recognition to be consistent with our current practices, however, there may be some differences as we continue to evaluate the implications.

 

 

 

Game Operations

 

We expect revenue recognition to be consistent with our current practices, however, with respect to our WAP offering(s), for which we initiated this year, we will be required to net the direct costs with Games revenues as opposed to our existing practice of recording those amounts to Games cost of revenues. WAP jackpot expense was approximately $0.1 million and $0.3 million for the three and nine months ended September 30, 2017, respectively.

 

 

 

Payments Segment:

 

 

 

 

 

Cash Advance, ATM and Check Services

 

We generally expect revenue recognition to be consistent with our current practices, however, there may potentially be significant differences as we continue to evaluate the implications specifically related to our reporting these revenues on a gross versus net basis. As such, there will be no effect on operating income, net loss, cash flows or the timing of revenues recognized and costs incurred. In addition, there may be changes to the Kiosk Sales and Services and Compliance Sales and Services offerings that impact cash advance, ATM and check services revenue streams as we continue to evaluate the revenue recognition standard.

 

 

 

Central Credit

 

We expect revenue recognition to be consistent with our current practices, however, there may be differences as we continue to evaluate the implications.

 

 

 

Kiosk Sales and Services

 

We expect to encounter some level of change to our revenue recognition practices for these revenue streams under the new guidance, however, the amounts are not anticipated to be material as we continue to evaluate the implications.

 

 

 

Compliance Sales and Services

 

We expect to encounter some level of change to our revenue recognition practices for these revenue streams under the new guidance, however, the amounts are not anticipated to be material as we continue to evaluate the implications.

 

11


 

Currently, we do not expect our Games or certain of our Payments revenues to be materially impacted by the implementation of this guidance; however, we continue to evaluate certain of our other Payments-related revenue streams as there may be a potentially significant impact, depending on our final interpretation of the accounting guidance. More specifically, based on the transition guidance related to the new revenue recognition standard, we are in the process of determining if our cash advance, ATM and check services revenue streams will be required to be reported “net of transaction price” rather than our current gross revenue presentation basis. Under the existing Topic 605, certain factors that supported our gross reporting position have been eliminated in the new Topic 606. In addition, our understanding of the new transition guidance, as it specifically pertains to payments from customers, may further require us to report certain of these Payments-related revenue streams on a net presentation basis. If our conclusions, in accordance with GAAP, support a net reporting of these specific revenue streams, this will have a significant impact on our revenues, cost of revenues and margins for the affected revenue streams, however, there will be no effect on operating income, net loss, cash flows or the timing of revenues recognized and costs incurred.

As we continue to take the necessary measures of preparedness in connection with the adoption of the new revenue recognition standard, we continue to do the following:

 

Evaluate our revenue streams to determine the extent, if any, of the changes to the timing and amount of revenue recorded in each reporting period.

 

Review our existing accounting policies, procedures and internal controls to further determine the impact of the new standard on our Financial Statements.

 

Prepare the enhanced disclosures and updates to our revenue recognition policies to identify performance obligations to customers and that will require significant judgment in both measurement and recognition.

 

Review in detail our sales contract terms and conditions to determine the necessary adjustments, if any.

 

Monitor the activity of the FASB and the transition resource group as it relates to specific interpretive guidance that may impact us.

We may identify other impacts from the implementation of this guidance as we continue our assessment. We expect to adopt this guidance using the modified retrospective method beginning in the first quarter of 2018.

3.

BUSINESS COMBINATIONS

We account for business combinations in accordance with ASC 805, which requires that the identifiable assets acquired and liabilities assumed be recorded at their estimated fair values on the acquisition date separately from goodwill, which is the excess of the fair value of the purchase price over the fair values of these identifiable assets and liabilities. We include the results of operations of an acquired business as of the acquisition date. We had no material acquisitions for the three and nine months ended September 30, 2017 and 2016.

4.

FUNDING AGREEMENTS

Contract Cash Solutions Agreement

Our Contract Cash Solutions Agreement with Wells Fargo Bank, N.A. (“Wells Fargo”) allows us to use funds owned by Wells Fargo to provide the currency needed for normal operating requirements for our ATMs. For the use of these funds, we pay Wells Fargo a cash usage fee on the average daily balance of funds utilized multiplied by a contractually defined cash usage rate. These cash usage fees, reflected as interest expense within the Statements of Loss, were $1.2 million and $3.5 million for the three and nine months ended September 30, 2017, respectively, and $0.7 million and $2.3 million for the three and nine months ended September 30, 2016, respectively. We are exposed to interest rate risk to the extent that the applicable London Interbank Offered Rate (“LIBOR”) increases.

Under this agreement, all currency supplied by Wells Fargo remains the sole property of Wells Fargo at all times until it is dispensed, at which time Wells Fargo obtains an interest in the corresponding settlement receivable which is recorded on a net basis. As these funds are not our assets, supplied cash is not reflected on the Balance Sheets. The outstanding balances of ATM cash utilized by us from Wells Fargo were $226.6 million and $285.4 million as of September 30, 2017 and December 31, 2016, respectively.

12


 

The Contract Cash Solutions Agreement, as amended, provides us with cash in the maximum amount of $425.0 million during the term of the agreement, which expires on June 30, 2019.

We are responsible for any losses of cash in the ATMs under this agreement, and we self‑insure for this risk. We incurred no material losses related to this self‑insurance for the three and nine months ended September 30, 2017 and 2016.

Site-Funded ATMs

We operate ATMs at certain customer gaming establishments where the gaming establishment provides the cash required for the ATM operational needs. We are required to reimburse the customer for the amount of cash dispensed from these site-funded ATMs. The site-funded ATM liability included within settlement liabilities in the accompanying Balance Sheets was $134.1 million and $151.0 million as of September 30, 2017 and December 31, 2016, respectively.

Prefunded Cash Access Agreements

Due to certain regulatory requirements, some international gaming establishments require prefunding of cash to cover all outstanding settlement amounts in order for us to provide cash access services to their properties. We enter into agreements with these operators for which we supply our cash access services for their properties. Under these agreements, we maintain sole discretion to either continue or cease operations as well as discretion over the amounts prefunded to the properties and may request amounts to be refunded to us, with appropriate notice to the operator, at any time. The initial prefunded amounts and subsequent amounts from the settlement of transactions are deposited into a bank account that is to be used exclusively for cash access services, and we maintain the right to monitor all transaction activity in that account. The total amount of prefunded cash outstanding was approximately $9.3 million and $8.5 million at September 30, 2017 and December 31, 2016, respectively, and is included in prepaid expenses and other assets on our Balance Sheets.

5.

TRADE AND OTHER RECEIVABLES

Trade and loans receivables represent short-term credit granted to customers as well as long-term loans receivable on our games, fully integrated kiosks 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 and casino patrons. Other receivables include income taxes receivables and other miscellaneous receivables. The balance of trade and other receivables consisted of the following (in thousands):

 

 

 

At September 30,

 

 

At December 31,

 

 

 

2017

 

 

2016

 

Trade and other receivables, net

 

 

 

 

 

 

 

 

Games trade and loans receivables

 

$

36,837

 

 

$

44,410

 

Payments trade and loans receivables

 

 

10,214

 

 

 

12,337

 

Other receivables

 

 

796

 

 

 

1,924

 

Total trade and other receivables, net

 

$

47,847

 

 

$

58,671

 

Less: non-current portion of receivables

 

 

2,876

 

 

 

2,020

 

Total trade and other receivables,

   current portion

 

$

44,971

 

 

$

56,651

 

 

At least quarterly, we evaluate the collectability of the outstanding balances and establish a reserve for the face amount of the expected losses on our receivables. The allowance for doubtful accounts for trade receivables was $5.4 million and $4.7 million as of September 30, 2017 and December 31, 2016, respectively, and includes reserves for both Games and Payments receivables. The provision for doubtful accounts is generally included within operating expenses in the Statements of Loss. We also have a provision for doubtful accounts specifically associated with our outstanding check warranty receivables, which is included within Payments cost of revenues (exclusive of depreciation and amortization) in the Statements of Loss. The outstanding balances of the check warranty and general reserves were $3.0 million and $2.4 million, respectively, as of September 30, 2017 and $2.7 million and $2.0 million, respectively, as of December 31, 2016.

13


 

6.

PREPAID AND OTHER ASSETS

Prepaid and other assets include the balance of prepaid expenses, deposits, debt issuance costs on our Revolving Credit Facility (defined herein), restricted cash and other assets. The current portion of these assets is included in prepaid and other assets and the non-current portion is included in other assets, both of which are contained within the Balance Sheets.

The balance of the current portion of prepaid and other assets consisted of the following (in thousands):

 

 

 

At September 30,

 

 

At December 31,

 

 

 

2017

 

 

2016

 

Prepaid expenses and other assets

 

 

 

 

 

 

 

 

Deposits

 

$

9,971

 

 

$

8,622

 

Prepaid expenses

 

 

7,870

 

 

 

5,937

 

Other

 

 

4,697

 

 

 

3,489

 

Total prepaid expenses and other assets

 

$

22,538

 

 

$

18,048

 

 

The balance of the non-current portion of other assets consisted of the following (in thousands):

 

 

 

At September 30,

 

 

At December 31,

 

 

 

2017

 

 

2016

 

Other assets

 

 

 

 

 

 

 

 

Prepaid expenses and deposits

 

$

3,464

 

 

$

3,399

 

Debt issuance costs of revolving credit facility

 

 

898

 

 

 

689

 

Other

 

 

3,088

 

 

 

3,434

 

Total other assets

 

$

7,450

 

 

$

7,522

 

 

 

7.

INVENTORY

Our inventory primarily consists of component parts as well as work-in-progress and finished goods. The cost of inventory includes cost of materials, labor, overhead and freight. The inventory is stated at the lower of cost or net realizable value and accounted for using the FIFO method.

Inventory consisted of the following (in thousands):

 

 

 

At September 30,

 

 

At December 31,

 

 

 

2017

 

 

2016

 

Inventory

 

 

 

 

 

 

 

 

Raw materials and component parts, net of reserves of $1,523 and $2,155 at

   September 30, 2017 and December 31, 2016, respectively

 

$

15,974

 

 

$

12,570

 

Work-in-progress

 

 

3,516

 

 

 

1,502

 

Finished goods

 

 

4,300

 

 

 

4,996

 

Total inventory

 

$

23,790

 

 

$

19,068

 

 

14


 

8.

PROPERTY, EQUIPMENT AND LEASED ASSETS

Property, equipment and leased assets consist of the following (in thousands):

 

 

 

 

 

At September 30, 2017

 

 

At December 31, 2016

 

 

 

Useful Life

 

 

 

 

 

Accumulated

 

 

Net Book

 

 

 

 

 

 

Accumulated

 

 

Net Book

 

 

 

(Years)

 

Cost

 

 

Depreciation

 

 

Value

 

 

Cost

 

 

Depreciation

 

 

Value

 

Property, equipment and leased

   assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental pool - deployed

 

2-4

 

$

149,895

 

 

$

73,623

 

 

$

76,272

 

 

$

123,812

 

 

$

59,188

 

 

$

64,624

 

Rental pool - undeployed

 

2-4

 

 

19,829

 

 

 

10,874

 

 

 

8,955

 

 

 

13,456

 

 

 

5,721

 

 

 

7,735

 

ATM equipment

 

5

 

 

17,154

 

 

 

11,992

 

 

 

5,162

 

 

 

16,537

 

 

 

11,189

 

 

 

5,348

 

Leasehold and building

   improvements

 

Lease

Term

 

 

10,723

 

 

 

4,820

 

 

 

5,903

 

 

 

10,023

 

 

 

3,698

 

 

 

6,325

 

Cash advance equipment

 

3

 

 

8,492

 

 

 

5,544

 

 

 

2,948

 

 

 

8,590

 

 

 

4,499

 

 

 

4,091

 

Machinery, office and other

   equipment

 

2-5

 

 

33,217

 

 

 

23,058

 

 

 

10,159

 

 

 

30,424

 

 

 

20,108

 

 

 

10,316

 

Total

 

 

 

$

239,310

 

 

$

129,911

 

 

$

109,399

 

 

$

202,842

 

 

$

104,403

 

 

$

98,439

 

 

Depreciation expense related to property, equipment and leased assets totaled approximately $12.5 million and $34.8 million for the three and nine months ended September 30, 2017, respectively, and $12.4 million and $37.2 million for the three and nine months ended September 30, 2016, respectively. There was no material impairment of our property, equipment and leased assets for the three and nine months ended September 30, 2017 and 2016.

9.

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 $640.6 million and $640.5 million at September 30, 2017 and December 31, 2016, respectively.

In accordance with ASC 350, we test goodwill at the reporting unit level, which are identified as operating segments 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 for impairment annually on a reporting unit basis, at the beginning of our fourth fiscal quarter, or more often under certain circumstances. 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 an income approach that discounts future cash flows based on the estimated future results of our reporting units and a market approach that compares market multiples of comparable companies to determine whether or not any impairment exists. If the fair value of a reporting unit is less than its carrying amount, we will use the Step 1 assessment to determine the impairment in accordance with the adoption of ASU No 2017-04.

No impairment was identified for our goodwill for the three and nine months ended September 30, 2017 and 2016.

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Other Intangible Assets

Other intangible assets consist of the following (in thousands):

 

 

 

 

At September 30, 2017

 

 

At December 31, 2016

 

 

 

Useful Life

 

 

 

 

 

Accumulated

 

 

Net Book

 

 

 

 

 

 

Accumulated

 

 

Net Book

 

 

 

(years)

 

Cost

 

 

Amortization

 

 

Value

 

 

Cost

 

 

Amortization

 

 

Value

 

Other intangible assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contract rights under placement

   fee agreements

 

1-7

 

$

59,605

 

 

$

1,782

 

 

$

57,823

 

 

$

17,742

 

 

$

6,281

 

 

$

11,461

 

Customer contracts

 

7-14

 

 

50,975

 

 

 

42,768

 

 

 

8,207

 

 

 

50,975

 

 

 

40,419

 

 

 

10,556

 

Customer relationships

 

8-12

 

 

231,100

 

 

 

58,412

 

 

 

172,688

 

 

 

231,100

 

 

 

42,688

 

 

 

188,412

 

Developed technology and

   software

 

1-6

 

 

244,151

 

 

 

152,706

 

 

 

91,445

 

 

 

224,265

 

 

 

126,721

 

 

 

97,544

 

Patents, trademarks and other

 

1-17

 

 

28,834

 

 

 

20,923

 

 

 

7,911

 

 

 

27,771

 

 

 

17,747

 

 

 

10,024

 

Total

 

 

 

$

614,665

 

 

$

276,591

 

 

$

338,074