EVERI HOLDINGS INC., 10-Q filed on 5/7/2019
Quarterly Report
v3.19.1
DOCUMENT AND ENTITY INFORMATION - shares
3 Months Ended
Mar. 31, 2019
May 01, 2019
Document And Entity Information [Abstract]    
Entity Registrant Name Everi Holdings Inc.  
Entity Central Index Key 0001318568  
Document Type 10-Q  
Document Period End Date Mar. 31, 2019  
Amendment Flag false  
Current Fiscal Year End Date --12-31  
Entity Current Reporting Status Yes  
Entity Filer Category Accelerated Filer  
Entity Emerging Growth Company false  
Entity Small Business false  
Entity Common Stock, Shares Outstanding   71,112,733
Document Fiscal Year Focus 2019  
Document Fiscal Period Focus Q1  
Trading Symbol EVRI  
v3.19.1
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS) - USD ($)
shares in Thousands, $ in Thousands
3 Months Ended
Mar. 31, 2019
Mar. 31, 2018
Revenues    
Total revenues $ 123,775 $ 111,001
Costs and expenses    
Total cost of revenues 24,638 20,884
Operating expenses 34,648 32,187
Research and development 7,531 4,311
Depreciation 14,789 12,825
Amortization 16,297 16,303
Total costs and expenses 97,903 86,510
Operating income 25,872 24,491
Other expenses    
Interest expense, net of interest income 20,400 20,307
Total other expenses 20,400 20,307
Income before income tax 5,472 4,184
Income tax benefit (388) (425)
Net income 5,860 4,609
Foreign currency translation 504 323
Comprehensive income $ 6,364 $ 4,932
Earnings per share    
Basic (in dollars per share) $ 0.08 $ 0.07
Diluted (in dollars per share) $ 0.08 $ 0.06
Weighted average common shares outstanding    
Basic (in shares) 70,334 68,686
Diluted (in shares) 75,256 73,285
Games    
Revenues    
Total revenues $ 67,427 $ 60,217
Costs and expenses    
Total cost of revenues 16,653 14,923
Operating expenses 14,667 12,007
Research and development 5,847 4,311
Depreciation 13,374 11,139
Amortization 13,782 13,484
Total costs and expenses 64,323 55,864
Operating income 3,104 4,353
Games | Gaming operations    
Revenues    
Total revenues 44,286 40,056
Costs and expenses    
Total cost of revenues [1] 4,124 4,182
Games | Gaming equipment and systems    
Revenues    
Total revenues 23,087 20,154
Costs and expenses    
Total cost of revenues [1] 12,529 10,741
Games | Gaming other    
Revenues    
Total revenues 54 7
Costs and expenses    
Total cost of revenues 0 0
Gaming other    
Revenues    
Total revenues 54 7
Costs and expenses    
Total cost of revenues [1] 0 0
FinTech    
Revenues    
Total revenues 56,348 50,784
Costs and expenses    
Total cost of revenues 7,985 5,961
Operating expenses 19,981 20,180
Research and development 1,684 0
Depreciation 1,415 1,686
Amortization 2,515 2,819
Total costs and expenses 33,580 30,646
Operating income 22,768 20,138
FinTech | Cash access services    
Revenues    
Total revenues 40,832 38,218
Costs and expenses    
Total cost of revenues 2,697 2,231
FinTech | Equipment    
Revenues    
Total revenues 7,028 4,419
Costs and expenses    
Total cost of revenues 4,330 2,514
FinTech | Information services and other    
Revenues    
Total revenues 8,488 8,147
Costs and expenses    
Total cost of revenues $ 958 $ 1,216
[1] Exclusive of depreciation and amortization.
v3.19.1
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS - USD ($)
$ in Thousands
Mar. 31, 2019
Dec. 31, 2018
Current assets    
Cash and cash equivalents $ 139,857 $ 297,532
Settlement receivables 259,288 82,359
Trade and other receivables, net of allowances for doubtful accounts of $6,281 and $6,425 at March 31, 2019 and December 31, 2018, respectively 72,333 64,387
Inventory 24,797 24,403
Prepaid expenses and other assets 22,293 20,259
Total current assets 518,568 488,940
Non-current assets    
Property, equipment and leased assets, net 113,067 116,288
Goodwill 673,447 640,537
Other intangible assets, net 292,955 287,397
Other receivables 12,297 8,847
Other assets 21,670 6,252
Total non-current assets 1,113,436 1,059,321
Total assets 1,632,004 1,548,261
Current liabilities    
Settlement liabilities 354,402 334,198
Accounts payable and accrued expenses 152,716 129,238
Current portion of long-term debt 8,200 8,200
Total current liabilities 515,318 471,636
Non-current liabilities    
Deferred tax liability 27,354 27,867
Long-term debt, less current portion 1,153,807 1,155,016
Other accrued expenses and liabilities 31,327 2,637
Total non-current liabilities 1,212,488 1,185,520
Total liabilities 1,727,806 1,657,156
Commitments and contingencies (Note 13)
Stockholders’ deficit    
Common stock, $0.001 par value, 500,000 shares authorized and 95,966 and 95,100 shares issued at March 31, 2019 and December 31, 2018, respectively 96 95
Convertible preferred stock, $0.001 par value, 50,000 shares authorized and no shares outstanding at March 31, 2019 and December 31, 2018, respectively 0 0
Additional paid-in capital 305,672 298,929
Accumulated deficit (223,597) (229,457)
Accumulated other comprehensive loss (1,494) (1,998)
Treasury stock, at cost, 24,902 and 24,900 shares at March 31, 2019 and December 31, 2018, respectively (176,479) (176,464)
Total stockholders’ deficit (95,802) (108,895)
Total liabilities and stockholders’ deficit $ 1,632,004 $ 1,548,261
v3.19.1
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) - USD ($)
$ in Thousands
Mar. 31, 2019
Dec. 31, 2018
Current assets    
Allowances for doubtful accounts $ 6,281 $ 6,425
Stockholders’ deficit    
Common stock par value (in dollars per share) $ 0.001 $ 0.001
Common stock authorized (in shares) 500,000,000 500,000,000
Common stock issued (in shares) 95,965,756 95,099,532
Convertible preferred stock, par value (in dollars per share) $ 0.001 $ 0.001
Convertible preferred stock authorized (in shares) 50,000,000 50,000,000
Convertible preferred stock outstanding (in shares) 0 0
Treasury stock (in shares) 24,902,000 24,900,000
v3.19.1
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2019
Mar. 31, 2018
Cash flows from operating activities    
Net income $ 5,860 $ 4,609
Adjustments to reconcile net income to cash provided by (used in) operating activities:    
Depreciation 14,789 12,825
Amortization 16,297 16,303
Amortization of financing costs and discounts 890 905
Loss (gain) on sale or disposal of assets 513 (13)
Accretion of contract rights 2,122 2,057
Provision for bad debts 2,864 2,182
Deferred income taxes (513) (561)
Reserve for obsolescence 441 305
Stock-based compensation 1,773 2,350
Changes in operating assets and liabilities:    
Settlement receivables (175,748) 73,571
Trade and other receivables (12,385) (9,715)
Inventory 57 (1,157)
Other assets (16,756) 1,251
Settlement liabilities 19,931 (74,617)
Other liabilities 27,677 2,456
Net cash (used in) provided by operating activities (112,188) 32,751
Cash flows from investing activities    
Capital expenditures (22,194) (26,339)
Acquisition (20,000) 0
Proceeds from sale of fixed assets 33 72
Placement fee agreements (5,329) (4,643)
Net cash used in investing activities (47,490) (30,910)
Cash flows from financing activities    
Repayments of credit facilities (2,050) (2,050)
Proceeds from exercise of stock options 4,686 4,088
Purchase of treasury stock (15) (38)
Net cash provided by financing activities 2,621 2,000
Effect of exchange rates on cash (343) 147
Cash, cash equivalents and restricted cash    
Net (decrease) increase for the period (157,400) 3,988
Balance, beginning of the period 299,181 129,604
Balance, end of the period 141,781 133,592
Supplemental cash disclosures    
Cash paid for interest 12,470 15,206
Cash paid for income tax, net of refunds 92 66
Supplemental non-cash disclosures    
Accrued and unpaid capital expenditures 3,209 4,145
Accrued and unpaid placement fees added during the year 0 363
Transfer of leased gaming equipment to inventory 4,673 1,897
Operating lease ROU assets obtained in exchange for lease obligations 15,132 0
Fair value of assets acquired 50,240 0
Cash paid 20,000 0
Accrued and unpaid liability for loyalty acquisition 27,556 0
Liabilities assumed $ 2,684 $ 0
v3.19.1
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) - USD ($)
shares in Thousands
Total
Common Stock— Series A
Additional Paid-in Capital
Retained Earnings (Accumulated Deficit)
Accumulated Other Comprehensive Income (Loss)
Treasury Stock
Balance, beginning of period (in shares) at Dec. 31, 2017   93,120        
Balance, beginning of period at Dec. 31, 2017 $ (140,633,000) $ 93,000 $ 282,070,000 $ (246,202,000) $ (253,000) $ (176,341,000)
Increase (Decrease) in Stockholders' Equity            
Net income 4,609,000     4,609,000    
Foreign currency translation 324,000       324,000  
Stock-based compensation expense 2,350,000   2,350,000      
Exercise of options (in shares)   712        
Exercise of options 4,299,000 $ 1,000 4,298,000      
Restricted shares (in shares)   0        
Restricted share vesting and withholding (38,000)         (38,400)
Balance, end of period (in shares) at Mar. 31, 2018   93,832        
Balance, end of period at Mar. 31, 2018 (124,700,000) $ 94,000 288,718,000 (237,204,000) 71,000 (176,379,000)
Balance, beginning of period (in shares) at Dec. 31, 2018   95,100        
Balance, beginning of period at Dec. 31, 2018 (108,895,000) $ 95,000 298,929,000 (229,457,000) (1,998,000) (176,464,000)
Increase (Decrease) in Stockholders' Equity            
Net income 5,860,000     5,860,000    
Foreign currency translation 504,000       504,000  
Stock-based compensation expense 1,773,000   1,773,000      
Exercise of options (in shares)   864        
Exercise of options 4,971,000 $ 1,000 4,970,000      
Restricted shares (in shares)   2        
Restricted share vesting and withholding (15,000)         (14,718.24)
Balance, end of period (in shares) at Mar. 31, 2019   95,966        
Balance, end of period at Mar. 31, 2019 $ (95,802,000) $ 96,000 $ 305,672,000 $ (223,597,000) $ (1,494,000) $ (176,479,000)
v3.19.1
BUSINESS
3 Months Ended
Mar. 31, 2019
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
BUSINESS
BUSINESS
Everi Holdings Inc. (“Everi Holdings,” “Holdings,” or “Everi”) is a holding company, the assets of which are the issued and outstanding shares of capital stock of each of Everi Games Holding Inc. (“Everi Games Holding”), which owns all of the issued and outstanding shares of capital stock of Everi Games Inc. (“Everi Games” or “Games”), and Everi Payments Inc. (“Everi Payments”). Unless otherwise indicated, the terms the “Company,” “we,” “us,” and “our” refer to Everi Holdings together with its consolidated subsidiaries.
Everi is a leading supplier of technology solutions for the casino gaming industry. We provide casino operators with a diverse portfolio of products, including innovative gaming machines that power the casino floor, and casino operational and management systems that include comprehensive, end-to-end financial technology solutions, critical intelligence offerings, and gaming operations efficiency technology. Everi also provides tier one land-based game content to online social and real-money markets via its Remote Game Server and operates social play for fun casinos.
Everi Holdings reports its results of operations based on two operating segments: Games and FinTech. Effective April 1, 2018, we changed the name of the operating segment previously referred to as “Payments” to “Financial Technology Solutions” (“Everi FinTech” or “FinTech”). We believe this reference more accurately reflects the focus of the business segment on delivering innovative and integrated solutions to enhance the efficiency of the casino operator, support the comprehensive regulatory and tax requirements of their gaming customers, and improve players’ gaming experience by providing easy access to their funds and payment of winnings.
Everi Games provides gaming operators products and services, including: (a) gaming machines primarily comprised of Class II and Class III slot machines placed under participation or fixed fee lease arrangements or sold to casino customers, including TournEvent® terminals that allow operators to switch from in-revenue gaming to out-of-revenue tournaments; (b) system software, licenses, and ancillary equipment; and (c) business-to-consumer and business-to-business interactive activities. In addition, Everi Games develops and manages the central determinant system for the video lottery terminals (“VLTs”) installed in the State of New York, and it also provides similar technology in certain tribal jurisdictions.
Everi FinTech provides gaming operators cash access and related products and services, including: (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 cash access transactions, and check verification and warranty services; (b) equipment that provides cash access and efficiency-related services; (c) self-service enrollment and loyalty card printing equipment; (d) products and services that improve credit decision making, automate cashier operations, and enhance patron marketing activities for gaming establishments; (e) compliance, audit, and data solutions; and (f) online payment processing solutions for gaming operators in states that offer intrastate, Internet-based gaming and lottery activities.
v3.19.1
BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
3 Months Ended
Mar. 31, 2019
Accounting Policies [Abstract]  
BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 months ended March 31, 2019 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, 2018.
Other than the adoption of the Financial Accounting Standard Board’s (the “FASB”) Accounting Standards Update (“ASU”) No. 2016-02 (“Leases”) and all subsequent amendments (collectively, Accounting Standards Codification 842, or ASC 842), 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, 2018.
Revenue Recognition
Overview
We evaluate the recognition of revenue based on the criteria set forth in ASC 606 (“Revenue from Contracts with Customers”) and ASC 842, 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.
We evaluate the composition of our revenues to ensure compliance with SEC Regulation S-X Section 210.5-3, which requires us to separately present certain categories of revenues that exceed the quantitative threshold on our Statements of Income.
Significant Judgments
We apply judgments or estimates to determine the performance obligations and the Stand-Alone Selling Price (“SSP”) of each identified performance obligation. The establishment of SSP requires judgment as to whether there is a sufficient quantity of items sold or renewed on a stand-alone basis and those prices demonstrate an appropriate level of concentration to conclude that a SSP exists. The SSP of our goods and services are generally determined based on observable prices, an adjusted market assessment approach or an expected cost plus margin approach. We utilize a residual approach only when the SSP for performance obligations with observable prices has been established and the remaining performance obligation in the contract with a customer does not have an observable price as it is uncertain or highly variable and, therefore, is not discernible.
Collectability
To assess collectability, we determine whether it is probable that we will collect substantially all of the consideration to which we are entitled in exchange for the goods and services transferred to the customer in accordance with the terms and conditions of the contract. In connection with these procedures, we evaluate the customer using internal and external information available, including, but not limited to, research and analysis of our credit history with the customer. Based on the nature of our transactions and historical trends, we determine whether our customers have the ability and intention to pay the amounts of consideration when they become due to identify potentially significant credit risk exposure.
Contract Combinations — Multiple Promised Goods and Services
Our contracts may include various performance obligations for promises to transfer multiple goods and services to a customer, especially since our Games and FinTech businesses may enter into multiple agreements with the same customer that meet the criteria to be combined for accounting purposes under ASC 606. When this occurs, a SSP will be determined for each performance obligation in the combined arrangement and the consideration allocated between the respective performance obligations. We use our judgment to analyze the nature of the promises made and determine whether each is distinct or should be combined with other promises in the contract based on the level of integration and interdependency between the individual deliverables.
Disaggregation of Revenues
We disaggregate revenues based on the nature and timing of the cash flows generated by such revenues as presented in “Note 18 Segment Information.”
Outbound Freight Costs
Upon transferring control of goods to a customer, the shipping and handling costs in connection with sale transactions are accounted for as fulfillment costs and included in cost of revenues.
Costs to Acquire a Contract with a Customer
We typically incur incremental costs to acquire customer contracts in the form of sales commission expenses. We evaluate those acquisition costs for groups of contracts with similar characteristics, based on the nature of the transactions. The incremental costs to acquire customer contracts identified would be amortized within one year and, as a result, we elected to utilize the practical expedient set forth in ASC 340 (“Contract Costs - Incremental Costs of Obtaining a Contract”) to expense these amounts as incurred.
Contract Balances
Since our contracts may include multiple performance obligations, there is often a timing difference between cash collections and the satisfaction of such performance obligations and revenue recognition. Such arrangements are evaluated to determine whether contract assets and liabilities exist. We generally record contract assets when the timing of cash collections differs from when revenue is recognized due to contracts containing specific performance obligations that are required to be met prior to a customer being billed. 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.
The following table summarizes our contract assets and contract liabilities arising from contracts with customers:
 
 
Three Months Ended
 
 
March 31, 2019
 
 
 
Contract assets(1)
 
 
     Balance at January 1
 
$
11,310

     Balance at March 31
 
14,098

         Increase
 
$
2,788

 
 
 
Contract liabilities(2)
 
 
     Balance at January 1
 
$
15,470

     Balance at March 31
 
24,350

         Increase
 
$
8,880

(1)
Current portion of contract assets is included within trade and other receivables, net, and non-current portion is included within other receivables in our Balance Sheets.
(2)
Current portion of contract liabilities is included within accounts payable and accrued expenses, and non-current portion is included within other accrued expenses and liabilities in our Balance Sheets.
We recognized approximately $6.1 million in revenue that was included in the beginning contract liability balance during the three months ended March 31, 2019.
Games Revenues
Our Games products and services include commercial products, such as Native American Class II products and other bingo products, Class III products, video lottery terminals, accounting and central determinant systems, business-to-consumer and business-to-business interactive activities, and other back office systems. We conduct our Games segment business based on results generated from the following major revenue streams: (a) Gaming Operations; (b) Gaming Equipment and Systems; and (c) Gaming Other.
Gaming Operations
Games revenues are primarily generated by our gaming operations under placement, participation, and development arrangements, in which we provide our customers with player terminals, including TournEvent® terminals that allow operators to switch from in-revenue gaming to out-of-revenue tournaments, player terminal-content licenses, local-area progressive machines, and back-office equipment, collectively referred to herein as leased gaming equipment. We evaluate the recognition of lease revenues based on criteria set forth in ASC 842. Generally, under these arrangements, we retain ownership of the machines installed at customer facilities. We receive recurring revenue based on a percentage of the net win per day generated by the leased gaming equipment or a fixed daily fee. Revenues from lease participation or daily fee arrangements are considered both realizable and earned at the end of each gaming day. Gaming operations revenues generated by leased gaming equipment deployed at sites under development or placement fee agreements give rise to contract rights, which are amounts recorded to intangible assets for dedicated floor space resulting from such agreements. The gaming operations revenues generated by these arrangements are reduced by the accretion of contract rights, which represents the related amortization of the contract rights recorded in connection with those agreements. Gaming operations lease revenues accounted for under ASC 842 are generally short-term in nature with payment terms ranging from 30 to 90 days. We recognized $33.8 million and $33.3 million in lease revenues for the three months ended March 31, 2019 and 2018, respectively.
Gaming operations revenues include amounts generated by Wide Area Progressive (“WAP”) systems, which are recognized under ASC 606. WAP consists of linked slot machines located in multiple casino properties that are connected to a central system. WAP-based gaming machines have a progressive jackpot we administer that increases with every wager until a player wins the top award combination. Casino operators pay us a percentage of the coin-in (the total amount wagered), a percentage of net win, or a combination of both for services related to the design, assembly, installation, operation, maintenance, administration, and marketing of the WAP systems. The gaming operations revenues with respect to WAP machines comprise a separate performance obligation and are recognized over time based on the amount expected to be received with any variability being resolved in the reporting period. These arrangements are generally short-term in nature with a majority of invoices payable within 30 to 90 days. Such revenues are presented in the Statements of Income net of the jackpot expense, which is comprised of incremental amounts funded by a portion of the coin-in from players. At the time a jackpot is won by a player, an additional jackpot expense is recorded with respect to the base seed amount required to fund the minimum level required by the respective WAP arrangement with the casino operator.
Gaming operations revenues also include amounts received in connection with our relationship with the New York State Gaming Commission to provide an accounting and central determinant system for the VLTs in operation at licensed State of New York gaming facilities. Pursuant to our agreement with the New York State Gaming Commission, we receive a portion of the network-wide net win (generally, cash-in less prizes paid) per day in exchange for provision and maintenance of the central determinant system, and we record revenues in accordance with ASC 606. We also provide central determinant system technology to Native American tribes in other licensed jurisdictions for which we receive a portion of the revenue generated from the VLTs connected to the system. These arrangements are generally short-term in nature with payments due monthly.
Gaming operations revenues also include amounts generated by our Interactive offering comprised of business-to-consumer (“B2C”) and business-to-business (“B2B”) activities. B2C relates to games offered directly to consumers to play with virtual currency which can be purchased through our web and mobile applications. Control transfers and we recognize revenues in accordance with ASC 606 from player purchases of virtual currency as it is consumed for game play, which is based on a historical data analysis. B2B relates to games offered to the online business partners, including social casinos and regulated real money casinos, who then offer the games to consumers. Our B2B arrangements primarily provide access to our game content and revenue is recognized in accordance with ASC 606 as the control transfers upon the online business partners’ daily access to such content based on either a flat fee or revenue share arrangements with the social casinos and regulated real money casinos.
Gaming Equipment and Systems 
Gaming equipment and systems revenues are accounted for under ASC 606 and are derived from the sale of some combination of: (a) gaming equipment and player terminals, including TournEvent® terminals that allow operators to switch from in-revenue gaming to out-of-revenue tournaments; (b) game content; (c) license fees; and (d) ancillary equipment. Such arrangements are predominately short-term in nature with payment terms ranging from 30 to 180 days with certain agreements providing for extended payment terms, ranging from 12 to 24 months. Each contract containing extended payment terms over 12 months is evaluated for the presence of a financing component, and for the arrangements in which the financing component is determined to be significant to the contact, the transaction price is adjusted for the time value of money. Generally, our contracts with customers do not contain a financing component that has been determined to be significant to the contract. Performance obligations for gaming equipment and systems arrangements include gaming equipment, player terminals, content, system software, license fees, ancillary equipment, or various combinations thereof. Gaming equipment and systems revenues are recognized at a point in time when control of the promised goods and services transfers to the customer, which is generally upon shipment or delivery pursuant to the terms of the contract. The performance obligations are generally satisfied at the same time or within a short period of time.
Gaming Other
Gaming other revenues consist of amounts generated by our TournEvent of Champions® national tournament that allows winners of local and regional tournaments throughout the year to participate in a national tournament that results in the determination of a final champion. Such revenues are accounted for under ASC 606. As the customer simultaneously receives and consumes the benefits of our performance as it occurs, revenues are recognized as earned over a period of time using an output method depicting the transfer of control to the customer. These arrangements are generally short-term in nature with payment terms ranging from 30 to 90 days.
FinTech Revenues
Cash Access Services 
Cash access services revenues are accounted for under ASC 606 and are generally comprised of the following distinct performance obligations: cash advance, ATM, and check services. We do not control the cash advance and ATM services provided to a customer and, therefore, we are acting as an agent whose performance obligation is to arrange for the provision of these services. Our cash access services involve the movement of funds between the various parties associated with cash access transactions and give rise to settlement receivables and settlement liabilities, both of which are settled in days following the transaction.
Cash advance revenues are comprised of transaction fees assessed to gaming patrons in connection with credit card cash access and POS debit card cash access transactions. Such fees are primarily based on a combination of a fixed amount plus a percentage of the face amount of the credit card cash access or POS debit card cash access transaction amount. In connection with these types of transactions, we report certain direct costs incurred as reductions to revenues on a net basis, which generally include: (a) commission expenses payable to casino operators; (b) interchange fees payable to the network associations; and (c) processing and related costs payable to other third party partners.
ATM revenues are primarily comprised of transaction fees in the form of cardholder surcharges assessed to gaming patrons in connection with ATM cash withdrawals at the time the transactions are authorized and reverse interchange fees paid to us by the patrons’ issuing banks. The cardholder surcharges assessed to gaming patrons in connection with ATM cash withdrawals are currently a fixed dollar amount and not a percentage of the transaction amount. In connection with these types of transactions, we report certain direct costs incurred as reductions to revenues on a net basis, which generally include: (a) commission expenses payable to casino operators; (b) interchange fees payable to the network associations; and (c) processing and related costs payable to other third party partners.
Check services revenues are principally comprised of check warranty revenues and are generally based upon a percentage of the face amount of checks warranted. These fees are paid to us by gaming establishments.
For cash access services arrangements, since the customer simultaneously receives and consumes the benefits as the performance obligations occur, we recognize revenues as earned over a period of time using an output method depicting the transfer of control to the customer based on variable consideration, such as volume of transactions processed with variability generally resolved in the reporting period.
Equipment
Equipment revenues are derived from the sale of our cash access kiosks and related equipment and are accounted for under ASC 606. Revenues are recognized at a point in time when control of the promised goods and services transfers to the customer generally upon shipment or delivery pursuant to the terms of the contract. These sales contracts are generally short-term in nature with payment terms ranging from 30 to 90 days.
In addition, equipment revenues are derived from the sale of our loyalty kiosks and related equipment and are accounted for under ASC 606. Revenues are recognized at a point in time when control of the promised goods and services transfers to the customer generally upon installation and customer acceptance based on connectivity to a casino management system pursuant to the terms of the contract. These sales contracts are generally short-term in nature with payment terms ranging from 30 to 90 days.
Information Services and Other 
Information services and other revenues are accounted for under ASC 606 and include amounts derived from our cash access, kiosk, compliance, and loyalty related revenue streams from the sale of: (a) software licenses, software subscriptions, professional services, and certain other ancillary fees; (b) service-related fees associated with the sale, installation, and maintenance of equipment directly to our customers under contracts, which are generally short-term in nature with payment terms ranging from 30 to 90 days, secured by the related equipment; (c) credit worthiness-related software subscription services that are based upon either a flat monthly unlimited usage fee or a variable fee structure driven by the volume of patron credit histories generated; and (d) ancillary marketing, database, and Internet-based gaming-related activities.
Our software represents a functional right-to-use license, and the revenues are recognized as earned at a point in time. Subscription services are recognized over a period of time using an input method based on time elapsed as we transfer the control ratably by providing a stand-ready service. Professional and other services revenues are recognized over a period of time using an input method based on time elapsed as services are provided, thereby reflecting the transfer of control to the customer.
Restricted Cash
Our restricted cash primarily consists of: (a) deposits held in connection with a sponsorship agreement; (b) WAP-related restricted funds; and (c) Internet-related cash access activities. The current portion of restricted cash, which is included in prepaid expenses and other assets, was approximately $1.8 million and $1.5 million as of March 31, 2019 and December 31, 2018, respectively. The non-current portion of restricted cash, which is included in other assets, was approximately $0.1 million as of March 31, 2019 and December 31, 2018. The current portion of restricted cash was approximately $0.8 million and $0.9 million as of March 31, 2018 and December 31, 2017, respectively. The non-current portion of restricted cash was approximately $0.1 million as of March 31, 2018 and December 31, 2017.
Fair Values of Financial Instruments
The fair value of a financial instrument represents the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Fair value estimates are made at a specific point in time, based upon relevant market information about the financial instrument. 
The carrying amount of cash and cash equivalents, settlement receivables, short-term trade and other receivables, settlement liabilities, accounts payable and accrued expenses approximate fair value due to the short-term maturities of these instruments. The fair value of the long-term trade and loans receivable is estimated by discounting expected future cash flows using current interest rates at which similar loans would be made to borrowers with similar credit ratings and remaining maturities. As of March 31, 2019 and December 31, 2018, the fair value of notes receivable, net approximated the carrying value due to contractual terms of trade and loans receivable generally being under 24 months. The fair value of our borrowings is estimated based on various inputs to determine a market price, such as: market demand and supply, size of tranche, maturity, and similar instruments trading in more active markets. The estimated fair value and outstanding balances of our borrowings are as follows (in thousands): 
 
Level of
Hierarchy
 
Fair Value
 
Outstanding
Balance
March 31, 2019
 
 
 

 
 

Term loan
2
 
$
801,622

 
$
805,650

Senior unsecured notes
1
 
$
389,063

 
$
375,000

December 31, 2018
 
 
 

 
 

Term loan
2
 
$
784,479

 
$
807,700

Senior unsecured notes
1
 
$
354,863

 
$
375,000


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 March 31, 2019 and December 31, 2018. 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 March 31, 2019 and December 31, 2018.
Recent Accounting Guidance
Recently Adopted Accounting Guidance
In June 2018, the FASB issued ASU No. 2018-07, which expands the scope of Topic 718, Compensation — Stock Compensation (which currently only includes share-based payments to employees) to include share-based payments issued to nonemployees for goods or services. Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned. The new standard became effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We adopted this guidance in the quarter ended March 31, 2019. The adoption of this ASU did not have a material impact on our Financial Statements.
In February 2018, the FASB issued ASU No. 2018-02, which provides financial statement preparers with an option to reclassify stranded tax effects within accumulated other comprehensive income to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act of 2017 (or portion thereof) is recorded. The new standard became effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We adopted this guidance in the quarter ended March 31, 2019. The adoption of this ASU did not have a material impact on our Financial Statements.
In February 2016, the FASB issued ASU No. 2016-02, to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing transactions. The guidance establishes a right-of-use (“ROU”) model that requires a lessee to record a lease ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. We made an accounting policy election where leases that are 12 months or less and do not include an option to purchase the underlying asset are treated similarly to the operating lease accounting under ASC 840 and are not recorded on the balance sheet. For lessees, leases are classified as either financing or operating, with classification affecting the pattern of expense recognition in the income statement. For lessors, leases are classified as operating, sales-type, or direct financing with classification affecting the pattern of revenue and profit recognition in the income statement. In July 2018, the FASB issued ASU No. 2018-10 — Codification Improvements to Topic 842, Leases and ASU No. 2018-11 — Leases (Topic 842): Targeted Improvements. ASU No. 2018-10 affected narrow aspects of the guidance previously issued, and ASU No. 2018-11 provided a practical expedient for lessors on separating components of a contract and also included an additional optional transition relief methodology for adopting the new standard. In December 2018, the FASB issued ASU No. 2018-20 — Leases (Topic 842): Narrow-Scope Improvements for Lessors, which addressed the following issues facing lessors when applying the standard: sales taxes and other similar taxes collected from lessees, certain lessor costs paid directly by lessees, and recognition of variable payments for contracts with lease and non-lease components. The guidance requires an entity to adopt the new standard, as amended, under a modified retrospective application to each prior reporting period presented in the financial statements with the cumulative effect recognized at the beginning of the earliest comparative period. With the optional transition relief methodology available, entities had an opportunity to adopt the new lease standard retrospectively at the beginning of the period of adoption through a cumulative-effect adjustment, with certain practical expedients available. Based on the guidance, we adopted the new standard effective January 1, 2019 and applied certain practical expedients offered in the aforementioned guidance, such as those that stated that the Company need not reassess: (a) whether expired or existing contracts contain leases, (b) the lease classification of expired or existing leases, or (c) initial direct costs for any existing leases. We have provided additional information with respect to the new guidance in “Note 3 — Leases.”
Recent Accounting Guidance Not Yet Adopted
In August 2018, the FASB issued ASU No. 2018-15, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The new standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted, including adoption in any interim period. We are currently evaluating the impact of adopting this guidance on our Financial Statements; however, we do not expect the impact to be material.
In June 2016, the FASB issued ASU No. 2016-13, which provides updated guidance on how an entity should measure credit losses on financial instruments. The new guidance replaces the current incurred loss measurement methodology with a lifetime expected loss measurement methodology. Subsequently, in November 2018 the FASB issued ASU No. 2018-19 which clarified that receivables arising from operating leases are not within the scope of Subtopic 326-20, but should rather be accounted for in accordance with Topic 842, Leases. The new standard and related amendments are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. This guidance 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.
We do not anticipate that any other recently issued accounting guidance will have a significant effect on our consolidated financial statements.
v3.19.1
LEASES
3 Months Ended
Mar. 31, 2019
Leases [Abstract]  
LEASES
LEASES

Management determines if a contract is or contains a lease at the inception or modification of a contract. A contract is or contains a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Control over the use of an asset is predicated upon the notion that the lessee has both the right to (a) obtain substantially all of the economic benefits from the use of the asset, and (b) direct the use of the asset.

Operating lease ROU assets and liabilities are recognized based on the present value of minimum lease payments over the expected lease term at commencement date. Lease expense is recognized on a straight-line basis over the expected lease term. The Company’s lease arrangements have lease and non-lease components. For leases in which the Company is the lessee, the Company accounts for the lease components and non-lease components as a single lease component for the classes of underlying assets, primarily real estate that consists of buildings for office space and warehouses for manufacturing space. For leases in which the Company is the lessor, the Company accounts for the lease components and non-lease components as a single lease component (primarily electronic gaming machines (“EGMs”)).

Certain of our leases contain options to renew the agreements with terms that have the ability to extend the lease term from a range of approximately 1 to 15 years. The exercise of lease renewal options is generally at our sole discretion. The depreciable life of leased assets and leasehold improvements are limited by the expected term of such assets, unless there is a transfer of title or purchase option reasonably certain to be exercised.

Lessee

We enter into operating lease agreements for real estate purposes that generally consist of buildings for office space and warehouses for manufacturing space. Certain of our lease agreements consist of rental payments that are periodically adjusted for inflation. Our lease agreements do not contain material residual value guarantees or material restrictive covenants. Our lease agreements do not generally provide explicit rates of interest; therefore, we use our incremental borrowing rate based on the information available at commencement date to determine the present value of lease payments. Leases with an expected term of 12 months or less are not accounted for on the balance sheet and the related lease expense is recognized on a straight-line basis over the expected lease term.
Supplemental balance sheet information related to our operating leases is as follows (in thousands):
 
 
Classification on our Balance Sheets
 
March 31, 2019
Assets
 
 
 
 
Operating lease ROU assets
 
Other assets, noncurrent
 
$
14,104

Liabilities
 
 
 
 
Current operating lease liabilities
 
Accounts payable and accrued expenses
 
$
5,356

Non-current operating lease liabilities
 
Other accrued expenses and liabilities
 
$
12,604


Supplemental cash flow information related to leases was as follows (in thousands):
 
 
Three Months Ended
 
 
March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities
 
$
1,434

Operating lease ROU assets obtained in exchange for lease obligations(1)
 
$
15,132


(1)
The amount includes approximately $14.1 million of operating lease ROU assets obtained in exchange for existing lease obligations and approximately $1.0 million of operating lease ROU assets obtained in exchange for new lease obligations entered into during the three months ended March 31, 2019, excluding amortization for the period.

Other information related to lease terms and discount rates is as follows:
 
 
March 31, 2019
Weighted average remaining lease term (in years)
 
3.3

Weighted average discount rate
 
5.25
%

Components of lease expense are as follows (in thousands):
 
 
Three Months Ended
 
 
March 31, 2019
Lease Cost:
 
 
Operating lease cost
 
$
944

Variable lease cost
 
$
439



Maturities of lease liabilities are summarized as follows as of March 31, 2019 (in thousands):
Year ending December 31,
 
Amount
2019 (excluding the three months ended March 31, 2019)
 
$
4,613

2020
 
6,273

2021
 
4,953

2022
 
2,711

2023
 
1,011

Thereafter
 

Total future minimum lease payments
 
$
19,561

Amount representing interest
 
1,601

Present value of future minimum lease payments
 
$
17,960

Current operating lease obligations
 
5,356

Long-term lease obligations
 
$
12,604


As previously disclosed in our 2018 Annual Report on Form 10-K and under the previous lease accounting, maturities of lease liabilities were as follows as of December 31, 2018 (in thousands):
Year ending December 31,
 
Amount
2019
 
$
5,570

2020
 
5,680

2021
 
4,598

2022
 
2,799

2023
 
1,074

Thereafter
 

Total future minimum lease payments
 
$
19,721



Lessor

The Company generates lease revenues primarily from its gaming operations activities. Under these arrangements, we retain ownership of the machines installed at customer facilities. We receive recurring revenue based on a percentage of the net win per day generated by the leased gaming equipment or a fixed daily fee. Revenues from lease participation or daily fee arrangements are considered both realizable and earned at the end of each gaming day. Certain or our leases have terms and conditions of options for a lessee to purchase the underlying asset.
 
The cost of property and equipment the Company is leasing to third parties as of March 31, 2019 is $183.7 million which includes accumulated depreciation of $106.5 million.
LEASES
LEASES

Management determines if a contract is or contains a lease at the inception or modification of a contract. A contract is or contains a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Control over the use of an asset is predicated upon the notion that the lessee has both the right to (a) obtain substantially all of the economic benefits from the use of the asset, and (b) direct the use of the asset.

Operating lease ROU assets and liabilities are recognized based on the present value of minimum lease payments over the expected lease term at commencement date. Lease expense is recognized on a straight-line basis over the expected lease term. The Company’s lease arrangements have lease and non-lease components. For leases in which the Company is the lessee, the Company accounts for the lease components and non-lease components as a single lease component for the classes of underlying assets, primarily real estate that consists of buildings for office space and warehouses for manufacturing space. For leases in which the Company is the lessor, the Company accounts for the lease components and non-lease components as a single lease component (primarily electronic gaming machines (“EGMs”)).

Certain of our leases contain options to renew the agreements with terms that have the ability to extend the lease term from a range of approximately 1 to 15 years. The exercise of lease renewal options is generally at our sole discretion. The depreciable life of leased assets and leasehold improvements are limited by the expected term of such assets, unless there is a transfer of title or purchase option reasonably certain to be exercised.

Lessee

We enter into operating lease agreements for real estate purposes that generally consist of buildings for office space and warehouses for manufacturing space. Certain of our lease agreements consist of rental payments that are periodically adjusted for inflation. Our lease agreements do not contain material residual value guarantees or material restrictive covenants. Our lease agreements do not generally provide explicit rates of interest; therefore, we use our incremental borrowing rate based on the information available at commencement date to determine the present value of lease payments. Leases with an expected term of 12 months or less are not accounted for on the balance sheet and the related lease expense is recognized on a straight-line basis over the expected lease term.
Supplemental balance sheet information related to our operating leases is as follows (in thousands):
 
 
Classification on our Balance Sheets
 
March 31, 2019
Assets
 
 
 
 
Operating lease ROU assets
 
Other assets, noncurrent
 
$
14,104

Liabilities
 
 
 
 
Current operating lease liabilities
 
Accounts payable and accrued expenses
 
$
5,356

Non-current operating lease liabilities
 
Other accrued expenses and liabilities
 
$
12,604


Supplemental cash flow information related to leases was as follows (in thousands):
 
 
Three Months Ended
 
 
March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities
 
$
1,434

Operating lease ROU assets obtained in exchange for lease obligations(1)
 
$
15,132


(1)
The amount includes approximately $14.1 million of operating lease ROU assets obtained in exchange for existing lease obligations and approximately $1.0 million of operating lease ROU assets obtained in exchange for new lease obligations entered into during the three months ended March 31, 2019, excluding amortization for the period.

Other information related to lease terms and discount rates is as follows:
 
 
March 31, 2019
Weighted average remaining lease term (in years)
 
3.3

Weighted average discount rate
 
5.25
%

Components of lease expense are as follows (in thousands):
 
 
Three Months Ended
 
 
March 31, 2019
Lease Cost:
 
 
Operating lease cost
 
$
944

Variable lease cost
 
$
439



Maturities of lease liabilities are summarized as follows as of March 31, 2019 (in thousands):
Year ending December 31,
 
Amount
2019 (excluding the three months ended March 31, 2019)
 
$
4,613

2020
 
6,273

2021
 
4,953

2022
 
2,711

2023
 
1,011

Thereafter
 

Total future minimum lease payments
 
$
19,561

Amount representing interest
 
1,601

Present value of future minimum lease payments
 
$
17,960

Current operating lease obligations
 
5,356

Long-term lease obligations
 
$
12,604


As previously disclosed in our 2018 Annual Report on Form 10-K and under the previous lease accounting, maturities of lease liabilities were as follows as of December 31, 2018 (in thousands):
Year ending December 31,
 
Amount
2019
 
$
5,570

2020
 
5,680

2021
 
4,598

2022
 
2,799

2023
 
1,074

Thereafter
 

Total future minimum lease payments
 
$
19,721



Lessor

The Company generates lease revenues primarily from its gaming operations activities. Under these arrangements, we retain ownership of the machines installed at customer facilities. We receive recurring revenue based on a percentage of the net win per day generated by the leased gaming equipment or a fixed daily fee. Revenues from lease participation or daily fee arrangements are considered both realizable and earned at the end of each gaming day. Certain or our leases have terms and conditions of options for a lessee to purchase the underlying asset.
 
The cost of property and equipment the Company is leasing to third parties as of March 31, 2019 is $183.7 million which includes accumulated depreciation of $106.5 million.
v3.19.1
BUSINESS COMBINATIONS
3 Months Ended
Mar. 31, 2019
Business Combinations [Abstract]  
BUSINESS COMBINATIONS
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.
Atrient, Inc.
On March 8, 2019, we acquired certain assets of Atrient, Inc. (“Atrient,” the “Seller”), a privately held company that develops and distributes hardware and software applications to gaming operators to enhance gaming patron loyalty, pursuant to an asset purchase agreement. This acquisition includes existing contracts with gaming operators, technology, and intellectual property that allow us to provide gaming operators a self-service enrollment and loyalty card printing kiosk, a mobile application to offer a gaming operator’s patrons additional flexibility in accessing casino promotions, and a marketing platform that manages and delivers a gaming operator’s marketing programs through these patron interfaces. This acquisition expands our financial technology solutions offerings within our FinTech segment. Under the terms of the asset purchase agreement, we paid the Seller $20 million at the closing of the transaction and will pay an additional $10 million one year following the closing and another $10 million two years following the date of closing. In addition, we expect that an additional $10 million in contingent consideration will be earned by the Seller based upon the achievement of certain revenue targets over the first two years post-closing. We expect the total purchase price for this acquisition, inclusive of the contingent consideration, to be approximately $50 million. The acquisition did not have a significant impact on our results of operations or financial condition.
The total purchase consideration for Atrient was as follows (in thousands, at fair value):
 
 
Amount
Purchase consideration
 
 
Cash consideration paid at closing
 
$
20,000

Cash consideration to be paid in subsequent periods
 
18,528

Total cash consideration
 
38,528

Contingent consideration
 
9,028

Total purchase consideration
 
$
47,556


The transaction was accounted for using the acquisition method of accounting, which requires, among other things, the assets acquired and liabilities assumed be recognized at their respective fair values as of the acquisition date. The excess of the purchase price over those fair values was recorded as goodwill, which will be amortized over a period of 15 years for tax purposes. The goodwill recognized is attributable primarily to the income potential from the expansion of our footprint in the gaming space by enhancing our existing financial technology solution portfolio to add new touch-points for gaming patrons at customer locations and a new player loyalty and marketing-focused business line, assembled workforce, and other strategic benefits.
The estimates and assumptions used include the projected timing and amount of future cash flows and discount rates reflecting risk inherent in the future cash flows. The estimated fair values of assets acquired and liabilities assumed and resulting goodwill are subject to adjustment as the Company finalizes its purchase price accounting. The significant items for which a final fair value has not been determined include, but are not limited to: the valuation and estimated useful lives of intangible assets, deferred and unearned revenues, and deferred income taxes. We do not expect our fair value determinations to materially change; however, there may be differences between the amounts recorded at March 31, 2019 and the final fair value analysis, which we expect to complete no later than the first quarter of 2020.
The information below reflects the preliminary amounts of identifiable assets acquired and liabilities assumed as of the closing date of the transaction (in thousands):
 
 
Amount
Current assets
 
$
2,896

Property, equipment and leased assets, net
 
8

Operating lease ROU assets
 
239

Goodwill
 
32,897

Other intangible assets, net
 
14,200

Total assets
 
50,240

Contract liabilities
 
(2,445
)
Current operating lease liabilities
 
(105
)
Non-current operating lease liabilities
 
(134
)
Total liabilities
 
(2,684
)
Net assets acquired
 
$
47,556


Trade receivables acquired of approximately $1.8 million were short-term in nature and considered to be collectible, and therefore, the carrying amounts of these assets represented their fair values. Inventory acquired of approximately $1.0 million consisted of raw materials and finished goods and was fair valued based on the estimated net realizable value of these assets. Property, equipment, and leased assets acquired were not material in size or scope, and the carrying amounts of these assets represented their fair values. The operating lease ROU assets of approximately $0.2 million were recorded at their fair values based on the present value of future lease payments discounted by utilizing our incremental borrowing rate.
Other intangible assets acquired of approximately $14.2 million were comprised of customer contracts and developed technology. The fair value of customer contracts of approximately $9.2 million was determined by applying the income approach utilizing the excess earnings methodology with a discount rate utilized of 17%. The fair value of developed technology of approximately $5.0 million was determined by applying the income approach utilizing the relief from royalty methodology with a royalty rate of 15% and a discount rate utilized of 18%.
The following table summarizes acquired intangible assets (dollars in thousands):
 
 
Useful Life (Years)
 
Estimated Fair Value
Other Intangible Assets
 
 
 
 
Developed technology
 
3
 
$
5,000

Customer contracts
 
5
 
9,200

Total other intangible assets
 
 
 
$
14,200


The selected financial data with respect to the revenue and earnings on a pro forma consolidated basis as if the acquisition of Atrient occurred on January 1, 2018 has been omitted as it was impracticable to make the necessary adjustments to prepare the acquired entity’s financial statements in accordance with GAAP for the year ended December 31, 2018 in a timely manner as the acquired entity was a privately held organization for which financial statements were prepared under a cash basis of accounting.
The financial results included in our Statements of Income since the acquisition date and through March 31, 2019 reflected revenues of approximately $0.5 million and net income of approximately $0.2 million, including acquisition-related costs of approximately $0.1 million.
v3.19.1
FUNDING AGREEMENTS
3 Months Ended
Mar. 31, 2019
A T M Funding Agreement Disclosure [Abstract]  
FUNDING AGREEMENTS
FUNDING AGREEMENTS
Commercial Cash Arrangements
We have commercial arrangements with third party vendors to provide cash for certain of our ATMs. For the use of these funds, we pay a cash usage fee on either the average daily balance of funds utilized multiplied by a contractually defined cash usage rate or the amounts supplied multiplied by a contractually defined cash usage rate. These cash usage fees, reflected as interest expense within the Statements of Income, were approximately $1.7 million for the three months ended March 31, 2019 and March 31, 2018, respectively. We are exposed to interest rate risk to the extent that the applicable rates increase.
Under these agreements, the currency supplied by third party vendors remains their sole property until the funds are dispensed. As these funds are not our assets, supplied cash is not reflected in our Balance Sheets. The outstanding balances of ATM cash utilized by us from the third parties were approximately $267.0 million and $224.7 million as of March 31, 2019 and December 31, 2018, respectively.
Our primary commercial arrangement, the Contract Cash Solutions Agreement, as amended, is with Wells Fargo, N.A. (“Wells Fargo”). Wells Fargo provides us with cash in the maximum amount of $300 million with the ability to increase the amount by $75 million over a 5-day period for holidays, such as the period around New Year’s Day. The term of the agreement expires on June 30, 2021 and will automatically renew for additional one-year periods unless either party provides a 90-day written notice of its intent not to renew.
We are responsible for any losses of cash in the ATMs under this agreement, and we self‑insure for this risk. We incurred no material losses related to this self‑insurance for the three months ended March 31, 2019 and 2018.
Site-Funded ATMs
We operate ATMs at certain customers’ gaming establishments where the gaming establishment provides the cash required for the ATM’s operational needs. We are required to reimburse the customer for the amount of cash dispensed from these site-funded ATMs. The site-funded ATM liability included within settlement liabilities in the accompanying Balance Sheets was approximately $245.1 million and $249.6 million as of March 31, 2019 and December 31, 2018, respectively.
Everi-Funded ATMs
We enter into agreements with customers for certain of our Canadian ATMs whereby we provide the cash required to operate the ATMs. We had supplied approximately $2.4 million and $4.8 million of our cash for these ATMs as of March 31, 2019 and December 31, 2018, respectively, which represents an outstanding balance under such agreements at the end of the period. Such amounts are reported within the settlement receivables line of our Balance Sheets.
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 $6.2 million and $6.1 million at March 31, 2019 and December 31, 2018, respectively, and is included in the prepaid expenses and other assets line on our Balance Sheets.
v3.19.1
TRADE AND OTHER RECEIVABLES
3 Months Ended
Mar. 31, 2019
Receivables [Abstract]  
TRADE AND OTHER RECEIVABLES
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, equipment, and compliance products. Trade and loans receivables generally do not require collateral. The balance of trade and loans receivables consists of outstanding balances owed to us by gaming establishments. Other receivables include income tax receivables and other miscellaneous receivables.
The balance of trade and other receivables consisted of the following (in thousands):
 
At March 31,
 
At December 31,
 
2019
 
2018
Trade and other receivables, net
 

 
 

Games trade and loans receivables
$
57,080

 
$
53,011

FinTech trade and loans receivables
24,138

 
18,890

Other receivables
3,412

 
1,333

Total trade and other receivables, net
84,630

 
73,234

Non-current portion of receivables
 

 
 

Games trade and loans receivables
(1,785
)
 
(2,922
)
FinTech trade and loans receivables
(10,512
)
 
(5,925
)
Total non-current portion of receivables
(12,297
)
 
(8,847
)
Total trade and other receivables, current portion
$
72,333

 
$
64,387

At least quarterly, we evaluate the collectability of outstanding balances and establish a reserve for the amount of the expected losses on our receivables. The allowance for doubtful accounts for trade receivables was approximately $6.3 million as of March 31, 2019 and $6.4 million as of December 31, 2018, respectively, and included approximately $3.3 million and $3.2 million of check warranty reserves, respectively. The provision for doubtful customer accounts receivable is generally included within operating expenses in the Statements of Income.
v3.19.1
INVENTORY
3 Months Ended
Mar. 31, 2019
Inventory Disclosure [Abstract]  
INVENTORY
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 first in, first out method. 
Inventory consisted of the following (in thousands): 
 
At March 31,
 
At December 31,
 
2019
 
2018
Inventory
 

 
 

Component parts, net of reserves of $1,695 and $1,468 at March 31, 2019 and December 31, 2018, respectively
$
20,886

 
$
23,197

Work-in-progress
1,309

 
280

Finished goods
2,602

 
926

Total inventory
$
24,797

 
$
24,403

v3.19.1
PREPAID EXPENSES AND OTHER ASSETS
3 Months Ended
Mar. 31, 2019
Prepaid Expense and Other Assets [Abstract]  
PREPAID EXPENSES AND OTHER ASSETS
PREPAID EXPENSES AND OTHER ASSETS
Prepaid expenses and other assets include the balance of prepaid expenses, deposits, debt issuance costs on our Revolving Credit Facility (defined herein), restricted cash and other assets. The current portion of these assets is included in prepaid expenses and other assets and the non-current portion is included in other assets, both of which are contained within the Balance Sheets.
The balance of the current portion of prepaid expenses and other assets consisted of the following (in thousands):
 
At March 31,
 
At December 31,
 
2019
 
2018
Prepaid expenses and other assets
 

 
 

Prepaid expenses
$
10,810

 
$
8,351

Deposits
8,268

 
8,241

Other
3,215

 
3,667

Total prepaid expenses and other assets
$
22,293

 
$
20,259


The balance of the non-current portion of other assets consisted of the following (in thousands): 
 
At March 31,
 
At December 31,
 
2019
 
2018
Other assets
 

 
 

Operating lease ROU assets(1)
$
14,104

 
$

Prepaid expenses and deposits
6,683

 
5,289

Debt issuance costs of revolving credit facility
606

 
654

Other
277

 
309

Total other assets
$
21,670

 
$
6,252

(1)
Refer to “Note 3 — Leases” for discussion on operating lease ROU assets recorded on the Balance Sheets as a result of the implementation of ASC 842.
v3.19.1
PROPERTY, EQUIPMENT AND LEASED ASSETS
3 Months Ended
Mar. 31, 2019
Property, Plant and Equipment [Abstract]  
PROPERTY, EQUIPMENT AND LEASED ASSETS
PROPERTY, EQUIPMENT AND LEASED ASSETS
Property, equipment and leased assets consist of the following (dollars in thousands): 
 
 
 
At March 31, 2019
 
At December 31, 2018
 
Useful Life
(Years)
 
Cost
 
Accumulated
Depreciation
 
Net Book
Value
 
Cost
 
Accumulated
Depreciation
 
Net Book
Value
Property, equipment and leased assets
 
 
 

 
 

 
 

 
 

 
 

 
 

Rental pool - deployed
2-4
 
$
183,669

 
$
106,488

 
$
77,181

 
$
183,309

 
$
105,038

 
$
78,271

Rental pool - undeployed
2-4
 
30,285

 
21,026

 
9,259

 
23,825

 
14,680

 
9,145

FinTech equipment
3-5
 
27,417

 
21,731

 
5,686

 
27,285

 
21,000

 
6,285

Leasehold and building    improvements
Lease Term
 
11,870

 
7,374

 
4,496

 
11,857

 
6,938

 
4,919

Machinery, office and other equipment
2-5
 
46,439

 
29,994

 
16,445

 
46,322

 
28,654

 
17,668

Total
 
 
$
299,680

 
$
186,613

 
$
113,067

 
$
292,598

 
$
176,310

 
$
116,288


Depreciation expense related to property, equipment and leased assets totaled approximately $14.8 million and $12.8 million for the three months ended March 31, 2019 and 2018, respectively.
v3.19.1
GOODWILL AND OTHER INTANGIBLE ASSETS
3 Months Ended
Mar. 31, 2019
Goodwill and Intangible Assets Disclosure [Abstract]  
GOODWILL AND OTHER INTANGIBLE ASSETS
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 $673.4 million at March 31, 2019 and $640.5 million at December 31, 2018. Change in the goodwill amount of approximately $32.9 million was attributable to the acquisition of Atrient.
In accordance with ASC 350 (“Intangibles-Goodwill and Other”), we test goodwill at the reporting unit level, which is identified as an operating segment or one level below, for impairment on an annual basis and between annual tests if events and circumstances indicate it is more likely than not that the fair value of a reporting unit is less than its carrying amount.
We test 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.
There was no impairment identified for our goodwill for the three months ended March 31, 2019 and 2018.
Other Intangible Assets
Other intangible assets consist of the following (dollars in thousands): 
 
 
 
At March 31, 2019
 
At December 31, 2018
 
Weighted Average
Remaining Life
(Years)
 
Cost
 
Accumulated
Amortization
 
Net Book
Value
 
Cost
 
Accumulated
Amortization
 
Net Book
Value
Other intangible assets
 
 
 
 
 
 
 
 
 
 
 
 
 
Contract rights under placement fee agreements
4
 
$
57,441

 
$
14,300

 
$
43,141

 
$
57,440

 
$
12,178

 
$
45,262

Customer contracts
6
 
60,375

 
46,816

 
13,559

 
51,175

 
46,162

 
5,013

Customer relationships
8
 
231,100

 
89,860

 
141,240

 
231,100

 
84,619

 
146,481

Developed technology and software
2
 
289,352

 
198,262

 
91,090

 
277,243

 
190,886

 
86,357

Patents, trademarks and other
4
 
29,046

 
25,121

 
3,925

 
29,168

 
24,884

 
4,284

Total
 
 
$
667,314

 
$
374,359

 
$
292,955

 
$
646,126

 
$
358,729

 
$
287,397


Amortization expense related to other intangible assets was approximately $16.3 million for the three months ended March 31, 2019 and 2018, respectively.
We evaluate our other intangible assets for potential impairment in connection with our quarterly review process.
We enter into placement fee agreements to secure a long-term revenue share percentage and a fixed number of player terminal placements in a gaming facility, for which the funding under placement fee agreements is not reimbursed. In return for the fees under these agreements, each facility dedicates a percentage of its floor space, or an agreed upon unit count, for the placement of our EGMs over the term of the agreement, generally 12 to 83 months, and we receive a fixed percentage or flat fee of those machines’ hold per day. Certain of the agreements contain EGM performance standards that could allow the respective facility to reduce a portion of our guaranteed floor space.
Placement fees and amounts advanced in excess of those to be reimbursed by the customer for real property and land improvements are allocated to intangible assets and are generally amortized over the term of the contract, which is recorded as a reduction of revenue generated from the facility. In the past we have, and in the future, we may, by mutual agreement, amend these agreements to reduce our floor space at the facilities. Any proceeds received for the reduction of floor space are first applied against the intangible asset for that particular placement fee agreement, if any, and the remaining net book value of the intangible asset is prospectively amortized on a straight-line method over the remaining estimated useful life.
We paid approximately $5.6 million in placement fees, including $0.3 million of imputed interest, to a customer for the three months ended March 31, 2019, and approximately $5.6 million in placement fees, including $1.0 million of imputed interest, to a customer for the three months ended March 31, 2018.
v3.19.1
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
3 Months Ended
Mar. 31, 2019
Payables and Accruals [Abstract]  
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The following table presents our accounts payable and accrued expenses (in thousands):
 
At March 31,
 
At December 31,
 
2019
 
2018
Accounts payable and accrued expenses
 
 
 
Trade accounts payable
$
85,383

 
$
70,796

Deferred and unearned revenues
20,258

 
12,887

Placement fees(1)
11,164

 
16,746

Accrued interest
8,652

 
1,374

Payroll and related expenses
7,408

 
15,055

Cash access processing and related expenses
6,931

 
4,160

Other
5,773

 
6,303

Operating lease liabilities(2)
5,356

 

Accrued taxes
1,791

 
1,917

Total accounts payable and accrued expenses
$
152,716

 
$
129,238

(1)
The total outstanding balance of the placement fee liability was approximately $11.2 million and $16.7 million as of March 31, 2019 and December 31, 2018, respectively. The placement fee liability was considered current due to the remaining obligation being due within twelve months of March 31, 2019 and December 31, 2018.
(2)
Refer to “Note 3 — Leases” for discussion on operating lease liabilities recorded on the Balance Sheets as a result of the implementation of ASC 842.
v3.19.1
LONG-TERM DEBT
3 Months Ended
Mar. 31, 2019
Debt Disclosure [Abstract]  
LONG-TERM DEBT
LONG-TERM DEBT
The following table summarizes our outstanding indebtedness (in thousands):
 
At March 31,
 
At December 31,
 
2019
 
2018
Long-term debt
 
 
 
Senior secured term loan
$
805,650

 
$
807,700

Senior unsecured notes
375,000

 
375,000

Total debt
1,180,650

 
1,182,700

Debt issuance costs and discount
(18,643
)
 
(19,484
)
Total debt after debt issuance costs and discount
1,162,007

 
1,163,216

Current portion of long-term debt
(8,200
)
 
(8,200
)
Long-term debt, less current portion
$
1,153,807

 
$
1,155,016


Refinancing
On May 9, 2017 (the “Closing Date”), Everi Payments, as borrower, and Holdings entered into a credit agreement with the lenders party thereto and Jefferies Finance LLC, as administrative agent, collateral agent, swing line lender, letter of credit issuer, sole lead arranger and sole book manager (amended as described below, the “Credit Agreement”). The Credit Agreement provides for: (a) a $35.0 million, five-year senior secured revolving credit facility (the “Revolving Credit Facility”); and (b) an $820.0 million, seven-year senior secured term loan facility (the “Term Loan Facility,” and together with the Revolving Credit Facility, the “Credit Facilities”). The fees associated with the Credit Facilities included discounts of approximately $4.1 million and debt issuance costs of approximately $15.5 million. All borrowings under the Revolving Credit Facility are subject to the satisfaction of customary conditions, including the absence of defaults and the accuracy of representations and warranties.
The proceeds from the Term Loan Facility incurred on the Closing Date were used to: (a) refinance: (i) Everi Payments’ existing credit facility with an outstanding balance of approximately $462.3 million with Bank of America, N.A., as administrative agent, collateral agent, swing line lender and letter of credit issuer, Deutsche Bank Securities Inc., as syndication agent, and Merrill Lynch, Pierce, Fenner & Smith Incorporated and Deutsche Bank Securities Inc., as joint lead arrangers and joint book managers (the “Prior Credit Facility”); and (ii) Everi Payments’ 7.25% Senior Secured Notes due 2021 in the aggregate original principal amount of $335.0 million (the “Refinanced Secured Notes”); and (b) pay related transaction fees and expenses.
In connection with the refinancing, we recorded a non-cash charge of approximately $14.6 million during the second quarter of 2017 related to the unamortized deferred financing fees and discounts related to the extinguished term loan under the Prior Credit Facility and the redeemed Refinanced Secured Notes. No prepayment penalties were incurred.
On November 13, 2017 (the “Repricing Closing Date”), we entered into an amendment to the Credit Agreement (the “First Amendment”) which, among other things, reduced the interest rate on the approximately $818.0 million then outstanding balance of the Term Loan Facility, but did not change the maturity dates for the Term Loan Facility or the Revolving Credit Facility or the financial covenants or other debt repayments terms set forth in the Credit Agreement. We incurred approximately $3.0 million of debt issuance costs and fees associated with the repricing of the Term Loan Facility.
On May 17, 2018, we entered into a Second Amendment (the “Second Amendment”) to the Credit Agreement, which reduced the interest rate on the $813.9 million outstanding balance of the senior secured term loan under the Credit Agreement by 50 basis points to the London Interbank Offered Rate (“LIBOR”) + 3.00% from LIBOR + 3.50% with the LIBOR floor unchanged at 1.00%. The senior secured term loan under the Credit Agreement will be subject to a prepayment premium of 1.00% of the principal amount repaid for any voluntary prepayment or mandatory prepayment with proceeds of debt that has a lower effective yield than the repriced term loan or any amendment to the repriced term loan that reduces the interest rate thereon, in each case, to the extent occurring within six months of the effective date of the Second Amendment. The maturity date for the Credit Agreement remains May 9, 2024, and no changes were made to the financial covenants or other debt repayment terms. We incurred approximately $1.3 million of debt issuance costs and fees associated with the repricing of the Term Loan Facility. 
Credit Facilities
The Term Loan Facility matures seven years after the Closing Date and the Revolving Credit Facility matures five years after the Closing Date. The Revolving Credit Facility is available for general corporate purposes, including permitted acquisitions, working capital and the issuance of letters of credit.
The interest rate per annum applicable to loans under the Revolving Credit Facility is, at Everi Payments’ option, the base rate or the Eurodollar Rate (defined to be LIBOR or a comparable or successor rate) (the “Eurodollar Rate”) plus, in each case, an applicable margin. The interest rate per annum applicable to the Term Loan Facility also is, at Everi Payments’ option, the base rate or the Eurodollar Rate plus, in each case, an applicable margin. The Eurodollar Rate is reset at the beginning of each selected interest period based on the Eurodollar Rate then in effect; provided that, if the Eurodollar Rate is below zero, then such rate will be equal to zero plus the applicable margin. The base rate is a fluctuating interest rate equal to the highest of: (a) the prime lending rate announced by the administrative agent; (b) the federal funds effective rate from time to time plus 0.50%; and (c) the Eurodollar Rate (after taking account of any applicable floor) applicable for an interest period of one month plus 1.00%. Prior to the effectiveness of the First Amendment on the Repricing Closing Date, the applicable margins for both the Revolving Credit Facility and the Term Loan Facility were: (a) 4.50% in respect of Eurodollar Rate loans, and (b) 3.50% in respect of base rate loans. The applicable margins for the Term Loan Facility from and after the effectiveness of the First Amendment on the Repricing Closing Date through the effectiveness of the Second Amendment were: (a) 3.50% in respect of Eurodollar Rate loans, and (b) 2.50% in respect of base rate loans. The applicable margins for the Term Loan Facility from and after the effectiveness of the Second Amendment are: (a) 3.00% in respect of Eurodollar Rate loans, and (b) 2.00% in respect of base rate loans.
Voluntary prepayments of the term loan and the revolving loans and voluntary reductions in the unused commitments are permitted in whole or in part, in minimum amounts as set forth in the Credit Agreement governing the Credit Facilities, with prior notice but without premium or penalty.
Subject to certain exceptions, the obligations under the Credit Facilities are secured by substantially all of the present and subsequently acquired assets of each of Everi Payments, Holdings and the subsidiary guarantors party thereto, including: (a) a perfected first priority pledge of all the capital stock of Everi Payments and each domestic direct, wholly owned material restricted subsidiary held by Holdings, Everi Payments or any such subsidiary guarantor; and (b) a perfected first priority security interest in substantially all other tangible and intangible assets of Holdings, Everi Payments, and such subsidiary guarantors (including, but not limited to, accounts receivable, inventory, equipment, general intangibles, investment property, real property, intellectual property and the proceeds of the foregoing). Subject to certain exceptions, the Credit Facilities are unconditionally guaranteed by Holdings and such subsidiary guarantors.
The Credit Agreement governing the Credit Facilities contains certain covenants that, among other things, limit Holdings’ ability, and the ability of certain of its subsidiaries, to incur additional indebtedness, sell assets or consolidate or merge with or into other companies, pay dividends or repurchase or redeem capital stock, make certain investments, issue capital stock of subsidiaries, incur liens, prepay, redeem or repurchase subordinated debt, and enter into certain types of transactions with its affiliates. The Credit Agreement governing the Credit Facilities also requires Holdings, together with its subsidiaries, to comply with a consolidated secured leverage ratio. At March 31, 2019, our consolidated secured leverage ratio was 3.22 to 1.00, with a maximum allowable ratio of 4.75 to 1.00 (which maximum allowable ratio is reduced to 4.50 to 1.00 as of December 31, 2019, 4.25 to 1.00 as of December 31, 2020, and 4.00 to 1.00 as of December 31, 2021 and each December 31 thereafter).
We were in compliance with the covenants and terms of the Credit Facilities as of March 31, 2019.
Events of default under the Credit Agreement governing the Credit Facilities include customary events such as a cross-default provision with respect to other material debt. In addition, an event of default will occur if Holdings undergoes a change of control. This is defined to include the case where Holdings ceases to own 100% of the equity interests of Everi Payments, or where any person or group acquires a percentage of the economic or voting interests of Holdings’ capital stock of 35% or more (determined on a fully diluted basis).
We are required to repay the Term Loan Facility in an amount equal to 0.25% per quarter of the initial aggregate principal, with the final principal repayment installment on the maturity date. Interest is due in arrears on each interest payment date applicable thereto and at such other times as may be specified in the Credit Agreement. As to any loan other than a base rate loan, the interest payment dates shall be the last day of each interest period applicable to such loan and the maturity date (provided, however, that if any interest period for a Eurodollar Rate loan exceeds three months, the respective dates that fall every three months after the beginning of such interest period shall also be interest payment dates). As to any base rate loan, the interest payment dates shall be last business day of each March, June, September and December and the maturity date.  
For the three months ended March 31, 2019, the Term Loan Facility had an applicable weighted average interest rate of 5.50%.
At March 31, 2019, we had $805.7 million of borrowings outstanding under the Term Loan Facility and no borrowings outstanding under the Revolving Credit Facility. We had $35.0 million of additional borrowing availability under the Revolving Credit Facility as of March 31, 2019.
Refinanced Senior Secured Notes
In connection with entering into the Credit Agreement, on May 9, 2017, Everi Payments redeemed in full all outstanding Refinanced Secured Notes in the aggregate principal amount of $335.0 million face value (plus accrued interest) of the Refinanced Secured Notes. As a result of the redemption, we recorded non-cash charges in the amount of approximately $1.7 million, which consisted of unamortized deferred financing fees of $0.2 million and discounts of $1.5 million. These fees were included in the total $14.6 million non-cash charge referred to above.
Senior Unsecured Notes
In December 2014, we issued $350.0 million in aggregate principal amount of 10.0% Senior Unsecured Notes due 2022 (the “2014 Unsecured Notes”) under an indenture (as supplemented, the “2014 Notes Indenture”), dated December 19, 2014, between Everi Payments (as successor issuer) and Deutsche Bank Trust Company Americas, as trustee. The fees associated with the 2014 Unsecured Notes included original issue discounts of approximately $3.8 million and debt issuance costs of approximately $14.0 million. In December 2015, we completed an exchange offer in which all of the unregistered 2014 Unsecured Notes were exchanged for a like amount of 2014 Unsecured Notes that had been registered under the Securities Act of 1933.
In December 2017, we issued $375 million in aggregate principal amount of 7.50% Senior Unsecured Notes due 2025 (the “2017 Unsecured Notes”) under an indenture (the “2017 Notes Indenture”), dated December 5, 2017, among Everi Payments (as issuer), Holdings and certain of its direct and indirect domestic subsidiaries as guarantors, and Deutsche Bank Trust Company Americas, as trustee. Interest on the 2017 Unsecured Notes accrues at a rate of 7.50% per annum and is payable semi-annually in arrears on each June 15 and December 15, commencing on June 15, 2018. The 2017 Unsecured Notes will mature on December 15, 2025. We incurred approximately $6.1 million of debt issuance costs and fees associated with the issuance of the 2017 Unsecured Notes.
On December 5, 2017, together with the issuance of the 2017 Unsecured Notes, Everi Payments satisfied and discharged the 2014 Notes Indenture relating to the 2014 Unsecured Notes. To effect the satisfaction and discharge, Everi Payments issued an unconditional notice of redemption to Deutsche Bank Trust Company Americas, as trustee, of the redemption in full on January 15, 2018 (the “Redemption Date”) of all outstanding 2014 Unsecured Notes under the terms of the 2014 Notes Indenture. In addition, using the proceeds from the sale of the 2017 Unsecured Notes and cash on hand, Everi Payments irrevocably deposited with the trustee funds sufficient to pay the redemption price of the 2014 Unsecured Notes of 107.5% of the principal amount thereof, plus accrued and unpaid interest to, but not including, the Redemption Date (the “Redemption Price”), and irrevocably instructed the trustee to apply the deposited money toward payment of the Redemption Price for the 2014 Unsecured Notes on the Redemption Date. Upon the trustee’s receipt of such funds and instructions, along with an officer’s certificate of Everi Payments and an opinion of counsel certifying and opining that all conditions under the 2014 Notes Indenture to the satisfaction and discharge of the 2014 Notes Indenture had been satisfied, the 2014 Notes Indenture was satisfied and discharged, and all of the obligations of Everi Payments and the guarantors under the 2014 Notes Indenture ceased to be of further effect, as of December 5, 2017 (subject to certain exceptions). The 2014 Unsecured Notes were thereafter redeemed on the Redemption Date.
In connection with the issuance of the 2017 Unsecured Notes and the redemption of the 2014 Unsecured Notes, in December 2017 we incurred a $37.2 million loss on extinguishment of debt consisting of a $26.3 million make-whole premium related to the satisfaction and redemption of the 2014 Unsecured Notes and approximately $10.9 million for the write-off of related unamortized debt issuance costs and fees.
We were in compliance with the terms of the 2017 Unsecured Notes as of March 31, 2019.
v3.19.1
COMMITMENTS AND CONTINGENCIES
3 Months Ended
Mar. 31, 2019
Commitments and Contingencies Disclosure [Abstract]  
COMMITMENTS AND CONTINGENCIES
COMMITMENTS AND CONTINGENCIES
There were no material changes in our commitments under contractual obligations as compared to those disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, aside from the cash consideration and contingent consideration payable to Atrient as discussed in “Note 4 — Business Combinations.”
We are involved in various investigations, claims and lawsuits in the ordinary course of our business. In addition, various legal actions, claims and governmental inquiries and proceedings are pending or may be instituted or asserted in the future against us and our subsidiaries. Although the outcome of our legal proceedings cannot be predicted with certainty and no assurances can be provided, based upon current information, we do not believe the liabilities, if any, which may ultimately result from the outcome of such matters, individually or in the aggregate, will have a material adverse impact on our financial position, liquidity, or results of operations.
v3.19.1
SHAREHOLDERS' EQUITY
3 Months Ended
Mar. 31, 2019
Stockholders' Equity Note [Abstract]  
STOCKHOLDERS' EQUITY
EQUITY
Preferred Stock. Our amended and restated certificate of incorporation, as amended, allows our Board of Directors, without further action by stockholders, to issue up to 50,000,000 shares of preferred stock in one or more series and to fix the designations, powers, preferences, privileges and relative participating, optional, or special rights as well as the qualifications, limitations or restrictions of the preferred stock, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences. As of March 31, 2019 and December 31, 2018, we had no shares of preferred stock outstanding.
Common Stock. Subject to the preferences that may apply to shares of preferred stock that may be outstanding at the time, the holders of outstanding shares of common stock are entitled to receive dividends out of assets legally available at the times and in the amounts as our Board of Directors may from time to time determine. All dividends are non-cumulative. In the event of the liquidation, dissolution or winding up of Everi, the holders of common stock are entitled to share ratably in all assets remaining after the payment of liabilities, subject to the prior distribution rights of preferred stock, if any, then outstanding. Each stockholder is entitled to one vote for each share of common stock held on all matters submitted to a vote of stockholders. Cumulative voting for the election of directors is not provided for. The common stock is not entitled to preemptive rights and is not subject to conversion or redemption. There are no sinking fund provisions applicable to the common stock. Each outstanding share of common stock is fully paid and non-assessable. As of March 31, 2019 and December 31, 2018, we had 95,965,756 and 95,099,532 shares of common stock issued, respectively. 
Treasury Stock. Employees may direct us to withhold vested shares of restricted stock to satisfy the minimum statutory withholding requirements applicable to their restricted stock vesting. We repurchased or withheld from restricted stock awards 2,096 and 5,001 shares of common stock for the three months ended March 31, 2019 and 2018, respectively, at an aggregate purchase price of $14,718 and $38,400, respectively, to satisfy the minimum applicable tax withholding obligations related to the vesting of such restricted stock awards.
v3.19.1
WEIGHTED AVERAGE COMMON SHARES
3 Months Ended
Mar. 31, 2019
Earnings Per Share [Abstract]  
WEIGHTED AVERAGE COMMON SHARES
WEIGHTED AVERAGE COMMON SHARES
The weighted average number of shares of common stock outstanding used in the computation of basic and diluted earnings per share is as follows (in thousands): 
 
At March 31,
 
2019
 
2018
Weighted average shares
 

 
 

Weighted average number of common shares outstanding - basic
70,334

 
68,686

Potential dilution from equity awards(1)
4,922

 
4,599

Weighted average number of common shares outstanding - diluted(1)
75,256

 
73,285

(1)
The potential dilution excludes the weighted average effect of equity awards to purchase approximately 6.7 million and 7.0 million shares of common stock for the three months ended March 31, 2019 and 2018, respectively, as the application of the treasury stock method, as required, makes them anti-dilutive.
v3.19.1
SHARE-BASED COMPENSATION
3 Months Ended
Mar. 31, 2019
Disclosure of Compensation Related Costs, Share-based Payments [Abstract]  
SHARE-BASED COMPENSATION
SHARE-BASED COMPENSATION
Equity Incentive Awards
Our 2014 Equity Incentive Plan (as amended and restated effective May 22, 2018, the “Amended and Restated 2014 Plan”) and our 2012 Equity Incentive Plan (as amended, the “2012 Plan”) are used to attract and retain the best available personnel, to provide additional incentives to employees, directors and consultants and to promote the success of our business. Our equity incentive plans are administered by the Compensation Committee of our Board of Directors, which has the authority to select individuals who are to receive equity incentive awards and to specify the terms and conditions of grants of such awards, including, but not limited to the vesting provisions and exercise prices.
Generally, we grant the following award types: (a) time-based options; (b) market-based options; (c) time-based restricted stock; and (d) restricted stock units (“RSUs”) with either time- or performance-based criteria.
A summary of award activity is as follows (in thousands): 
 
Stock Options
Granted
 
Restricted Stock
Awards Granted
 
Restricted Stock
Units Granted
Outstanding, December 31, 2018
15,674

 
8

 
1,797

Granted

 

 
84

Exercised options or vested shares
(864
)
 
(5
)
 
(2
)
Canceled or forfeited
(56
)
 

 
(17
)
Outstanding, March 31, 2019
14,754

 
3

 
1,862


There are approximately 3.6 million awards of our common stock available for future equity grants, both under the Amended and Restated 2014 Plan and the 2012 Plan as of March 31, 2019.
Stock Options
Our time-based stock options granted under our equity plans generally vest at a rate of 25% per year on each of the first four anniversaries of the option grant dates, and the options expire after a ten-year period. We estimate forfeiture amounts based on historical patterns.
Our market-based options granted in 2017 and 2016 under our 2014 Plan and 2012 Plan vest at a rate of 25% per year on each of the first four anniversaries of the grant date, provided that as of the vesting date for each vesting tranche, the closing price of our shares on the New York Stock Exchange is at least a specified price hurdle, defined as a 25% and 50% premium for 2017 and 2016, respectively, to the closing stock price on the grant date. If the price hurdle is not met as of the vesting date for a vesting tranche, then the vested tranche shall vest and become vested shares on the last day of a period of 30 consecutive trading days during which the closing price is at least the price hurdle. These options expire after a ten-year period.
The following table presents the options activity for the three months ended March 31, 2019
 
Number of
Options
(in thousands)
 
Weighted Average
Exercise Price
(per Share)
 
Weighted
Average Life
Remaining
(Years)
 
Aggregate
Intrinsic Value
(in thousands)
Outstanding, December 31, 2018
15,674

 
$
5.39

 
6.0
 
$
17,733

Granted

 


 
 
 
 
Exercised
(864
)
 
$
5.74

 
 
 
 
Canceled or forfeited
(56
)
 
$
4.40

 
 
 
 
Outstanding, March 31, 2019
14,754

 
$
5.38

 
5.8
 
$
75,894

Vested and expected to vest, March 31, 2019
14,302

 
$
5.43

 
5.8
 
$
72,739

Exercisable, March 31, 2019
9,738

 
$
5.92

 
5.5
 
$
44,777


There were no time-based or market-based option awards granted during the three months ended March 31, 2019, and 2018, respectively. The total intrinsic value of options exercised was $3.3 million and $1.3 million for the three months ended March 31, 2019 and 2018, respectively.
There was approximately $2.7 million in unrecognized compensation expense related to options expected to vest as of March 31, 2019. This cost is expected to be recognized on a straight-line basis over a weighted average period of 2.3 years. We recorded approximately $1.0 million in non-cash compensation expense related to options granted that were expected to vest as of March 31, 2019. We received approximately $4.7 million in cash from the exercise of options for the three months ended March 31, 2019.
There was $6.4 million in unrecognized compensation expense related to options expected to vest as of March 31, 2018. This cost was expected to be recognized on a straight-line basis over a weighted average period of 3.1 years. We recorded approximately $2.1 million in non-cash compensation expense related to options granted that were expected to vest as of March 31, 2018. We received approximately $4.2 million in cash from the exercise of options for the three months ended March 31, 2018.
Restricted Stock Awards
The following is a summary of non-vested share awards for our time-based restricted stock:
 
Shares
Outstanding
(in thousands)
 
Weighted
Average Grant
Date Fair Value
(per share)
Outstanding, December 31, 2018
8

 
$
6.66

Granted

 
$

Vested
(5
)
 
$
6.66

Forfeited

 
$

Outstanding, March 31, 2019
3

 
$
6.66


There were no shares of restricted stock granted for the three months ended March 31, 2019 and 2018. The total fair value of restricted stock vested was $33,287 and $118,747 for the three months ended March 31, 2019 and 2018, respectively.
There was approximately $8,744 in unrecognized compensation expense related to shares of restricted stock expected to vest as of March 31, 2019. This cost is expected to be recognized on a straight-line basis over a weighted average period of 0.1 years. During the three months ended March 31, 2019, there were 4,998 shares of restricted stock that vested, and we recorded approximately $32,523 in non-cash compensation expense related to restricted stock expected to vest.
There was approximately $0.3 million in unrecognized compensation expense related to shares of restricted stock expected to vest as of March 31, 2018. This cost was expected to be recognized on a straight-line basis over a weighted average period of 0.8 years. During the three months ended March 31, 2018, there were 17,001 shares of restricted stock that vested, and we recorded $0.2 million in non-cash compensation expense related to the restricted stock expected to vest.
Restricted Stock Units
The following is a summary of non-vested RSU awards: 
 
Shares
Outstanding
(in thousands)
 
Weighted
Average Grant
Date Fair Value
(per share)
 
Weighted
Average Life
Remaining
(years)
 
Aggregate
Intrinsic Value
(in thousands)
Outstanding, December 31, 2018
1,797

 
$
7.49

 
2.0
 
$
9,254

Granted
84

 
$
7.16

 
 
 
 

Vested
(2
)
 
$
6.79

 
 
 
 

Forfeited
(17
)
 
$
7.45

 
 
 
 

Outstanding, March 31, 2019
1,862

 
$
7.47

 
1.8
 
$
19,591

Vested and expected to vest, March 31, 2019
1,292

 
$
7.46

 
1.6
 
$
13,595


There were approximately 84,100 shares of time-based RSUs granted during the three months ended March 31, 2019 that vest at a rate of 25% per year on each of the first four anniversaries of the grant dates. There were approximately 116,326 shares RSU awards granted for the three months ended March 31, 2018, respectively. The time-based RSUs granted during the three months ended March 31, 2018 to independent members of our Board of Directors vest in equal installments on each of the first three anniversary dates of the grant date and settle on the earliest of the following events: (a) March 7, 2028; (b) death; (c) the occurrence of a Change in Control (as defined in the Amended and Restated 2014 Plan), subject to qualifying conditions; or (d) the date that is six months following the separation from service, subject to qualifying conditions.
There were 2,084 RSU awards that vested during the three months ended March 31, 2019 and no shares that vested during the three months ended March 31, 2018.
There was approximately $6.4 million and $0.7 million in unrecognized compensation expense related to RSU awards expected to vest as of March 31, 2019 and 2018, respectively. This cost is expected to be recognized on a straight-line basis over a weighted average period of 2.8 years and 2.9 years as of March 31, 2019 and 2018, respectively. We recorded approximately $0.8 million and $17,359 in non-cash compensation expense related to RSU awards during the three months ended March 31, 2019 and 2018, respectively.
v3.19.1
INCOME TAXES
3 Months Ended
Mar. 31, 2019
Income Tax Disclosure [Abstract]  
INCOME TAXES
INCOME TAXES
The income tax benefit reflected an effective income tax rate of negative 7.1% for the three months ended March 31, 2019, which was less than the statutory federal rate of 21.0%, primarily due to a decrease in our valuation allowance for deferred tax assets, the benefit from stock option exercises and the benefit from a research credit. The decrease in our valuation allowance is primarily due to the book income during the year and certain indefinite lived deferred tax assets which can be offset against our indefinite lived deferred tax liabilities. The income tax provision reflected an effective income tax rate of negative 10.2% for the three months ended March 31, 2018, which was less than the statutory federal rate of 21.0%, primarily due to a decrease in our valuation allowance for deferred tax assets, and the benefit from a research credit.
We have analyzed filing positions in all of the federal, state and foreign jurisdictions where we are required to file income tax returns, as well as all open tax years in these jurisdictions. As of March 31, 2019, we recorded $1.1 million of unrecognized tax benefits, all of which would impact our effective tax rate, if recognized. We do not anticipate that our unrecognized tax benefits will materially change within the next 12 months. We have not accrued any penalties and interest for our unrecognized tax benefits. Other than the unrecognized tax benefit recorded, we believe that our income tax filing positions and deductions will be sustained upon audit, and we do not anticipate any other adjustments that will result in a material change to our financial position. We may, from time to time, be assessed interest or penalties by tax jurisdictions, although any such assessments historically have been minimal and immaterial to our financial results. Our policy for recording interest and penalties associated with audits and unrecognized tax benefits is to record such items as a component of income tax in our Statements of Income.