EVERI HOLDINGS INC., 10-Q filed on 11/6/2018
Quarterly Report
v3.10.0.1
DOCUMENT AND ENTITY INFORMATION - shares
9 Months Ended
Sep. 30, 2018
Nov. 01, 2018
Document And Entity Information [Abstract]    
Entity Registrant Name Everi Holdings Inc.  
Entity Central Index Key 0001318568  
Document Type 10-Q  
Document Period End Date Sep. 30, 2018  
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   70,193,655
Document Fiscal Year Focus 2018  
Document Fiscal Period Focus Q3  
Trading Symbol EVRI  
v3.10.0.1
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS) - USD ($)
shares in Thousands, $ in Thousands
3 Months Ended 9 Months Ended
Sep. 30, 2018
Sep. 30, 2017
Sep. 30, 2018
Sep. 30, 2017
Revenues        
Total revenues $ 120,330 $ 247,322 $ 350,013 $ 727,089
Costs and expenses        
Total cost of revenues 24,602 163,658 69,153 475,607
Operating expenses 35,419 29,463 105,176 87,235
Research and development 5,407 4,545 14,313 13,706
Depreciation 17,304 12,539 43,830 34,765
Amortization 16,088 17,322 48,943 52,086
Total costs and expenses 98,820 227,527 281,415 663,399
Operating income 21,510 19,795 68,598 63,690
Other expenses        
Interest expense, net of interest income 20,160 23,368 62,589 72,306
Loss on extinguishment of debt 0 0 166 14,615
Total other expenses 20,160 23,368 62,755 86,921
Income (loss) before income tax 1,350 (3,573) 5,843 (23,231)
Income tax (benefit) provision (719) 716 (2,310) 3,623
Net income (loss) 2,069 (4,289) 8,153 (26,854)
Foreign currency translation (9) 602 (744) 1,710
Comprehensive income (loss) $ 2,060 $ (3,687) $ 7,409 $ (25,144)
Earnings (loss) per share        
Basic (in dollars per share) $ 0.03 $ (0.06) $ 0.12 $ (0.40)
Diluted (in dollars per share) $ 0.03 $ (0.06) $ 0.11 $ (0.40)
Weighted average common shares outstanding        
Basic (in shares) 69,750 66,897 69,217 66,449
Diluted (in shares) 74,594 66,897 73,712 66,449
Games        
Revenues        
Total revenues $ 65,839 $ 55,452 $ 192,004 $ 165,832
Costs and expenses        
Total cost of revenues [1] 17,573 13,820 49,311 39,503
Operating expenses 13,969 9,967 42,186 31,163
Research and development 5,407 4,545 14,313 13,706
Depreciation 15,847 10,863 39,099 29,591
Amortization 13,789 14,470 41,181 42,568
Total costs and expenses 66,585 53,665 186,090 156,531
Operating income (746) 1,787 5,914 9,301
Games | Gaming operations        
Revenues        
Total revenues 43,540 37,820 126,618 111,219
Costs and expenses        
Total cost of revenues [1] 4,607 4,045 13,000 11,216
Games | Gaming equipment and systems        
Revenues        
Total revenues 21,068 16,292 63,499 52,574
Costs and expenses        
Total cost of revenues [1] 11,907 8,568 34,693 26,544
Games | Gaming other        
Revenues        
Total revenues 1,231 1,340 1,887 2,039
Costs and expenses        
Total cost of revenues [1] 1,059 1,207 1,618 1,743
FinTech        
Revenues        
Total revenues 54,491 191,870 158,009 561,257
Costs and expenses        
Total cost of revenues [1] 7,029 149,838 19,842 436,104
Operating expenses 21,450 19,496 62,990 56,072
Depreciation 1,457 1,676 4,731 5,174
Amortization 2,299 2,852 7,762 9,518
Total costs and expenses 32,235 173,862 95,325 506,868
Operating income 22,256 18,008 62,684 54,389
FinTech | Cash access services        
Revenues        
Total revenues 39,406 181,104 117,364 528,279
Costs and expenses        
Total cost of revenues [1] 2,234 147,078 6,910 428,184
FinTech | Equipment        
Revenues        
Total revenues 7,155 3,011 16,338 9,008
Costs and expenses        
Total cost of revenues [1] 3,846 1,887 9,786 5,518
FinTech | Information services and other        
Revenues        
Total revenues 7,930 7,755 24,307 23,970
Costs and expenses        
Total cost of revenues [1] $ 949 $ 873 $ 3,146 $ 2,402
[1] Exclusive of depreciation and amortization.
v3.10.0.1
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS - USD ($)
$ in Thousands
Sep. 30, 2018
Dec. 31, 2017
Current assets    
Cash and cash equivalents $ 128,722 $ 128,586
Settlement receivables 225,210 227,403
Trade and other receivables, net of allowances for doubtful accounts of $6,537 and $4,706 at September 30, 2018 and December 31, 2017, respectively 61,652 47,782
Inventory 25,897 23,967
Prepaid expenses and other assets 22,720 20,670
Total current assets 464,201 448,408
Non-current assets    
Property, equipment and leased assets, net 118,001 113,519
Goodwill 640,571 640,589
Other intangible assets, net 296,315 324,311
Other receivables 8,834 2,638
Other assets 6,319 7,609
Total non-current assets 1,070,040 1,088,666
Total assets 1,534,241 1,537,074
Current liabilities    
Settlement liabilities 304,594 317,744
Accounts payable and accrued expenses 139,922 134,504
Current portion of long-term debt 8,200 8,200
Total current liabilities 452,716 460,448
Non-current liabilities    
Deferred tax liability 35,403 38,207
Long-term debt, less current portion 1,156,207 1,159,643
Other accrued expenses and liabilities 3,130 19,409
Total non-current liabilities 1,194,740 1,217,259
Total liabilities 1,647,456 1,677,707
Commitments and contingencies (Note 13)
Stockholders’ deficit    
Common stock, $0.001 par value, 500,000 shares authorized and 95,083 and 93,120 shares issued at September 30, 2018 and December 31, 2017, respectively 95 93
Convertible preferred stock, $0.001 par value, 50,000 shares authorized and no shares outstanding at September 30, 2018 and December 31, 2017, respectively 0 0
Additional paid-in capital 297,745 282,070
Accumulated deficit (233,660) (246,202)
Accumulated other comprehensive loss (997) (253)
Treasury stock, at cost, 24,890 and 24,883 shares at September 30, 2018 and December 31, 2017, respectively (176,398) (176,341)
Total stockholders’ deficit (113,215) (140,633)
Total liabilities and stockholders’ deficit $ 1,534,241 $ 1,537,074
v3.10.0.1
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) - USD ($)
$ in Thousands
Sep. 30, 2018
Dec. 31, 2017
Current assets    
Allowances for doubtful accounts $ 6,537 $ 4,706
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) 95,083,271 93,119,988
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) 24,890,000 24,883,000
v3.10.0.1
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($)
$ in Thousands
9 Months Ended
Sep. 30, 2018
Sep. 30, 2017
Cash flows from operating activities    
Net income (loss) $ 8,153 $ (26,854)
Adjustments to reconcile net income (loss) to cash provided by operating activities:    
Depreciation and amortization 92,773 86,851
Amortization of financing costs and discounts 3,969 4,567
Loss on sale or disposal of assets 687 1,580
Accretion of contract rights 6,299 5,845
Provision for bad debts 8,342 7,946
Deferred income taxes (2,804) 3,174
Write-down of inventory and fixed assets 2,575 0
Reserve for obsolescence 1,386 46
Loss on extinguishment of debt 166 14,615
Stock-based compensation 6,117 5,125
Adjustment to certain purchase accounting liabilities (550) 0
Changes in operating assets and liabilities:    
Settlement receivables 1,703 1,569
Trade and other receivables (23,856) 2,767
Inventory (4,824) (5,314)
Prepaid and other assets (1,146) (3,145)
Settlement liabilities (12,889) (41,799)
Accounts payable and accrued expenses 6,281 12,981
Net cash provided by operating activities 92,382 69,954
Cash flows from investing activities    
Capital expenditures (78,545) (70,057)
Proceeds from sale of fixed assets 83 4
Placement fee agreements (15,300) (13,132)
Net cash used in investing activities (93,762) (83,185)
Cash flows from financing activities    
Proceeds from credit facility 0 820,000
Repayments of prior credit facility 0 (465,600)
Repayments of secured notes 0 (335,000)
Repayments of credit facilities (6,150) (2,050)
Debt issuance costs and discounts (1,276) (19,748)
Proceeds from exercise of stock options 9,529 4,046
Purchase of treasury stock (57) (21)
Net cash provided by financing activities 2,046 1,627
Effect of exchange rates on cash (432) 1,365
Cash, cash equivalents and restricted cash    
Net increase (decrease) for the period 234 (10,239)
Balance, beginning of the period 129,604 119,439
Balance, end of the period 129,838 109,200
Supplemental cash disclosures    
Cash paid for interest 54,930 59,894
Cash paid for income tax 350 760
Cash refunded for income tax 4 200
Supplemental non-cash disclosures    
Accrued and unpaid capital expenditures 2,591 4,736
Accrued and unpaid placement fees added during the year 0 39,074
Transfer of leased gaming equipment to inventory $ 7,284 $ 6,093
v3.10.0.1
BUSINESS
9 Months Ended
Sep. 30, 2018
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” or “Payments”). Unless otherwise indicated, the terms the “Company,” “we,” “us” and “our” refer to 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 payments solutions, critical intelligence offerings, and gaming operations efficiency technology.
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 a number of products and services for casinos, 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 the award-winning TournEvent®; and (b) system software, licenses, ancillary equipment and maintenance to its casino customers. Everi Games also develops and manages the central determinant system for the video lottery terminals installed in the State of New York.
Everi FinTech provides its casino customers 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) products and services that improve credit decision making, automate cashier operations and enhance patron marketing activities for gaming establishments; (d) compliance, audit and data solutions; and (e) online payment processing solutions for gaming operators in states that offer intrastate, Internet-based gaming and lottery activities.
v3.10.0.1
BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
9 Months Ended
Sep. 30, 2018
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 and nine months ended September 30, 2018 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, 2017.
Other than the adoption of ASU 2014-09 and all subsequent amendments (collectively, ASC 606) and Accounting Standards Update (“ASU”) No. 2016-18, 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, 2017.
Overall – Revenue Recognition
We evaluate the recognition of revenue based on the criteria set forth in ASC 606 and ASC 840, 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 may include various 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 (Loss).
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 have 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 the 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 promises to transfer multiple goods and services to a customer. 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 a good 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 340-40, Contract Costs – Incremental Costs of Obtaining a Contract to expense these amounts as incurred.
Asset Balances
In connection with the adoption of ASC 606 utilizing the modified retrospective transition method, we recorded an immaterial cumulative adjustment with respect to certain amounts that had been previously deferred under the then existing revenue recognition guidance as of December 31, 2017 that required recognition under ASC 606 as of the effective date of adoption in accumulated deficit.
Games Revenues
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, player terminal-content licenses, central determinant systems for devices placed in service in licensed jurisdictions 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 840. Generally, under these arrangements, we retain ownership of the leased gaming equipment installed at customer facilities and we receive revenues based on a percentage of the net win per day generated by the leased gaming equipment or a fixed daily fee based on the number of player terminals installed at the facility. 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 revenues include amounts generated by Wide Area Progressive (“WAP”) systems, which consist 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) 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-based gaming machines are presented in the Statements of Income (Loss) net of the jackpot expense, which is comprised of incremental amount funded by a portion of the coin-in from players. At such 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 Equipment and Systems 
Gaming equipment and systems revenues are derived from the sale of gaming equipment to our customers under contracts on standard credit terms, which are generally short-term in nature, and 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.
Gaming Other 
Gaming other revenues primarily consist of our TournEvent of Champions® national tournament and are recognized over a period of time as the customer simultaneously receives and consumes the benefits. 
FinTech Revenues 
Cash Access Services 
Cash access services revenues are comprised of cash advance, ATM and check services revenue streams. 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.
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: (i) commission expenses payable to casino operators; (ii) interchange fees payable to the network associations; and (iii) 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: (i) commission expenses payable to casino operators; (ii) interchange fees payable to the network associations; and (iii) 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, we recognize revenues 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 equipment under contracts with standard credit terms, which are generally short-term in nature, and 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. 
Information Services and Other 
Information services and other revenues include amounts derived from the sale of: (i) software licenses, software subscriptions, professional services and certain other ancillary fees; (ii) service related fees associated with the sale, installation and maintenance of equipment directly to our customers under contracts on standard credit terms, which are generally short-term in nature, secured by the related equipment, (iii) 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 (iv) ancillary marketing, database and internet-based gaming related activities.
Our software represents a functional right-to-use license and the revenues are recognized at a point in time. Subscription services represent a stand-ready performance obligation and the revenues are recognized over a period of time using an input method based on time elapsed. 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: (i) deposits held in connection with a sponsorship agreement; (ii) WAP-related restricted funds; and (iii) Internet related cash access activities. The current portion of restricted cash, which is included in prepaid expenses and other assets, was approximately $1.0 million and $0.9 million as of September 30, 2018 and December 31, 2017, respectively. The non-current portion of restricted cash, which is included in other assets, was approximately $0.1 million as of September 30, 2018 and December 31, 2017. The current portion of restricted cash was approximately $0.6 million and $0.3 million as of September 30, 2017 and December 31, 2016, respectively. The non-current portion of restricted cash was approximately $0.1 million as of September 30, 2017 and December 31, 2016.
Fair Values of Financial Instruments
The fair value of a financial instrument represents the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Fair value estimates are made at a specific point in time, based upon relevant market information about the financial instrument.
The carrying amount of cash and cash equivalents, settlement receivables, 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 September 30, 2018 and December 31, 2017, 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
September 30, 2018
 
 
 

 
 

Term loan
2
 
$
815,985

 
$
809,750

Senior unsecured notes
1
 
$
377,813

 
$
375,000

December 31, 2017
 
 
 

 
 

Term loan
2
 
$
826,099

 
$
815,900

Senior unsecured notes
1
 
$
372,656

 
$
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 September 30, 2018 and December 31, 2017. The senior unsecured notes were reported at fair value using a Level 1 input as there were quoted prices in markets that were considered active as of September 30, 2018 and December 31, 2017.
Reclassification of Prior Year Balances
Reclassifications were made to the prior-period Financial Statements to conform to the current period presentation, except for the adoption impact of the application of ASC 606 utilizing the modified retrospective transition method.
Recent Accounting Guidance
Recently Adopted Accounting Guidance
In March 2018, the FASB issued ASU No. 2018-05, which provides guidance on accounting for the tax effects of the 2017 Tax Act (pursuant to SEC Staff Accounting Bulletin No. 118). The new standard is effective March 13, 2018. We have adopted this guidance in the quarter ended March 31, 2018. In accordance with this guidance, some of the income tax effects recorded in 2017 are provisional and may be adjusted during 2018.
In May 2014, the FASB issued ASU No. 2014-09, which creates ASC 606 and supersedes ASC Topic 605, “Revenue Recognition.” The guidance replaces industry-specific guidance and establishes a single five-step model to identify and recognize revenue. The core principle of the guidance is that an entity should recognize revenue upon transfer of control of promised goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. Additionally, the guidance requires the entity to disclose further quantitative and qualitative information regarding the nature and amount of revenues arising from contracts with customers, as well as other information about the significant judgments and estimates used in recognizing revenues from contracts with customers. The guidance in ASU 2014-9 was further updated by ASU 2016-08 in March 2016, which provided clarification on the implementation of the principal versus agent considerations in ASU 2014-09. In April 2016, the FASB issued ASU 2016-10, which provides clarification on the implementation of performance obligations and licensing in ASU 2014-9. In May 2016, the FASB issued ASU 2016-11, which amended guidance provided in two SEC Staff Announcements at the March 3, 2016 Emerging Issues Task Force meeting over various topics relating to ASU 606. In May 2016, the FASB issued ASU 2016-12, which clarified various topics in ASC 606. In December 2016, the FASB issued ASU 2016-20, which clarified additional topics in ASC 606. This guidance may be adopted retrospectively or under a modified retrospective method where the cumulative effect is recognized at the date of initial application. We adopted this guidance effective January 1, 2018 and have provided additional information with respect to the new revenue recognition topic elsewhere in this Note 2 disclosure and also in “Note 3 Adoption of ASC 606, Revenue from Contracts with Customers.”
In May 2017, the FASB issued ASU No. 2017-09 to clarify which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting under Topic 718. An entity is required to account for the effects of a modification unless all of the following conditions are met: (i) the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or value using an alternative measurement method) of the original award immediately before the original award is modified. If the modification does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not required to estimate the value immediately before and after the modification; (ii) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; and (iii) the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. We adopted this guidance in the quarter ended March 31, 2018. The adoption of this ASU did not have a material impact on our Financial Statements.
In January 2017, the FASB issued ASU No. 2017-01, which clarifies the definition of a business. The amendments affect all companies and other reporting organizations that must determine whether they have acquired or sold a business. The amendments are intended to help companies and other organizations evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The new standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. This guidance is to be applied using a prospective approach as of the beginning of the first period of adoption. We adopted this guidance in the quarter ended March 31, 2018. The adoption of this ASU did not have a material impact on our Financial Statements.
In October 2016, the FASB issued ASU No. 2016-18, which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. As a result, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments do not provide a definition of restricted cash or restricted cash equivalents. We adopted this guidance in the quarter ended March 31, 2018 using a retrospective approach to each period presented. The adoption of this ASU did not have a material impact on our Financial Statements.
In October 2016, the FASB issued ASU No. 2016-16, which provides updated guidance on the recognition of the income tax consequences of intra-entity transfers of assets other than inventory when the transfer occurs, and this eliminates the exception for an intra-entity transfer of such assets. This guidance will be applied using a modified retrospective approach through a cumulative-effective adjustment directly to retained earnings as of the beginning of the period of adoption. We adopted this guidance in the quarter ended March 31, 2018. The adoption of this ASU did not have a material impact on our Financial Statements.
In August 2016, the FASB issued ASU No. 2016-15, which provides updated guidance on the classification of certain cash receipts and cash payments in the statement of cash flows. This guidance is to be applied using a retrospective approach. If it is impracticable to apply the amendments retrospectively for some of the issues within this ASU, the amendments for those issues would be applied prospectively as of the earliest date practicable. We adopted this guidance in the quarter ended March 31, 2018. The adoption of this ASU did not have a material impact on our Financial Statements.
Recent Accounting Guidance Not Yet Adopted
In August 208, 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.
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 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. We do not expect the adoption of this ASU to have a material impact on our Financial Statements. We are currently evaluating the impact of adopting this guidance 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 AOCI 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 (or portion thereof) is recorded. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. We do not expect the adoption of this ASU to have a material impact on our Financial Statements. We are currently evaluating the impact of adopting this guidance on our Financial Statements.
In June 2016, the FASB issued ASU No. 2016-13, which provides updated guidance on 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, and is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. This guidance will be applied using a modified retrospective approach for the cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective and using a prospective approach for debt securities for which any other-than-temporary impairment had been recognized before the effective date. Early adoption is permitted for fiscal years beginning after December 15, 2018. We are currently evaluating the impact of adopting this guidance on our Financial Statements.
In February 2016, the FASB issued ASU No. 2016-02, 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 ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. We expect to make an accounting policy election where leases that are 12 months or less and do not include an option to purchase the underlying asset, will be treated similar to current operating lease accounting and will not be recorded on the balance sheet. For lessees, leases will be classified as either financing or operating, with classification affecting the pattern of expense recognition in the income statement. For lessors, leases will be 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 affects narrow aspects of the guidance previously issued and ASU No. 2018-11 provides a practical expedient for lessors on separating components of a contract and also includes an additional optional transition relief methodology for adopting the new standard. 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 have 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 intend to adopt the new standard effective on January 1, 2019 and, if necessary, will recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. We expect to apply certain practical expedients offered in the aforementioned guidance, such as those that state 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.
While we are currently assessing the impact of this new lease standard on our financial statements, including evaluation of available practical expedients, we expect the following impact to our financial statements as summarized within the table below.
Lessor Perspective
Preliminary Expected Impact Upon Adoption

Games Segment
We expect accounting for leases to be consistent with our current practices; however, there may be differences as we continue to evaluate the impact to our gaming operations revenue stream.

FinTech Segment
We do not typically have leases in which we are the lessor, however, we are continuing to assess our conclusions under Topic 842.

 
 
Lessee Perspective
Preliminary Expected Impact Upon Adoption

Games and FinTech Segments
We expect to recognize operating lease ROU assets and liabilities primarily associated with real estate leases on our Balance Sheets for lease contracts with terms that are longer than 12 months with no material impact to the Statements of Income (Loss). The operating lease ROU assets and liabilities are expected to be recognized at the commencement date based on the present value of lease payments over the lease terms. Our lease contracts may include renewal options to extend the terms and, when it is reasonably certain that we expect to exercise the options, they will be factored into the analysis, as applicable. Operating lease expenses will be recognized on a straight-line basis over the lease terms. In the event we enter into financing lease arrangements, the costs will be amortized utilizing the effective interest method.

The Company is in the process of identifying and implementing appropriate changes to its business processes, systems and controls to support lease accounting and disclosures under Topic 842. We expect our quantitative and qualitative disclosures regarding Topic 842 to increase post adoption of the guidance.
We do not anticipate that any other recently issued accounting guidance will have a significant effect on our consolidated financial statements.
v3.10.0.1
ADOPTION OF ASC 606, REVENUE FROM CONTRACTS WITH CUSTOMERS
9 Months Ended
Sep. 30, 2018
Revenue from Contract with Customer [Abstract]  
ADOPTION OF ASC 606, REVENUE FROM CONTRACTS WITH CUSTOMERS
ADOPTION OF ASC 606, “REVENUE FROM CONTRACTS WITH CUSTOMERS”
Change in accounting policies
On January 1, 2018, we adopted ASC 606 using the modified retrospective method, which requires us to evaluate whether any cumulative adjustment is required to be recorded to retained earnings (or accumulated deficit) as a result of applying the provisions set forth under ASC 606 for any existing arrangements not yet completed as of the adoption date of January 1, 2018. We determined that there was an immaterial cumulative adjustment in the amount of approximately $4.4 million, which we recorded to accumulated deficit as of the adoption date as a result of applying the modified retrospective transition method. In addition, under the modified retrospective method, our prior period results were not recast to reflect the new revenue recognition standard. Except for the changes discussed with respect to revenue recognition, the impact of which is summarized in the tables below, we have consistently applied our accounting policies to all periods presented in our Financial Statements.
Games revenues 
We previously reported certain costs incurred in connection with our WAP platform, consisting primarily of the WAP jackpot expenses, as cost of revenues. Under ASC 606, such costs are reflected as reductions to gaming operations revenues on a net basis.
FinTech revenues 
We previously reported costs and expenses related to our cash access services, which include commission expenses payable to casino operators, interchange fees payable to the network associations and processing and related costs payable to other third party partners, as a cost of revenues. Under ASC 606, such costs are reflected as reductions to cash access services revenues on a net basis.
The following table presents the impact of the application of ASC 606 utilizing the modified retrospective transition method to certain line items on our Unaudited Condensed Consolidated Statements of Income and Comprehensive Income for the three and nine months ended September 30, 2018 (in thousands): 
 
Three Months Ended September 30, 2018
 
As Reported
 
Adjustments
 
Without Adoption
of ASC 606
Revenues
 
 
 
 
 
Games revenues
 
 
 
 
 
Gaming operations
$
43,540

 
$
697

 
$
44,237

Games total revenues
65,839

 
697

 
66,536

 
 
 
 
 
 
FinTech revenues
 

 
 

 
 

Cash access services
39,406

 
160,985

 
200,391

Equipment
7,155

 
(748
)
 
6,407

FinTech total revenues
54,491

 
160,237

 
214,728

 
 
 
 
 
 
Total revenues
120,330

 
160,934

 
281,264

 
 
 
 
 
 
Costs and expenses
 
 
 
 
 
Games cost of revenues(1)
 

 
 

 
 

Gaming operations
4,607

 
697

 
5,304

Games total cost of revenues
17,573

 
697

 
18,270

 
 
 
 
 
 
FinTech cost of revenues(1)
 

 
 

 
 

Cash access services
2,234

 
160,985

 
163,219

Equipment
3,846

 
(446
)
 
3,400

FinTech total cost of revenues
7,029

 
160,539

 
167,568

 
 
 
 
 
 
Total costs and expenses
98,820

 
161,236

 
260,056

 
 
 
 
 
 
Operating income
21,510

 
(302
)
 
21,208

 
 
 
 
 
 
Income before income tax
1,350

 
(302
)
 
1,048

 
 
 
 
 
 
Income tax benefit
(719
)
 

 
(719
)
Net income
2,069

 
(302
)
 
1,767

 
 
 
 
 
 
Comprehensive income
2,060

 
(302
)
 
1,758

(1) Exclusive of depreciation and amortization.
The adoption of ASC 606 utilizing the modified retrospective transition method did not have a material impact to our Balance Sheets and Cash Flows as of and for the three months ended September 30, 2018.
 
Nine Months Ended September 30, 2018
 
As Reported
 
Adjustments
 
Without Adoption
of ASC 606
Revenues
 
 
 
 
 
Games revenues
 
 
 
 
 
Gaming operations
$
126,618

 
$
1,778

 
$
128,396

Games total revenues
192,004

 
1,778

 
193,782

 
 
 
 
 
 
FinTech revenues
 

 
 

 
 

Cash access services
117,364

 
471,433

 
588,797

Equipment
16,338

 
(1,088
)
 
15,250

FinTech total revenues
158,009

 
470,345

 
628,354

 
 
 
 
 
 
Total revenues
350,013

 
472,123

 
822,136

 
 
 
 
 
 
Costs and expenses
 

 
 

 
 

Games cost of revenues(1)
 

 
 

 
 

Gaming operations
13,000

 
1,778

 
14,778

Games total cost of revenues
49,311

 
1,778

 
51,089

 
 
 
 
 
 
FinTech cost of revenues(1)
 

 
 

 
 

Cash access services
6,910

 
470,884

 
477,794

Equipment
9,786

 
(543
)
 
9,243

FinTech total cost of revenues
19,842

 
470,341

 
490,183

 
 
 
 
 
 
Total costs and expenses
281,415

 
472,119

 
753,534

 
 
 
 
 
 
Operating income
68,598

 
4

 
68,602

 
 
 
 
 
 
 
 
 
 
 
 
Income before income tax
5,843

 
4

 
5,847

 
 
 
 
 
 
Income tax benefit
(2,310
)
 

 
(2,310
)
Net income
8,153

 
4

 
8,157

 
 
 
 
 
 
Comprehensive income
7,409

 
4

 
7,413

(1) Exclusive of depreciation and amortization.
The adoption of ASC 606 utilizing the modified retrospective transition method did not have a material impact to our Balance Sheets and Cash Flows as of and for the nine months ended September 30, 2018.
v3.10.0.1
BUSINESS COMBINATIONS
9 Months Ended
Sep. 30, 2018
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. We had no material acquisitions for the three and nine months ended September 30, 2018 and 2017.
In August 2015, we acquired certain assets of Resort Advantage, LLC (“Resort Advantage”), a supplier of comprehensive and integrated solutions for complete Financial Crimes Enforcement Network (“FinCEN”) and Internal Revenue Service regulatory compliance to the gaming industry, for an aggregate purchase price of approximately $13.3 million, of which we estimated that approximately $4.7 million (the “earn out liability”) would be paid under the provisions of the agreement over a period of 40 months (the “payout period”) based upon an evaluation over a period of 36 months (the “earn out period”) following the closing of the transaction. With the earn out period having expired in August 2018, we analyzed the remaining earn out liability of approximately $0.8 million, as of September 30, 2018, and determined that approximately $0.6 million would not be realized; therefore, we reversed that amount into income, which resulted in an estimate of approximately $0.2 million to be potentially paid under the provisions of the agreement over the remaining term set to expire in December 2018. The Resort Advantage acquisition did not have a material impact on our results of operations or financial condition.
v3.10.0.1
FUNDING AGREEMENTS
9 Months Ended
Sep. 30, 2018
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 (Loss), were approximately $1.6 million and $5.3 million for the three and nine months ended September 30, 2018, respectively, and approximately $1.2 million and $3.5 million for the three and nine months ended September 30, 2017, respectively. We are exposed to interest rate risk to the extent that the applicable rates increase.
Under these agreements, the currency supplied by third party vendors remain their sole property until the funds are dispensed. As these funds are not our assets, supplied cash is not reflected in our Balance Sheets. The outstanding balances of ATM cash utilized by us from the third parties were approximately $194.2 million and $289.8 million as of September 30, 2018 and December 31, 2017, respectively.
Our primary commercial arrangement, the Contract Cash Solutions Agreement, as amended, with Wells Fargo, N.A. 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 agreement currently expires on June 30, 2020. We are responsible for any losses of cash in the ATMs under this agreement, and we self‑insure for this risk. We incurred no material losses related to this self‑insurance for the three and nine months ended September 30, 2018 and 2017.
Site-Funded ATMs
We operate ATMs at certain customer gaming establishments where the gaming establishment provides the cash required for the ATM operational needs. We are required to reimburse the customer for the amount of cash dispensed from these site-funded ATMs. The site-funded ATM liability included within settlement liabilities in the accompanying Balance Sheets was approximately $209.8 million and $210.8 million as of September 30, 2018 and December 31, 2017, 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 supplied approximately $2.3 million and $6.9 million of our cash for these ATMs at September 30, 2018 and December 31, 2017, respectively, which represents an outstanding balance under such agreements at the end of the period. Such amounts are reported within 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 $8.4 million at September 30, 2018 and December 31, 2017, respectively, and is included in prepaid expenses and other assets on our Balance Sheets.
v3.10.0.1
TRADE AND OTHER RECEIVABLES
9 Months Ended
Sep. 30, 2018
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 taxes receivables and other miscellaneous receivables. The balance of trade and other receivables consisted of the following (in thousands):
 
At September 30,
 
At December 31,
 
2018
 
2017
Trade and other receivables, net
 

 
 

Games trade and loans receivables
$
46,231

 
$
38,070

FinTech trade and loans receivables(1)
23,047

 
10,780

Other receivables
1,208

 
1,570

Total trade and other receivables, net
70,486

 
50,420

Less: non-current portion of receivables
 

 
 

Games trade and loans receivables
(2,409
)
 
(1,267
)
FinTech trade and loans receivables(1)
(6,425
)
 
(1,371
)
Total non-current portion of receivables
(8,834
)
 
(2,638
)
Total trade and other receivables, current portion
$
61,652

 
$
47,782

(1) In connection with the adoption of ASC 606 utilizing the modified retrospective transition method, we recorded an immaterial cumulative adjustment with respect to certain amounts that had been previously deferred under the then existing revenue recognition guidance as of December 31, 2017 that required recognition under ASC 606 as of the effective date of adoption in accumulated deficit.
At least quarterly, we evaluate the collectability of the outstanding balances and establish a reserve for the amount of the expected losses on our receivables. The allowance for doubtful accounts for trade receivables was approximately $6.5 million and $4.7 million as of September 30, 2018 and December 31, 2017, respectively, and included approximately $3.0 million and $2.7 million of check warranty reserves, respectively. The provision for doubtful customer accounts receivable is generally included within operating expenses in the Statements of Income (Loss).
v3.10.0.1
INVENTORY
9 Months Ended
Sep. 30, 2018
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 FIFO method. 
There was no material impairment of our inventory for the three and nine months ended September 30, 2018 and 2017
We recorded an immaterial impairment charge of approximately $1.8 million in our Games segment for the nine months ended September 30, 2018 to reduce the carrying value of certain component parts to their fair values. The adjustment was included in operating expenses in our Statements of Income (Loss).  
Inventory consisted of the following (in thousands): 
 
At September 30,
 
At December 31,
 
2018
 
2017
Inventory
 

 
 

Component parts, net of reserves of $1,631 and $1,327 at
 September 30, 2018 and December 31, 2017, respectively
$
23,032

 
$
18,782

Work-in-progress
1,248

 
985

Finished goods
1,617

 
4,200

Total inventory
$
25,897

 
$
23,967

v3.10.0.1
PREPAID AND OTHER ASSETS
9 Months Ended
Sep. 30, 2018
Prepaid Expense and Other Assets [Abstract]  
PREPAID AND OTHER ASSETS
PREPAID AND OTHER ASSETS
Prepaid and other assets include the balance of prepaid expenses, deposits, debt issuance costs on our New Revolving Credit Facility (defined herein), restricted cash and other assets. The current portion of these assets is included in prepaid and other assets and the non-current portion is included in other assets, both of which are contained within the Balance Sheets.
The balance of the current portion of prepaid and other assets consisted of the following (in thousands):
 
 
At September 30,
 
At December 31,
 
2018
 
2017
Prepaid expenses and other assets
 

 
 

Deposits
$
8,717

 
$
9,003

Prepaid expenses
10,071

 
6,426

Other
3,932

 
5,241

Total prepaid expenses and other assets
$
22,720

 
$
20,670


The balance of the non-current portion of other assets consisted of the following (in thousands): 
 
At September 30,
 
At December 31,
 
2018
 
2017
Other assets
 

 
 

Prepaid expenses and deposits
$
5,275

 
$
4,103

Debt issuance costs of revolving credit facility
703

 
849

Other
341

 
2,657

Total other assets
$
6,319

 
$
7,609

v3.10.0.1
PROPERTY, EQUIPMENT AND LEASED ASSETS
9 Months Ended
Sep. 30, 2018
Property, Plant and Equipment [Abstract]  
PROPERTY, EQUIPMENT AND LEASED ASSETS
PROPERTY, EQUIPMENT AND LEASED ASSETS
Property, equipment and leased assets consist of the following (in thousands): 
 
 
 
At September 30, 2018
 
At December 31, 2017
 
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
 
$
184,724

 
$
102,078

 
$
82,646

 
$
162,319

 
$
80,895

 
$
81,424

Rental pool - undeployed
2-4
 
21,061

 
12,622

 
8,439

 
17,366

 
9,374

 
7,992

FinTech equipment
3-5
 
26,855

 
20,698

 
6,157

 
25,907

 
18,654

 
7,253

Leasehold and building
   improvements
Lease Term
 
11,724

 
6,504

 
5,220

 
10,981

 
5,211

 
5,770

Machinery, office and other
   equipment
2-5
 
42,943

 
27,404

 
15,539

 
35,167

 
24,087

 
11,080

Total
 
 
$
287,307

 
$
169,306

 
$
118,001

 
$
251,740

 
$
138,221

 
$
113,519


Depreciation expense related to property, equipment and leased assets totaled approximately $17.3 million and $43.8 million for the three and nine months ended September 30, 2018 and approximately $12.5 million and $34.8 million for the three and nine months ended September 30, 2017, respectively.
There was no material impairment of our property, equipment and leased assets for the three and nine months ended September 30, 2018 and 2017.
We recorded an immaterial impairment charge of approximately $0.8 million in our Games segment for the nine months ended September 30, 2018 to reduce the carrying value of certain leased assets to their fair values. The adjustment was included in operating expenses in our Statements of Income (Loss).
v3.10.0.1
GOODWILL AND OTHER INTANGIBLE ASSETS
9 Months Ended
Sep. 30, 2018
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 $640.6 million at September 30, 2018 and at December 31, 2017.
In accordance with ASC 350, 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 and nine months ended September 30, 2018 and 2017.
Other Intangible Assets
Other intangible assets consist of the following (in thousands): 
 
 
 
At September 30, 2018
 
At December 31, 2017
 
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
 
$
57,440

 
$
10,057

 
$
47,383

 
$
57,231

 
$
3,910

 
$
53,321

Customer contracts
6
 
51,175

 
45,531

 
5,644

 
51,175

 
43,638

 
7,537

Customer relationships
8
 
231,100

 
79,377

 
151,723

 
231,100

 
63,653

 
167,447

Developed technology and
   software
2
 
270,048

 
183,126

 
86,922

 
249,064

 
158,919

 
90,145

Patents, trademarks and other
4
 
29,168

 
24,525

 
4,643

 
29,046

 
23,185

 
5,861

Total
 
 
$
638,931

 
$
342,616

 
$
296,315

 
$
617,616

 
$
293,305

 
$
324,311


Amortization expense related to other intangible assets was approximately $16.1 million and $48.9 million for the three and nine months ended September 30, 2018, respectively, and approximately $17.3 million and $52.1 million for the three and nine months ended September 30, 2017, respectively.
We evaluate our other intangible assets for potential impairment in connection with our quarterly review process. There was no material impairment identified for any of our other intangible assets for the three and nine months ended September 30, 2018 and 2017.
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 electronic gaming machines (“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 and $17.1 million in placement fees, including $0.4 million and $1.8 million of imputed interest, to a customer for the three and nine months ended September 30, 2018, respectively, and approximately $10.1 million and $13.1 million in placement fees for the three and nine months ended September 30, 2017.
v3.10.0.1
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
9 Months Ended
Sep. 30, 2018
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 September 30,
 
At December 31,
 
2018
 
2017
Accounts payable and accrued expenses
 
 
 
Trade accounts payable
$
66,067

 
$
59,435

Placement fees(1)
22,328

 
22,328

Accrued interest
8,637

 
5,766

Deferred and unearned revenues
13,472

 
10,450

Cash access processing and related expenses
6,727

 
8,932

Payroll and related expenses
11,335

 
14,178

Accrued taxes
2,410

 
2,112

Other
8,946

 
11,303

Total accounts payable and accrued expenses
$
139,922

 
$
134,504

(1) The total outstanding balance of the placement fee liability was approximately $22.3 million and $39.1 million as of September 30, 2018 and December 31, 2017, respectively. The remaining placement fee liability was considered current portion due to the remaining obligation being due within twelve months of September 30, 2018. The remaining non-current placement fees of approximately $16.8 million as of December 31, 2017 were included in other accrued expenses and liabilities in our Balance Sheets.
v3.10.0.1
LONG-TERM DEBT
9 Months Ended
Sep. 30, 2018
Debt Disclosure [Abstract]  
LONG-TERM DEBT
LONG-TERM DEBT
The following table summarizes our outstanding indebtedness (in thousands):
 
At September 30,
 
At December 31,
 
2018
 
2017
Long-term debt
 
 
 
Senior secured term loan
$
809,750

 
$
815,900

Senior unsecured notes
375,000

 
375,000

Total debt
1,184,750

 
1,190,900

Less: debt issuance costs and discount
(20,343
)
 
(23,057
)
Total debt after debt issuance costs and discount
1,164,407

 
1,167,843

Less: current portion of long-term debt
(8,200
)
 
(8,200
)
Long-term debt, less current portion
$
1,156,207

 
$
1,159,643


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 “New Credit Agreement”). The New Credit Agreement provides for: (i) a $35.0 million, five-year senior secured revolving credit facility (the “New Revolving Credit Facility”); and (ii) an $820.0 million, seven-year senior secured term loan facility (the “New Term Loan Facility,” and together with the New Revolving Credit Facility, the “New Credit Facilities”). The fees associated with the New Credit Facilities included discounts of approximately $4.1 million and debt issuance costs of approximately $15.5 million. All borrowings under the New 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 New Term Loan Facility incurred on the Closing Date were used to: (i) refinance: (a) 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 (b) Everi Payments’ 7.25% Senior Secured Notes due 2021 in the aggregate original principal amount of $335.0 million (the “Refinanced Secured Notes”); and (ii) 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 New Credit Agreement (the “First Amendment”) which, among other things, reduced the interest rate on the approximately $818.0 million then outstanding balance of the New Term Loan Facility, but did not change the maturity dates for the New Term Loan Facility or the New Revolving Credit Facility or the financial covenants or other debt repayments terms set forth in the New Credit Agreement. We incurred approximately $3.0 million of debt issuance costs and fees associated with the repricing of the New Term Loan Facility.
On May 17, 2018, we entered into a Second Amendment (the “Second Amendment”) to the New Credit Agreement, which reduced the interest rate on the $813.9 million outstanding balance of the senior secured term loan under the Credit Agreement by 50 basis points to LIBOR + 3.00% from LIBOR + 3.50% with the LIBOR floor unchanged at 1.00%. The senior secured term loan under the Credit Agreement will be subject to a prepayment premium of 1.00% of the principal amount repaid for any voluntary prepayment or mandatory prepayment with proceeds of debt that has a lower effective yield than the repriced term loan or any amendment to the repriced term loan that reduces the interest rate thereon, in each case, to the extent occurring within six months of the effective date of the Second Amendment. 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 New Term Loan Facility. 
New Credit Facilities
The New Term Loan Facility matures seven years after the Closing Date and the New Revolving Credit Facility matures five years after the Closing Date. The New 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 New Revolving Credit Facility is, at Everi Payments’ option, the base rate or the Eurodollar Rate (defined to be the London Interbank Offered Rate or a comparable or successor rate) (the “Eurodollar Rate”) plus, in each case, an applicable margin. The interest rate per annum applicable to the New 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: (i) the prime lending rate announced by the administrative agent; (ii) the federal funds effective rate from time to time plus 0.50%; and (iii) 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 New Revolving Credit Facility and the New Term Loan Facility were: (i) 4.50% in respect of Eurodollar Rate loans and (ii) 3.50% in respect of base rate loans. The applicable margins for the New 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: (i) 3.50% in respect of Eurodollar Rate loans and (ii) 2.50% in respect of base rate loans. The applicable margins for the New Term Loan Facility from and after the effectiveness of the Second Amendment are: (i) 3.00% in respect of Eurodollar Rate loans and (ii) 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 New Credit Agreement governing the New Credit Facilities, with prior notice but without premium or penalty, except that certain refinancings of the term loans within six months after the Repricing Closing Date will be subject to a prepayment premium of 1.00% of the principal amount repaid.
Subject to certain exceptions, the obligations under the New 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: (i) 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 (ii) 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 New Credit Facilities are unconditionally guaranteed by Holdings and such subsidiary guarantors.
The New Credit Agreement governing the New 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 New Credit Agreement governing the New Credit Facilities also requires Holdings, together with its subsidiaries, to comply with a consolidated secured leverage ratio. At September 30, 2018, our consolidated secured leverage ratio was 3.33 to 1.00, with a maximum allowable ratio of 5.00 to 1.00 (which maximum allowable ratio is reduced to 4.75 to 1.00 as of December 31, 2018, 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 New Credit Facilities as of September 30, 2018.
Events of default under the New Credit Agreement governing the New 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 New 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 New Credit Agreement. As to any loan other than a base rate loan, the interest payment dates shall be the last day of each interest period applicable to such loan and the maturity date (provided, however, that if any interest period for a Eurodollar Rate loan exceeds three months, the respective dates that fall every three months after the beginning of such interest period shall also be interest payment dates). As to any base rate loan, the interest payment dates shall be last business day of each March, June, September and December and the maturity date.  
For the three and nine months ended September 30, 2018, the New Term Loan Facility had an applicable weighted average interest rate of 5.09% and 5.13%, respectively.
At September 30, 2018, we had $809.8 million of borrowings outstanding under the New Term Loan Facility and no borrowings outstanding under the New Revolving Credit Facility. We had $35.0 million of additional borrowing availability under the New Revolving Credit Facility as of September 30, 2018.
Refinanced Senior Secured Notes
In connection with entering into the New 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.
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 September 30, 2018.
v3.10.0.1
COMMITMENTS AND CONTINGENCIES
9 Months Ended
Sep. 30, 2018
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, 2017.
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.
v3.10.0.1
SHAREHOLDERS' EQUITY
9 Months Ended
Sep. 30, 2018
Stockholders' Equity Note [Abstract]  
SHAREHOLDERS' EQUITY
SHAREHOLDERS’ EQUITY
Preferred Stock. Our amended and restated certificate of incorporation, as amended, allows our Board of Directors, without further action by stockholders, to issue up to 50,000,000 shares of preferred stock in one or more series and to fix the designations, powers, preferences, privileges and relative participating, optional, or special rights as well as the qualifications, limitations or restrictions of the preferred stock, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences. As of September 30, 2018 and December 31, 2017, 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 September 30, 2018 and December 31, 2017, we had 95,083,271 and 93,119,988 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 withheld from restricted stock awards 1,215 and 7,431 shares of common stock for the three and nine months ended September 30, 2018, respectively, at an aggregate purchase price of $9,424 and $56,702, respectively, and 1,365 and 4,394 shares of common stock for the three and nine months ended September 30, 2017, respectively, at an aggregate purchase price of $10,115 and $20,706, respectively, to satisfy the minimum applicable tax withholding obligations related to the vesting of such restricted stock awards.
v3.10.0.1
WEIGHTED AVERAGE COMMON SHARES
9 Months Ended
Sep. 30, 2018
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 loss per share is as follows (in thousands): 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Weighted average shares
 

 
 

 
 

 
 

Weighted average number of common shares
   outstanding - basic
69,750

 
66,897

 
69,217

 
66,449

Potential dilution from equity awards(1)
4,844

 

 
4,495

 

Weighted average number of common shares
   outstanding - diluted(1)
74,594

 
66,897

 
73,712

 
66,449

(1) The potential dilution excludes the weighted average effect of equity awards to purchase approximately 3.7 million and 7.4 million shares of common stock for the three and nine months ended September 30, 2018, respectively, because the application of the treasury stock method, as required, makes them anti-dilutive. The Company was in a net loss position for the three and nine months ended September 30, 2017; therefore, potentially dilutive common shares were excluded as their effects would be anti-dilutive under the application of the treasury stock method. Equity awards to purchase approximately 8.0 million and 12.0 million of common stock for the three and nine months ended September 30, 2017 were excluded from the diluted net loss per share results.
v3.10.0.1
SHARE-BASED COMPENSATION
9 Months Ended
Sep. 30, 2018
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 23, 2017, 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. The 2012 Plan was assumed in connection with our 2014 acquisition of Everi Games Holding and conformed to include similar provisions to those as set forth in the Amended and Restated 2014 Plan. 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 with varying vesting provisions and expiration periods: (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, 2017
19,131

 
74

 

Granted
20

 

 
1,857

Exercised options or vested shares
(1,963
)
 
(27
)
 

Canceled or forfeited
(1,324
)
 

 
(40
)
Outstanding, September 30, 2018
15,864

 
47

 
1,817


There are approximately 3.1 million awards of our common stock available for future equity grants, both under the Amended and Restated 2014 Plan and the 2012 Plan.
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 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% premium 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.
There were no market-based option awards granted during the nine months ended September 30, 2018.
The fair values of our standard time-based options were determined as of the date of grant using the Black-Scholes option pricing model with the following assumptions: 
 
Nine Months Ended September 30,
 
2018
2017
Risk-free interest rate
3
%
2
%
Expected life of options (in years)
6

6

Expected volatility
53
%
54
%
Expected dividend yield
%
%

The fair values of our market-based options were determined as of the date of grant using a lattice-based option valuation model with the following assumptions: 
 
Nine Months Ended September 30,
 
2017
Risk-free interest rate
3
%
Measurement period (in years)
10

Expected volatility
70
%
Expected dividend yield
%

The following table presents the options activity: 
 
Number of
Options
(in thousands)
 
Weighted Average
Exercise Price
(per share)
 
Weighted
Average Life
Remaining
(years)
 
Aggregate
Intrinsic Value
(in thousands)
Outstanding, December 31, 2017
19,131

 
$
5.34

 
6.4
 
$
45,887

Granted
20

 
$
7.88

 
 
 
 
Exercised
(1,963
)
 
$
4.86

 
 
 
 
Canceled or forfeited
(1,324
)
 
$
5.65

 
 
 
 
Outstanding, September 30, 2018
15,864

 
$
5.38

 
6.3
 
$
60,147

Vested and expected to vest, September 30, 2018
14,839

 
$
5.43

 
6.3
 
$
55,553

Exercisable, September 30, 2018
9,529

 
$
6.13

 
5.6
 
$
28,945


There were 20,000 options granted for the three and nine months ended September 30, 2018 and 45,750 and 4.1 million options granted for the three and nine months ended September 30, 2017, respectively. The weighted average grant date fair value per share of options granted was $4.15 for the three and nine months ended September 30, 2018 and $3.85 and $1.86 for the three and nine months ended September 30, 2017, respectively. The total intrinsic value of options exercised was $2.7 million and $6.5 million for the three and nine months ended September 30, 2018, respectively, and $0.8 million and $2.8 million for the three and nine months ended September 30, 2017.
There was approximately $4.3 million in unrecognized compensation expense related to options expected to vest as of September 30, 2018. This cost is expected to be recognized on a straight-line basis over a weighted average period of 3 years. We recorded approximately $4.7 million during the nine months ended September 30, 2018 in non-cash compensation expense related to options granted that were expected to vest as of September 30, 2018. During the three and nine months ended September 30, 2018, we received approximately $3.2 million and $9.5 million, respectively, in cash from the exercise of options.
There was $11.7 million in unrecognized compensation expense related to options expected to vest as of September 30, 2017. This cost was expected to be recognized on a straight-line basis over a weighted average period of 2.3 years. We recorded approximately $4.8 million during the nine months ended September 30, 2017 in non-cash compensation expense related to options granted that were expected to vest as of September 30, 2017. We received approximately $2.2 million and $4.0 million in cash from the exercise of options for the three and nine months ended September 30, 2017, respectively.
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, 2017
74

 
$
7.00

Granted

 
$

Vested
(27
)
 
$
6.86

Forfeited

 
$

Outstanding, September 30, 2018
47

 
$
7.08


There were no shares of restricted stock granted for the three and nine months ended September 30, 2018. The total fair value of restricted stock vested was $33,307 and $185,359 for the three and nine months ended September 30, 2018, respectively, and $37,958 and $121,979 for the three and nine months ended September 30, 2017, respectively.
There was approximately $0.1 million in unrecognized compensation expense related to shares of restricted stock expected to vest as of September 30, 2018. This cost is expected to be recognized on a straight-line basis over a weighted average period of 0.3 years. During the nine months ended September 30, 2018, there were 27,003 shares of restricted stock that vested and we recorded approximately $0.4 million in non-cash compensation expense related to restricted stock expected to vest.
There was approximately $0.7 million in unrecognized compensation expense related to shares of restricted stock expected to vest as of September 30, 2017. This cost was expected to be recognized on a straight-line basis over a weighted average period of 1.2 years. During the nine months ended September 30, 2017, there were 16,071 shares of restricted stock that vested and we recorded $0.3 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, 2017

 
$

 
 
 
 

Granted
1,857

 
$
7.49

 
 
 
 

Vested

 
$

 
 
 
 

Forfeited
(40
)
 
$
7.47

 
 
 
 

Outstanding, September 30, 2018
1,817

 
$
7.49

 
2.3
 
$
16,662

Vested and expected to vest, September 30, 2018
1,172

 
$
7.50

 
2.1
 
$
10,744


The time-based RSUs granted during the three and nine months ended September 30, 2018 vest at a rate of 25% per year on each of the first four anniversaries of the grant dates.
The performance-based RSUs granted during the nine months ended September 30, 2018 will be evaluated by our Compensation Committee of our Board of Directors after a performance period, beginning on the date of grant through December 31, 2020, based on certain revenue and Adjusted EBITDA growth rate metrics, with achievement of each measure to be determined independently of one another. If the performance criteria of the metrics are approved, the eligible awards will become vested on the third anniversary of the grant dates.
The time-based RSUs granted during 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: (i) March 7, 2028; (ii) death; (iii) the occurrence of a Change in Control (as defined in the Amended and Restated 2014 Plan), subject to qualifying conditions; or (iv) the date that is six months following the separation from service, subject to qualifying conditions.
There were approximately 1.9 million shares of RSU awards granted for the nine months ended September 30, 2018. There were no RSUs granted for the nine months ended September 30, 2017. There were no RSUs vested during the nine months ended September 30, 2018 and 2017.
There was approximately $7.3 million in unrecognized compensation expense related to RSU awards expected to vest as of September 30, 2018. This cost is expected to be recognized on a straight-line basis over a weighted average period of 3.2 years. We recorded approximately $1.0 million in non-cash compensation expense related to RSU awards during the nine months ended September 30, 2018.
v3.10.0.1
INCOME TAXES
9 Months Ended
Sep. 30, 2018
Income Tax Disclosure [Abstract]  
INCOME TAXES
INCOME TAXES
The income tax benefit reflected an effective income tax rate of negative 53.3% and negative 39.5% for the three and nine months ended September 30, 2018, respectively, 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. The decrease in our valuation allowance is primarily due to the income during the year and the interest deduction limitation (deferred tax asset) which can be offset against our indefinite lived deferred tax liabilities. The income tax provision reflected an effective income tax rate of negative 20.0% and a negative 15.6% for the three and nine months ended September 30, 2017, respectively, which was less than the statutory federal rate of 35.0%, primarily due to an increase in our valuation allowance for deferred tax assets, partially offset by state taxes, the benefit from stock option exercises, 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 September 30, 2018, we recorded $0.9 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 (Loss).
On December 22, 2017, the SEC staff issued Staff Accounting Bulletin 118 (“SAB 118”), which provides guidance on accounting for the tax effects of the Tax Cut and Jobs Act of 2017 (the “2017 Tax Act”). SAB 118 was added to the FASB codification in March 2018 with the issuance of ASU 2018-5. SAB 118 provides a measurement period that should not extend beyond one year from the enactment date for companies to complete the accounting under Accounting Standards Codification Topic 740 Income Taxes (“ASC 740”). In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the 2017 Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the 2017 Tax Act is incomplete but for which they are able to determine a reasonable estimate, it must record a provisional amount in the financial statements. Provisional treatment is proper in light of anticipated additional guidance from various taxing authorities, the SEC, the FASB, and even the Joint Committee on Taxation. Provisional treatment is also necessary if the company is waiting for final financial information from domestic and foreign equity investments. If a company cannot determine a provisional amount to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the 2017 Tax Act.
In accordance with the SAB 118 guidance, some of the income tax effects recorded in 2017 are provisional, including the one-time transition tax, the effect on our valuation allowance including the stricter limits on interest deductions, and the re-measurement of our deferred tax assets and liabilities. In addition, we are still evaluating the Global Intangible Low-Taxed Income provisions of the 2017 Tax Act and its impact, if any, on our Financial Statements. The accounting for these income tax effects may be adjusted during 2018 as a result of continuing analysis of the 2017 Tax Act; additional implementation guidance from the IRS, state tax authorities, the SEC, the FASB, or the Joint Committee on Taxation; and new information from domestic or foreign equity affiliates. As of September 30, 2018, we have not finalized our analysis of these provisional amounts.
v3.10.0.1
SEGMENT INFORMATION
9 Months Ended
Sep. 30, 2018
Segment Reporting [Abstract]  
SEGMENT INFORMATION
SEGMENT INFORMATION
Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision-making group (the “CODM”). Our CODM consists of the Chief Executive Officer and the Chief Financial Officer. Our CODM allocates resources and measures profitability based on our operating segments, which are managed and reviewed separately, as each represent products and services that can be sold separately to our customers. Our segments are monitored by management for performance against our internal forecasts.
We have reported our financial performance based on our segments in both the current and prior periods. Our CODM determined that our operating segments for conducting business are: (a) Games; and (b) FinTech:
The Games segment provides solutions directly to gaming establishments to offer their patrons gaming entertainment-related experiences including: leased gaming equipment; gaming systems; sales and maintenance related services of gaming equipment; and ancillary products and services.
The FinTech segment provides solutions directly to gaming establishments to offer their patrons cash access-related services and products, including: access to cash at gaming facilities via ATM cash withdrawals; credit card cash access transactions and POS debit card cash access transactions; check-related services; equipment and maintenance services; compliance, audit and data software; casino credit data and reporting services and other ancillary offerings.
Corporate overhead expenses have been allocated to the segments either through specific identification or based on a reasonable methodology. In addition, we record depreciation and amortization expenses to the business segments.
Our business is predominantly domestic with no specific regional concentrations and no significant assets in foreign locations.
The accounting policies of the operating segments are generally the same as those described in the summary of significant accounting policies. Since we adopted ASC 606 utilizing the modified retrospective method, the prior year comparative amounts shown in the tables below have not been restated.
The following tables present segment information (in thousands):
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Games
 

 
 

 
 

 
 

Revenues
 

 
 

 
 

 
 

Gaming operations