EVERI HOLDINGS INC. In this filing, we refer to: (i) our unaudited condensed consolidated financial statements and notes thereto as our "Financial Statements"; (ii) our Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) as our "Statements of Operations"; (iii) our Unaudited Condensed Consolidated Balance Sheets as our "Balance Sheets"; and (iv) our Management's Discussion and Analysis of Financial Condition and Results of Operations as our "Results of Operations." Cautionary Information Regarding Forward-Looking Statements The following Management's Discussion and Analysis of Financial Condition and Results of Operations contains "forward-looking statements" as defined in theU.S. Private Securities Litigation Reform Act of 1995. In this context, forward-looking statements address our expected future business and financial performance, and often contain words such as "goal," "target," "future," "indication," "estimate," "assume," "expect," "anticipate," "intend," "aim to," "can," "could," "plan," "believe," "seek," "project," "may," "should," "designed to," "favorably positioned," or "will" and similar expressions to identify forward-looking statements. Examples of forward-looking statements include, among others, statements regarding trends, developments, and uncertainties impacting our business, as well as statements regarding expectations: for the re-opening of casinos, including the related public health confidence and availability of discretionary spending income of casino patrons and our ability to withstand the current disruption; for further product innovations; to address customer needs in the new and evolving operating environment; to regain or maintain revenue, earnings, and cash flow momentum, and to enhance shareholder value in the long-term. Forward-looking statements are subject to additional risks and uncertainties, including those set forth under the heading "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our current and periodic reports filed with theSecurities and Exchange Commission (the "SEC"), including, without limitation, our Annual Report on Form 10-K for the year endedDecember 31, 2020 (the "Annual Report"), and are based on information available to us on the date hereof. Such risks and uncertainties could cause actual results to differ materially from those projected or assumed, including, but not limited to, the following: our ability to generate profits in the future and to create incremental value for shareholders; our ability to execute on mergers, acquisitions and/or strategic alliances, including our ability to integrate and operate such acquisitions or alliances consistent with our forecasts in order to achieve future growth; our ability to execute on key initiatives and deliver ongoing improvements; expectations regarding growth for the Company's installed base and daily win per unit; expectations regarding placement fee arrangements; inaccuracies in underlying operating assumptions; the impact of the ongoing Coronavirus Disease 2019 ("COVID-19") global pandemic on our business, operations and financial condition, including (i) actions taken by federal, state, tribal and municipal governmental and regulatory agencies to contain the COVID-19 public health emergency or mitigate its impact, (ii) the direct and indirect economic effects of COVID-19 and measures to contain it, including directives, orders or similar actions by federal, state, tribal and municipal governmental and regulatory agencies to regulate freedom of movement and business operations such as travel restrictions, border closures, business closures, limitations on public gatherings, quarantines and shelter-in-place orders as well as re-opening guidance related to capacity restrictions for casino operations, social distancing, hygiene and re-opening safety protocols, and (iii) potential adverse reactions or changes to employee relationships in response to the furlough and salary reduction actions taken in response to COVID-19; changes in global market, business, and regulatory conditions arising as a result of the COVID-19 global pandemic; our history of net losses and our ability to generate profits in the future; our substantial leverage and the related covenants that restrict our operations; our ability to generate sufficient cash to service all of our indebtedness, fund working capital, and capital expenditures; our ability to withstand unanticipated impacts of a pandemic outbreak of uncertain duration; our ability to withstand the loss of revenue during the closure of our customers' facilities; our ability to maintain our current customers; expectations regarding customers' preferences and demands for future product and service offerings; the overall growth of the gaming industry, if any; our ability to replace revenue associated with terminated contracts; margin degradation from contract renewals; our ability to comply with the Europay, MasterCard, andVisa global standard for cards equipped with security chip technology; our ability to successfully introduce new products and services, including third-party licensed content; gaming establishment and patron preferences; failure to control product development costs and create successful new products; anticipated sales performance; our ability to prevent, mitigate, or timely recover from cybersecurity breaches, attacks, and compromises; national and international economic and industry conditions; changes in gaming regulatory, card association, and statutory requirements; regulatory and licensing difficulties, competitive pressures and changes in the competitive environment; operational limitations; gaming market contraction; changes to tax laws; uncertainty of litigation outcomes; interest rate fluctuations; business prospects; unanticipated expenses or capital needs; technological obsolescence and our ability to adapt to evolving technologies; our ability to comply with our debt covenants and service outstanding debt; employee turnover; and other statements that are not historical facts. If any of these assumptions proves to be 31 -------------------------------------------------------------------------------- incorrect, the results contemplated by the forward-looking statements regarding our future results of operations are unlikely to be realized. These cautionary statements qualify our forward-looking statements, and you are cautioned not to place undue reliance on such forward-looking statements. Any forward-looking statement contained herein speaks only as of the date on which it is made, and we do not intend, and assume no obligation, to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. This Quarterly Report on Form 10-Q should be read in conjunction with our most recent Annual Report and the information included in our other press releases, reports, and other filings with theSEC . Understanding the information contained in these filings is important in order to fully understand our reported financial results and our business outlook for future periods. Overview Everi is a leading supplier of imaginative entertainment and trusted technology solutions for the casino and digital gaming industry. Everi's mission is to lead the gaming industry through the power of people, imagination and technology. With a focus on player engagement and helping casino customers operate more efficiently, the Company develops entertaining game content and gaming machines, gaming systems and services for land-based and iGaming operators. The Company is also a preeminent and comprehensive provider of trusted financial technology solutions that power the casino floor while improving operational efficiencies and fulfilling regulatory compliance requirements, including products and services that facilitate convenient and secure cash and cashless financial transactions, self-service player loyalty tools and applications, and regulatory and intelligence software. Everi reports its financial performance, and organizes and manages its operations, across the following two business segments: (i) Games and (ii) FinTech. Everi Games provides gaming operators with gaming technology products and services, including: (i) gaming machines, primarily comprising Class II and Class III slot machines placed under participation or fixed-fee lease arrangements or sold to casino customers; (ii) providing and maintaining the central determinant systems for the video lottery terminals ("VLTs") installed in theState of New York and similar technology in certain tribal jurisdictions; and (iii) business-to-business ("B2B") digital online gaming activities. Everi FinTech provides gaming operators with financial technology products and services, including: financial access and related services supporting digital, cashless and physical cash options across mobile, assisted and self-service channels along with related loyalty and marketing tools, and other information-related products and services. Our services operate as part of an end-to-end security suite to protect against cyber-related attacks and maintain the necessary secured environments to maintain compliance with applicable regulatory requirements. These solutions include: access to cash and cashless funding at gaming facilities via Automated Teller Machine ("ATM") debit withdrawals, credit card financial access transactions, and point of sale ("POS") debit card purchases at casino cages, kiosk and mobile POS devices; accounts for the CashClub Wallet, check warranty services, self-service ATMs and fully integrated kiosk and maintenance services; self-service loyalty tools and promotion management software; compliance, audit, and data software; casino credit data and reporting services; marketing and promotional offering subscription-based services; and other ancillary offerings. With respect to our FinTech business, we have made the following updates to certain of our financial statement descriptions, where applicable: (i) "Cash access services" has become "Financial access services"; (ii) "ATM" has been renamed "Funds dispensed"; (iii) "Equipment" has been changed to "Hardware"; and (iv) "Information services and other" has been revised to "Software and other." These naming convention changes better represent how our business has evolved. Impact of the COVID-19 Pandemic The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains, lowered equity market valuations, created significant volatility in the financial markets, increased unemployment levels, and caused temporary, and in certain cases, permanent closures of many businesses. The gaming industry was not immune to these factors as our casino customers closed their gaming establishments in the first quarter of 2020, with many beginning to reopen their operations over the remainder of 2020 and in 2021. As a result, our operations experienced significant disruptions in the first three quarters of 2020. At the immediate onset of the COVID-19 pandemic, we were affected by various measures, including, but not limited to: the institution of social distancing and sheltering-in-place requirements in many states and communities where we operate, which significantly impacted demand for our products and services, and resulted in office closures, the furlough of a majority of our employees, the implementation of temporary base salary reductions for our employees and the implementation of a work-from-home policy. 32 -------------------------------------------------------------------------------- Since the onset of COVID-19, we have implemented measures to mitigate our exposure throughout the global pandemic. While there may be further uncertainty facing our customers as a result of COVID-19, we continue to evaluate our business strategies and the impacts of the global pandemic on our results of operations and financial condition and make business decisions to mitigate further risk. While industry conditions have improved significantly compared to 2020, it is unclear if the customer volumes experienced will continue to exceed pre-COVID levels, to the extent another resurgence of COVID-19 could result in the further closure or re-closure of casinos by federal, state, tribal or municipal governments and regulatory agencies or by the casino operators themselves in an effort to contain the COVID-19 global pandemic or mitigate its impact and the impact of vaccines on these matters. As ofSeptember 30, 2021 , excluding the few casinos that have permanently closed, there are only a minimal number of customers whose operations still remain closed. Our revenues, cash flows, and liquidity for the third quarter of 2021 exceeded the third quarter of 2020, which was significantly impacted by the effects of COVID-19. At the onset of the pandemic, our customers implemented protocols intended to protect their patrons and guests from potential COVID-19 exposure and re-establish customer confidence in the gaming and hospitality industry. These measures included enhanced sanitization, limitations on public gathering and casino capacity, patron social distancing requirements, and limitations on casino operations and amenities, of which have limited the number of patrons that are able or who desire to attend these venues. This has also impacted the pace at which demand for our products and services rebounds. With some limitations still in effect, we expect that demand for our products and services will continue to be tempered in the short-term, to the extent gaming activity decreases at our customers' locations or fails to increase at expected rates or return to pre-pandemic levels and to the extent our customers decide to restrict their capital spending as a result of uncertainty in the industry, or otherwise. As a result, we continue to monitor and manage liquidity levels and we may, from time to time, evaluate available capital resource alternatives on acceptable terms to provide additional financial flexibility. The impact of the COVID-19 pandemic also exacerbates the risks disclosed in the Annual Report, including, but not limited to: our ability to comply with the terms of our indebtedness; our ability to generate revenues, earn profits and maintain adequate liquidity; our ability to service existing and attract new customers and maintain our overall competitiveness in the market; the potential for significant fluctuations in demand for our products and services; overall trends in the gaming industry impacting our business; and potential volatility in our stock price, among other concerns such as cybersecurity exposure. Additional Items Impacting Comparability of Results of Operations and Financial Condition Our financial statements included in this report reflect the following additional items impacting the comparability of results of operations for the three and nine months endedSeptember 30, 2021 : •During the third quarter of 2021, we completed a refinancing of our prior credit facilities and entered into a credit agreement and a letter of credit (the "New Credit Agreement"). The New Credit Agreement provides for: (i) a seven-year$600 million senior secured term loan due 2028 issued at 99.75% of par (the "New Term Loan"); and (ii) a$125 million senior secured revolving credit facility due 2026, which was undrawn at closing (the "New Revolver" and together with the New Term Loan, the "New Credit Facilities"). The fees associated with the New Credit Facilities were approximately$13.9 million , which included discounts of approximately$1.5 million . •During the third quarter of 2021, we completed a refinancing of our 7.50% senior unsecured notes due in 2025 (the "2017 Unsecured Notes") with an offering of$400 million in aggregate principal, issued at par, of 5.00% senior unsecured notes due 2029 (the "2021 Unsecured Notes"). The fees associated with the 2021 Unsecured Notes included debt issuance costs of approximately$5.9 million . •During the third quarter of 2021, in connection with these refinancing and repayment activities, the total fees were approximately$40.6 million , comprised of approximately$20.8 million of early redemption penalties and make-whole interest associated with the prior debt instruments and approximately$19.8 million of capitalized debt issuance costs attributable to the new debt instruments. •During the third quarter of 2021, in connection with these refinancing and repayment activities, we recorded a loss on extinguishment of debt of approximately$34.4 million , comprised of cash charges of approximately$20.8 million for prepayment penalties and make-whole interest and non-cash charges of approximately$13.6 million related to the write-off of unamortized debt issuance costs and discounts associated with the prior credit facility (the "Prior Term Loan"), the prior incremental term loan facility (the "Prior Incremental Term Loan") and the 2017 Unsecured Notes. As a result of these additional events, together with the impacts of COVID-19, our results of operations and earnings per share and financial condition in the periods covered by our Financial Statements may not be directly comparable. 33 -------------------------------------------------------------------------------- Trends and Developments Impacting our Business In addition to the factors discussed above and the information below, we refer to Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Trends and Developments Impacting our Business" in our Annual Report, which is incorporated herein by reference. OurU.S. federal and state operating businesses had deferred tax asset valuation allowances of approximately$64.3 million as ofSeptember 30, 2021 . The deferred tax assets are reviewed on a quarterly basis, and based on our most recent analysis as ofSeptember 30, 2021 , we continued to maintain a full valuation allowance in these jurisdictions. The significant positive evidence in our analysis included: improvements in profitability, product mix, capital levels, credit metrics and a stabilizing economy. The most significant negative evidence continued to be a three-year cumulative loss position. We believe the negative evidence continued to outweigh the positive evidence as ofSeptember 30, 2021 . To the extent the negative evidence of a three-year cumulative loss is no longer present, and future longer-term forecasts show sustained profitability, our conclusion regarding the need for full valuation allowances could change, which may lead to the reversal of a significant portion of our valuation allowances within the next 12 months. To the extent this materializes, we may record a significant tax benefit reflecting the reversal, which could result in a lower or negative effective tax rate for both the quarter and full year in which the adjustment occurs. Operating Segments We report our financial performance based on two operating segments: (i) Games and (ii) FinTech. For additional information on our segments, see "Note 2 - Basis of Presentation and Summary of Significant Accounting Policies" and
"Note 18 - Segment Information" included in Part I, Item 1: Financial Statements of this Quarterly Report on Form 10-Q.
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Results of Operations
Three months ended September 30, 2021 compared to three months ended
September 30, 2020
The following table presents our Results of Operations as reported for the three
months ended September 30, 2021 compared to the three months ended September 30,
2020 (amounts in thousands)*:
Three Months Ended
September 30, 2021 September 30, 2020 2021 vs 2020
$ % $ % $ %
Revenues
Games revenues
Gaming operations $ 71,580 43 % $ 46,968 42 % $ 24,612 52 %
Gaming equipment and systems 24,220 14 % 10,229 9 % 13,991 137 %
Gaming other 33 - % 44 - % (11) (25) %
Games total revenues 95,833 57 % 57,241 51 % 38,592 67 %
FinTech revenues
Financial access services 46,421 28 % 33,979 30 % 12,442 37 %
Software and other 17,024 10 % 14,630 13 % 2,394 16 %
Hardware 9,024 5 % 6,248 6 % 2,776 44 %
FinTech total revenues 72,469 43 % 54,857 49 % 17,612 32 %
Total revenues 168,302 100 % 112,098 100 % 56,204 50 %
Costs and expenses
Games cost of revenues(1)
Gaming operations 5,675 3 % 4,245 4 % 1,430 34 %
Gaming equipment and systems 13,503 8 % 5,730 5 % 7,773 136 %
Games total cost of revenues 19,178 11 % 9,975 9 % 9,203 92 %
FinTech cost of revenues(1)
Financial access services 1,830 1 % 1,161 1 % 669 58 %
Software and other 1,063 1 % 859 1 % 204 24 %
Hardware 5,380 3 % 3,548 3 % 1,832 52 %
FinTech total cost of revenues 8,273 5 % 5,568 5 % 2,705 49 %
Operating expenses 47,121 28 % 34,927 31 % 12,194 35 %
Research and development 9,598 6 % 7,034 6 % 2,564 36 %
Depreciation 14,463 9 % 16,163 14 % (1,700) (11) %
Amortization 14,596 9 % 18,693 17 % (4,097) (22) %
Total costs and expenses 113,229 67 % 92,360 82 % 20,869 23 %
Operating income 55,073 33 % 19,738 18 % 35,335 179 %
Other expenses
Interest expense, net of interest 14,257 8 % 18,905 17 % (4,648) (25) %
income
Loss on extinguishment of debt 34,389 20 % - - % 34,389 100 %
Total other expenses 48,646 29 % 18,905 17 % 29,741 157 %
Income before income tax 6,427 4 % 833 1 % 5,594 672 %
(1) Exclusive of depreciation and amortization.
* Rounding may cause variances.
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Three Months Ended
September 30, 2021 September 30, 2020 2021 vs 2020
$ % $ % $ %
Income tax (benefit) (319) - % 1,711 2 % (2,030) (119) %
provision
Net income (loss) $ 6,746 4 % $ (878) (1) % $ 7,624 868 %
* Rounding may cause variances.
We continued to experience a certain level of recovery from the global pandemic
for the three months ended September 30, 2021 , and as a result, our revenues,
costs and expenses were stronger than expected in the current year period, as
compared to the same period in the prior year, which were negatively impacted at
the onset of COVID-19. As of September 30, 2021 , fewer than 2% of casinos in the
United States remained closed, according to our estimates.
Revenues
Total revenues increased by approximately $56.2 million , or 50%, to
approximately $168.3 million for the three months ended September 30, 2021 , as
compared to the same period in the prior year. This was primarily due to the
higher Games and FinTech revenues described below.
Games revenues increased by approximately $38.6 million , or 67%, to
approximately $95.8 million for the three months ended September 30, 2021 , as
compared to the same period in the prior year. This was primarily due to
contributions from our gaming operations revenues that included: (i) an increase
in both the total number of units in our installed base and the average daily
win per unit, particularly associated with a greater mix of premium units; (ii)
an increase in our New York Lottery results as business reopened in late 2020
and operating restrictions to mitigate the impact of COVID-19 were reduced; and
(iii) greater B2B digital and interactive results as we began to provide our
services to new markets. In addition, an increase in the number of machines sold
with a consistent average selling price per unit contributed to higher gaming
equipment revenues.
FinTech revenues increased by approximately $17.6 million , or 32%, to
approximately $72.5 million for the three months ended September 30, 2021 , as
compared to the same period in the prior year. This was primarily due to
contributions that included: (i) an increase in both transaction and dollar
volumes in base, new and renewed business from our financial access services
revenues; (ii) higher software sales and support related service fees
attributable to our compliance, Central Credit and kiosk solutions from our
software and other revenues; and (iii) an increase in unit sales of both our
kiosk and loyalty equipment with a mix of more higher priced loyalty equipment
sold from our hardware revenues.
Costs and Expenses
Total costs and expenses increased by approximately $20.9 million , or 23%, to
approximately $113.2 million for the three months ended September 30, 2021 , as
compared to the same period in the prior year. This was primarily due to higher
Games and FinTech costs and expenses described below.
Games cost of revenues increased by approximately $9.2 million , or 92%, to
approximately $19.2 million for the three months ended September 30, 2021 , as
compared to the same period in the prior year. This was primarily due to the
additional variable costs associated with the higher unit sales from our gaming
equipment and systems revenues.
FinTech cost of revenue increased by approximately $2.7 million , or 49%, to
approximately $8.3 million for the three months ended September 30, 2021 , as
compared to the same period in the prior year. This was primarily due to higher
unit sales from our hardware revenues.
Operating expenses increased by approximately $12.2 million , or 35%, to
approximately $47.1 million for the three months ended September 30, 2021 , as
compared to the same period in the prior year. This was primarily due to higher
payroll and related expenses to support our Games and FinTech businesses. In
addition, the increase was associated with the prior year period as many of the
Company's employees were still on furlough, and those that remained were on
reduced pay levels during that time period. In addition, legal fees increased
due to ongoing matters from our FinTech segment.
Research and development expenses increased by approximately $2.6 million , or
36%, to approximately $9.6 million for the three months ended September 30,
2021 , as compared to the same period in the prior year. This was primarily due
to higher payroll and related expenses, consulting fees, certification charges
and testing costs from our Games and FinTech segments.
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Depreciation expenses decreased by $1.7 million , or 11%, to approximately $14.5
million for the three months ended September 30, 2021 , as compared to the same
period in the prior year. This was primarily associated with certain of our
fixed assets that were fully depreciated in our Games segment.
Amortization expense decreased by approximately $4.1 million , or 22%, to
approximately $14.6 million for the three months ended September 30, 2021 , as
compared to the same period in the prior year. This was primarily due to certain
intangible assets recorded in connection with the acquisition of the Games
business being fully amortized.
Primarily as a result of the factors described above, our operating income
increased by approximately $35.3 million , or 179%, as compared to the same
period in the prior year. The operating income margin was 33% for the three
months ended September 30, 2021 compared to an operating loss margin of 18% for
the same period in the prior year.
Interest expense, net of interest income, decreased by approximately $4.6
million , or 25%, to approximately $14.3 million for the three months ended
September 30, 2021 , as compared to the same period in the prior year. This was
primarily due to lower debt balances and more favorable variable interest rates
in effect, including a reduction in the LIBOR floor on the Prior Term Loan, a
refinancing of the 2017 Unsecured Notes in July 2021 with the issuance of the
2021 Unsecured Notes and entering into the New Term Loan in August 2021 .
Loss on extinguishment of debt was approximately $34.4 million for the three
months ended September 30, 2021 as a result of the refinancing of our 2017
Unsecured Notes in July 2021 and entering into our New Term Loan in August 2021 .
The income tax benefit was $0.3 million for the three months ended September 30,
2021 , as compared to an income tax provision of $1.7 million for the same period
in the prior year. The income tax benefit reflected an effective income tax rate
of negative 5.0% for the three months ended September 30, 2021 , which was less
than the statutory federal rate of 21.0%, primarily due to a decrease in our
valuation allowance due to book income during the period, and the benefit from
stock option exercises. The income tax provision reflected an effective income
tax rate of 205.4% for the same period in the prior year, which was greater than
the statutory federal rate of 21.0%, primarily due to an increase in our
valuation allowance as a result of a reduction of certain indefinite lived
deferred tax assets that could be offset against our indefinite lived deferred
tax liabilities.
Primarily as a result of the factors described above, we had net income of
approximately $6.7 million for the three months ended September 30, 2021 . We had
a net loss of approximately $0.9 million for the three months ended
September 30, 2020 .
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Results of Operations
Nine months ended September 30, 2021 compared to nine months ended September 30,
2020
The following table presents our Results of Operations as reported for the nine
months ended September 30, 2021 compared to the nine months ended September 30,
2020 (amounts in thousands)*:
Nine months ended
September 30, 2021 September 30, 2020 2021 vs 2020
$ % $ % $ %
Revenues
Games revenues
Gaming operations $ 202,941 42 % $ 106,513 40 % $ 96,428 91 %
Gaming equipment and systems 68,298 14 % 28,795 11 % 39,503 137 %
Gaming other 82 - % 76 - % 6 8 %
Games total revenues 271,321 57 % 135,384 51 % 135,937 100 %
FinTech revenues
Financial access services 129,973 27 % 80,986 31 % 48,987 60 %
Software and other 49,874 10 % 31,748 12 % 18,126 57 %
Hardware 28,829 6 % 16,004 6 % 12,825 80 %
FinTech total revenues 208,676 43 % 128,738 49 % 79,938 62 %
Total revenues 479,997 100 % 264,122 100 % 215,875 82 %
Costs and expenses
Games cost of revenues(1)
Gaming operations 15,776 3 % 10,471 4 % 5,305 51 %
Gaming equipment and systems 39,058 8 % 16,625 6 % 22,433 135 %
Gaming other - - % 456 - % (456) (100) %
Games total cost of revenues 54,834 11 % 27,552 10 % 27,282 99 %
FinTech cost of revenues(1)
Financial access services 4,863 1 % 5,227 2 % (364) (7) %
Software and other 3,196 1 % 2,057 1 % 1,139 55 %
Hardware 17,078 4 % 9,452 4 % 7,626 81 %
FinTech total cost of revenues 25,137 5 % 16,736 7 % 8,401 50 %
Operating expenses 133,320 28 % 115,428 44 % 17,892 16 %
Research and development 26,799 6 % 20,958 8 % 5,841 28 %
Depreciation 46,571 10 % 48,700 18 % (2,129) (4) %
Amortization 43,680 9 % 57,312 22 % (13,632) (24) %
Total costs and expenses 330,341 69 % 286,686 109 % 43,655 15 %
Operating income (loss) 149,656 31 % (22,564) (9) % 172,220 763 %
Other expenses
Interest expense, net of interest 50,488 11 % 56,226 21 % (5,738) (10) %
income
Loss on extinguishment of debt 34,389 7 % 7,457 3 % 26,932 361 %
Total other expenses 84,877 18 % 63,683 24 % 21,194 33 %
Income (loss) before income tax 64,779 13 % (86,247) (32) % 151,026 175 %
(1) Exclusive of depreciation and amortization.
* Rounding may cause variances.
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Nine months ended
September 30, 2021 September 30, 2020 2021 vs 2020
$ % $ % $ %
Income tax provision 1,285 - % (3,434) (1) % 4,719 (137) %
(benefit)
Net income (loss) $ 63,494 13 % $ (82,813) (31) % $ 146,307 177 %
* Rounding may cause variances.
We continued to experience a certain level of recovery from the global pandemic
for the nine months ended September 30, 2021 , and as a result, our revenues,
costs and expenses were stronger than expected in the current year period, as
compared to the same period in the prior year, which were negatively impacted at
the onset of COVID-19. As of September 30, 2021 , fewer than 2% of casinos in the
United States remained closed, according to our estimates.
Revenues
Total revenues increased by approximately $215.9 million , or 82%, to
approximately $480.0 million for the nine months ended September 30, 2021 , as
compared to the same period in the prior year. This was primarily due to the
higher Games and FinTech revenues described below.
Games revenues increased by approximately $135.9 million , or 100%, to
approximately $271.3 million for the nine months ended September 30, 2021 , as
compared to the same period in the prior year. This was primarily due to
contributions from our gaming operations revenues that included: (i) an increase
in both the total number of units in our installed base and the average daily
win per unit, particularly associated with a greater mix of premium units; (ii)
an increase in our New York Lottery results as business reopened in late 2020
and operating restrictions to mitigate the impact of COVID-19 were reduced; and
(iii) greater B2B digital and interactive results as we began to provide our
services to new markets. In addition, we had an increase in the number of
machines sold with a higher average selling price per unit from our gaming
equipment revenues.
FinTech revenues increased by approximately $79.9 million , or 62%, to
approximately $208.7 million for the nine months ended September 30, 2021 , as
compared to the same period in the prior year. This was primarily due to
contributions that included: (i) an increase in both transaction and dollar
volumes in base, new and renewed business from our financial access services
revenues; (ii) higher software sales and support related service fees
attributable to our compliance, Central Credit, kiosk and loyalty solutions from
our software and other revenues; and (iii) an increase in unit sales of both our
kiosk and loyalty equipment with a mix of more higher priced loyalty equipment
sold from our hardware revenues.
Costs and Expenses
Total costs and expenses increased by approximately $43.7 million , or 15%, to
approximately $330.3 million for the nine months ended September 30, 2021 , as
compared to the same period in the prior year. This was primarily due to higher
Games and FinTech costs and expenses, described below.
Games cost of revenues increased by approximately $27.3 million , or 99%, to
approximately $54.8 million for the nine months ended September 30, 2021 , as
compared to the same period in the prior year. This was primarily due to the
additional variable costs associated with the higher unit sales from our gaming
equipment and systems revenues.
FinTech cost of revenue increased by approximately $8.4 million , or 50%, to
approximately $25.1 million for the nine months ended September 30, 2021 , as
compared to the same period in the prior year. This was primarily due to the
additional variable costs associated with the higher unit sales from our
hardware revenues, partially offset by reduced warranty expense from our check
warranty solutions from our financial access services.
Operating expenses increased by approximately $17.9 million , or 16%, to
approximately $133.3 million for the nine months ended September 30, 2021 , as
compared to the same period in the prior year. This was primarily due to higher
payroll and related expenses to support our Games and FinTech business. In
addition, the increase was associated with the prior year period as many of the
Company's employees were still on furlough, and those that remained were on
reduced pay levels during that time period. This increase in operating expenses
was partially offset by the recovery of a settlement from a dispute with an
insurance carrier for a payment associated with the Fair and Accurate Credit
Transactions Act legal matter of approximately $1.9 million , which was offset by
approximately $0.8 million of additional legal fees related to the settlement
and collection of this recovery for our FinTech segment.
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Research and development expenses increased by approximately $5.8 million , or
28%, to approximately $26.8 million for the nine months ended September 30,
2021 , as compared to the same period in the prior year. This was primarily due
to higher payroll and related expenses, consulting fees, certification charges
and testing costs from our Games and FinTech segments.
Depreciation expenses decreased by approximately $2.1 million , or 4%, to
approximately $46.6 million . This was primarily associated with certain of our
fixed assets that were fully depreciated in our Games segment.
Amortization expense decreased by approximately $13.6 million , or 24%, to
approximately $43.7 million for the nine months ended September 30, 2021 , as
compared to the same period in the prior year. This was primarily due to certain
intangible assets recorded in connection with the acquisition of the Games
business being fully amortized.
Primarily as a result of the factors described above, our operating income
increased by approximately $172.2 million , or 763%, as compared to the same
period in the prior year. The operating income margin was 31% for the nine
months ended September 30, 2021 compared to an operating loss margin of 9% for
the same period in the prior year.
Interest expense, net of interest income, decreased by approximately $5.7
million , or 10%, to approximately $50.5 million for the nine months ended
September 30, 2021 , as compared to the same period in the prior year. This was
primarily due to lower debt balances and more favorable variable interest rates
in effect for certain of our debt instruments and a reduction in the LIBOR floor
on our Prior Term Loan as a result of a repricing transaction in February 2021 ,
a refinancing of the 2017 Unsecured Notes in July 2021 and entering into the New
Term Loan in August 2021 .
Loss on extinguishment of debt increased by approximately $26.9 million , or
361%, to approximately $34.4 million for the nine months ended September 30,
2021 . This was primarily due to increased loss from the refinancing of our 2017
Unsecured Notes in July 2021 and our New Term Loan in August 2021 as compared to
the redemption and repurchase transactions related to the 2017 Unsecured Notes.
The income tax provision was $1.3 million for the nine months ended
September 30, 2021 , as compared to an income tax benefit of $3.4 million for the
same period in the prior year. The income tax provision reflected an effective
income tax rate of 2.0% for the nine months ended September 30, 2021 , which was
less than the statutory federal rate of 21.0%, primarily due to a decrease in
our valuation allowance due to book income during the period, and the benefit
from stock option exercises. The income tax benefit reflected an effective
income tax rate of 4.0% for the same period in the prior year, which was less
than the statutory federal rate of 21.0%, primarily due to an increase in our
valuation allowance due to the book loss incurred during the period, partially
offset by certain indefinite lived deferred tax assets that can be offset
against our indefinite lived deferred tax liabilities.
Primarily as a result of the factors described above, we had net income of
approximately $63.5 million for the nine months ended September 30, 2021 . We had
a net loss of approximately $82.8 million for the nine months ended
September 30, 2020 .
Critical Accounting Policies
The preparation of our financial statements in conformity with U.S. generally
accepted accounting principles ("GAAP") requires us to make estimates and
assumptions that affect our reported amounts of assets and liabilities, revenues
and expenses, and related disclosures of contingent assets and liabilities in
our Financial Statements. The SEC has defined critical accounting policies as
the ones that are most important to the portrayal of the financial condition and
results of operations, and which require management to make its most difficult
and subjective judgments, often as a result of the need to make estimates about
matters that are inherently uncertain.
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Recent Accounting Guidance
For a description of our recently adopted accounting guidance and recent
accounting guidance not yet adopted, see "Note 2 - Basis of Presentation and
Summary of Significant Accounting Policies - Recent Accounting Guidance"
included in Part I, Item 1: Financial Statements of this Quarterly Report on
Form 10-Q.
Liquidity and Capital Resources
Overview
The following table presents an unaudited reconciliation of cash and cash
equivalents per GAAP to net cash position and net cash available (in
thousands):
September 30, At December 31
2021 2020
Balance sheet data
Total assets $ 1,466,043 $ 1,477,179
Total borrowings $ 982,407 $ 1,129,253
Total stockholders' equity (deficit) $ 72,768 $ (7,898)
Cash available
Cash and cash equivalents $ 215,551 $ 251,706
Settlement receivables 50,596 60,652
Settlement liabilities (177,582) (173,211)
Net cash position(1) 88,565 139,147
Undrawn New Revolver/Prior Revolver 125,000 35,000
Net cash available(1) $ 213,565 $ 174,147
(1) Non-GAAP measure. In order to enhance investor understanding of our cash
balance, we are providing in this Quarterly Report on Form 10-Q Net Cash
Position and Net Cash Available, which are not measures of our financial
performance or position under GAAP. Accordingly, these measures should not be
considered in isolation or as a substitute for GAAP measures, and should be read
in conjunction with our balance sheets prepared in accordance with GAAP. We
define our (i) Net Cash Position as cash and cash equivalents plus settlement
receivables less settlement liabilities; and (ii) Net Cash Available as Net Cash
Position plus undrawn amounts available under our Revolving Credit Facility. Our
Net Cash Position and Net Cash Available change substantially based upon the
timing of our receipt of funds for settlement receivables and payments we make
to customers for our settlement liabilities. We present these non-GAAP measures
as we monitor these amounts in connection with forecasting of cash flows and
future cash requirements, both on a short-term and long-term basis.
Cash Resources
As of September 30, 2021 , our cash balance, cash flows, and line of credit are
expected to be sufficient to meet our recurring operating commitments and to
fund our planned capital expenditures on both a short- and long-term basis. Cash
and cash equivalents at September 30, 2021 included cash in non-U.S.
jurisdictions of approximately $18.7 million . Generally, these funds are
available for operating and investment purposes within the jurisdiction in which
they reside, and we may from time to time consider repatriating these foreign
funds to the United States , subject to potential withholding tax obligations,
based on operating requirements.
We expect that cash provided by operating activities will also be sufficient for
our operating and debt servicing needs during the foreseeable future on both a
short- and long-term basis. In addition, we have sufficient borrowings available
under the New Revolver to meet further funding requirements. We monitor the
financial strength of our lenders on an ongoing basis using publicly available
information. Based upon available information, we believe our lenders should be
able to honor their commitments under our credit agreement (defined in "Note
12 - Long-term Debt" ).
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Sources and Uses of Cash
The following table presents a summary of our cash flow activity (in thousands):
Nine Months Ended September 30, $ Change
2021 2020 2021 vs 2020
Cash flow activities
Net cash provided by (used in) operating $ 243,500 $ (1,768) $ 245,268
activities
Net cash used in investing activities (88,073) (70,308) (17,765)
Net cash (used in) provided by financing (190,653) 12,852 (203,505)
activities
Effect of exchange rates on cash and cash (237) (1,370) 1,133
equivalents
Cash, cash equivalents and restricted cash Net decrease for the period (35,463) (60,594) 25,131 Balance, beginning of the period 252,349 296,610 (44,261) Balance, end of the period$ 216,886 $
236,016
Cash flows provided by operating activities increased by approximately$245.3 million for the nine months endedSeptember 30, 2021 , as compared to the same period in the prior year. This was primarily attributable to net income earned and changes in working capital, most notably associated with settlement activities from our FinTech segment, partially offset by loss on extinguishment of debt incurred during the three months endedSeptember 30, 2021 . Cash flows used in investing activities increased by approximately$17.8 million for the nine months endedSeptember 30, 2021 , as compared to the same period in the prior year. This was primarily attributable to an increase in capital expenditures in our Games and FinTech segment. Cash flows used in financing activities increased by approximately$203.5 million for the nine months endedSeptember 30, 2021 , as compared to the same period in the prior year. This was primarily attributable to the refinancing of our 2017 Unsecured Notes inJuly 2021 and entering into our New Term Loan inAugust 2021 and incurring fees associated with these transactions. In addition, we made a final earnout payment during the current period with respect to the Atrient transaction. Long-Term Debt Our New Revolver remained fully undrawn as ofSeptember 30, 2021 . For additional information regarding our credit agreement and other debt as well as interest rate risk refer to Part I, Item 3: Quantitative and Qualitative Disclosures About Market Risk, "Note 12 - Long-Term Debt" in Part I, Item 1: Financial Statements. Contractual Obligations There were no material changes to our commitments under contractual obligations as compared to those disclosed in our Annual Report, other than an increase to certain purchase obligations of approximately$44.3 million from those disclosed in our Annual Report and obligations discussed in "Note 3 - Leases," "Note 4 - Business Combinations," and "Note 12 - Long-Term Debt" in Part I, Item 1: Financial Statements. We expect that cash provided by operating activities will be sufficient to meet such obligations during the foreseeable future. We are involved in various legal proceedings in the ordinary course of our business. While we believe resolution of the claims brought against us, both individually and in aggregate, will not have a material adverse impact on our financial condition or results of operations, litigation of this nature is inherently unpredictable. Our views on these legal proceedings, including those described in "Note 13 - Commitments and Contingencies" in Part I, Item 1: Financial Statements, may change in the future. We intend to vigorously defend against these actions, and ultimately believe we should prevail. 42 -------------------------------------------------------------------------------- Off-Balance Sheet Arrangements We have commercial arrangements with third-party vendors to provide cash for certain of our fund dispensing devices. For the use of this cash, we pay a usage fee on either the average daily balance of funds utilized multiplied by a contractually defined usage rate or the amounts supplied multiplied by a contractually defined usage rate. These fund usage fees, reflected as interest expense within the Statements of Operations, were approximately$1.2 million and$2.9 million for the three and nine months endedSeptember 30, 2021 , respectively, and approximately$0.7 million and$2.5 million for the three and nine months endedSeptember 30, 2020 , respectively. The cash usage fees were significantly higher in the current reporting period as compared to the same period in the prior year as a result of increased funds dispensing volumes at our customer locations as the operational impacts from the pandemic began to lessen. We are exposed to interest rate risk to the extent that the target federal funds rate increases. Under these agreements, the currency supplied by third-party vendors remains their sole property until the funds are dispensed. As these funds are not our assets, supplied cash is not reflected on our Balance Sheets. The outstanding balance of funds provided by the third-party vendors were approximately$401.5 million and$340.3 million as ofSeptember 30, 2021 andDecember 31, 2020 , respectively. Our primary commercial arrangement, the Contract Cash Solutions Agreement, as amended, withWells Fargo Bank, N.A. provides us with cash up to$300 million with the ability to increase the amount as defined within the agreement or otherwise permitted by the vault cash provider. The agreement currently expires onJune 30, 2023 and will automatically renew for additional one-year periods unless either party provides a ninety-day written notice of its intent not to renew. We are responsible for any losses of cash in the fund dispensing devices under this agreement, and we self-insure for this risk. There were no material losses related to this self-insurance for the three and nine months endedSeptember 30, 2021 and 2020. Item 3. Quantitative and Qualitative Disclosures About Market Risk. There have been no material changes in our reported market risks or risk management policies since the filing of our most recent Annual Report. In the normal course of business, we are exposed to foreign currency exchange risk. We operate and conduct business in foreign countries and, as a result, are exposed to movements in foreign currency exchange rates. Our exposure to foreign currency exchange risk related to our foreign operations is not material to our results of operations, cash flows, or financial condition. At present, we do not hedge this exposure; however, we continue to evaluate such foreign currency exchange risk. In the normal course of business, we have commercial arrangements with third-party vendors to provide cash for certain of our fund dispensing devices. Under the terms of these agreements, we pay a monthly fund usage fee that is generally based upon the target federal funds rate. We are, therefore, exposed to interest rate risk to the extent that the target federal funds rate increases. The outstanding balance of funds provided by the third-party vendors was approximately$401.5 million as ofSeptember 30, 2021 ; therefore, each 100 basis points increase in the target federal funds rate would have approximately a$4.02 million impact on income before tax over a 12-month period. The New Credit Facilities bear interest at rates that can vary over time. We have the option of paying interest on the outstanding amounts under the New Credit Facilities using a base rate or LIBOR. We have historically elected to pay interest based on LIBOR, and we expect to continue to do so for various maturities. The weighted average interest rate on the New Term Loan, which includes a 50 basis point floor, was 3.00% for the three and nine months endedSeptember 30, 2021 . Based upon the outstanding balance on the New Term Loan of$600.0 million as ofSeptember 30, 2021 , each 100 basis points increase in the applicable LIBOR would have a combined impact of approximately$6.00 million on interest expense over a 12-month period. The interest rate is fixed at 5.00% for the 2021 Unsecured Notes due 2029; therefore, an increase in LIBOR does not impact the related interest expense. At present, we do not hedge the risk related to the changes in the interest rate; however, we continue to evaluate such interest rate exposure. We continue to evaluate the potential impact of the eventual replacement of the LIBOR benchmark, which is set to phase out by the end of 2021. We expect to utilize the replacement rate commonly referred to as the secured overnight financing rate ("SOFR"), which is the anticipated benchmark in place of LIBOR, and we do not expect the transition to SOFR to have a material impact on our business, financial condition and results of operations. 43
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