Everi (EVRI) - 2020 Q3 - Quarterly Report

PART I: FINANCIAL INFORMATION Item 1: Financial Statements This section presents Everi Holdings Inc.'s unaudited condensed consolidated financial statements, including operations, balance sheets, cash flows, and equity, with detailed notes on business and accounting policies Unaudited Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income Consolidated Statements of Operations (Three Months Ended September 30) | Metric (in thousands) | 2020 | 2019 | Change ($) | Change (%) | | :-------------------- | :---------- | :---------- | :---------- | :---------- | | Total Revenues | $112,098 | $134,569 | $(22,471) | (17)% | | Total Costs & Expenses| $92,360 | $107,276 | $(14,916) | (14)% | | Operating Income | $19,738 | $27,293 | $(7,555) | (28)% | | Net (Loss) Income | $(878) | $9,315 | $(10,193) | (109)% | | Basic EPS | $(0.01) | $0.13 | $(0.14) | (108)% | | Diluted EPS | $(0.01) | $0.12 | $(0.13) | (108)% | Consolidated Statements of Operations (Nine Months Ended September 30) | Metric (in thousands) | 2020 | 2019 | Change ($) | Change (%) | | :-------------------- | :----------- | :----------- | :----------- | :----------- | | Total Revenues | $264,122 | $388,050 | $(123,928) | (32)% | | Total Costs & Expenses| $286,686 | $310,006 | $(23,320) | (8)% | | Operating (Loss) Income| $(22,564) | $78,044 | $(100,608) | (129)% | | Net (Loss) Income | $(82,813) | $20,661 | $(103,474) | (501)% | | Basic EPS | $(0.97) | $0.29 | $(1.26) | (434)% | | Diluted EPS | $(0.97) | $0.27 | $(1.24) | (459)% | Unaudited Condensed Consolidated Balance Sheets Consolidated Balance Sheets (as of September 30, 2020 vs. December 31, 2019) | Metric (in thousands) | Sep 30, 2020 | Dec 31, 2019 | | :-------------------- | :----------- | :----------- | | Total Current Assets | $396,577 | $502,532 | | Total Non-Current Assets| $1,061,627 | $1,126,691 | | Total Assets | $1,458,204 | $1,629,223 | | Total Current Liabilities| $306,696 | $407,190 | | Total Non-Current Liabilities| $1,166,918 | $1,168,045 | | Total Liabilities | $1,473,614 | $1,575,235 | | Total Stockholders' (Deficit) Equity| $(15,410) | $53,988 | Unaudited Condensed Consolidated Statements of Cash Flows Consolidated Statements of Cash Flows (Nine Months Ended September 30) | Metric (in thousands) | 2020 | 2019 | Change ($) | | :-------------------- | :---------- | :---------- | :---------- | | Net cash (used in) provided by operating activities | $(1,768) | $120,364 | $(122,132) | | Net cash used in investing activities | $(70,308) | $(118,688) | $48,380 | | Net cash provided by (used in) financing activities | $12,852 | $(15,433) | $28,285 | | Net decrease for the period | $(60,594) | $(15,071) | $(45,523) | | Balance, end of the period | $236,016 | $284,110 | $(48,094) | - Cash paid for interest decreased from $52,077 thousand in 2019 to $45,331 thousand in 2020 for the nine months ended September 30[17] Unaudited Condensed Consolidated Statements of Stockholders' (Deficit) Equity Stockholders' (Deficit) Equity (Nine Months Ended September 30, 2020) | Metric (in thousands) | January 1, 2020 | September 30, 2020 | | :-------------------- | :-------------- | :----------------- | | Common Stock | $109 | $111 | | Additional Paid-in Capital | $445,162 | $460,967 | | Accumulated Deficit | $(212,940) | $(295,753) | | Accumulated Other Comprehensive Loss | $(819) | $(2,114) | | Treasury Stock | $(177,524) | $(178,621) | | Total Stockholders' (Deficit) Equity | $53,988 | $(15,410) | - The company reported a net loss of $878 thousand for the three months ended September 30, 2020, contributing to an accumulated deficit of $(295,753) thousand by September 30, 2020[21] Notes to Unaudited Condensed Consolidated Financial Statements 1. BUSINESS Everi Holdings Inc. supplies entertainment and technology solutions to the casino and digital gaming industry through Games and FinTech segments, significantly impacted by COVID-19, leading to cost-saving measures and debt adjustments - Everi Holdings Inc. operates in two segments: Games (gaming machines, systems, digital online gaming) and FinTech (cash access, loyalty tools, compliance software)[26][27][28] - The COVID-19 pandemic caused significant disruptions, including casino closures, furloughs, and salary reductions. By Q3 2020, most employees returned, compensation was reinstated, and the revolving credit facility was repaid[29][31][38] - The company utilized CARES Act provisions, including the Employee Retention Payroll Tax Credit, Employer Social Security Tax Payment Deferral, and Alternative Minimum Tax (AMT) Credit Refund[39][201] 2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This section details Everi's financial statement presentation, revenue recognition, contract balances, goodwill impairment, fair value measurements, and the adoption of new accounting guidance - The company recognizes revenue upon transferring control of goods or services to customers, net of sales taxes, and evaluates contracts for multiple performance obligations to determine contract assets and liabilities[43][45] Contract Balances (in thousands) | Metric | Jan 1, 2020 | Sep 30, 2020 | | :------------------ | :---------- | :----------- | | Contract Assets | $15,408 | $16,490 | | Contract Liabilities| $28,864 | $34,878 | - Goodwill is tested for impairment annually on October 1, or more frequently if triggering events occur, using income and market valuation approaches[55][107] Fair Value of Borrowings (in thousands) | Debt Type | Sep 30, 2020 Fair Value | Sep 30, 2020 Outstanding Balance | Dec 31, 2019 Fair Value | Dec 31, 2019 Outstanding Balance | | :-------------------- | :---------------------- | :------------------------------- | :---------------------- | :------------------------------- | | Term loan | $715,127 | $735,500 | $753,494 | $749,000 | | Incremental term loan | $127,805 | $124,688 | N/A | N/A | | Senior unsecured notes| $279,673 | $285,381 | $401,738 | $375,000 | - The company adopted ASC 326 (Credit Losses) and ASU 2018-15 (Cloud Computing Arrangement Costs) on January 1, 2020, with no material impact on financial statements[62] 3. LEASES Everi recognizes operating lease ROU assets and liabilities, leases real estate and vehicles, and generates lease revenues from gaming operations as a lessor Operating Lease ROU Assets and Liabilities (in thousands) | Metric | Sep 30, 2020 | Dec 31, 2019 | | :-------------------------- | :----------- | :----------- | | Operating lease ROU assets | $16,479 | $12,257 | | Current operating lease liabilities | $5,402 | $5,824 | | Non-current operating lease liabilities | $15,491 | $9,628 | Lease Terms and Discount Rates | Metric | Sep 30, 2020 | Dec 31, 2019 | | :----------------------------------- | :----------- | :----------- | | Weighted Average Remaining Lease Term (Operating leases) | 4.21 years | 2.96 years | | Weighted Average Discount Rate (Operating leases) | 5.25% | 5.25% | - The cost of property and equipment leased to third-parties was approximately $203.2 million as of September 30, 2020, with accumulated depreciation of $124.7 million[74] 4. BUSINESS COMBINATIONS Everi had no material acquisitions in 2020, but completed Atrient and MGT acquisitions in 2019, expanding player loyalty and FinTech offerings - No material acquisitions occurred during the three and nine months ended September 30, 2020[78] - The acquisition of Atrient, Inc. in March 2019 involved an initial payment of $20.0 million, an additional $10.0 million paid during the nine months ended September 30, 2020, and another $10.0 million due two years post-closing. Contingent consideration liabilities were approximately $9.8 million as of September 30, 2020[80][81] - The acquisition of Micro Gaming Technologies, Inc. (MGT) in December 2019 for approximately $25.0 million expanded FinTech's player loyalty offerings. MGT contributed revenues of approximately $3.1 million and $6.9 million for the three and nine months ended September 30, 2020, respectively[82][84] 5. FUNDING AGREEMENTS Everi uses third-party funding for ATM cash, with $301.6 million off-balance sheet as of September 30, 2020, and reduced cash usage fees due to COVID-19 - Everi utilizes third-party funding for ATM cash, with outstanding balances of approximately $301.6 million as of September 30, 2020, which are off-balance sheet[90][264] - Cash usage fees, reflected as interest expense, were approximately $0.7 million and $2.5 million for the three and nine months ended September 30, 2020, respectively, a decrease from the prior year due to COVID-19[89][263] - The primary agreement with Wells Fargo, N.A. provides up to $300 million in cash, expiring June 30, 2022, with automatic one-year renewals[91][265] 6. TRADE AND OTHER RECEIVABLES Trade and other receivables, totaling $90.2 million as of September 30, 2020, include short-term credit and long-term loans, with ASC 326 adoption having no material impact Trade and Other Receivables, Net (in thousands) | Metric | 2020 | 2019 | | :----------------------------------- | :---------- | :---------- | | Games trade and loans receivable | $42,774 | $51,651 | | FinTech trade and loans receivable | $20,989 | $23,723 | | Contract assets | $16,490 | $15,408 | | Insurance settlement receivable | $7,650 | $7,650 | | Other receivables | $787 | $3,977 | | Net investment in sales-type leases | $1,525 | $2,162 | | Total trade and other receivables, net | $90,215 | $104,571 | | Total trade and other receivables, current portion | $75,997 | $87,910 | Allowance for Credit Losses (in thousands) | Metric | 2020 | 2019 | | :----------------------------------- | :---------- | :---------- | | Beginning allowance for credit losses| $(5,786) | $(6,425) | | Provision | $(6,926) | $(10,010) |\ | Charge-offs and recoveries | $8,958 | $10,723 | | Ending allowance for credit losses | $(3,754) | $(5,712) | - The adoption of ASC 326 (Credit Losses) on January 1, 2020, did not materially impact financial statements due to the company's ability to withhold funds from FinTech customers and collateralized long-term Games receivables[96] 7. INVENTORY Everi's inventory, primarily component parts, work-in-progress, and finished goods, is valued at the lower of cost or net realizable value using FIFO, increasing to $33.8 million as of September 30, 2020 Inventory Composition (in thousands) | Metric | Sep 30, 2020 | Dec 31, 2019 | | :------------------ | :----------- | :----------- | | Component parts, net| $24,175 | $24,864 | | Work-in-progress | $1,481 | $94 | | Finished goods | $8,123 | $1,616 | | Total inventory | $33,779 | $26,574 | 8. PREPAID EXPENSES AND OTHER ASSETS Current prepaid expenses and other current assets decreased to $18.3 million as of September 30, 2020, primarily due to reduced restricted cash and deposits, while non-current other assets increased to $22.7 million Prepaid Expenses and Other Current Assets (in thousands) | Metric | Sep 30, 2020 | Dec 31, 2019 | | :-------------------------- | :----------- | :----------- | | Prepaid expenses | $11,652 | $11,272 | | Restricted cash | $508 | $6,639 | | Deposits | $4,221 | $8,501 | | Other | $1,887 | $1,484 | | Total | $18,268 | $27,896 | Other Non-Current Assets (in thousands) | Metric | Sep 30, 2020 | Dec 31, 2019 | | :----------------------------------- | :----------- | :----------- | | Operating lease ROU assets | $16,479 | $12,257 | | Prepaid expenses and deposits | $5,279 | $7,378 | | Debt issuance costs of revolving credit facility | $315 | $460 | | Other | $623 | $244 | | Total | $22,696 | $20,339 | 9. PROPERTY AND EQUIPMENT Net property and equipment decreased to $113.8 million as of September 30, 2020, with depreciation expense increasing by 6% to $48.7 million for the nine months ended September 30, 2020 Property and Equipment (in thousands) | Category | Useful Life (Years) | Sep 30, 2020 Net Book Value | Dec 31, 2019 Net Book Value | | :--------------------------- | :------------------ | :-------------------------- | :-------------------------- | | Rental pool - deployed | 2-4 | $78,550 | $89,683 | | Rental pool - undeployed | 2-4 | $7,463 | $8,931 | | FinTech equipment | 3-5 | $10,165 | $7,833 | | Leasehold and building improvements | Lease Term | $2,751 | $3,665 | | Machinery, office, and other equipment | 2-5 | $14,883 | $18,757 | | Total | | $113,812 | $128,869 | - Depreciation expense for property and equipment increased by approximately $2.6 million (6%) to $48.7 million for the nine months ended September 30, 2020, primarily due to an increase in the installed base of leased gaming machines[105][234] 10. GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill remained stable at $681.9 million with no impairment, while other intangible assets decreased to $229.0 million, and amortization expense increased by 12% to $57.3 million - Goodwill balance was approximately $681.9 million as of September 30, 2020, with no impairment identified despite an interim test in Q2 2020 due to COVID-19[106][111][112] Other Intangible Assets (in thousands) | Category | Useful Life (Years) | Sep 30, 2020 Net Value | Dec 31, 2019 Net Book Value | | :------------------------------------- | :------------------ | :--------------------- | :-------------------------- | | Contract rights under placement fee agreements | 3-7 | $34,720 | $37,628 | | Customer contracts | 3-14 | $18,801 | $22,498 | | Customer relationships | 3-7 | $109,792 | $125,516 | | Developed technology and software | 1-6 | $63,381 | $90,069 | | Patents, trademarks, and other | 2-18 | $2,264 | $3,476 | | Total | | $228,958 | $279,187 | - Amortization expense for other intangible assets increased by approximately $6.2 million (12%) to $57.3 million for the nine months ended September 30, 2020, driven by new game themes and acquired player loyalty intangible assets[115][235] - A $5.9 million write-down of intangible assets was recorded during the nine months ended September 30, 2020, primarily for internally developed and third-party software projects not expected to be pursued[118] 11. ACCOUNTS PAYABLE AND ACCRUED EXPENSES Total accounts payable and accrued expenses decreased to $165.2 million as of September 30, 2020, from $173.1 million at December 31, 2019, with notable changes in accrued interest and cash access processing expenses Accounts Payable and Accrued Expenses (in thousands) | Metric | Sep 30, 2020 | Dec 31, 2019 | | :----------------------------------- | :----------- | :----------- | | Trade accounts payable | $58,857 | $78,627 | | Contract liabilities | $34,846 | $28,510 | | Litigation accrual | $12,903 | $14,000 | | Contingent consideration and acquisition-related liabilities | $24,353 | $14,902 | | Accrued interest | $6,419 | $1,347 | | Operating lease liabilities | $5,402 | $5,824 | | Payroll and related expenses | $14,526 | $18,058 | | Cash access processing and related expenses | $2,065 | $5,511 | | Other | $3,619 | $3,893 | | Accrued taxes | $2,227 | $1,846 | | Placement fees | $0 | $585 | | Total | $165,217 | $173,103 | 12. LONG-TERM DEBT Total long-term debt, net of issuance costs and discount, was $1,128.4 million as of September 30, 2020, including a $125.0 million Incremental Term Loan and a $7.5 million loss on debt extinguishment Outstanding Indebtedness (in thousands) | Debt Type | Maturity Date | Interest Rate | Sep 30, 2020 | Dec 31, 2019 | | :---------------------------- | :------------ | :------------ | :----------- | :----------- | | $820 million Term Loan Facility | 2024 | LIBOR+2.75% | $735,500 | $749,000 | | $125 million Incremental Term Loan Facility | 2024 | LIBOR+10.50% | $124,688 | $0 | | $35 million Revolving Credit Facility | 2022 | LIBOR+4.50% | $0 | $0 | | Senior Secured Credit Facilities | | | $860,188 | $749,000 | | $375 million 2017 Unsecured Notes | 2025 | 7.50% | $285,381 | $375,000 | | Total debt | | | $1,145,569 | $1,124,000 | | Total long-term debt, net of current portion | | | $1,127,191 | $1,108,078 | - The company fully repaid the $35.0 million Revolving Credit Facility on September 14, 2020, after drawing it down earlier in the year for liquidity[123] - A $125.0 million Incremental Term Loan was incurred on April 21, 2020, with an interest rate of Eurodollar rate plus 10.50% or base rate plus 9.50%[125][126] - A loss on extinguishment of debt of approximately $7.5 million was recorded for the nine months ended September 30, 2020, due to partial redemption and repurchase of the 2017 Unsecured Notes[132][238] - The company was in compliance with all debt covenants as of September 30, 2020[133] 13. COMMITMENTS AND CONTINGENCIES Everi is involved in FACTA-related class action matters and an antitrust civil action, accruing $14.0 million for FACTA contingencies with $7.7 million expected insurance recovery - The company accrued approximately $14.0 million for FACTA-related legal contingencies, with an expected recovery of $7.7 million from insurance providers[136] - Preliminary court approval was granted in Q3 2020 for the settlement agreement of FACTA-related class action matters, with a final approval hearing scheduled for November 30, 2020[138] - Everi is defending against a civil action filed by NRT Technology Corp. alleging monopolization, fraudulent patent procurement, and sham litigation, with the outcome currently unpredictable[142] 14. STOCKHOLDERS' (DEFICIT) EQUITY A $10.0 million share repurchase program was authorized in February 2020 but suspended due to COVID-19, with no repurchases made during the three and nine months ended September 30, 2020 - A new $10.0 million share repurchase program was authorized in February 2020 but suspended due to COVID-19, with no repurchases made during the three and nine months ended September 30, 2020[144][288] 15. WEIGHTED AVERAGE COMMON SHARES Weighted average common shares outstanding for basic and diluted EPS calculations are presented, with potential dilution from equity awards being anti-dilutive in 2020 due to a net loss Weighted Average Common Shares Outstanding (in thousands) | Metric | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :----------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Basic | 85,556 | 72,251 | 85,102 | 71,361 | | Diluted | 85,556 | 79,125 | 85,102 | 77,854 | - For the three and nine months ended September 30, 2020, potential dilution from equity awards was not applicable or anti-dilutive due to the company being in a net loss position[145] 16. SHARE-BASED COMPENSATION Everi grants time-based and market-based stock options and RSUs, with 11.1 million options and 4.6 million RSUs outstanding as of September 30, 2020 Equity Incentive Award Activity (in thousands) | Metric | Stock Options Granted | Restricted Stock Units Granted | | :-------------------------- | :-------------------- | :----------------------------- | | Outstanding, Dec 31, 2019 | 11,969 | 3,451 | | Granted | — | 2,183 | | Exercised options or vested shares | (734) | (852) | | Canceled or forfeited | (146) | (192) | | Outstanding, Sep 30, 2020 | 11,089 | 4,590 | - Unrecognized compensation expense for stock options was approximately $0.6 million as of September 30, 2020, to be recognized over a weighted average period of 0.5 years[151] - Unrecognized compensation expense for RSU awards was approximately $18.1 million as of September 30, 2020, to be recognized over a weighted average period of 2.0 years[157] 17. INCOME TAXES Everi's Q3 2020 income tax provision reflected a 205.4% effective tax rate due to a valuation allowance increase, while the nine-month period showed a 4.0% rate due to book loss - The income tax provision for the three months ended September 30, 2020, was $1.7 million, reflecting an effective tax rate of 205.4%, primarily due to an increase in valuation allowance[158][222] - For the nine months ended September 30, 2020, the income tax benefit was $3.4 million, with an effective tax rate of 4.0%, primarily due to an increase in valuation allowance from a book loss[158][239] - As of September 30, 2020, the company recorded approximately $1.4 million of unrecognized tax benefits[159] 18. SEGMENT INFORMATION Everi reports financial performance across Games and FinTech segments, both experiencing significant revenue declines due to COVID-19, with Games revenues down 17% and 34% for the three and nine months, respectively - Everi's operating segments are Games (gaming equipment, systems, digital online solutions) and FinTech (cash access, loyalty tools, compliance software)[163][165] Segment Revenues (Three Months Ended September 30, in thousands) | Segment | 2020 | 2019 | Change ($) | Change (%) | | :---------- | :---------- | :---------- | :---------- | :---------- | | Games | $57,241 | $69,273 | $(12,032) | (17)% | | FinTech | $54,857 | $65,296 | $(10,439) | (16)% | | Total | $112,098 | $134,569 | $(22,471) | (17)% | Segment Revenues (Nine Months Ended September 30, in thousands) | Segment | 2020 | 2019 | Change ($) | Change (%) | | :---------- | :----------- | :----------- | :----------- | :----------- | | Games | $135,384 | $206,079 | $(70,695) | (34)% | | FinTech | $128,738 | $181,971 | $(53,233) | (29)% | | Total | $264,122 | $388,050 | $(123,928) | (32)% | Segment Operating Income (Loss) (in thousands) | Segment | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :---------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Games | $(430) | $3,073 | $(47,671) | $8,729 | | FinTech | $20,167 | $24,220 | $25,107 | $69,315 | 19. SUBSEQUENT EVENTS As of the filing date, Everi Holdings Inc. had not identified any subsequent events for the period - No subsequent events were identified as of the filing date[173] Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes Everi's financial condition and operations, highlighting the significant adverse impact of COVID-19 on revenues, profitability, and liquidity, and details responsive measures and ongoing uncertainty Cautionary Information Regarding Forward-Looking Statements - The report contains forward-looking statements about future business and financial performance, subject to risks and uncertainties, including those related to the COVID-19 pandemic, mergers, acquisitions, debt, and market conditions[176] - Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of their date and are not subject to updates[178] Overview - Everi is a leading supplier of entertainment and technology solutions for the casino and digital gaming industry, operating through Games and FinTech segments[180][181] - The Games segment provides gaming machines, systems, and digital online gaming activities, while the FinTech segment offers cash access services, player loyalty tools, and compliance solutions[182][183] Impact of COVID-19 Pandemic - The COVID-19 pandemic severely impacted the global economy and gaming industry, leading to casino closures, reduced demand, employee furloughs, and salary reductions[184] - By Q3 2020, most furloughed employees returned, compensation was reinstated, and the revolving credit facility was repaid, but customer volumes remained below pre-COVID levels[185][192] - The company implemented cost reduction measures, including a permanent reduction in employee base and asset write-downs of approximately $11.0 million[188][192] Liquidity Net Cash Position (in thousands) | Metric | Sep 30, 2020 | Dec 31, 2019 | | :-------------------------- | :----------- | :----------- | | Cash and cash equivalents | $235,407 | $289,870 | | Settlement receivables | $33,126 | $70,282 | | Settlement liabilities | $(140,229) | $(234,087) | | Net cash position | $128,304 | $126,065 | | Undrawn revolving credit facility | $35,000 | $35,000 | | Net cash available | $163,304 | $161,065 | - Cash and cash equivalents decreased to $235.4 million at September 30, 2020, from $289.9 million at December 31, 2019[252] - The company expects to meet operating commitments and debt servicing needs, and fund capital expenditures, but continues to monitor liquidity and evaluate capital resource alternatives due to ongoing uncertainty[254] Government Relief - Everi utilized provisions of the CARES Act, including the Employee Retention Payroll Tax Credit, Employer Social Security Tax Payment Deferral, and Alternative Minimum Tax (AMT) Credit Refund[201] Additional Items Impacting Comparability of Results of Operations - Comparability of results was impacted by the acquisitions of Atrient and MGT in 2019, and a $7.5 million loss on extinguishment of debt in Q1 2020 from partial redemption and repurchase of 2017 Unsecured Notes[202] Trends and Developments Impacting our Business - The company refers to its Annual Report for a comprehensive discussion of trends and developments impacting its business[205] Operating Segments - Everi reports financial performance based on two operating segments: Games and FinTech[206] Results of Operations Three Months Ended September 30, 2020 compared to three months ended September 30, 2019 Revenue Changes (Three Months Ended September 30, in thousands) | Revenue Category | 2020 | 2019 | Change ($) | Change (%) | | :--------------------------- | :---------- | :---------- | :---------- | :---------- | | Games total revenues | $57,241 | $69,273 | $(12,032) | (17)% | | FinTech total revenues | $54,857 | $65,296 | $(10,439) | (16)% | | Total revenues | $112,098 | $134,569 | $(22,471) | (17)% | - Games revenue decline was driven by decreased gaming equipment sales and lower average daily win per unit. FinTech revenue decline was due to reduced cash access dollar and transaction volumes, and lower full-service kiosk sales, partially offset by increased software sales and support fees[213] Cost and Expense Changes (Three Months Ended September 30, in thousands) | Expense Category | 2020 | 2019 | Change ($) | Change (%) | | :--------------------------- | :---------- | :---------- | :---------- | :---------- | | Games total cost of revenues | $9,975 | $17,185 | $(7,210) | (42)% | | FinTech total cost of revenues | $5,568 | $11,093 | $(5,525) | (50)% | | Operating expenses | $34,927 | $37,631 | $(2,704) | (7)% | | Research and development | $7,034 | $8,196 | $(1,162) | (14)% | | Depreciation | $16,163 | $16,015 | $148 | 1% | | Amortization | $18,693 | $17,156 | $1,537 | 9% | | Total costs and expenses | $92,360 | $107,276 | $(14,916) | (14)% | - Operating income decreased by 28% to $19.7 million, with the operating income margin falling from 20% to 18%. Net loss was $0.9 million compared to net income of $9.3 million in the prior year[220][223] Nine months ended September 30, 2020 compared to nine months ended September 30, 2019 Revenue Changes (Nine Months Ended September 30, in thousands) | Revenue Category | 2020 | 2019 | Change ($) | Change (%) | | :--------------------------- | :----------- | :----------- | :----------- | :----------- | | Games total revenues | $135,384 | $206,079 | $(70,695) | (34)% | | FinTech total revenues | $128,738 | $181,971 | $(53,233) | (29)% | | Total revenues | $264,122 | $388,050 | $(123,928) | (32)% | - Games revenue decline was due to decreased gaming machine sales and lower average daily win per unit. FinTech revenue decline was primarily from reduced cash access dollar and transaction volumes and lower full-service kiosk sales[229] Cost and Expense Changes (Nine Months Ended September 30, in thousands) | Expense Category | 2020 | 2019 | Change ($) | Change (%) | | :--------------------------- | :----------- | :----------- | :----------- | :----------- | | Games total cost of revenues | $27,552 | $51,343 | $(23,791) | (46)% | | FinTech total cost of revenues | $16,736 | $27,613 | $(10,877) | (39)% | | Operating expenses | $115,428 | $111,446 | $3,982 | 4% | | Research and development | $20,958 | $22,399 | $(1,441) | (6)% | | Depreciation | $48,700 | $46,062 | $2,638 | 6% | | Amortization | $57,312 | $51,143 | $6,169 | 12% | | Total costs and expenses | $286,686 | $310,006 | $(23,320) | (8)% | - Operating income decreased by 129% to an operating loss of $22.6 million, with the operating loss margin at 9% compared to an operating income margin of 20% in the prior year. Net loss was $82.8 million compared to net income of $20.7 million in the prior year[236][240] Critical Accounting Policies - The company performed an interim goodwill impairment test in Q2 2020 due to COVID-19, but no impairment adjustments were necessary as the fair value of each reporting unit exceeded its carrying amount[243][244] - The evaluation of goodwill impairment requires significant judgment and estimates about future operating results, which are inherently uncertain, especially given the COVID-19 pandemic[247] Recent Accounting Guidance - For details on recently adopted and not yet adopted accounting guidance, refer to Note 2 of the financial statements[249] Liquidity and Capital Resources Cash Flow Activities (Nine Months Ended September 30, in thousands) | Cash Flow Activity | 2020 | 2019 | Change ($) | | :------------------------------------------------ | :---------- | :---------- | :---------- | | Net cash (used in) provided by operating activities | $(1,768) | $120,364 | $(122,132) | | Net cash used in investing activities | $(70,308) | $(118,688) | $48,380 | | Net cash provided by (used in) financing activities | $12,852 | $(15,433) | $28,285 | | Net decrease for the period | $(60,594) | $(15,071) | $(45,523) | - Operating cash flows decreased by $122.1 million, primarily due to COVID-19 impacts and changes in working capital[256] - Investing cash flows decreased by $48.4 million, mainly due to reduced capital expenditures and prior year acquisitions[257] - Financing cash flows increased by $28.3 million, driven by proceeds from the Incremental Term Loan, partially offset by debt repayments and issuance costs[258] Off-Balance Sheet Arrangements - The company has commercial arrangements with third-party vendors to provide cash for its ATMs, with approximately $301.6 million in outstanding ATM cash utilized as of September 30, 2020, which is not reflected on the balance sheets[264] - Cash usage fees, recorded as interest expense, were significantly reduced in the current period due to COVID-19[263] Item 3: Quantitative and Qualitative Disclosures About Market Risk Market Risk Disclosures Everi is exposed to foreign currency and interest rate risks, with a 100 basis point increase in LIBOR impacting interest expense by $7.4 million for the Term Loan and $1.25 million for the Incremental Term Loan - Foreign currency exchange risk is not material to operations, cash flows, or financial condition and is not currently hedged[268] - Interest rate risk exists for ATM cash funding agreements; a 100 basis point increase in the target federal funds rate would impact income before tax by approximately $3.0 million over 12 months[269] - For the Term Loan ($735.5 million outstanding), a 100 basis point increase in LIBOR would impact interest expense by approximately $7.4 million over 12 months[271] - For the Incremental Term Loan ($124.7 million outstanding), a 100 basis point increase in LIBOR would impact interest expense by approximately $1.25 million over 12 months[272] - The company expects the transition from LIBOR to SOFR by the end of 2021 to not have a material impact on its business[275] Item 4: Controls and Procedures Evaluation of Disclosure Controls and Procedures As of September 30, 2020, management concluded Everi's disclosure controls and procedures were effective, with no material changes in internal control over financial reporting - As of September 30, 2020, the company's disclosure controls and procedures were deemed effective[276] - No material changes in internal control over financial reporting occurred during the quarter ended September 30, 2020[277] PART II: OTHER INFORMATION Item 1. Legal Proceedings This section refers to Note 13 of the financial statements for a discussion of Everi's legal proceedings, which include FACTA-related class actions and an antitrust lawsuit - Details on legal proceedings are provided in Note 13 — Commitments and Contingencies[279] Item 1A. Risk Factors Everi supplements existing risk factors with a focus on the material adverse impact of the COVID-19 pandemic on operations, financial performance, and liquidity, exacerbating debt compliance and revenue risks - The global COVID-19 pandemic has had and may continue to have a material adverse impact on Everi's operations, financial performance, and liquidity, as well as on its customers and suppliers in the gaming industry[281][282] - Uncertainty regarding the pandemic's duration and impact could lead to non-cash impairment charges in future periods[281][282] - The pandemic exacerbates existing risks, including the ability to comply with debt terms, generate revenues, maintain liquidity, service customers, and manage market competitiveness[284] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section reports on 64.4 thousand shares of common stock withheld from restricted stock awards to satisfy tax obligations, with no repurchases under the suspended $10.0 million program Issuer Purchases and Withholding of Equity Securities (in thousands) | Period | Shares Purchased | Average Price per Share | | :----------------- | :--------------- | :---------------------- | | 7/1/20 - 7/31/20 | 0.8 | $5.59 | | 8/1/20 - 8/31/20 | 4.0 | $6.78 | | 9/1/20 - 9/30/20 | 59.6 | $7.99 | | Total | 64.4 | $7.88 | - Shares purchased represent common stock withheld from restricted stock awards to satisfy minimum tax withholding obligations[287] - The $10.0 million share repurchase program approved in February 2020 was suspended, and no repurchases occurred under it during the nine months ended September 30, 2020[288] Item 3. Defaults Upon Senior Securities No defaults upon senior securities were reported - No defaults upon senior securities were reported[290] Item 4. Mine Safety Disclosures This item is not applicable to the company - Mine Safety Disclosures are not applicable[292] Item 5. Other Information No other information was reported under this item - No other information was reported[294] Item 6. Exhibits This section lists the exhibits filed with the Quarterly Report on Form 10-Q, including certifications and XBRL instance documents - Exhibits include certifications (31.1, 31.2, 32.1) and XBRL documents (101.INS, 101.SCH, 101.CAL, 101.DEF, 101.LAB, 101.PRE, 104)[296] Signatures The report was signed by Todd A. Valli, Senior Vice President, Corporate Finance and Chief Accounting Officer, on November 2, 2020 - The report was signed by Todd A. Valli, Senior Vice President, Corporate Finance and Chief Accounting Officer, on November 2, 2020[298][299]