Hello, everyone. Thank you for standing by and welcome to the Everi Holdings Inc. First Quarter 2020 Earnings Conference Call. During today's presentation, all parties would be in a listen-only mode. Following the prepared remarks, the call will open for a question-and-answer session. This discussion is being recorded today.

And now, I would like to turn the conference over to Bill Pfund, Vice President Investor Relations. Please go ahead sir..

Thank you, James, and welcome, everyone. Let me begin by reminding everyone of the Safe Harbor disclaimer that covers today's call and webcast. Our call will contain forward-looking statements and assumptions, which involve risks and uncertainties that could cause actual results to differ materially from those discussed during our call.

These risks and uncertainties include, but are not limited to, those contained in our earnings release today and other SEC filings, which are posted in the Investors section of our corporate website at everi.com. We do not intend and assume no obligation to update any forward-looking statements.

You are cautioned not to place undue reliance on forward-looking statements, which are made only as of today June 2, 2020. In addition, we will refer to certain non-GAAP financial measures, such as adjusted EBITDA, free cash flow, total net debt and total net debt leverage ratio.

A description of each non-GAAP measure and a reconciliation to the most directly comparable GAAP measure can be found in our earnings release and related 8-K, as well as within the Investors section on our website. This call is being webcast and recorded.

A link to the webcast and replay of today's call can be found in the Investors section of our website.

Joining me on the call today are Mike Rumbolz, our Chief Executive Officer; Randy Taylor, President and Chief Operating Officer; Mark Labay, Executive Vice President and Chief Financial Officer; Dean Ehrlich, our Games Business leader; Darren Simmons, our FinTech business Leader; and Harper Ko, General Counsel.

We are on this call from separate locations. So if there is a technical glitch, I apologize in advance. Now, it's my pleasure to turn the call over to Randy Taylor, who will also act as our moderator for today's call..

Thank you, Bill. Good afternoon, everyone, and thank you for joining. Before discussing our first quarter results, we would like to extend our sympathies to those individuals in the gaming industry, as well as those in communities around the globe who have been or continue to be impacted by the COVID-19 pandemic.

In just three months, since our last earnings call on March 2, the virus has tragically turned the world upside down. However, the first green shoots of revival are being seen in the gaming industry, as well as in communities across the country.

For today's call, we recognize you are probably less focused on our Q1 results, so we are going to change our normal call structure a little. Mark will not do a normal quarterly results comparison. Instead, I will cover some of the more relevant highlights in my prepared remarks.

Our first quarter results reflect the impact of our customers shutting down across the country in mid-March. To better understand our trends in operating performance and the overall health of our business, we believe it is relevant to highlight certain portions of the company's operating performance during the first two months of the quarter.

Overall, we had very strong performance in the first part of the quarter, like a Ferrari with the throttle wide open on an open stretch of road. In the first two months of the first quarter, consolidated revenue was up more than 20% year-over-year.

In gaming operations, a year-over-year revenue increase of over 30% in the first two months helped drive an increase for the full quarter period. These results reflect the continued growth in our installed base and strong daily win per unit in the first two months.

Premium units were a key element in driving the growth, as they comprise 38% of our total installed base at March 31, 2020, compared to 22% at the same time last year. These higher yielding gains contributed to the 20% year-over-year increase in daily win per unit in the first two months.

In our largest gaming market, Oklahoma, not only was our installed base up on a quarterly sequential basis, but daily win per unit actually increased more than 50% in the first two months of 2020 as compared to the prior year.

We believe the strong performance of our games prior to our customers' casinos closing are going to be highly correlated to the relative performance we expect as these casinos begin to reopen. Given our diversification across the games and FinTech businesses, we are not overly dependent on the sale of slot machines.

In terms of overall unit sales, 2019 was a good year for the industry and for Everi as our percentage of total ship share increased, yet only 17% of our 2019 consolidated revenue came from gaming equipment sales.

Even as we expect our customers will be in a capital conservation mode for the near term, we believe we are well positioned to gain our fair share of slot purchase budgets. Beginning of 2020, we launched our new curve single-screen Flex cabinet that combines an attractive cabinet with proven game features and play mechanics.

Early performance has been very encouraging with us selling 147 units in the first quarter. The most recent Eilers & Krejcik Gaming performance reports, the Flex quickly climbed to be the top-performing cabinet in the very large and competitive portrait size category surpassing several other well-known offerings in this category.

These are early results and reflect our initial units sold into the market, but combined with the feedback we've gotten from our customers, we are very encouraged as we look to the back half of this year and beyond.

Having grown our ship share in each of the last three years, we are optimistic that with the early performance of the Flex Cabinet and it's exciting differentiated content, we will perform well in the future on a relative basis as casinos continue to reopen and recover.

In our FinTech segment, business was also very strong prior to the casino closures. For the first two months, total cash access transactions increased 17% year-over-year, while the total amount of dollars process rose 19%.

In addition to the same-store sales growth, we were experiencing these increases also reflect incremental revenue from new casino openings and competitive takeaways.

Revenues from information services and others increased for the full quarter, as we benefited from $5.2 million of revenue from software sales and the recurring software license support for player loyalty and marketing products as compared to $0.5 million in the prior year following our initial entry into the player loyalty business in March of 2019.

We continue to believe the player loyalty business is a great business and we expect it will be a meaningful contributor to our performance in both the near and longer term.

Even during the period when casinos were closed, we were selling and installing player loyalty equipment at some customers' facilities as they prepare to reopen with our self-service contactless kiosks and marketing support.

We also signed the cash access agreements with both new and existing customers as casino operators continue to appreciate the real value that our FinTech product and service solutions can bring as they reopen their facilities.

As the COVID-19 pandemic began to impact the gaming industry, we took rapid action to focus on what we could control including; one, making sure we click this quickly, took precautionary safety measures to protect our employees, aggressively reduced our cash burn rate; and three, taking steps to increase our liquidity cushion to withstand a potentially prolonged period of minimal industry activity.

As hard as the decision was to make, we furloughed 80% of our workforce while continuing to cover their health care plans and associated costs. We also created and funded an employee support and relief plan to provide access to additional emergency funds to our furloughed team members.

To date, we have dispersed relief payments to more than 700 employees. Most of our remaining employees have been working remotely.

Additionally led by Mike and the Board of Directors who reduced their salaries to zero and the executive team, which reduced their salaries by approximately 70%, we implemented company-wide temporary pay reductions and eliminated nonessential travel and other expenses.

As it became apparent that all casinos would eventually close for some period of time, we also deferred all nonessential CapEx.

These austerity moves allowed us to reduce payroll to approximately $2 million per month and together with overhead costs for rent, utilities and other required operating expenses, yielded a cash burn rate for operating costs of approximately $5 million per month.

In addition, average cash interest runs another $5 million to $6 million per month, which includes our semiannual bond payments as well as the interest on our secured borrowings. We improved our liquidity position by drawing down our $35 million revolving credit line. And in April, we borrowed an incremental $125 million term loan.

Concurrent with completing this new borrowing, we also amended our credit facility to eliminate the financial maintenance covenant measures for the first quarter of 2021 and reset the go-forward leverage targets. In the end of May, our net cash position was approximately $125 million.

I would emphasize that this is just an estimate of our operating cash position two-thirds of the way through the quarter and not an audited number.

In total, we believe as a result of our decisive and rapid actions, we are in a solid position to be able to fully support our customers as they reopen their facilities while maintaining maximum flexibility to weather any short-term sluggishness in recovery.

As casinos reopen across the country and assuming there is no major second wave of the pandemic, we expect the second quarter will be the low watermark for revenue and cash flow. Based on the reopening schedules we have seen, we believe we will be on pace to achieve positive adjusted EBITDA in the third quarter.

More importantly as the recovery continues, we should be poised to generate positive free cash flow in the fourth quarter. Now, I'd like to turn the call over to Mike, so he can share his perspective on the industry, and how Everi is positioned to regain the momentum we had prior to the pandemic.

Mike?.

Thanks, Randy, and good afternoon, everyone. I've been in the gaming industry now for more than four years. And during that time I've held a number of different positions and had a wide range of business responsibilities.

But while having seen my share of tragic and recessionary conditions, I can honestly say to you that I have never experienced anything close to the impact from this pandemic. Based with this extraordinary challenge, it is critical that we here at Everi embrace this time as an opportunity to be a catalyst for change.

Alongside our casino customers, we're reviewing everything that we do with a critical eye toward planning and adjusting both our strategies and processes to deliver our products and services with excellence under this new normal.

As Randy mentioned, we acted swiftly to protect our employees and our company, making sure that we were in the best possible position to support our customers when and as the industry begins to recover. We realized early on that to be able to support our customers and their patrons, we first have to make sure that our employees are safe.

Even as we took significant actions to reduce costs and capital spending, we also furthered the progress that we were making in our innovation and development projects that align with the new normal. We anticipated that there would be a demand for new solutions that are contactless, cashless and it support social distancing.

As an example, our teams continue to work on major portions of our digital neighborhood. As a result, today, we are in active discussions with several customers about our digital neighborhood product offerings, including a core digital mobile wallet that features cashless and contactless benefits.

Additionally, our existing quick ticket product, allows players to insert their debit card into one of our integrated kiosks and receive a ticket that can be directly inserted into their favorite slot machine, enabling them to bypass any handling of cash.

Similar to our player loyalty solutions, we are seeing increased interest from operators for quick ticket as a cashless self-service option for their casino floors.

Now, these two solutions, as well as additional functionality that we've added to our self-service kiosks, including player loyalty programs, help our customers to address the expected desire of many players to limit face-to-face interactions.

We have existing products that can provide real-time solutions for today's environment by eliminating the need for players to stand in line at a casino cage or engage with players club employees to sign up for an operator's launching programs. Of course, a key element of a truly successful and sustainable solution is that it supports consumer choice.

We give the casino patron, an opportunity to have a digital experience, but also continue to provide ticket and cash solutions for players who still prefer those options. Enabling patron choice, wherever, whenever and however they want leads to success in our industry.

Whether it's cash or cashless, video slots or spinning real slots, the patron always welcomes having a choice in how and what they do on a casino floor. Everi is in an excellent position to help our customers deliver the best possible array of choices for their guests.

And at the same time, these products enable cost-effective integration across both our consumer-facing products and our employee-facing back of house products. Now, let me share some additional color regarding our early performance as our customers restart their operations.

Today, based on the American Gaming Association reports and our own estimates, approximately 32% of U.S. casinos have reopened. Importantly, as doors reopen, players were eager to enter and enjoy the entertainment options on their casino.

Now while it is still very early, let me say that again, it's very early our initial reports indicate that we are generating average daily win on most of our operating slot products that is exceeding pre-COVID levels.

Additionally the number and value of cash access transactions that we are processing are also initially exceeding pre-COVID levels in newly reopened jurisdictions. This is great news. We believe that as more casinos open, this news will become tempered and cash access transactions will trend closer to prior year levels.

Going forward we will continue to invest in innovation and development. In addition to the heightened interest that we're seeing for our forward-thinking fintech solutions that I already mentioned, our game studios still have a pipeline of exciting new game content that we expect to launch in the coming months.

These new games will augment our already strong performing game themes that are in the market today. Now as Randy noted, we borrowed an incremental $125 million to provide an extra cushion for our liquidity so the company could endure even the most negative of scenarios.

Now while those outcomes look less and less likely as more and more casinos reopen and stay open across the country, we appreciate having that liquidity. We view this incremental borrowing as a temporary bump in the road to the success that we have consistently demonstrated in reducing our total leverage.

This prior success gives me great confidence that we will regain our momentum and generate a steady stream of strong free cash flow and once again begin to reduce our net leverage in the near future. Now, with that, I'd like to turn the call back to the operator for your questions..

[Operator Instructions] We'll take our first question today from Brad Boyer with Stifel..

Yes. Thanks for all the detail there guys, very helpful. First question for me is just around breakeven levels. I know a lot of your peers have sort of provided this level of detail and it's pretty helpful for us. I also appreciate that you guys have sort of dramatically different gross margin profiles across your businesses.

So it might be a little bit harder to tease out.

But can you give us a sense of what level of say prior period revenue you guys need to achieve to get back to breakeven EBITDA as you sort of bring the operation back online here?.

Yes.

We think our CFO should probably address that Mark?.

Thanks Mike. I think you hit on the head with our margin profile and how our revenue streams are a little different. Obviously, our cash access and gaming operations revenues very high-margin business and again with the growth we experienced in 2019 I'm not sure that the revenue number is good a metric to look at.

So let me try to go about it in a little different way and focus you on kind of where our spend is and how we kind of view the spend coming here. Looking at our cash interest on our debt that's kind of the easy part with current rates we're expecting about $65 million in annualized cash interest costs.

And with business returning the ATM vault cash interest was probably another $3 million to $5 million on top of that. So our total cash interest probably in the $70 million range for -- on an annualized basis. Now as you kind of get into expenses, it gets a little bit more challenging as Randy kind of highlighted in his prepared comments.

What you'll see, as we've been ramping up our employees to help support our customers reopening. So you're seeing more and more of the employee base coming back to work and more of the costs, we're incurring to support our customers as that goes. So I really kind of focus you more on Q3. In Q3, we said we're going to be EBITDA positive.

And this kind of assumes that most casinos will open at the start of the third quarter in our estimation. And we'll no longer have any employees remaining on furlough at that point.

With that as a backdrop and excluding some of the direct costs if you will related to any equipment sales we have, the rest of our expense profile we kind of think probably falls in the $35 million to $40 million range for the third quarter.

And as we move into Q4 this is where we expect us to start getting more into the free cash flow positive at that point and still remain EBITDA positive. This would assume that all the rest of the casinos have reopened in some fashion and that gaining revenues from the casinos that have been opening or ramping up a little more.

So again, our employee base is full at that point. I think we kind of fall in a similar range probably at the higher end of that range with probably a couple of million dollars on top of that. So hopefully that kind of frames it our you but....

Yes, that's helpful. Second question is just around cashless. I mean there's a lot of -- you guys provided a lot of good color on the call. Just curious if you could, sort of, talk about the appetite amongst regulators today. And I appreciate that it's still early, but with regard to sort of, fully embracing cashless technology.

Any thoughts you could provide there?.

Yes. I think -- yes, Brad this is Mike. We're seeing receptiveness from our commercial gaming regulators. We've had I think receptiveness all along from travel gaming regulators. And as we go forward I think the regulatory systems in virtually every jurisdiction are trying to be as helpful as possible to allow the paper in the casinos to feel safe.

And if that includes contactless or cashless solutions they're willing to take those into their laboratories and give them a quick review for us before allowing them out on the floor. So I'm very heartened by the regulatory environment that we're seeing today..

Okay. And then lastly, I don't know if Dean is on the line, want to answer this or Mike or Randy, but I think we all appreciate the fact that the landscape is going to change a little bit on the other side of this whether it's some capacity limitations in the near-term impaired operator balance sheets capital budgets what have you.

But strategically how do you guys or how are you guys positioning the slot business here to sort of, win in this new sort of, normal that we're going to be facing here over the next who knows how long, but certainly here in the near-term? And that's all for me. Thanks..

Thanks, Brad. Look Dean is on the line and so I'll turn it over to him since he directed it there and Dean can reply..

Okay. Thanks Brad for the question. I believe it's about product.

And the bottom-line is it is we continue to not only have a tremendous amount of success from the product that we have launched in a couple of new hardware form factors before the pandemic took place we think we're very well-poised to continue on through this with not only what has been approved, but also what's in the pipeline and to continue on in 2021.

And that's been the major preparation here is to make sure that as our customers come out of their respective situations very different. It's amazing that some are going to try to operate as close to business as usual with limiting players coming in versus others that are going to turn off machines and so on and so forth.

At the end of the day, the key focus from our standpoint is to make sure that we can provide the best product to them and that it makes sense from their standpoint, when they're ready to invest and get the greatest ROI on the best product that we have available. So to me, the product is still going to be an important component.

And I think, with the current trajectory that we have, we're poised very well coming out of this..

And Brad this is Randy. I'll just tack on a couple of things is that -- as in my opening remarks, I mean, we now have 38% of our footprint being our premium product. And that's really what had been strong at the end of 2019 and strong into 2020. And again talk about sales being, look, not a big portion of our revenue.

So I just think we're very well positioned going forward as we come out of this, because I think or we think that, what will stay on the floor is going to be the best-performing products. And I think we've shown that those premium products, that the Games team, under Dean, have produced, are doing really well.

So, again, don't know where everything will shake out, but I think we're well positioned..

Perfect. Thanks for the color guys and best of luck getting the things back up on the ground here..

Thanks Brad..

Thanks Brad..

Perfect. Yes. Thank you Mr. Pfund..

Next we'll hear from David Katz with Jefferies..

Hi. Good evening, everyone..

Hi, David. .

Hi. I wanted to focus on the FinTech segment, because I will admit as -- since this event is an equalizer for all of us that I had not contemplated sort of what this business looks like, what it does, the puts and takes in a period of time that at least for the second quarter or so is mostly shut down.

Can you just talk me through the different pieces of it and their ability to earn and cost for the first couple of months of the quarter anyway that are effectively shut down? And I think that would be really helpful to start out please..

Hi, David, this is Randy. Make sure I'm addressing your question. I think from the FinTech business, the great piece of that business is that, immediately as casinos start to open up, we start earning revenue on transacting business.

Now during the shutdown, we don't -- we have -- the major cost is payroll and we talked about what we did from a furlough standpoint. But as at the casinos come back on board, we will bring people on board, but it's a business that on day one, as transactions start to take place, we're going to generate revenue.

And then we add on the loyalty product that we have that, as I said in the remarks, is that, look, we've had interest in that even when the casinos were shut down. So I want to make sure I'm addressing your question appropriately..

The question is probably simpler than you think. Only from the perspective that are just understanding any -- the ability to earn any revenue at all. And, obviously, the costs are self-evident during the periods of time that things are shut down.

In other words, does its revenue become entirely zero for every day that it's shut down I suppose is what I'm asking?.

Okay. Well, I would say, you would think that would be yes, although, we have -- and I would just say, it's relatively yes, other than we were still transacting some business in some locations. I'll give you some examples. There may have been a gas station that was connected to a casino that still had businesses very small David.

So, once we're -- the casinos are shut down, there's no cash access or check transactions. But I would say we have still looked at selling kiosks, because again, the casinos want to reopen. And so they were buying kiosks as well as loyalty.

But from a cash access standpoint, you're exactly right within close down revenue goes to basically zero, correct. Yes, Darren, go ahead. You got it..

Yeah. I think Randy just to add to that. I mean I think we were still supporting our maintenance and software support agreements, which we're billing that customers were still paying. Because obviously they all expect to continue business and reopen so they want that support when they reopen. So we did have some revenues there..

Okay. Appreciate that.

And then on the gaming side, I wanted to ask what kind of an order backlog for sale or placements did you have on the day before we found out that things were going to start shutting down? And have you had any conversations about what portions of that backlog could be revisited or resurrected now that we have some visibility into things opening again?.

Sure. Again, maybe I'll turn it over to Dean, because he's probably a little closer to what the backlog was going into the end of the quarter. As you know that March is -- those last 15 days of March are important to us and had a big impact. But I'll turn it over to Dean and go from there..

Hey, David, so the great news on it is that we didn't -- the backlog without going into exact numbers was pretty robust before all this started happening. And the good news is, there hasn't been a lot of cancellations or a lot of returns. And basically what's happened is it's been a postponement.

And as people -- as our customers turn to look back on and seeing the levels that predicates on how quick that the backlog is fortified. So, surprisingly it hasn't been -- you would think would be the other direction where there'll be a kind of cancellations in terms of operating new products and so forth, truly has not been the case.

To a point to me, personally has been pretty surprising. So we're very encouraged from that side. Then what it shows is how I answered Brad's question before that, our products have been performed an extraordinary well, and there's a great demand to get it on at the time that the customer is comfortable towards bringing it on to their property.

So, they want them still. It's just a matter of when, not if. I know if they answer your direct what's the backlog number aside that, but I'm not comfortable given those direct numbers out as well. So, if Randy wants to do it that's on him, but it's not going to come from me. So….

Yeah. I think, he answered it the way I would, which is, look, we had a strong backlog still David in it as you shut down immediately. And I think we're still very optimistic about the orders that we had out there, and whether we'll ultimately fulfill those..

Okay..

Okay. We'd also seen – we've seen a large increase in our premium units going into March, and we have yet to see a full quarter of those units performance. So we're anticipating that, as well as we come out of this..

Yeah. Excuse that, in install base. Thank you very much..

Thanks, David..

Next, we'll hear from Barry Jonas with SunTrust..

Hey, guys.

I wanted to start on FinTech with all the discussions around cashless gaming, what do you think is a realistic mix of cashless versus cash on casino floors at some point in the future? And I guess the second part to that is, could you see the – your FinTech business maybe moving more support remote gaming virtual outside of say traditional land-based casinos where they can focus is now fixed?.

Okay. Hey, Barry good to see you or hear from you. And I'll let Darren start that question..

So on your first question on sort of what you would anticipate mix of cash versus cashless, I still think it's early days with what I would say is, kind of the digital transformation of customers' operations. What I would say is our approach has been released products that help them achieve cash flows quicker. And we've talked about quick ticket.

And that's a real simple low lift cost-effective way to help our casino go cashless. Now, if you want to talk about the digital experience, I think that's more longer term that does require some investment.

Now, we pivoted a little bit with our strategy around our mobile wallet to provide something that is simple, easy for operators to have as a part of their offering to their patrons, allows customers to download the app complete their profiles, link it with their player card and add their accounts to it, and basically perform all of these transactions and do it mobilely and through our kiosks access, a ticket and be cashless.

So low – kind of low tech, but helping achieve that.

There are some longer-term sort of transformational journeys that operators are going to with larger integrations with some of the systems and the wagering accounts, which we're a part of, and what we've been working on with – to Mike's points and travel customers, but I think it's early days as to what that will be.

We've got some data around sort of what our quick ticket transactions are. But I think, it's still early on in the process. Other industries are more mature within the retail world and you've seen a growth in that over the past few months, because of kind of this new world order we have.

But I think it's early to tell and I think we'll see in the coming months. Your second question around, land-based versus I guess online. Yeah, I mean, I would say that you could probably expect there to be an increase in online.

But I would say you're not going to be able to replace that land-based experience that patrons love and with all the amenities that properties offer. So I think you'll see a mix in terms of that as those offerings increase in the different states, and with different operators..

Sorry, Darren.

I think what I was saying the second question was more, could we see Everi sort of change its strategy to somewhat address some of those high casino and offerings from a FinTech perspective?.

Sure, yes. Yes, absolutely. We do have the ability to be able to provide that from an online and pure mobile digital experience standpoint. So absolutely, we see growth with that. Yes,.

Great. And then maybe more for Mike. In the past you've talked about the Games and FinTech business, not necessarily having a need to be together.

Does the events over the past few months change your perspective on this at all?.

Now that's a great question, Barry. Thanks. I don't know that it has changed my opinion with respect to whether they have to be together I can tell you that – and this is something I've said for a long time now. They are highly complementary of one another and continue to be.

And I think, if anything this pandemic is proving the need for casinos to be able to deal with their vendors in a multitude of different places on their casino floor.

And in our case, it's initially at our kiosks and our games but ultimately, it's a matter of smartphones enabled by our FinTech business being able to address our machines directly on the floor. And that's a coalescing that's going to occur over the next year to two years..

Great. Thank you so much, guys..

Thanks, Barry..

We'll now hear from John Davis with Raymond James..

Hey, thanks. Good afternoon, guys. Appreciate the commentary on the kind of the trend of the casinos that have opened versus pre-COVID. But wondered, if we can maybe dig in a little bit there. I think a couple of properties have been open for a couple of weeks now.

Maybe just talk a little bit about what that opening weekend or opening week look like, and kind of where we are today? Have you seen it start to trail off yet maybe as a percentage of what pre-COVID volumes were, what was it opening weekend? And kind of where are we today? Just how has that trended over the first couple of weeks, realizing it's still early?.

Yes, John. Look, I think, Mike said it – where he said again, this is early and this is early but right now what we're seeing in the casinos that have opened that are either a FinTech or a Games that have our lease games, we're seeing that our revenues are equal to or sometimes better than they were pre-COVID.

Now, I think we think there's a supply issue there. We think there's some pent-up demand there. But even in – I'll give an example of one of our larger customers.

We're seeing that even though they may have the games there spaced out or they may have a portion of our games turn off just because of their social distancing, still we're at the same type of revenue we were having with all the units on that floor. On the cash access side, it's similar.

Even though they may have restrictions on how many people they're letting in the door, we're seeing – what we look at John is cash of the floor.

And I think Darren continues to run reports that show right now, the cash of the floor is consistent with either the same period of prior year because we try to match it at the same period because you can get some differences with holidays or pre-COVID. Now, I think we still want to caution that we just don't know how long that will last.

And I guess, I think, long term we think it's going to come down just because there'll be more – there'll be more supply but it's very encouraging right now because I guess, it's better than the alternative, what we were talking about.

So, so far, very encouraged at both how our Games are performing, and how our cash access FinTech products from the standpoint of just volume of transactions..

Okay. But you haven't seen like an opening weekend where it shoots up a lot and immediately falls off. It's been -- I know it's early, but it's been, fairly consistent..

No. It's been fairly steady, John. I mean, -- yeah, it's been fairly steady. John to your point though, I mean, obviously Memorial Day was a strong weekend. There's no doubt about it. But it would be strong in normal times.

And the fact that people were able to produce the kind of gaming revenue that they did with only 50% of the positions, I think speaks well to that demand curve continuing..

Yeah. And John, we compare it to a -- as I say in some cases we would have either compared it to prior year Memorial Day weekend or just a seven-day period that was exclusive of a holiday. So and -- we try to line it up as best we can.

And again, taking out some more that we can pass that, and we're still seeing that our volumes and our daily win per unit is slightly above what it was..

Okay.

And then, on the gaming side, specifically on the units, if the casino were to have 50% -- and do you have information that it sounds like casino were caused to shut down half their machines because of social distancing? What does that kind of look like for you? I would assume given the performance of your machines that they would shut down less than kind of the floor average.

I don't know if you have any stats on, different properties or just kind of a ballpark idea of, if they shut down 30% of some of your machines only, if 20% of your machines are shut down right now or kind of commentary there to kind of speak to your performance?.

Yeah. I was trying to get there. And maybe I didn't come across. But, look, the limited data that we have, we've been at a location where we had a portion of ours shutdown. It wasn't 50% but let's pick a number 25% or so or 30% or so. And still based on the units that remained, we were again on average equal to that same daily win per unit.

So clearly there are units that are staying on, we're performing better, right? And again I also think it has a lot to do with the premium units that we have.

And our expectation is that the casino will probably dark, those machines of ours that are maybe a little bit older, but they may be clearly keeping up the premium games, which is really helping us. So again, it's very early, but that's what we've seen..

And I think you hit the nail on the head, John. It's all about performance for the operator. If our machines are performing better, they're going to want those to stay lit, while they darken somebody else's machines or machines that aren't producing as well..

Okay. And then lastly, for me....

Also John premium units -- some of our premium units also are configured in pods, which also lend itself to appropriate social distancing. So those by default will also all stay on.

But we're highly encouraging as much of our footprint, especially with respect to 5,527 with Bulk or Shark Week or smoking how Suffield well that if they bank them in a pod configuration they can keep 100% of those on. And that's really helped us out as well..

Okay. And then last one for me. I'd be remiss not to touch on cash flows came in not to be a dead horse here, but maybe taking a little bit different angle.

Mike, how close are we to being able to implement that from a technology standpoint and a regulatory standpoint? And I think regulatory wise, I'm less concerned, but just from a technology standpoint, how close are we, any commentary on how the economics would be similar or different to your current cash access business? And then finally, who else can actually provide this service? Or are you, kind of, the only game in talent at this point on the cash access side of cash flow scanning? Thanks..

Well, I'm going to -- yeah, I'm going to turn some of this over to Darren. Look, I don't think we've ever expressed the transaction economics between us and our customers when it comes to QuickTicket or our digital neighborhood, or our core digital wallet.

But I'll leave that for Darren to dance around or decide if he wants to give you an answer on it. But I will say, John, we have QuickTicket out there today. And QuickTicket today does not require anyone to touch cash. There's -- so it’s already a cashless product on the floors of casinos in North America.

And during the closure, we had customers that had been looking at the product that now wanted. Because they understand the power of being cashless both in the efficiencies of their operations, but also in addressing customers' concerns about touching cash. And what that may end up with in terms of infections or germs or bacteria or whatever.

But I would say we're as close as the third quarter to the first iteration of a QuickTicket that is tied to your accounts, and I'll let Darren go into that with you a bit more and probably not much behind that you'll be talking about the digital wallet aspect of QuickTicket as well.

So Darren you want to address some of that?.

Yeah, I think to Mike's point around QuickTicket, I mean what's great is that the customers that have opened the doors that already have current implementations of QuickTicket. We've actually seen increase in that transaction type. So more people are selecting that as an option in terms of how they're getting their funds to play.

So again it's a cash flow transaction simple, easy they unhanded. It's low tech. It's using technology and using an infrastructure that they are familiar with and feel good about today. So your question around pure cash was and I think you may be thinking more mobile and thinking more maybe going direct from mobile down to a game.

I think -- again that's a more transformational journey that we've been working on with some other customers and again extending not only to the gaming floor but also into retail areas. And those integrations with systems and other third parties are a little more involved.

And so we -- again we pivoted a little bit with our approach to just to provide a simple mobile digital wallet application that they can consume now that doesn't have any of these, sort of, regulatory integration concerns to facilitate again having transactions completed where somebody doesn't have to go to a cage or reduce that whole I guess social interaction and support the new protocol that the operators are implementing.

So we try to just look at --look what do we have now that we can facilitate this. And some of those other integrated solutions with other third-party and system providers and whatnot. Those are a little longer pull intent, because they do have regulatory implications.

But to Mike's point, the operator -- the regulators are supporting these and trying to fast track those. But I think those are just a little longer pull intent, because they do require a little bit more work.

And especially when you want to look purely integrating those wagering account systems to actually a funding wallet like we have and they're very complementary products and they're compatible and we're working with these providers to be able to implement that with customers.

So I think it's early days yet, but I would see what may have been a kind of a three or five-year sort of term a to Mike's point, we would probably see these in the next couple of quarters start to get rolled out. And I think more in earnest in terms of investment from operators..

Okay. Thanks. But the advantage there is the money transmitter license. And to my knowledge I don't think any of your competitors on the cash access side to have that ability, so, chance to be first to market here.

Are any of your competitors kind of working on this or could offer similar product?.

Yes, John..

Yes, a few comments. Sorry, that we got back from a customer was I have all of your solutions today. And I guess the beauty of it is what we are offering really is based within the existing infrastructure that we provide them.

So, all the settlement of funding that we provide today, all reporting, all the KYC, all the AML, and all those responsible gaming support that we provide is levered in this. So it's a low lift for the operator to be able to consume this with their own staff, because they're using all the existing tools that they have that support their business.

And then from a patron standpoint, again, you're kind of leveraging sort of an existing relationship they have with us being a service provider. And so I think our ability to get adoption on both sides, because, again, the operator needs to adopt it with their teams and the patrons need to adopt it.

So we're in a really, really good place to be able to be in a position to deliver this..

Okay. Thanks for all the color guys..

Thanks, John..

Chad Beynon with Macquarie has our next question..

Good afternoon. Thanks for taking my questions. Good to see you guys are well..

Hi, Chad..

Mark, on your financial model response, which was helpful, I know you and Randy both noted 3Q positive free cash flow. So I wanted to ask about, I guess, the missing piece that nobody has addressed here, I guess, near-term and the medium-term and that's CapEx, which you've noted, you've eliminated non-essential CapEx.

But firstly on the third quarter, should we assume that that positive free cash flow assumes, I guess, below average normal CapEx and then bringing it back to a bigger picture as things recover following your debt raise with a focus on deleveraging, I know you’ve spent over $100 million in CapEx in the past couple of years and that's what you guided back in March.

Does that still make sense? Or is that something that obviously you'll address after casinos reopened? Thanks..

Yes. Hey, Chad, let me first correct you. I said, I think, we were -- what we tried to convey and hopefully you heard this was Q3 will be EBITDA positive. Q4 will be EBITDA and cash flow positive -- free cash flow positive.

I suspect Q3 just with the ramp-up and where we are, we probably are not going to be free cash flow positive at this point with the numbers I framed out $35 million to $40 million of total expenses. And then again, that's really the cost of revenue on the gaming ops side.

That's my OpEx and that's my R&D expense just so we're very clear on what I was accumulating altogether in terms of spending of how that works. I think we end up being not free cash flow positive at that point. Now, to your core of your question which is CapEx.

The great thing is, we control the spend and we have a lot of optionality in how the spend goes. So, depending on how our customers return and their needs, we can certainly pump up the CapEx to support that.

But I think you're kind of right on that, Q1 we spent $22 million as we fill the pipeline of demand for some of our premium units had some really nice growth in the premium units. And we still have unit demand for the premium unit growth coming out of this.

So, we'll make some smart choices in where we deploy that capital to and manage the CapEx numbers kind of relative to our casino customers' operations at that point. So, to answer your question even more specifically, no, I don't think its $114 million to $120 million, but it's still a little early to see right now where we shake out.

I think looking at Q1 as a guide $22 million, I think you'll probably be one-third at least reduced of where we were if not more just depending on how the flow of customer equipment really goes on there..

Okay. Perfect. Thank you and thanks for clarifying that. My second question is a hypothetical, I guess for operator for CFOs who are purchasing your slots in your FinTech products. So, I think we're all expecting the second quarter to be extremely nominal for everybody.

But as there's a budget for these CFOs and slot managers in the back half of the year, I know you've talked about potentially selling some kiosks in the FinTech business, which certainly drive a lot of efficiencies and hopefully higher revenues for your partners.

Do you think that when CapEx budgets come back into light, the kiosk purchases could actually move up in the stack order? Or do you think, they'll be focused on just replenishing their slots and this could actually get pushed back into 2021?.

Chad, this is Randy. I'll throw one other item out there. I think the interesting thing on the kiosk I think what we're really focusing on is to play our loyalty that usually kind of falls into the marketing budget.

And so, it kind of -- at least in our experience has been there's been some extra dollars there, I actually think and we'll see who's right here is that casinos will want to make sure, they can get customers in and as much contactless as they can, which means that they would look to buy our enrollment kiosk which allows them to get their card without going to players club booth and then be able to get whatever promotions are going on.

So, if what happened during the shutdown is any indication and again, we were selling and installing our player loyalty and kiosk during the shutdown and so we feel pretty comfortable that that should continue at what level? Hard to say.

And even our standard -- I'll say our fully integrated kiosk again, if a casino wants to reduce the amount of -- they want to have quick ticket and they want to have charity modules and other things that can be more efficient, they're still interested in buying the fully integrated kiosk.

Because as we talked before this whole pandemic, we felt and still believe we were in somewhat of a refresh cycle with those kiosks, so some of them are just getting old out there. Now, will they buy as many? Don't know.

Will they buy them this year or maybe push them to next year? Don't know, but we do think that there's still some CapEx that they're going to have to spend just it is -- my guess is they're going to want extended more extended payment terms, try to make it over a longer a period of time than it is they want to not do it all..

Make sense. Thanks, Randy. Appreciate it guys. Best of luck..

Yes. Thanks, Chad..

Our last question will come from Ricardo Chinchilla with Deutsche Bank..

Hey, guys. Thanks for taking the question. Quick one for me. In terms of your installed base, I mean, there's always that some of the operators that get into trouble, they might be reducing some of the placements.

Could you please remind us of how much of your installed base is currently protected under the placement fees? And how do you guys are thinking about the installed base now versus the end of the year? Do you guys it to shrink? Do you guys think it will be largely stable? Any color will be helpful?.

Sure. This is Randy, again. And Mark or Dean can correct, but I think our -- still our placement fee covers 4200-plus machines. So it's somewhere in that neighborhood. So it's still I think about not quite one-third if I'm doing the math right there.

And then where we'll end up at the end of the year? Look I will -- hard to say right? It's -- I think our product continues to impress our customers and we had a very good pipeline and a very good demand for our premium units. So if you're asking me my expectation is that we somehow squeeze something out of there.

But hopefully we'll at least be -- flat or hopefully slightly up..

This is Mike.

I mean one of the things that we've witnessed in previous pandemic is – well, excuse me, previous recessions and previous hard times for casinos since this is our first and hopefully last pandemic, is that casinos that can make more money for themselves by bringing a participation unit on their floor than they are making with the machine that they are replacing are inclined to look for participation units that perform extremely well.

And so that gives me great hope that we will see operators look at our premium products and how well they perform and consider putting them on their floors in place of perhaps even casino-owned games that are not producing that kind of revenue for them..

And Ricardo, this is Mark. Just to clarify Randy's one. We actually had a little bit of growth in Oklahoma related to one of the placement fees that are now covered under about 4,400 plus units under placement fees in Oklahoma..

Perfect. Thank you. And just....

I would say -- well one other -- one last thing of color. Is that if you take a look at removals that are coming out from the field in comparison to our backlog, we still have placements for everything that would be coming out in some.

So if you look at this as a marathon you talk about getting out of the block we are very well-positioned out of the block as casinos start coming up. So we feel very good about having an opportunity to not only hold what our current footprint is.

Obviously product -- performance predicated which we feel great about, even potentially being able to take some share from somebody else..

Great. That's great color. I appreciate it.

In terms of your current operations how much of your portfolio is currently opening both in the payment side and in the participation side? And just to have like an idea of the cadence, you guys expect to be north of like 80% online by the end of the month or 100%? Or any cadence on the opening for your particular businesses would be helpful?.

So, I'd give you some -- again it's very early, but I would say right now on the FinTech side as Mike had talked about, there's about 32% of the casinos open. And look we have -- on the FinTech side we have a fairly good market there -- market share there. So, we are -- right now about 30% of our customers are up and operate.

Now, that may just be because of who they are there they may be more tribal which we've got a good footprint in. So, that gives you an idea that we've got a lot of the customers on the FinTech side, they're up and operating.

And on the customer -- on our customer side, again, this is on the game side, it's a little different because it's a smaller set of customers, but we're in a smaller set of casinos. So, we're at again about 32% of our customers that are open. We -- the customers that are open, we have about 32% of our gains in those customer.

I don't know if I'm saying that right. But basically 200-plus locations where we're at of the 600 and some -- 600-plus locations that we have games in. So, again, we're in that kind of 30% range in both I would say FinTech and games.

Does that help?.

Yes, that's very helpful. If I can squeeze one last one. You guys I believe have an earn-out payment related to one of your acquisitions for next year. Any possibility that that gets delayed or that you could work out on some way to delay that? Or do you guys feel like 2021 is going to be strong.

We will not have any issue making that earn-out payment even if there's gaming is a little bit weak just as it does we recover?.

Ricardo, it's Mark here. I'll take the question and Randy can feed some color in on this one as well.

As you pointed out related to the acquisition of assets from Atrient in March of 2019, we do have an earn-out in the final portion of purchase price payment left that would be due in March of 2021 and that would be -- we expect to be $20 million worth of payments. Again, that's all reflective of the volume of business; the earn-out is anyways.

The volume of business that the loyalty business performs and does and that business has been performing very well. So we would expect that we will owe the full amount under those payments when due in March and we would expect to pay those amounts in March.

We expect that the volume of business has returned sufficient level enough clearly to keep us on a free cash flow positive by fourth quarter and as you move into late Q1, that position should only improve..

Great. Thank you so much. I really appreciate all the color..

Thank you..

And we do have a question from George Sutton with Craig-Hallum..

Thank you. I got dropped off. And I want to make sure I don't ask something that's already been asked. So, I will ask Randy the following question.

Given that in February you were driving a Ferrari with the throttle wide open on an open road, I'm curious what car you're driving now? And I'm curious, if you could be specific to the month or the quarter when do you plan to pick the Ferrari back up from the lender?.

Killing me. I'm going to blame Bill for that. You realize that because... .

Well, I'd love to know how you came up with Ferrari. I'm not sure if they're sponsoring the call..

No, no. I just -- I do drive a faster car, but I would say it's not a Ferrari so don't go there. I don't know how to answer your question. What car do I have right now? Look as you know it's just -- it's early. So we're just being -- we want to see the casinos open.

We want to see how much activity they have before we decide what car we're going to put on the road and how fast we're going to be going. But look I think what we were trying to say is that, we were performing very well in those first two months and we expect to be performing well as casinos come open.

How much, what their level of activity? That's still to be determined. But we just feel like we're very well positioned George and our products on the game side, we're performing very well in the Fintech, side transactions were up and the loyalty product is up.

So we just feel like we were in a great position and we should be in a good position when the casinos are back up and operating at whatever that normal level will be. What car is, I have to think about it..

Sounds like you're driving a Jeep on a rugged road right now, but it is going to get better and we look forward to that. Thanks guys..

Thanks..

Thank you for your questions. If there are no further questions at this time, I would like to turn things back to Mr. Taylor for closing remarks..

We'd like to thank everyone for joining us today on the call. With the green shoots of recovery now beginning to happen in the gaming industry, we expect that our balance between Games and Fintech segments places us in a unique position who wasn't as pandemic and come out the other side a more efficient and stronger company.

We look forward to providing you further updates on our next quarterly call. Thank you. .

Thanks everyone..

That does conclude today's conference. Thank you for your participation. You may now disconnect..