EVERI HOLDINGS INC., 10-Q filed on 5/9/2017
Quarterly Report
Document and Entity Information
3 Months Ended
Mar. 31, 2017
May 1, 2017
Document and Entity Information
 
 
Entity Registrant Name
Everi Holdings Inc. 
 
Entity Central Index Key
0001318568 
 
Document Type
10-Q 
 
Document Period End Date
Mar. 31, 2017 
 
Amendment Flag
false 
 
Current Fiscal Year End Date
--12-31 
 
Entity Current Reporting Status
Yes 
 
Entity Filer Category
Accelerated Filer 
 
Entity Common Stock, Shares Outstanding
 
66,097,275 
Document Fiscal Year Focus
2017 
 
Document Fiscal Period Focus
Q1 
 
CONDENSED CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended
Mar. 31, 2017
Mar. 31, 2016
Revenues
$ 237,537 
$ 205,769 
Costs and expenses
 
 
Operating expenses
28,993 
30,005 
Research and development
4,543 
5,368 
Depreciation
10,830 
12,335 
Amortization
17,325 
23,183 
Total costs and expenses
214,934 
201,984 
Operating income
22,603 
3,785 
Other expenses
 
 
Interest expense, net of interest income
25,057 
24,992 
Total other expenses
25,057 
24,992 
Loss before income tax
(2,454)
(21,207)
Income tax provision (benefit)
1,054 
(8,056)
Net loss
(3,508)
(13,151)
Foreign currency translation
272 
(485)
Comprehensive loss
(3,236)
(13,636)
Loss per share
 
 
Basic (in dollars per share)
$ (0.05)
$ (0.20)
Diluted (in dollars per share)
$ (0.05)
$ (0.20)
Weighted average common shares outstanding
 
 
Basic (in shares)
66,090 
66,034 
Diluted (in shares)
66,090 
66,034 
Games
 
 
Revenues
55,276 
48,178 
Costs and expenses
 
 
Cost of revenue (exclusive of depreciation and amortization)
12,444 
8,436 
Operating income
4,792 
(3,245)
Payments
 
 
Revenues
182,261 
157,591 
Costs and expenses
 
 
Cost of revenue (exclusive of depreciation and amortization)
140,799 
122,657 
Operating income
$ 17,811 
$ 7,030 
CONDENSED CONSOLIDATED BALANCE SHEETS (USD $)
In Thousands, unless otherwise specified
Mar. 31, 2017
Dec. 31, 2016
Current assets
 
 
Cash and cash equivalents
$ 127,861 
$ 119,051 
Settlement receivables
42,443 
128,821 
Trade and other receivables, net of allowances for doubtful accounts of $4,999 million and $4,701 at March 31, 2017 and December 31, 2016, respectively
47,874 
56,651 
Inventory
22,386 
19,068 
Prepaid expenses and other assets
21,555 
18,048 
Total current assets
262,119 
341,639 
Non-current assets
 
 
Property, equipment and leased assets, net
97,303 
98,439 
Goodwill
640,551 
640,546 
Other intangible assets, net
309,450 
317,997 
Other receivables
3,453 
2,020 
Other assets
7,598 
7,522 
Total non-current assets
1,058,355 
1,066,524 
Total assets
1,320,474 
1,408,163 
Current Liabilities
 
 
Settlement liabilities
127,635 
239,123 
Accounts payable and accrued expenses
120,348 
94,391 
Current portion of long-term debt
10,000 
10,000 
Total current liabilities
257,983 
343,514 
Non-current liabilities
 
 
Deferred tax liability
58,238 
57,611 
Long-term debt, less current portion
1,110,995 
1,111,880 
Other accrued expenses and liabilities
2,874 
2,951 
Total non-current liabilities
1,172,107 
1,172,442 
Total liabilities
1,430,090 
1,515,956 
Commitments and Contingencies (Note 12)
   
   
Stockholders' deficit)
 
 
Common stock, $0.001 par value, 500,000 shares authorized and 90,965 and 90,952 shares issued at March 31, 2017 and December 31, 2016, respectively
91 
91 
Additional paid-in capital
266,175 
264,755 
Retained deficit
(197,806)
(194,299)
Accumulated other comprehensive loss
(1,838)
(2,109)
Treasury stock, at cost, 24,870 and 24,867 shares at March 31, 2017 and December 31, 2016, respectively
(176,238)
(176,231)
Total stockholders' deficit
(109,616)
(107,793)
Total liabilities and stockholders' deficit
$ 1,320,474 
$ 1,408,163 
CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)
In Thousands, except Share data, unless otherwise specified
Mar. 31, 2017
Dec. 31, 2016
CONDENSED CONSOLIDATED BALANCE SHEETS
 
 
Allowances for doubtful accounts
$ 4,999 
$ 4,701 
Common stock par value (in dollars per share)
$ 0.001 
$ 0.001 
Common stock, shares authorized
500,000,000 
500,000,000 
Common stock, shares issued
90,965,482 
90,952,185 
Convertible preferred stock, par value (in dollars per share)
$ 0.001 
$ 0.001 
Convertible preferred stock, shares authorized
50,000,000 
50,000,000 
Convertible preferred stock, shares outstanding
Treasury stock, shares
24,870,000 
24,867,000 
CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)
In Thousands, unless otherwise specified
3 Months Ended
Mar. 31, 2017
Mar. 31, 2016
Cash flows from operating activities
 
 
Net loss
$ (3,508)
$ (13,151)
Adjustments to reconcile net loss to cash provided by operating activities:
 
 
Depreciation and amortization
28,155 
35,518 
Amortization of financing costs
1,672 
1,672 
Loss on sale or disposal of assets
436 
611 
Accretion of contract rights
2,002 
2,097 
Provision for bad debts
2,817 
2,444 
Reserve for obsolescence
408 
119 
Stock-based compensation
1,412 
1,061 
Changes in operating assets and liabilities:
 
 
Settlement receivables
86,400 
16,634 
Trade and other receivables
4,423 
5,711 
Inventory
(3,739)
(497)
Prepaid and other assets
(3,409)
2,047 
Deferred income taxes
626 
(8,343)
Settlement liabilities
(111,498)
(29,603)
Accounts payable and accrued expenses
25,161 
8,384 
Net cash provided by operating activities
31,358 
24,704 
Cash flows from investing activities
 
 
Capital expenditures
(17,184)
(23,613)
Proceeds from sale of fixed assets
 
10 
Placement fee agreements
(3,044)
(1,000)
Changes in restricted cash and cash equivalents
(125)
44 
Net cash used in investing activities
(20,353)
(24,559)
Cash flows from financing activities
 
 
Repayments of credit facility
(2,500)
(2,500)
Issuance costs of new debt
 
(480)
Proceeds from exercise of stock options
 
Purchase of treasury stock
(7)
(9)
Net cash used in financing activities
(2,502)
(2,989)
Effect of exchange rates on cash
307 
148 
Cash and cash equivalents
 
 
Net (decrease) increase for the period
8,810 
(2,696)
Balance, beginning of the period
119,051 
102,030 
Balance, end of the period
127,861 
99,334 
Supplemental cash disclosures
 
 
Cash paid for interest
8,243 
8,846 
Cash paid for income tax
575 
273 
Cash refunded for income tax
200 
 
Supplemental non-cash disclosures
 
 
Accrued and unpaid capital expenditures
2,789 
12,424 
Transfer of leased gaming equipment to inventory
$ 2,301 
$ 1,039 
BUSINESS
BUSINESS

1.BUSINESS

 

Everi Holdings Inc. (formerly known as Global Cash Access Holdings, Inc.) (“Everi Holdings,” “Holdings” or “Everi”) is a holding company, the assets of which are the issued and outstanding shares of capital stock of each of Everi Games Holding Inc. (formerly known as Multimedia Games Holding Company, Inc.) (“Everi Games Holding”), which owns all of the issued and outstanding shares of capital stock of Everi Games Inc. (formerly known as Multimedia Games, Inc.) (“Everi Games” or “Games”) and Everi Payments Inc. (formerly known as Global Cash Access, Inc.) (“Everi Payments” or “Payments”). Unless otherwise indicated, the terms the “Company,” “we,” “us” and “our” refer to Holdings together with its consolidated subsidiaries.

 

Everi is dedicated to providing video and mechanical reel gaming content and technology solutions, integrated gaming payments solutions and compliance and efficiency software. Everi Games provides: (a) comprehensive content, electronic gaming units and systems for Native American and commercial casinos, including the award winning TournEvent® slot tournament solution; and (b) the central determinant system for the video lottery terminals installed in the State of New York. Everi Payments provides: (a) access to cash at gaming facilities via Automated Teller Machine (“ATM”) cash withdrawals, credit card cash access transactions, point of sale (“POS”) debit card transactions, and check verification and warranty services; (b) fully integrated gaming industry kiosks that provide cash access and related services; (c) products and services that improve credit decision making, automate cashier operations and enhance patron marketing activities for gaming establishments; (d) compliance, audit and data solutions; and (e) online payment processing solutions for gaming operators in states that offer intrastate, Internet-based gaming and lottery activities.

 

BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

2.BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

Our unaudited Condensed Consolidated Financial Statements included herein have been prepared by us pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Some of the information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States have been condensed or omitted pursuant to such rules and regulations, although we believe the disclosures are adequate to make the information presented not misleading. In the opinion of management, all adjustments (which include normal recurring adjustments) necessary for a fair presentation of results for the interim periods have been made. The results for the three months ended March 31, 2017 are not necessarily indicative of results to be expected for the full fiscal year. The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

 

There have been no changes to our basis of presentation and significant accounting policies since the most recent filing of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

 

Fair Values of Financial Instruments

 

The fair value of a financial instrument represents the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Fair value estimates are made at a specific point in time, based upon relevant market information about the financial instrument. 

 

The carrying amount of cash and cash equivalents, settlement receivables, trade receivables, other receivables, settlement liabilities, accounts payable and accrued expenses approximates fair value due to the short-term maturities of these instruments. The fair value of our borrowings are estimated based on various inputs to determine a market price, such as: market demand and supply, size of tranche, maturity and similar instruments trading in more active markets. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Level of

    

 

 

    

Outstanding

 

 

 

Hierarchy

 

Fair Value

 

Balance

 

March 31, 2017

 

 

 

 

 

 

 

 

 

Term loan

 

1

 

$

467,731

 

$

463,100

 

Senior secured notes

 

3

 

$

338,350

 

$

335,000

 

Senior unsecured notes

 

1

 

$

363,125

 

$

350,000

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

Term loan

 

1

 

$

451,632

 

$

465,600

 

Senior secured notes

 

3

 

$

324,950

 

$

335,000

 

Senior unsecured notes

 

1

 

$

350,000

 

$

350,000

 

 

The senior secured notes were fair valued using a Level 3 input as there was no market activity or observable inputs as of March 31, 2017 and December 31, 2016.  During the current period, the fair value of the senior secured notes was derived using the same rate as the term loan given that both were treated similarly. 

 

Reclassification of Prior Year Balances

 

Reclassifications were made to the prior-period financial statements to conform to the current period presentation.

 

Recent Accounting Guidance

 

Recently Adopted Accounting Guidance

 

In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-04, which provides updated guidance on the goodwill impairment test and the method by which an entity recognizes an impairment charge. These amendments eliminate Step 2 from the current goodwill impairment process and require that an entity recognize an impairment charge equal to the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to that reporting unit. Additionally, a company should also take into consideration income tax effects from tax deductible goodwill on the carrying amount of a reporting unit when recording an impairment loss. The new standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. This guidance will be applied using a prospective approach. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We adopted this guidance in the current period. As no indicators of impairment were identified for our goodwill during the three months ended March 31, 2017, this ASU did not impact our Condensed Consolidated Financial Statements and disclosures included within Notes to Unaudited Condensed Consolidated Financial Statements.

 

In March 2016, the FASB issued ASU No. 2016-09, which simplifies several aspects of the accounting for share-based payment transactions, including the accounting for income taxes, statutory tax withholding requirements and classification on the statement of cash flows. The new standard is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. This guidance will be applied either prospectively, retrospectively or using a modified retrospective transition method, depending on the area covered in this update. Early adoption is permitted. We adopted this guidance in the current quarter on a prospective basis.  As of March 31, 2017, the adoption of ASU No. 2016-09 has not impacted our Condensed Consolidated Financial Statements. With respect to forfeitures, the Company will continue to estimate the number of awards expected to be forfeited in accordance with our existing accounting policy. In addition, our Condensed Consolidated Statements of Cash Flows present excess tax benefits as operating activities in the current period, as the prior period was not adjusted.

 

In July 2015, the FASB issued ASU No. 2015-11, which provides guidance on the measurement of inventory value. The amendments require an entity to measure in scope inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Subsequent measurement is unchanged for inventory measured using last-in, first-out (“LIFO”) or the retail inventory method. The amendments do not apply to inventory that is measured using LIFO or the retail inventory method. The amendments apply to all other inventory, which includes inventory that is measured using first-in, first-out (“FIFO”) or average cost. The pronouncement is effective for annual periods beginning after December 15, 2016, and interim periods within those fiscal years, and early adoption is permitted. We adopted this guidance in the current period. This ASU did not have a material impact on our Condensed Consolidated Financial Statements and disclosures included within the Notes to Unaudited Condensed Consolidated Financial Statements.

 

Recent Accounting Guidance Not Yet Adopted

 

In January 2017, the FASB issued ASU No. 2017-01, which clarifies the definition of a business. The amendments affect all companies and other reporting organizations that must determine whether they have acquired or sold a business. The amendments are intended to help companies and other organizations evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses.   The new standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. This guidance will be applied using a prospective approach as of the beginning of the first period of adoption. Early adoption is permitted for acquisitions, or disposals that occur before the issuance date or effectiveness date of the amendments when the transaction has not been reported in financial statements that have been issued or made available for issuance. We are currently evaluating the impact of adopting this guidance on our Condensed Consolidated Financial Statements and disclosures included within Notes to Unaudited Condensed Consolidated Financial Statements.

 

In October 2016, the FASB issued ASU No. 2016-18, which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. As a result, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments do not provide a definition of restricted cash or restricted cash equivalents. The new standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. This guidance will be applied using a retrospective approach to each period presented. Early adoption is permitted and adoption in an interim period should reflect adjustments as of the beginning of the fiscal year that includes that interim period. We are currently evaluating the impact of adopting this guidance on our Condensed Consolidated Financial Statements and disclosures included within Notes to Unaudited Condensed Consolidated Financial Statements.

 

In October 2016, the FASB issued ASU No. 2016-16, which provides updated guidance on the recognition of the income tax consequences of intra-entity transfers of assets other than inventory when the transfer occurs, and this eliminates the exception for an intra-entity transfer of such assets. The new standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. This guidance will be applied using a modified retrospective approach through a cumulative-effective adjustment directly to retained earnings as of the beginning of the period of adoption. Early adoption is permitted during the first interim period of the year this guidance is adopted. We are currently evaluating the impact of adopting this guidance on our Condensed Consolidated Financial Statements and disclosures included within Notes to Unaudited Condensed Consolidated Financial Statements.

 

In August 2016, the FASB issued ASU No. 2016-15, which provides updated guidance on the classification of certain cash receipts and cash payments in the statement of cash flows. The new standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. This guidance will be applied using a retrospective approach. If it is impracticable to apply the amendments retrospectively for some of the issues within this ASU, the amendments for those issues would be applied prospectively as of the earliest date practicable. Early adoption is permitted including adoption in an interim period. We are currently evaluating the impact of adopting this guidance on our Condensed Consolidated Financial Statements and disclosures included within Notes to Unaudited Condensed Consolidated Financial Statements.

 

In June 2016, the FASB issued ASU No. 2016-13, which provides updated guidance on credit losses for financial assets measured at amortized cost basis and available-for sale debt securities. The new standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. This guidance will be applied using a modified retrospective approach for the cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective and using a prospective approach for debt securities for which any other-than-temporary impairment had been recognized before the effective date. Early adoption is permitted for fiscal years beginning after December 15, 2018. We are currently evaluating the impact of adopting this guidance on our Condensed Consolidated Financial Statements and disclosures included within Notes to Unaudited Condensed Consolidated Financial Statements.

 

In February 2016, the FASB issued ASU No. 2016-02, which provides guidance on the accounting treatment of leases.  The ASU establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either financing or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years and early adoption is permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. While we are currently assessing the impact of this ASU on our Condensed Consolidated Financial Statements, we expect the primary impact to our consolidated financial position upon adoption will be the recognition, on a discounted basis, of our minimum commitments under noncancelable operating leases on our Condensed Consolidated Balance Sheets, which will result in the recording of right of use assets and lease obligations and are currently discussed in “Note 12 — Commitments and Contingencies.”

 

In May 2014, the FASB issued ASU No. 2014-09, which creates FASB Accounting Standards Codification (“ASC”) Topic 606, “Revenue from Contracts with Customers” and supersedes ASC Topic 605, “Revenue Recognition”. The guidance replaces industry-specific guidance and establishes a single five-step model to identify and recognize revenue. The core principle of the guidance is that an entity should recognize revenue upon transfer of control of promised goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. Additionally, the guidance requires the entity to disclose further quantitative and qualitative information regarding the nature and amount of revenues arising from contracts with customers, as well as other information about the significant judgments and estimates used in recognizing revenues from contracts with customers. The guidance in ASU 2014-09 was further updated by ASU 2016-08 in March 2016, which provides clarification on the implementation of the principal versus agent considerations in ASU 2014-09.  In April 2016, the FASB issued ASU 2016-10, which provides clarification on the implementation of performance obligations and licensing in ASU 2014-09.  In May 2016, the FASB issued ASU 2016-11, which amends guidance provided in two SEC Staff Announcements at the March 3, 2016 Emerging Issues Task Force meeting over various topics relating to ASU 606. In May 2016, the FASB issued ASU 2016-12, which clarified various topics in ASU 606.  In December 2016, the FASB issued ASU 2016-20, which clarified additional topics in ASU 606.  This guidance was originally effective for interim and annual reporting periods beginning after December 15, 2016. However, in August 2015, the FASB issued ASU No. 2015-14, which extended the effective date to interim and annual periods beginning after December 15, 2017. Early application is permitted only as of annual reporting periods beginning after December 15, 2015, including interim reporting periods within that reporting period. This guidance may be adopted retrospectively or under a modified retrospective method where the cumulative effect is recognized at the date of initial application.

 

We will likely adopt this guidance using the retrospective method beginning in the first quarter of 2018. We performed an initial review of the requirements of the standard and are monitoring the activity of the FASB and the transition resource group as it relates to specific interpretive guidance that may impact us. We are currently completing detailed contract reviews to determine necessary adjustments to existing accounting policies and procedures and to support an evaluation of the standard’s impact on our Condensed Consolidated Financial Statements and disclosures included within Notes to Condensed Consolidated Financial Statements. Based on reviews performed, we do not expect our Payments revenues to be materially impacted by the implementation of this guidance. We are still evaluating our Games revenues and equipment and systems revenues to determine the extent, if any, of changes to the timing and amount of revenue recorded in each reporting period. Additionally, the new guidance will require enhanced disclosures and updates to our revenue recognition policies to identify performance obligations to customers and will also require significant judgment in both measurement and recognition. We may identify other impacts from the implementation of this guidance as we continue our assessment. 

 

BUSINESS COMBINATIONS
BUSINESS COMBINATIONS

3. BUSINESS COMBINATIONS

 

We account for business combinations in accordance with ASC 805, which requires that the identifiable assets acquired and liabilities assumed be recorded at their estimated fair values on the acquisition date separately from goodwill, which is the excess of the fair value of the purchase price over the fair values of these identifiable assets and liabilities. We include the results of operations of an acquired business as of the acquisition date. We had no material acquisitions for the three months ended March 31, 2017 and 2016.

FUNDING AGREEMENTS
FUNDING AGREEMENTS

4. FUNDING AGREEMENTS

 

Contract Cash Solutions Agreement

 

Our Contract Cash Solutions Agreement with Wells Fargo Bank, N.A. (“Wells Fargo”) allows us to use funds owned by Wells Fargo to provide the currency needed for normal operating requirements for our ATMs. For the use of these funds, we pay Wells Fargo a cash usage fee on the average daily balance of funds utilized multiplied by a contractually defined cash usage rate. These cash usage fees, reflected as interest expense within the Condensed Consolidated Statements of Loss and Comprehensive Loss, were $1.1 million and $0.8 million for the three months ended March 31, 2017 and 2016. We are exposed to interest rate risk to the extent that the applicable London Interbank Offered Rate (“LIBOR”) increases.

 

Under this agreement, all currency supplied by Wells Fargo remains the sole property of Wells Fargo at all times until it is dispensed, at which time Wells Fargo obtains an interest in the corresponding settlement receivable which is recorded on a net basis. As these funds are not our assets, supplied cash is not reflected on the Condensed Consolidated Balance Sheets. The outstanding balances of ATM cash utilized by us from Wells Fargo were $270.8 million and $285.4 million as of March 31, 2017 and December 31, 2016, respectively.

 

The Contract Cash Solutions Agreement, as amended, provides us with cash in the maximum amount of $425.0 million during the term of the agreement, which expires on June 30, 2019.

 

We are responsible for any losses of cash in the ATMs under this agreement, and we self‑insure for this risk. We incurred no material losses related to this self‑insurance for the three months ended March 31, 2017 and 2016.

 

Site-Funded ATMs

 

We operate ATMs at certain customer gaming establishments where the gaming establishment provides the cash required for the ATM operational needs. We are required to reimburse the customer for the amount of cash dispensed from these Site-Funded ATMs. The Site-Funded ATM liability included within settlement liabilities in the accompanying Condensed Consolidated Balance Sheets was $87.3 million and $151.0 million as of March 31, 2017 and December 31, 2016, respectively.

 

Prefunded Cash Access Agreements

Due to certain regulatory requirements, some international gaming establishments require prefunding of cash to cover all outstanding settlement amounts in order for us to provide cash access services to their properties. We enter into agreements with these operators for which we supply our cash access services for their properties. Under these agreements, we maintain sole discretion to either continue or cease operations as well as discretion over the amounts prefunded to the properties and may request amounts to be refunded to us, with appropriate notice to the operator, at any time. The initial prefunded amounts and subsequent amounts from the settlement of transactions are deposited into a bank account that is to be used exclusively for cash access services and we maintain the right to monitor all transaction activity in that account. The total amount of prefunded cash outstanding was approximately $9.8 million and $8.5 million at March 31, 2017 and December 31, 2016, respectively, and is included in prepaid expenses and other assets on our Condensed Consolidated Balance Sheets.

 

TRADE AND OTHER RECEIVABLES
TRADE AND OTHER RECEIVABLES

5. TRADE AND OTHER RECEIVABLES

 

Trade and loans receivables represent short-term credit granted to customers as well as long-term loans receivable on our games, fully integrated kiosks and compliance products.  Trade and loans receivables generally do not require collateral.  The balance of trade and loans receivables consists of outstanding balances owed to us by gaming establishments and casino patrons. Other receivables include income taxes receivables and other miscellaneous receivables. The balance of trade and other receivables consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

At March 31,

 

At December 31,

 

 

2017

   

2016

 

Trade and other receivables, net

 

 

 

 

 

 

Games trade and loans receivables

$

38,118

 

$

44,410

 

Payments trade and loans receivables

 

12,180

 

 

12,337

 

Other receivables

 

1,029

 

 

1,924

 

Total trade and other receivables, net

$

51,327

 

$

58,671

 

Less: non-current portion of receivables

 

3,453

 

 

2,020

 

Total trade and other receivables, current portion

$

47,874

 

$

56,651

 

 

At least quarterly, we evaluate the collectability of the outstanding balances and establish a reserve for the face amount of the expected losses on our receivables. The allowance for doubtful accounts for trade receivables includes reserves for both Games and Payments receivables. The provision for doubtful accounts is generally included within operating expenses in the Condensed Consolidated Statements of Loss and Comprehensive Loss. We also have a provision for doubtful accounts specifically associated with our outstanding check warranty receivables, which is included within Payments cost of revenues (exclusive of depreciation and amortization) in the Condensed Consolidated Statements of Loss and Comprehensive Loss. The outstanding balances of the check warranty and general reserves were $2.7 million and $2.3 million, respectively, as of March 31, 2017 and $2.7 million and $2.0 million, respectively, as of December 31, 2016.

PREPAID AND OTHER ASSETS
PREPAID AND OTHER ASSETS

6. PREPAID AND OTHER ASSETS

 

Prepaid and other assets include the balance of prepaid expenses, deposits, debt issuance costs on our Revolving Credit Facility (defined herein), restricted cash and other assets. The current portion of these assets is included in prepaid and other assets and the non-current portion is included in other assets, both of which are contained within the Condensed Consolidated Balance Sheets.

 

The balance of the current portion of prepaid and other assets consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

At March 31,

 

At December 31,

 

 

2017

    

2016

 

Prepaid expenses and other assets

 

 

 

 

 

 

Deposits

$

10,259

 

$

8,622

 

Prepaid expenses

 

7,613

 

 

5,937

 

Other

 

3,683

 

 

3,489

 

Total prepaid expenses and other assets

$

21,555

 

$

18,048

 

 

The balance of the non-current portion of other assets consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

At March 31,

 

At December 31,

 

 

 

2017

 

2016

   

 

Other assets

 

 

 

 

 

 

 

Prepaid expenses and deposits

$

3,485

 

$

3,399

 

 

Debt issuance costs of revolving credit

 

632

 

 

689

 

 

Other

 

3,481

 

 

3,434

 

 

Total other assets

$

7,598

 

$

7,522

 

 

 

INVENTORY
INVENTORY

7. INVENTORY

 

Our inventory primarily consists of component parts as well as work-in-progress and finished goods. The cost of inventory includes cost of materials, labor, overhead and freight. The inventory is stated at the lower of cost or market and accounted for using the FIFO method.

 

Inventory consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

At March 31,

 

At December 31,

 

 

 

2017

    

2016

 

 

Inventory

 

 

 

 

 

 

 

Raw materials and component parts, net of reserves of $1,651 and $2,155 at March 31, 2017 and December 31, 2016, respectively

$

14,243

 

$

12,570

 

 

Work-in-progress

 

2,769

 

 

1,502

 

 

Finished goods

 

5,374

 

 

4,996

 

 

Total inventory

$

22,386

 

$

19,068

 

 

 

PROPERTY, EQUIPMENT AND LEASED ASSETS
PROPERTY, EQUIPMENT AND LEASED ASSETS

8. PROPERTY, EQUIPMENT AND LEASED ASSETS

 

Property, equipment and leased assets consist of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At March 31, 2017

 

At December 31, 2016

 

 

 

Useful Life

 

 

 

 

Accumulated

 

Net Book

 

 

 

Accumulated

 

Net Book

 

 

    

(Years)

   

  Cost  

   

Depreciation

   

Value

   

Cost

   

Depreciation

   

Value

 

Property, equipment and leased assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental pool - deployed

 

2

-

4

 

$

130,097

 

$

63,582

 

$

66,515

 

$

123,812

 

$

59,188

 

$

64,624

 

Rental pool - undeployed

 

2

-

4

 

 

13,750

 

 

7,058

 

 

6,692

 

 

13,456

 

 

5,721

 

 

7,735

 

ATM equipment

 

 

5

 

 

 

16,372

 

 

11,671

 

 

4,701

 

 

16,537

 

 

11,189

 

 

5,348

 

Leasehold and building improvements

 

Lease Term

 

 

9,919

 

 

4,022

 

 

5,897

 

 

10,023

 

 

3,698

 

 

6,325

 

Cash advance equipment

 

 

3

 

 

 

8,127

 

 

4,448

 

 

3,679

 

 

8,590

 

 

4,499

 

 

4,091

 

Machinery, office and other equipment

 

2

-

5

 

 

30,989

 

 

21,170

 

 

9,819

 

 

30,424

 

 

20,108

 

 

10,316

 

Total

 

 

 

 

 

$

209,254

 

$

111,951

 

$

97,303

 

$

202,842

 

$

104,403

 

$

98,439

 

 

Depreciation expense related to other property, equipment and leased assets totaled approximately $10.8 million for the three months ended March 31, 2017 and $12.3 million for the three months ended March 31, 2016. There was no material impairment of our property, equipment and leased assets for the three months ended March 31, 2017 and 2016, respectively.

GOODWILL AND OTHER INTANGIBLE ASSETS
GOODWILL AND OTHER INTANGIBLE ASSETS

9. GOODWILL AND OTHER INTANGIBLE ASSETS

 

Goodwill

 

Goodwill represents the excess of the purchase price over the identifiable tangible and intangible assets acquired plus liabilities assumed arising from business combinations. The balance of goodwill was $640.6 million and $640.5 million at March 31, 2017 and December 31, 2016, respectively. 

 

In accordance with ASC 350, we test goodwill at the reporting unit level, which are identified as operating segments or one level below, for impairment on an annual basis and between annual tests if events and circumstances indicate it is more likely than not that the fair value of a reporting unit is less than its carrying amount.

 

We test for impairment annually on a reporting unit basis, at the beginning of our fourth fiscal quarter, or more often under certain circumstances. The annual impairment test is completed using either: a qualitative Step 0 assessment based on reviewing relevant events and circumstances; or a quantitative Step 1 assessment, which determines the fair value of the reporting unit, using an income approach that discounts future cash flows based on the estimated future results of our reporting units and a market approach that compares market multiples of comparable companies to determine whether or not any impairment exists. If the fair value of a reporting unit is less than its carrying amount, we will use the Step 1 assessment to determine the impairment in accordance with the adoption of ASU No 2017-04.

 

No impairment was identified for our goodwill for the three months ended March 31, 2017 and 2016.  

Other Intangible Assets

 

Other intangible assets consist of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At March 31, 2017

 

At December 31, 2016

 

 

Useful Life

 

 

 

 

Accumulated

 

Net Book

 

 

 

 

Accumulated

 

Net Book

 

    

(years)

   

Cost

   

Amortization

   

Value

   

Cost

   

Amortization

   

Value

Other intangible assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contract rights under placement fee agreements

 

1

-

7

 

$

20,334

 

$

7,831

 

$

12,503

 

$

17,742

 

$

6,281

 

$

11,461

Customer contracts

 

7

-

14

 

 

50,975

 

 

41,427

 

 

9,548

 

 

50,975

 

 

40,419

 

 

10,556

Customer relationships

 

8

-

12

 

 

231,100

 

 

47,929

 

 

183,171

 

 

231,100

 

 

42,688

 

 

188,412

Developed technology and software

 

1

-

6

 

 

228,392

 

 

134,597

 

 

93,795

 

 

224,265

 

 

126,721

 

 

97,544

Patents, trademarks and other

 

1

-

17

 

 

29,242

 

 

18,809

 

 

10,433

 

 

27,771

 

 

17,747

 

 

10,024

Total

 

 

 

 

 

$

560,043

 

$

250,593

 

$

309,450

 

$

551,853

 

$

233,856

 

$

317,997

 

Amortization expense related to other intangible assets was approximately $17.3 million and $23.2 million for the three months ended March 31, 2017 and 2016, respectively.

 

We evaluate our other intangible assets for potential impairment in connection with our quarterly review process. There was no material impairment identified for any of our other intangible assets for the three months ended March 31, 2017 and 2016.

 

We enter into placement fee agreements to provide financing for new gaming facilities or for the expansion or improvement of existing facilities. The funding under placement fee agreements is not reimbursed. In return for the fees under these agreements, each facility dedicates a percentage of its floor space, or an agreed upon unit count, for the placement of our electronic gaming machines (“EGMs”) over the term of the agreement, generally 12 to 83 months, and we receive a fixed percentage or flat fee of those machines’ hold per day. Certain of the agreements contain EGM performance standards that could allow the respective facility to reduce a portion of our guaranteed floor space.

 

Placement fees and amounts advanced in excess of those to be reimbursed by the customer for real property and land improvements are allocated to intangible assets and are generally amortized over the term of the contract, which is recorded as a reduction of revenue generated from the facility. In the past we have, and in the future, we may, by mutual agreement, amend these agreements to reduce our floor space at the facilities. Any proceeds received for the reduction of floor space is first applied against the intangible asset for that particular placement fee agreement, if any, and the remaining net book value of the intangible asset is prospectively amortized on a straight-line method over the remaining estimated useful life.  We paid approximately $3.0 million and $1.0 million to extend the term of placement fee agreements with a customer for certain of its locations for the three months ended March 31, 2017 and 2016, respectively.  

ACCOUNTS PAYABLE AND ACCRUED EXPENSES
ACCOUNTS PAYABLE AND ACCRUED EXPENSES

10.ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 

The following table presents our accounts payable and accrued expenses (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

At March 31,

 

At December 31,

 

 

2017

   

2016

  

Accounts payable and accrued expenses

 

 

 

 

 

 

Trade accounts payable

$

66,895

 

$

55,352

 

Accrued interest

 

15,175

 

 

82

 

Payroll and related expenses

 

11,093

 

 

12,305

 

Deferred and unearned revenues

 

10,766

 

 

9,222

 

Cash access processing and related expenses

 

4,889

 

 

7,001

 

Accrued taxes

 

2,442

 

 

2,587

 

Other

 

9,088

 

 

7,842

 

Total accounts payable and accrued expenses

$

120,348

 

$

94,391

 

 

LONG-TERM DEBT
LONG-TERM DEBT

 

11. LONG-TERM DEBT

 

The following table summarizes our outstanding indebtedness (in thousands):

 

 

 

 

 

 

 

 

 

 

At March 31,

 

At December 31,

 

 

 

2017

    

2016

 

 

Long-term debt

 

 

 

 

 

 

 

Senior secured term loan

$

463,100

 

$

465,600

 

 

Senior secured notes

 

335,000

 

 

335,000

 

 

Senior unsecured notes

 

350,000

 

 

350,000

 

 

Total debt

 

1,148,100

 

 

1,150,600

 

 

Less: debt issuance costs and discount

 

(27,105)

 

 

(28,720)

 

 

Total debt after debt issuance costs and discount

 

1,120,995

 

 

1,121,880

 

 

Less: current portion of long-term debt

 

(10,000)

 

 

(10,000)

 

 

Long-term debt, less current portion

$

1,110,995

 

$

1,111,880

 

 

 

Credit Facilities

 

In December 2014, Everi Payments, as borrower, and Holdings entered into a credit agreement with Bank of America, N.A., as administrative agent, collateral agent, swing line lender and letter of credit issuer; Deutsche Bank Securities Inc., as syndication agent; and Merrill Lynch, Pierce, Fenner & Smith Incorporated and Deutsche Bank Securities Inc., as joint lead arrangers and joint book managers (the “Credit Agreement”). The Credit Agreement consists of the $500.0 million, six-year senior secured term loan facility that matures in 2020 (the “Term Loan”) and the $50.0 million, five-year senior secured revolving credit facility that matures in 2019 (the “Revolving Credit Facility,” and together with the Term Loan, the “Credit Facilities”). The fees associated with the Credit Facilities included discounts of approximately $7.5 million and debt issuance costs of approximately $13.9 million. All borrowings under the Credit Facilities are subject to the satisfaction of customary conditions, including the absence of a default and compliance with representations and warranties.

 

We are required to repay the Term Loan in an amount equal to 0.50% per quarter of the initial aggregate principal with the final principal repayment installment on the maturity date.  Interest is due in arrears each March, June, September and December and at the maturity date. However, interest may be remitted within one to three months of such dates.

 

The Term Loan had an applicable weighted average interest rate of 6.28%  and 6.25% for the period ended March 31, 2017 and December 31, 2016.

 

The interest rate per annum applicable to the Revolving Credit Facility is, at our option, the base rate or LIBOR plus, in each case, an applicable margin. The interest rate per annum applicable to the Term Loan is also, at our option, the base rate or LIBOR plus, in each case, an applicable margin. We have historically elected to pay interest based on LIBOR, and we expect to continue to pay interest based on LIBOR. LIBOR will be reset at the beginning of each selected interest period based on the LIBOR rate then in effect; provided that, with respect to the Revolving Credit Facility, if LIBOR is below zero, then such rate will be equal to zero plus the applicable margin, and, with respect to the Term Loan, if LIBOR is below 1.0%, then such rate will be equal to 1.0% plus the applicable margin. The base rate is a fluctuating interest rate equal to the highest of (a) the prime lending rate announced by the administrative agent, (b) the federal funds effective rate from time to time plus 0.50%, and (c) LIBOR (after taking account of any applicable floor) applicable for an interest period of one month plus 1.00%. The applicable margins of 4.75% and 5.25% for the Revolving Credit Facility and Term Loan, respectively, are subject to adjustment based on our consolidated secured leverage ratio.

Voluntary prepayments of the Term Loan and the Revolving Credit Facility and voluntary reductions in the unused commitments are permitted in whole or in part, in minimum amounts as set forth in the Credit Agreement, with prior notice but without premium or penalty.

Subject to certain exceptions, the obligations under the Credit Facilities are secured by substantially all of the present and after acquired assets of each of Everi Payments, Holdings and the subsidiary guarantors, including: (a) a perfected first priority pledge of all the capital stock of Everi Payments and each domestic direct, wholly owned material restricted subsidiary held by Holdings, Everi Payments or any such subsidiary guarantor; and (b) a perfected first priority security interest in substantially all other tangible and intangible assets of Holdings, Everi Payments, and such subsidiary guarantors (including, but not limited to, accounts receivable, inventory, equipment, general intangibles, investment property, certain real property, intellectual property and the proceeds of the foregoing). Subject to certain exceptions, the Credit Facilities are unconditionally guaranteed by Holdings and such subsidiary guarantors, including Everi Games Holding and its material domestic subsidiaries.

The Credit Agreement contains certain covenants that, among other things, limit Holdings’ ability, and the ability of certain of its subsidiaries, to incur additional indebtedness; sell assets or consolidate or merge with or into other companies; pay dividends or repurchase or redeem capital stock; make certain investments; issue capital stock of subsidiaries; incur liens; prepay, redeem or repurchase subordinated debt; and enter into certain types of transactions with our affiliates. The Credit Agreement also requires Holdings, together with its subsidiaries, to comply with a maximum consolidated secured leverage ratio as well as an annual excess cash flow requirement. At March 31, 2017, our consolidated secured leverage ratio was 3.66, with a maximum allowable ratio of 4.25. Our consolidated secured maximum leverage ratio will be 4.00,  3.75 and 3.50 as of December 31, 2017, 2018 and 2019 and thereafter, respectively.

Events of default under the Credit Agreement include customary events such as a cross-default provision with respect to other material debt (which includes the Refinanced Secured Notes and the Unsecured Notes (each defined below)). In addition, an event of default will occur if Holdings undergoes a change of control. This is defined to include the case where Holdings ceases to own 100% of the equity interests of Everi Payments, or where any person or group acquires a percentage of the economic or voting interests of Holdings’ capital stock of 35% or more (determined on a fully diluted basis), or where a majority of the board of directors of Everi Holdings ceases to consist of persons who are directors of Holdings on the closing date of the Credit Facilities or other directors whose nomination for election to the board of directors of Holdings was recommended by a majority of the then continuing directors.

At March 31, 2017, we had approximately $463.1 million of borrowings outstanding under the Term Loan and no borrowings outstanding under the Revolving Credit Facility. We had $50.0 million of additional borrowing availability under the Revolving Credit Facility as of March 31, 2017. The weighted average interest rate on the Credit Facilities was approximately 6.28% for the three months ended March 31, 2017.

We were in compliance with the terms of the Credit Facilities as of March 31, 2017 and December 31, 2016.

We expect that our cash provided by operating activities will be sufficient for our operating and debt servicing needs during the next 12 months. If not, we have sufficient borrowings available under our Credit Facilities to meet additional funding requirements. We monitor the financial strength of our lenders on an ongoing basis using publicly-available information. Based upon that information, we believe there is not a likelihood that any of our lenders might not be able to honor their commitments under the Credit Agreement.

Senior Secured Notes and Refinance of Senior Secured Notes

In December 2014, we issued $350.0 million in aggregate principal amount of 7.75% Secured Notes due 2021 (the “Secured Notes”). The fees associated with the Secured Notes included debt issuance costs of approximately $13.6 million. The Secured Notes were acquired by the initial purchasers pursuant to the terms of a purchase agreement. Under the terms of the purchase agreement, during a one-year period following the closing and upon prior notice from the initial purchasers, the Company was required to use commercially reasonable efforts to aid the purchasers in the resale of the Secured Notes, including by preparing an updated offering memorandum and participating in reasonable marketing efforts including road shows, to the extent required therein. Alternatively, we had the ability to redeem the Secured Notes from the initial purchasers without penalty. On April 15, 2015, the Company entered into a note purchase agreement with Everi Payments, CPPIB Credit Investments III Inc. (the “Purchaser”), and Deutsche Bank Trust Company Americas, as collateral agent (the “Note Purchase Agreement”), and issued $335.0 million in aggregate principal amount of 7.25% Senior Secured Notes due 2021 (the “Refinanced Secured Notes”) to the Purchaser in a private offering. With the proceeds from the issuance of the Refinanced Secured Notes, we redeemed, in full, the Company’s then outstanding Secured Notes from the initial purchasers in accordance with the terms of the indenture governing the Secured Notes. In connection with the issuance of the Refinanced Secured Notes during the second quarter of 2015, we expensed $13.0 million of related debt issuance costs and fees to loss on extinguishment of debt associated with the redeemed Secured Notes that were outstanding prior to the refinance transaction. 

In connection with the issuance of the Refinanced Secured Notes and pursuant to the terms of the Note Purchase Agreement, the Company issued a warrant to purchase shares of the Company’s common stock (the “Warrant”) to the Purchaser. The Warrant expires on the sixth anniversary of the date of issuance. The number of shares issuable pursuant to the Warrant and the warrant exercise price are subject to adjustment for stock splits, reverse stock splits, stock dividends, mergers and certain other events. The Warrant was valued at $2.2 million using a modified Black-Scholes model and was accounted for as a debt discount.

Interest is due quarterly in arrears each January, April, July and October.

We were in compliance with the terms of the Refinanced Secured Notes as of March 31, 2017 and December 31, 2016.

Senior Unsecured Notes

In December 2014, we issued $350.0 million in aggregate principal amount of 10.00% Unsecured Notes due 2022 (the “Unsecured Notes”). The fees associated with the Unsecured Notes included original issue discounts of approximately $3.8 million and debt issuance costs of approximately $14.0 million.

Interest is due semi-annually in arrears each January and July.

The Unsecured Notes were acquired by the initial purchasers pursuant to the terms of a purchase agreement. Under the terms of the purchase agreement, during a one-year period following the closing and upon prior notice from the initial purchasers, the Company was required to use commercially reasonable efforts to aid the purchasers in the resale of the Unsecured Notes, including by preparing an updated offering memorandum and participating in reasonable marketing efforts including road shows, to the extent required therein. The Unsecured Notes were resold by the initial purchasers to third parties in the second quarter of 2015.

In December 2015, we completed an exchange offer in which all of the unregistered Unsecured Notes were exchanged for a like amount of Unsecured Notes that had been registered under the Securities Act.

We were in compliance with the terms of the Unsecured Notes as of March 31, 2017 and December 31, 2016.

COMMITMENTS AND CONTINGENCIES
COMMITMENTS AND CONTINGENCIES

12.COMMITMENTS AND CONTINGENCIES

 

We are involved in various investigations, claims and lawsuits in the ordinary course of our business. In addition, various legal actions, claims and governmental inquiries and proceedings are pending or may be instituted or asserted in the future against us and our subsidiaries. Although the outcome of our legal proceedings cannot be predicted with certainty and no assurances can be provided, based upon current information, we do not believe the liabilities, if any, which may ultimately result from the outcome of such matters, individually or in the aggregate, will have a material adverse impact on our financial position, liquidity or results of operations.

 

SHAREHOLDERS' EQUITY
SHAREHOLDERS' EQUITY

13. SHAREHOLDERS’ EQUITY

 

Preferred Stock. Our amended and restated certificate of incorporation, as amended, allows our Board of Directors, without further action by stockholders, to issue up to 50,000,000 shares of preferred stock in one or more series and to fix the designations, powers, preferences, privileges and relative participating, optional, or special rights as well as the qualifications, limitations or restrictions of the preferred stock, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences.  As of March 31, 2017 and December 31, 2016, we had no shares of preferred stock outstanding.

 

Common Stock. Subject to the preferences that may apply to shares of preferred stock that may be outstanding at the time, the holders of outstanding shares of common stock are entitled to receive dividends out of assets legally available at the times and in the amounts as our Board of Directors may from time to time determine. All dividends are non-cumulative. In the event of the liquidation, dissolution or winding up of Everi, the holders of common stock are entitled to share ratably in all assets remaining after the payment of liabilities, subject to the prior distribution rights of preferred stock, if any, then outstanding. Each stockholder is entitled to one vote for each share of common stock held on all matters submitted to a vote of stockholders. Cumulative voting for the election of directors is not provided for. The common stock is not entitled to preemptive rights and is not subject to conversion or redemption. There are no sinking fund provisions applicable to the common stock. Each outstanding share of common stock is fully paid and non-assessable. As of March 31, 2017 and December 31, 2016, we had 90,965,482 and 90,952,185 shares of common stock issued, respectively.

 

Treasury Stock. Employees may direct us to withhold vested shares of restricted stock to satisfy the minimum statutory withholding requirements applicable to their restricted stock vesting. We repurchased or withheld from restricted stock awards 2,574 shares of common stock for the three months ended March 31, 2017 at an aggregate purchase price of $7,475 and 2,588 shares of common stock for the three months ended March 31, 2016 at an aggregate purchase price of $8,933, to satisfy the minimum applicable tax withholding obligations related to the vesting of such restricted stock awards. 

 

WEIGHTED AVERAGE COMMON SHARES
WEIGHTED AVERAGE COMMON SHARES

14.WEIGHTED AVERAGE COMMON SHARES

 

The weighted average number of shares of common stock outstanding used in the computation of basic and diluted loss per share is as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

 

 

 

2017

    

2016

 

    

 

Weighted average shares

 

 

 

 

 

 

 

Weighted average number of common shares outstanding - basic

 

66,090

 

66,034

 

 

 

Potential dilution from equity grants(1)

 

 —

 

 —

 

 

 

Weighted average number of common shares outstanding - diluted

 

66,090

 

66,034

 

 

 

 


(1)

The Company was in a net loss position for the three months ended March 31, 2017 and 2016. Therefore, no potential dilution from the application of the treasury stock method was applicable. Equity awards to purchase approximately 15.7 million shares of common stock for the three months ended March 31, 2017 and 8.4 million shares of common stock for the three months ended March 31, 2016 were excluded from the computation of diluted net loss per share as this effect would have been antidilutive.

SHARE-BASED COMPENSATION
SHARE-BASED COMPENSATION

15.SHARE-BASED COMPENSATION

 

Equity Incentive Awards

 

Our 2014 Equity Incentive Plan (the “2014 Plan”) and our 2012 Equity Incentive Plan (as amended, the “2012 Plan”) are used to attract and retain the best available personnel, to provide additional incentives to employees, directors and consultants and to promote the success of our business. The 2014 Plan superseded the then current 2005 Stock Incentive Plan (the “2005 Plan”). The 2012 Plan was assumed in connection with our acquisition of Everi Games Holding and conformed to include similar provisions to those as set forth in the 2014 Plan. Our equity incentive plans are administered by the Compensation Committee of our Board of Directors, which has the authority to select individuals who are to receive equity incentive awards and to specify the terms and conditions of grants of such awards, including, but not limited to: the vesting provisions and exercise prices.

 

Generally, we grant the following award types: (a) time-based options, (b) market-based options and (c) restricted stock. These awards have varying vesting provisions and expiration periods. For the three months ended March 31, 2017, we granted time- and market-based options. 

 

Our time-based stock options granted under our equity plans generally vest at a rate of 25% per year on each of the first four anniversaries of the option grant dates. These options expire after a ten-year period.

 

Our market-based options granted in 2017 vest at a rate of 25% per year on each of the first four anniversaries of the grant date, provided that as of the vesting date for each vesting tranche, the closing price of the Company’s shares on the New York Stock Exchange is at least a specified price hurdle, defined as a 25% premium to the closing stock price on the grant date. If the price hurdle is not met as of the vesting date for a vesting tranche, then the vested tranche shall vest and become vested shares on the last day of a period of 30 consecutive trading days during which the closing price is at least the price hurdle. These options expire after a ten-year period.

 

Our market-based options granted in 2016 vest at a rate of 25% per year on each of the first four anniversaries of the grant date, provided that as of the vesting date for each vesting tranche, the closing price of the Company’s shares on the New York Stock Exchange is at least a specified price hurdle, defined as a 50% premium to the closing stock price on the grant date. If the price hurdle is not met as of the vesting date for a vesting tranche, then the vested tranche shall vest and become vested shares on the last day of a period of 30 consecutive trading days during which the closing price is at least the price hurdle. These options expire after a ten-year period.

 

A summary of award activity is as follows (in thousands):

 

 

 

 

 

 

 

 

    

Stock Options

    

Restricted Stock

 

 

 

Granted

 

Granted

 

Outstanding, December 31, 2016

 

18,233

 

80

 

Additional authorized shares

 

 —

 

 —

 

Granted

 

4,003

 

 —

 

Exercised options or vested shares

 

(4)

 

(9)

 

Cancelled or forfeited

 

(71)

 

 —

 

Outstanding, March 31, 2017

 

22,161

 

71

 

 

The maximum number of shares available for future equity awards, both under the 2014 Plan and 2012 Plan, is approximately 1.0 million shares of our common stock. There are no shares available for future equity awards under the 2005 Plan.

 

 

Stock Options

 

The fair value of our standard time-based options in connection with our annual grant that occurred during the first quarter of 2017 was determined as of the date of grant using the Black-Scholes option pricing model with the following assumptions:

 

 

 

 

 

 

 

Three months ended

 

 

March 31,

 

    

2017   

Risk-free interest rate

 

 2

%  

Expected life of options (in years)

 

 6

 

Expected volatility

 

54

%  

Expected dividend yield

 

 —

%  

 

For the three months ended March 31, 2016, certain executive and director grants were valued under the Black-Scholes option pricing model that utilized different assumptions from those used for our standard time-based options. For the time-based options granted on February 25, 2016, the assumptions were: (a) risk-free interest rate of 1%; (b) expected term of five years; (c) expected volatility of 49%; and (d) no expected dividend yield. For the time-based options granted on February 13, 2016, the assumptions were: (a) risk-free interest rate of 1%; (b) expected term of six years; (c) expected volatility of 49%; and (d) no expected dividend yield.

 

The fair value of our market-based options in connection with the annual grant that occurred during the first quarter of 2017 was determined as of the date of grant using a lattice-based option valuation model with the following assumptions:

 

 

 

 

 

 

 

Three months ended

 

 

March 31,

 

    

2017

    

Risk-free interest rate

 

 3

%  

Measurement period (in years)

 

10

 

Expected volatility

 

70

%  

Expected dividend yield

 

 —

%  

 

For the three months ended March 31, 2016, there were no market-based options granted.

 

The following tables present the options activity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

 

    

Weighted

    

 

 

 

 

 

Number of

 

Weighted Average

 

Average Life

 

Aggregate

 

 

 

Common Shares

 

Exercise Price

 

Remaining

 

Intrinsic Value

 

 

 

(in thousands)

 

(per share)

 

(years)

 

(in thousands)

 

Outstanding, December 31, 2016

 

18,233

 

$

6.02

 

6.4

 

$

2,387

 

Granted

 

4,003

 

 

3.29

 

 

 

 

 

 

Exercised

 

(4)

 

 

2.20

 

 

 

 

 

 

Canceled or forfeited

 

(71)

 

 

5.56

 

 

 

 

 

 

Outstanding, March 31, 2017

 

22,161

 

$

5.53

 

6.9

 

$

20,511

 

Vested and expected to vest, March 31, 2017

 

19,149

 

$

5.68

 

6.7

 

$

16,465

 

Exercisable, March 31, 2017

 

9,573

 

$

7.12

 

4.6

 

$

2,186

 

 

There were 4.0 million and 0.6 million options granted for the three months ended March 31, 2017 and 2016, respectively. The weighted average grant date fair value per share of options granted was $1.81 and $1.28 for the three months ended March 31, 2017 and 2016, respectively. The total intrinsic value of options exercised was $6,132 for the three months ended March 31, 2017.  No options were exercised during the three months ended March 31, 2016.

 

There was $15.3 million in unrecognized compensation expense related to options expected to vest as of March 31, 2017. This cost is expected to be recognized on a straight-line basis over a weighted average period of 2.5 years. We recorded $1.3 million in non-cash compensation expense related to options granted that were expected to vest for the three months ended March 31, 2017. We received $8,554 in cash from the exercise of options for the three months ended March 31, 2017.

 

There was $15.0 million in unrecognized compensation expense related to options expected to vest as of March 31, 2016. This cost was expected to be recognized on a straight-line basis over a weighted average period of 2.5 years. We recorded $1.0 million in non-cash compensation expense related to options granted that were expected to vest as of March 31, 2016. There were no proceeds received from the exercise of options as no exercises occurred during the period.

 

Restricted Stock

 

The following is a summary of non-vested share awards for our time-based restricted stock:

 

 

 

 

 

 

 

 

 

    

 

    

Weighted

 

 

 

Shares

 

Average Grant

 

 

 

Outstanding

 

Date Fair Value

 

 

 

(in thousands)

 

(per share)

 

Outstanding, December 31, 2016

 

80

 

$

7.12

 

Granted

 

 —

 

 

 —

 

Vested

 

(9)

 

 

7.09

 

Forfeited

 

 —

 

 

 —

 

Outstanding, March 31, 2017

 

71

 

$

7.12

 

 

There were no shares of restricted stock granted for the three months ended March 31, 2017 and 2016. The total fair value of restricted stock vested was $45,050 and $24,267 for the three months ended March 31, 2017 and 2016, respectively.

 

There was $0.8 million in unrecognized compensation expense related to shares of time based restricted stock expected to vest as of March 31, 2017. This cost is expected to be recognized on a straight-line basis over a weighted average period of 1.6 years. There were 9,405 shares of restricted stock that vested and we recorded $0.1 million in non-cash compensation expense related to the restricted stock granted that was expected to vest during the three months ended March 31, 2017.  

 

There was $1.7 million in unrecognized compensation expense related to shares of time-based restricted shares expected to vest as of March 31, 2016. This cost was expected to be recognized on a straight-line basis over a weighted average period of 2.2 years. There were 10,600 shares of time-based restricted shares vested and we recorded $0.1 million in non-cash compensation expense related to the restricted stock granted that was expected to vest for the three months ended March 31, 2016.

INCOME TAXES
INCOME TAXES

16.INCOME TAXES

 

The income tax provision reflected an effective income tax rate of negative 43.0% for the three months ended March 31, 2017, which was less than the statutory federal rate of 35.0% primarily due to an increase in our valuation allowance for deferred tax assets, partially offset by the lower foreign tax rate applicable to our foreign source income, state taxes and the benefit from a research credit. The income tax provision reflected an effective income tax rate of 38.0% for the same period in the prior year, which was higher than the statutory federal rate of 35.0% primarily due to state taxes, the lower foreign tax rate applicable to our foreign source income and the benefit from a research credit, which was partially offset by non-statutory stock options that expired during 2016.

 

We have analyzed filing positions in all of the federal, state and foreign jurisdictions where we are required to file income tax returns, as well as all open tax years in these jurisdictions. As of March 31, 2017, the Company recorded $0.8 million of unrecognized tax benefits, all of which would impact our effective tax rate, if recognized. We do not anticipate that our unrecognized tax benefits will materially change within the next 12 months. The Company has not accrued any penalties and interest for its unrecognized tax benefits. Other than the unrecognized tax benefit recorded, we believe that our income tax filing positions and deductions will be sustained upon audit, and we do not anticipate any other adjustments that will result in a material change to our financial position. We may, from time to time, be assessed interest or penalties by tax jurisdictions, although any such assessments historically have been minimal and immaterial to our financial results. Our policy for recording interest and penalties associated with audits and unrecognized tax benefits is to record such items as a component of income tax in our Condensed Consolidated Statements of Loss and Comprehensive Loss.

 

SEGMENT INFORMATION
SEGMENT INFORMATION

17.SEGMENT INFORMATION

 

Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision-making group in deciding how to allocate resources and in assessing performance. Our chief operating decision-making group consists of the Chief Executive Officer and the Chief Financial Officer. This group manages the business, allocates resources and measures profitability based on our operating segments. Our operating segments are managed and reviewed separately, as each represents products that can be sold separately to our customers.

 

Our chief operating decision-making group has determined the following to be the operating segments for which we conduct business: (a) Games and (b) Payments. We have reported our financial performance based on our segments in both the current and prior periods. Each of these segments is monitored by our management for performance against its internal forecast and is consistent with our internal management reporting.

 

·

The Games segment provides solutions directly to gaming establishments to offer their patrons gaming entertainment related experiences including: leased gaming equipment; sales and maintenance related services of gaming equipment; gaming systems; and ancillary products and services.

 

·

The Payments segment provides solutions directly to gaming establishments to offer their patrons cash access related services and products, including: access to cash at gaming facilities via ATM cash withdrawals, credit card cash access transactions and POS debit card cash access transactions; check-related services; fully integrated kiosks and maintenance services; compliance, audit and data software; casino credit data and reporting services and other ancillary offerings.

 

Corporate overhead expenses have been allocated to the segments either through specific identification or based on a reasonable methodology. In addition, we allocate depreciation and amortization expenses to the business segments.

 

Our business is predominantly domestic with no specific regional concentrations and no significant assets in foreign locations.

 

The accounting policies of the operating segments are generally the same as those described in the summary of significant accounting policies.

 

The following tables present segment information (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended March 31,

 

 

    

2017

    

2016

    

Revenues

 

 

 

 

 

 

 

Games

 

$

55,276

 

$

48,178

 

Payments

 

 

182,261

 

 

157,591

 

Total revenues

 

$

237,537

 

$

205,769

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

 

 

 

 

 

 

Games

 

$

4,792

 

$

(3,245)

 

Payments

 

 

17,811

 

 

7,030

 

Total operating income

 

$

22,603

 

$

3,785

 

 

 

 

 

 

 

 

 

 

 

 

At March 31, 2017

    

At December 31, 2016

Total assets

 

 

 

 

 

 

Games

 

$

886,014

 

$

894,213

Payments

 

 

434,460

 

 

513,950

Total assets

 

$

1,320,474

 

$

1,408,163

 

Major Customers. For the three months ended March 31, 2017 and 2016, no single customer accounted for more than 10% of our revenues. Our five largest customers accounted for approximately 27% and 32% for the three months ended March 31, 2017 and 2016, respectively.

CONDENSED CONSOLIDATING FINANCIAL INFORMATION
CONDENSED CONSOLIDATING FINANCIAL INFORMATION

18.CONDENSED CONSOLIDATING FINANCIAL INFORMATION

 

We conduct substantially all of our business through our U.S. and foreign subsidiaries. Everi Payments’ (“Subsidiary Issuer”) obligations under the Unsecured Notes are fully and unconditionally guaranteed, subject to certain customary release provisions, on a joint and several basis by Holdings (“Parent”) and substantially all of our 100%-owned U.S. subsidiaries other than Subsidiary Issuer (the “Guarantor Subsidiaries” and, together with Parent, the “Guarantors” and each a “Guarantor” ). The guarantees of our Unsecured Notes will be released under the following customary circumstances: (i) the sale or disposition of all or substantially all of the assets of the Guarantor (by way of merger, consolidation, or otherwise) to a person that is not (either before or after giving effect to such transaction) Parent, Subsidiary Issuer or a restricted subsidiary; (ii) the sale or disposition of sufficient capital stock of the Guarantor to a person that is not (either before or after giving effect to such transaction) Parent, Subsidiary Issuer or a restricted subsidiary and the Guarantor ceases to be a restricted subsidiary of Subsidiary Issuer as a result of the sale or other disposition; (iii) the designation of the Guarantor as an unrestricted subsidiary in accordance with the indenture governing the Unsecured Notes; or (iv) the legal or covenant defeasance of the Unsecured Notes or the satisfaction and discharge of the indenture governing the Unsecured Notes.

 

Presented below is condensed consolidating financial information for (a) Parent, (b) Subsidiary Issuer, (c) the Guarantor Subsidiaries and (d) our U.S. subsidiaries that are not Guarantor Subsidiaries and our foreign subsidiaries (collectively, the “Non-Guarantor Subsidiaries”) as of March 31, 2017 and December 31, 2016 and for the three months ended March 31, 2017 and 2016. The condensed consolidating financial information has been presented to show the nature of assets held and the results of operations and cash flows of Parent, Subsidiary Issuer, the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries assuming that the guarantee structure of the Unsecured Notes had been in effect at the beginning of the periods presented.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2017

 

Parent

    

Subsidiary
Issuer

    

Guarantor
Subsidiaries

    

Non-Guarantor
Subsidiaries

    

Eliminations

    

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Games

$

 —

 

$

 —

 

$

55,518

 

$

440

 

$

(682)

 

$

55,276

Payments

 

 —

 

 

166,673

 

 

7,688

 

 

8,050

 

 

(150)

 

 

182,261

Total revenues

 

 —

 

 

166,673

 

 

63,206

 

 

8,490

 

 

(832)

 

 

237,537

Costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Games cost of revenue (exclusive of depreciation and amortization)

 

 —

 

 

 —

 

 

12,919

 

 

207

 

 

(682)

 

 

12,444

Payments cost of revenue (exclusive of depreciation and amortization)

 

 —

 

 

133,100

 

 

2,181

 

 

5,518

 

 

 —

 

 

140,799

Operating expenses

 

 —

 

 

17,543

 

 

11,058

 

 

542

 

 

(150)

 

 

28,993

Research and development

 

 —

 

 

 —

 

 

4,538

 

 

 5

 

 

 —

 

 

4,543

Depreciation

 

 —

 

 

1,763

 

 

8,951

 

 

116

 

 

 —

 

 

10,830

Amortization

 

 —

 

 

2,880

 

 

13,962

 

 

483

 

 

 —

 

 

17,325

Total costs and expenses

 

 —

 

 

155,286

 

 

53,609

 

 

6,871

 

 

(832)

 

 

214,934

Operating income

 

 —

 

 

11,387

 

 

9,597

 

 

1,619

 

 

 —

 

 

22,603

Other expenses (income)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net of interest income

 

 —

 

 

1,996

 

 

22,896

 

 

165

 

 

 —

 

 

25,057

Equity in loss (income) of subsidiaries

 

3,508

 

 

(4,181)

 

 

(103)

 

 

 —

 

 

776

 

 

 —

Total other expenses (income)

 

3,508

 

 

(2,185)

 

 

22,793

 

 

165

 

 

776

 

 

25,057

(Loss) income before income tax

 

(3,508)

 

 

13,572

 

 

(13,196)

 

 

1,454

 

 

(776)

 

 

(2,454)

Income tax provision (benefit)

 

 —

 

 

(1,060)

 

 

1,730

 

 

384

 

 

 —

 

 

1,054

Net (loss) income

 

(3,508)

 

 

14,632

 

 

(14,926)

 

 

1,070

 

 

(776)

 

 

(3,508)

Foreign currency translation

 

272

 

 

 —

 

 

 —

 

 

272

 

 

(272)

 

 

272

Comprehensive (loss) income

$

(3,236)

 

$

14,632

 

$

(14,926)

 

$

1,342

 

$

(1,048)

 

$

(3,236)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2016

 

Parent

    

Subsidiary
Issuer

    

Guarantor
Subsidiaries

    

Non-Guarantor
Subsidiaries

    

Eliminations

    

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Games

$

 —

 

$

 —

 

$

48,178

 

$

 —

 

$

 —

 

$

48,178

Payments

 

 —

 

 

146,386

 

 

7,418

 

 

4,158

 

 

(371)

 

 

157,591

Total revenues

 

 —

 

 

146,386

 

 

55,596

 

 

4,158

 

 

(371)

 

 

205,769

Costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Games cost of revenue (exclusive of depreciation and amortization)

 

 —

 

 

 —

 

 

8,436

 

 

 —

 

 

 —

 

 

8,436

Payments cost of revenue (exclusive of depreciation and amortization)

 

 —

 

 

118,064

 

 

2,342

 

 

2,251

 

 

 —

 

 

122,657

Operating expenses

 

 —

 

 

20,925

 

 

8,974

 

 

477

 

 

(371)

 

 

30,005

Research and development

 

 —

 

 

 —

 

 

5,368

 

 

 —

 

 

 —

 

 

5,368

Depreciation

 

 —