EVERI HOLDINGS INC., 10-K filed on 3/14/2017
Annual Report
Document and Entity Information (USD $)
In Millions, except Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2016
Mar. 1, 2017
Jun. 30, 2016
Document and Entity Information
 
 
 
Entity Registrant Name
Everi Holdings Inc. 
 
 
Entity Central Index Key
0001318568 
 
 
Document Type
10-K 
 
 
Document Period End Date
Dec. 31, 2016 
 
 
Amendment Flag
false 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Entity Well-known Seasoned Issuer
No 
 
 
Entity Voluntary Filers
No 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Filer Category
Accelerated Filer 
 
 
Entity Public Float
 
 
$ 76.0 
Entity Common Stock, Shares Outstanding
 
66,091,685 
 
Document Fiscal Year Focus
2016 
 
 
Document Fiscal Period Focus
FY 
 
 
CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended 12 Months Ended
Dec. 31, 2016
Sep. 30, 2016
Jun. 30, 2016
Mar. 31, 2016
Dec. 31, 2015
Sep. 30, 2015
Jun. 30, 2015
Mar. 31, 2015
Dec. 31, 2016
Dec. 31, 2015
Dec. 31, 2014
Revenues
$ 217,510 
$ 222,177 
$ 214,000 
$ 205,769 
$ 204,416 
$ 208,746 
$ 206,364 
$ 207,473 
$ 859,456 
$ 826,999 
$ 593,053 
Costs and expenses
 
 
 
 
 
 
 
 
 
 
 
Cost of revenues (exclusive of depreciation and amortization)
 
 
 
 
 
 
 
 
549,014 
510,397 
440,071 
Operating expenses
 
 
 
 
 
 
 
 
118,709 
101,202 
95,452 
Research and development
 
 
 
 
 
 
 
 
19,356 
19,098 
804 
Goodwill impairment
 
 
 
 
 
 
 
 
146,299 
75,008 
Depreciation
 
 
 
 
 
 
 
 
49,995 
45,551 
8,745 
Amortization
 
 
 
 
 
 
 
 
94,638 
85,473 
14,199 
Total costs and expenses
 
 
 
 
 
 
 
 
978,011 
836,729 
559,271 
Operating (loss) income
(139,972)
11,572 
6,060 
3,785 
(68,923)
14,716 
16,336 
28,141 
(118,555)
(9,730)
33,782 
Other (income) expense
 
 
 
 
 
 
 
 
 
 
 
Interest expense, net of interest income
 
 
 
 
 
 
 
 
99,228 
100,290 
10,756 
Loss on extinguishment of debt
 
 
 
 
 
 
 
 
 
13,063 
2,725 
Total other (income) expenses
 
 
 
 
 
 
 
 
99,228 
113,353 
13,481 
(Loss) income before income tax
 
 
 
 
 
 
 
 
(217,783)
(123,083)
20,301 
Income tax (benefit) provision
 
 
 
 
 
 
 
 
31,696 
(18,111)
8,161 
Net (loss) income
(217,278)
(8,254)
(10,796)
(13,151)
(86,590)
(6,110)
(12,741)
469 
(249,479)
(104,972)
12,140 
Foreign currency translation
 
 
 
 
 
 
 
 
(2,427)
(1,251)
(1,258)
Comprehensive (loss) income
 
 
 
 
 
 
 
 
(251,906)
(106,223)
10,882 
Loss per share
 
 
 
 
 
 
 
 
 
 
 
Basic (in dollars per share)
$ (3.29)
$ (0.12)
$ (0.16)
$ (0.20)
$ (1.31)
$ (0.09)
$ (0.19)
$ 0.01 
$ (3.78)
$ (1.59)
$ 0.18 
Diluted (in dollars per share)
$ (3.29)
$ (0.12)
$ (0.16)
$ (0.20)
$ (1.31)
$ (0.09)
$ (0.19)
$ 0.01 
$ (3.78)
$ (1.59)
$ 0.18 
Weighted average common shares outstanding
 
 
 
 
 
 
 
 
 
 
 
Basic (in shares)
66,074 
66,049 
66,041 
66,034 
66,004 
65,941 
65,844 
65,623 
66,050 
65,854 
65,780 
Diluted (in shares)
66,074 
66,049 
66,041 
66,034 
66,004 
65,941 
65,844 
66,492 
66,050 
65,854 
66,863 
Games
 
 
 
 
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
 
213,253 
214,424 
7,406 
Costs and expenses
 
 
 
 
 
 
 
 
 
 
 
Cost of revenues (exclusive of depreciation and amortization)
 
 
 
 
 
 
 
 
50,308 
47,017 
1,753 
Goodwill impairment
 
 
 
 
 
 
 
 
146,299 
75,008 
 
Operating (loss) income
 
 
 
 
 
 
 
 
(166,243)
(73,503)
(1,423)
Payments
 
 
 
 
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
 
646,203 
612,575 
585,647 
Costs and expenses
 
 
 
 
 
 
 
 
 
 
 
Cost of revenues (exclusive of depreciation and amortization)
 
 
 
 
 
 
 
 
498,706 
463,380 
438,318 
Operating (loss) income
 
 
 
 
 
 
 
 
$ 47,688 
$ 63,773 
$ 35,205 
CONSOLIDATED BALANCE SHEETS (USD $)
In Thousands, unless otherwise specified
Dec. 31, 2016
Dec. 31, 2015
Current assets
 
 
Cash and cash equivalents
$ 119,051 
$ 102,030 
Settlement receivables
128,821 
44,933 
Trade receivables, net of allowances for doubtful accounts of $4.7 million and $3.9 million at December 31, 2016 and December 31, 2015, respectively
51,651 
52,382 
Other receivables
5,000 
4,928 
Inventory
19,068 
28,738 
Prepaid expenses and other assets
18,048 
20,772 
Total current assets
341,639 
253,783 
Non-current assets
 
 
Property, equipment and leased assets, net
98,439 
106,308 
Goodwill
640,546 
789,803 
Other intangible assets, net
317,997 
382,462 
Other receivables
2,020 
6,655 
Other assets
7,522 
11,374 
Total non-current assets
1,066,524 
1,296,602 
Total assets
1,408,163 
1,550,385 
Current Liabilities
 
 
Settlement liabilities
239,123 
139,819 
Accounts payable and accrued expenses
94,391 
101,512 
Current portion of long-term debt
10,000 
10,000 
Total current liabilities
343,514 
251,331 
Non-current liabilities
 
 
Deferred tax liability
57,611 
27,644 
Long-term debt, less current portion
1,111,880 
1,129,899 
Other accrued expenses and liabilities
2,951 
4,091 
Total non-current liabilities
1,172,442 
1,161,634 
Total liabilities
1,515,956 
1,412,965 
Commitments and Contingencies (Note 13)
   
   
Stockholders' (deficit) equity
 
 
Common stock, $0.001 par value, 500,000 shares authorized and 90,952 and 90,877 shares issued at December 31, 2016 and December 31, 2015, respectively
91 
91 
Convertible preferred stock, $0.001 par value, 50,000 shares authorized and 0 shares outstanding at December 31, 2016 and December 31, 2015, respectively
   
   
Additional paid-in capital
264,755 
258,020 
Retained (deficit) earnings
(194,299)
55,180 
Accumulated other comprehensive (loss) income
(2,109)
318 
Treasury stock, at cost, 24,867 and 24,849 shares at December 31, 2016 and December 31, 2015, respectively
(176,231)
(176,189)
Total stockholders' (deficit) equity
(107,793)
137,420 
Total liabilities and stockholders' (deficit) equity
$ 1,408,163 
$ 1,550,385 
CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)
In Millions, except Share data, unless otherwise specified
Dec. 31, 2016
Dec. 31, 2015
CONDENSED CONSOLIDATED BALANCE SHEETS
 
 
Allowances for doubtful accounts
$ 4.7 
$ 3.9 
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
90,952,000 
90,877,000 
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
24,867,000 
24,849,000 
CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2016
Dec. 31, 2015
Dec. 31, 2014
Cash flows from operating activities
 
 
 
Net loss
$ (249,479)
$ (104,972)
$ 12,140 
Adjustments to reconcile net loss to cash provided by operating activities:
 
 
 
Depreciation and Amortization
144,633 
131,024 
22,944 
Amortization of financing costs
6,695 
7,109 
2,035 
Loss (gain) on sale or disposal of assets
2,563 
(2,789)
55 
Accretion of contract rights
8,692 
7,614 
301 
Provision for bad debts
9,908 
10,135 
8,991 
Reserve for obsolescence
3,581 
1,243 
270 
Impairment loss
4,289 
 
3,129 
Goodwill impairment
146,299 
75,008 
Loss on early extinguishment of debt
 
13,063 
2,725 
Stock-based compensation
6,735 
8,284 
8,876 
Other non-cash items
(38)
(149)
(19)
Changes in operating assets and liabilities:
 
 
 
Settlement receivables
(83,998)
(1,830)
(5,156)
Trade and other receivables
(8,169)
(5,070)
(12,256)
Inventory
5,600 
(1,075)
(1,120)
Prepaid and other assets
4,480 
(5,553)
904 
Deferred income taxes
29,940 
(19,878)
6,613 
Settlement liabilities
99,245 
21,229 
(25,523)
Accounts payable and accrued expenses
735 
(8,806)
(378)
Net cash provided by operating activities
131,711 
124,587 
24,531 
Cash flows from investing activities
 
 
 
Capital expenditures
(80,741)
(76,988)
(18,442)
Acquisitions, net of cash acquired
(694)
(10,857)
(1,068,000)
Proceeds from sale of fixed assets
4,599 
2,102 
421 
Placement fee agreements
(11,312)
(2,813)
 
Repayments under development agreements
 
3,104 
276 
Changes in restricted cash and cash equivalents
94 
(97)
(102)
Net cash used in investing activities
(88,054)
(85,549)
(1,085,847)
Cash flows from financing activities
 
 
 
Repayments of prior credit facility
 
 
(103,000)
Repayments of credit facility
(24,400)
(10,000)
 
Repayments of secured notes
 
(350,000)
 
Proceeds from securing credit facility
 
 
500,000 
Proceeds from issuance of secured notes
 
335,000 
350,000 
Proceeds from issuance of unsecured notes
 
 
350,000 
Debt issuance costs
(480)
(1,221)
(52,735)
Proceeds from exercise of stock options
 
1,839 
5,338 
Purchase of treasury stock
(42)
(169)
(12,180)
Net cash used in financing activities
(24,922)
(24,551)
1,037,423 
Effect of exchange rates on cash
(1,714)
(1,552)
(1,266)
Cash and cash equivalents
 
 
 
Net (decrease) increase for the period
17,021 
12,935 
(25,159)
Balance, beginning of the period
102,030 
89,095 
114,254 
Balance, end of the period
119,051 
102,030 
89,095 
Supplemental cash disclosures
 
 
 
Cash paid for interest
93,420 
98,361 
59,274 
Cash paid for income tax
1,703 
2,098 
962 
Cash refunded for income tax
171 
14,477 
 
Supplemental non-cash disclosures
 
 
 
Accrued and unpaid capital expenditures
2,104 
5,578 
731 
Accrued and unpaid contingent liability for acquisitions
(3,169)
4,681 
2,463 
Transfer of leased gaming equipment to inventory
9,042 
4,698 
 
Issuance of warrant
 
$ 2,246 
 
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (USD $)
In Thousands, unless otherwise specified
Common Stock
Additional Paid-in Capital
Retained Earnings (Deficit)
Accumulated Other Comprehensive Income
Treasury Stock
Total
Balance at Dec. 31, 2013
$ 89 
$ 231,516 
$ 148,012 
$ 2,827 
$ (163,840)
$ 218,604 
Balance (in shares) at Dec. 31, 2013
89,233 
 
 
 
 
 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
Net loss
 
 
12,140 
 
 
12,140 
Foreign currency translation
 
 
 
(1,258)
 
(1,258)
Share-based compensation expense
 
8,876 
 
 
 
8,876 
Exercise of options
5,290 
 
 
 
5,291 
Exercise of options (in shares)
971 
 
 
 
 
 
Treasury share repurchases
 
 
 
 
(11,721)
(11,721)
Restricted share vesting withholdings
 
 
 
 
(459)
(459)
Restricted shares vested (in shares)
201 
 
 
 
 
 
Balance at Dec. 31, 2014
90 
245,682 
160,152 
1,569 
(176,020)
231,473 
Balance (in shares) at Dec. 31, 2014
90,405 
 
 
 
 
 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
Net loss
 
 
(104,972)
 
 
(104,972)
Foreign currency translation
 
 
 
(1,251)
 
(1,251)
Share-based compensation expense
 
8,258 
 
 
 
8,258 
Exercise of options
1,834 
 
 
 
1,835 
Exercise of options (in shares)
343 
 
 
 
 
 
Restricted share vesting withholdings
 
 
 
 
(169)
(169)
Restricted shares vested (in shares)
129 
 
 
 
 
 
Issuance of warrants
 
2,246 
 
 
 
2,246 
Balance at Dec. 31, 2015
91 
258,020 
55,180 
318 
(176,189)
137,420 
Balance (in shares) at Dec. 31, 2015
90,877 
 
 
 
 
 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
Net loss
 
 
(249,479)
 
 
(249,479)
Foreign currency translation
 
 
 
(2,427)
 
(2,427)
Share-based compensation expense
 
6,735 
 
 
 
6,735 
Restricted share vesting withholdings
 
 
 
 
(42)
(42)
Restricted shares vested (in shares)
75 
 
 
 
 
 
Balance at Dec. 31, 2016
$ 91 
$ 264,755 
$ (194,299)
$ (2,109)
$ (176,231)
$ (107,793)
Balance (in shares) at Dec. 31, 2016
90,952 
 
 
 
 
 
BUSINESS AND BASIS OF PRESENTATION
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.

 

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

2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

All intercompany transactions and balances have been eliminated in consolidation.

Business Combinations

We apply the provisions of the Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (“ASC”) 805, “Business Combinations”, in the accounting for acquisitions. It requires us to recognize separately from goodwill the assets acquired and the liabilities assumed, at their acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed. Significant estimates and assumptions are required to value assets acquired and liabilities assumed at the acquisition date as well as contingent consideration, where applicable. These estimates are preliminary and typically include the calculation of an appropriate discount rate and projection of the cash flows associated with each acquired asset over its estimated useful life. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. In addition, deferred tax assets, deferred tax liabilities, uncertain tax positions and tax related valuation allowances assumed in connection with a business combination are initially estimated as of the acquisition date. We reevaluate these items quarterly based upon facts and circumstances that existed as of the acquisition date and any adjustments to its preliminary estimates are recorded to goodwill, in the period of identification, if identified within the measurement period. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income.

Acquisition-related Costs

We recognize a liability for acquisition-related costs when the expense is incurred. Acquisition-related costs include, but are not limited to: financial advisory, legal and debt fees; accounting, consulting, and professional fees associated with due diligence, valuation and integration; severance; and other related costs and adjustments.

Cash and Cash Equivalents

Cash and cash equivalents include cash and all balances on deposit in banks and financial institutions. We consider all highly liquid investments with maturities of three months or less at the time of purchase to be cash and cash equivalents. Such balances generally exceed the federal insurance limits. However, we periodically evaluate the creditworthiness of these institutions to minimize risk.

ATM Funding Agreements

We obtain all of the cash required to operate our ATMs through various ATM Funding Agreements. Some gaming establishments provide the cash utilized within the ATM (“Site‑Funded”). The Site‑Funded receivables generated for the amount of cash dispensed from transactions performed at our ATMs are owned by us and we are liable to the gaming establishment for the face amount of the cash dispensed. In the Consolidated Balance Sheets, the amount of the receivable for transactions processed on these ATM transactions is included within settlement receivables and the amount due to the gaming establishment for the face amount of dispensing transactions is included within settlement liabilities.

For the Non‑Site‑Funded locations, our Contract Cash Solutions Agreement with 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. 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. As the cash is never an asset of ours, supplied cash is not reflected on our balance sheet. We are charged a cash usage fee for the cash used in these ATMs, which is included as interest expense in the Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income. We recognize the fees as interest expense due to the similar operational characteristics to a revolving line of credit, the fact that the fees are calculated on a financial index and the fees are paid for access to a capital resource.

Allowance for Doubtful Accounts

We maintain an allowance for doubtful accounts related to our trade and other receivables and notes receivable that have been deemed to have a high risk of uncollectibility. Management reviews its accounts and notes receivable on a quarterly basis to determine if any receivables will potentially be uncollectible. Management analyzes historical collection trends and changes in our customer payment patterns, customer concentration, and creditworthiness when evaluating the adequacy of our allowance for doubtful accounts. In our overall allowance for doubtful accounts we include any receivable balances for which uncertainty exists as to whether the account balance has become uncollectible. Based on the information available, management believes the allowance for doubtful accounts is adequate; however, actual write-offs may exceed the recorded allowance.

Settlement Receivables and Settlement Liabilities

In the credit card cash access and POS debit card cash access transactions provided by us, the gaming establishment is reimbursed for the cash disbursed to gaming patrons through the issuance of a negotiable instrument or through electronic settlement. We receive reimbursement from the patron’s credit or debit card issuer for the transaction in an amount equal to the amount owed to the gaming establishment plus the fee charged to the patron. This reimbursement is included within the settlement receivables on the Consolidated Balance Sheets. The amounts owed to gaming establishments are included within settlement liabilities on the Consolidated Balance Sheets.

Warranty Receivables

If a gaming establishment chooses to have a check warranted, it sends a request to our third party check warranty service provider, asking whether it would be willing to accept the risk of cashing the check. If the check warranty provider accepts the risk and warrants the check, the gaming establishment negotiates the patron’s check by providing cash for the face amount of the check. If the check is dishonored by the patron’s bank upon presentment, the gaming establishment invokes the warranty, and the check warranty service provider purchases the check from the gaming establishment for the full check amount and then pursues collection activities on its own. In our Central Credit Check Warranty product under our agreement with the third party service provider, we receive all of the check warranty revenue. We are exposed to risk for the losses associated with any warranted items that cannot be collected from patrons issuing the items. Warranty receivables are defined as any amounts paid by the third party check warranty service provider to gaming establishments to purchase dishonored checks. Additionally, we pay a fee to the third party check warranty service provider for its services.

The warranty receivables amount is recorded in trade receivables, net on our Consolidated Balance Sheets. On a monthly basis, the Company evaluates the collectability of the outstanding balances and establishes a reserve for the face amount of the expected losses on these receivables. The warranty expense associated with this reserve is included within cost of revenues (exclusive of depreciation and amortization) on our Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income.

Inventory

Our inventory primarily consists of component parts as well as finished goods and work-in-progress. 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 first in, first out method.

Property, Equipment and Leased Assets

Property, equipment and leased assets are stated at cost, less accumulated depreciation, computed using the straight-line method over the lesser of the estimated life of the related assets, generally two to five years, or the related lease term.  Player terminals and related components and equipment are included in our rental pool. The rental pool can be further delineated as “rental pool – deployed,” which consists of assets deployed at customer sites under participation arrangements, and “rental pool – undeployed,” which consists of assets held by us that are available for customer use. Rental pool – undeployed consists of both new units awaiting deployment to a customer site and previously deployed units currently back with us to be refurbished awaiting re-deployment.  Routine maintenance of property, equipment and leased gaming equipment is expensed in the period incurred, while major component upgrades are capitalized and depreciated over the estimated remaining useful life of the component. Sales and retirements of depreciable property are recorded by removing the related cost and accumulated depreciation from the accounts. Gains or losses on sales and retirements of property are reflected in our Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income. Property, equipment and leased assets are reviewed for impairment whenever events or circumstances indicate that their carrying amounts may not be recoverable. Impairment is indicated when undiscounted future cash flows do not exceed the asset’s carrying value.

Development and Placement Fee Agreements

We enter into development and placement fee agreements to provide financing for new gaming facilities or for the expansion of existing facilities. All or a portion of the funds provided under development agreements are reimbursed to us, while funds provided under placement fee agreements are not reimbursed. In return, the facility dedicates a percentage of its floor space to placement of our player terminals, and we receive a fixed percentage of those player terminals' hold per day over the term of the agreement which is generally for 12 to 83 months. Certain of the agreements contain player terminal performance standards that could allow the facility to reduce a portion of our guaranteed floor space. In addition, certain development agreements allow the facilities to buy out floor space after advances that are subject to repayment have been repaid. The agreements typically provide for a portion of the amounts retained by the gaming facility for their share of the operating profits of the facility to be used to repay some or all of the advances recorded as notes receivable.

Goodwill

Goodwill represents the excess of the purchase price over the identifiable tangible and intangible assets acquired plus liabilities assumed arising from business combinations. 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 use the Step 2 assessment to determine the impairment. Our reporting units are identified as operating segments or one level below. Reporting units must: (a) engage in business activities from which they earn revenues and incur expenses; (b) have operating results that are regularly reviewed by our chief operating decision makers to ascertain the resources to be allocated to the segment and assess its performance; and (c) have discrete financial information available. As of December 31, 2016, our reporting units included: Games, Cash Access, Kiosk Sales and Service, Central Credit, and Everi Compliance. During the year ended December 31, 2016, the Company combined its Cash Advance, ATM and Check Services reporting units into a Cash Access reporting unit to be consistent with the current corporate structure and segment management.

Other Intangible Assets

Other intangible assets are stated at cost, less accumulated amortization, computed primarily using the straight-line method. Other intangible assets consist primarily of: (i) customer contracts (rights to provide Games and Payments services to gaming establishment customers), developed technology, trade names and trademarks and contract rights acquired through business combinations; (ii) capitalized software development costs; and (iii) the acquisition cost of our patent related to the 3-in-1 rollover technology acquired in 2005. Customer contracts require us to make renewal assumptions, which impact the estimated useful lives of such assets. Capitalized software development costs require us to make certain judgments as to the stages of development and costs eligible for capitalization. Capitalized software costs placed in service are amortized over their useful lives, generally not to exceed five years. The acquisition cost of the 3-in-1 Rollover patent is being amortized over the term of the patent, which expires in 2018. We review intangible assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Such events or circumstances include, but are not limited to, a significant decrease in the fair value of the underlying business or market price of the asset, a significant adverse change in legal factors or business climate that could affect the value of an asset, or a current period operating or cash flow loss combined with a history of operating or cash flow losses. We group intangible assets for impairment analysis at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Recoverability of intangible assets is measured by a comparison of the carrying amount of the asset to future, net cash flows expected to be generated by the asset, undiscounted and without interest or taxes. Any impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.

Debt Issuance Costs

Debt issuance costs incurred in connection with long-term borrowings are capitalized and amortized to interest expense based upon the related debt agreements using the straight-line method, which approximates the effective interest method. Debt issuance costs related to line-of-credit arrangements are included in other assets, non-current, on the Consolidated Balance Sheets.  All other debt issuance costs are included as contra-liabilities in long-term debt.

Original Issue Discounts

Original issue discounts incurred in connection with long-term borrowings are capitalized and amortized to interest expense based upon the related debt agreements using the straight-line method, which approximates the effective interest method. These amounts are recorded as contra-liabilities and included in long-term debt on the Consolidated Balance Sheets.

 

Deferred Revenue

Deferred revenue represents amounts from the sale of fully integrated kiosks and related service contracts, anti-money laundering and tax compliance software, and gaming equipment and systems that have been billed, or for which notes receivable have been executed, but which transaction has not met our revenue recognition criteria. The cost of the fully integrated kiosks and related service contracts, anti-money laundering and tax compliance software, and gaming equipment and systems is deferred and recorded at the time revenue is recognized. Amounts are classified between current and long-term liabilities, based upon the expected period in which the revenue will be recognized.

Revenue Recognition

Overall

We recognize revenue when evidence of an arrangement exists, services have been rendered, the price is fixed or determinable and collectability is reasonably assured. We evaluate our revenue streams for proper timing of revenue recognition. Revenue is recognized as products are delivered and or services are performed.

Games Revenues

Games revenues are primarily generated by our gaming operations under development, placement, and participation arrangements in which we provide our customers with player terminals, player terminal-content licenses and back-office equipment, collectively referred to herein as leased gaming equipment. Under these arrangements, we retain ownership of the leased gaming equipment installed at customer facilities, and we receive revenue based on a percentage of the net win per day generated by the leased gaming equipment or a fixed daily fee based on the number of player terminals installed at the facility. Revenue from lease participation or daily fee arrangements are considered both realizable and earned at the end of each gaming day.

Games revenues generated by player terminals deployed at sites under development or placement fee agreements are reduced by the accretion of contract rights acquired as part of those agreements. Contract rights are amounts allocated to intangible assets for dedicated floor space resulting from such agreements, described under “Development and Placement Fee Agreements.” The related amortization expense, or accretion of contract rights, is netted against our respective revenue category in the Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income.

We also generate Games revenues from back-office fees with certain customers. Back-office fees cover the service and maintenance costs for back-office servers installed in each gaming facility to run our gaming equipment, as well as the cost of related software updates. Back-office fees are considered both realizable and earned at the end of each gaming day.

Payments Revenues

Cash advance revenues are comprised of transaction fees assessed to gaming patrons in connection with credit card cash access and POS debit card cash access transactions and are recognized at the time the transactions are authorized. Such fees are based on a combination of a fixed amount plus a percentage of the face amount of the credit card cash access or POS debit card cash access transaction amount.

ATM revenues are comprised of transaction fees in the form of cardholder surcharges assessed to gaming patrons in connection with ATM cash withdrawals at the time the transactions are authorized and reverse interchange fees paid to us by the patrons’ issuing banks. Cardholder surcharges and reverse interchange are recognized as revenue when a transaction is initiated. The cardholder surcharges assessed to gaming patrons in connection with ATM cash withdrawals are currently a fixed dollar amount and not a percentage of the transaction amount.

Check services revenues are principally comprised of check warranty revenues and are generally based upon a percentage of the face amount of checks warranted. These fees are paid to us by gaming establishments.

Other revenues include amounts derived from the sale of cash access devices, such as the provision of certain professional services, software licensing, and certain other ancillary fees associated with the sale, installation and maintenance of those devices. In addition, other revenues consist of Central Credit revenues that are based upon either a flat monthly unlimited usage fee or a variable fee structure driven by the volume of patron credit histories generated. Also included in other revenues are revenues generated from ancillary marketing, database and Internet gaming activities.

Equipment and Systems Revenues

We sell gaming equipment, fully integrated kiosks and gaming systems directly to our customers under independent sales contracts through normal credit terms, or may grant extended credit terms under contracts secured by the related equipment.

For sales arrangements with multiple deliverables, we apply the guidance from ASC 605-25, “Revenue Recognition - Multiple-Element Arrangements.” In addition, we apply the guidance from ASC 985-605, “Software – Revenue Recognition”  which affects vendors that sell or lease tangible products in an arrangement that contains software that is more than incidental to the tangible product as a whole and clarifies what guidance should be used in allocating and measuring revenue.

The majority of our multiple element sales contracts are for some combination of gaming equipment, player terminals, content, system software, license fees, ancillary equipment and maintenance.

Revenue related to systems arrangements that contain both software and non-software deliverables requires allocation of the arrangement fee to the separate deliverables using the relative selling price method. Revenue for software deliverables is recognized under software revenue recognition guidance. Revenue resulting from the sale of non-software deliverables, such as gaming devices and other hardware, are accounted for based on other applicable revenue recognition guidance as the devices are tangible products containing both software and non-software components that function together to deliver the product's essential functionality.

In allocating the arrangement fees to separate deliverables, we evaluate whether we have vendor-specific objective evidence (“VSOE”) of selling price, third party evidence (“TPE”) or estimate of selling price (“ESP”) for gaming devices, maintenance and product support fees and other revenue sources. We generally use ESP to determine the selling price used in the allocation of separate deliverables, as VSOE and TPE are generally not available. We determine the ESP on separate deliverables by estimating a margin typically received on such items and applying that margin to the product cost incurred.

Generally, player terminal sales include ancillary equipment, such as networking gear, bases, chairs, and occasionally signage, some of which may be necessary for the full functionality of the player terminals in a casino. This ancillary equipment comprises an install kit that is shipped simultaneously with the player terminals. Although our products are analyzed as multiple deliverable arrangements, revenue for the player terminal and ancillary equipment is not recognized until all elements essential for the functionality of the product have been shipped or delivered. This includes game theme software and essential ancillary equipment. If elements that are not essential to the functionality of the player terminals are shipped after the unit, such as signage, chairs, or bases, these items would be classified as deferred revenue until shipped or delivered. 

Cost of Revenues (exclusive of depreciation and amortization)

The cost of revenues (exclusive of depreciation and amortization) represents the direct costs required to perform revenue generating transactions. The principal costs included within cost of revenues (exclusive of depreciation and amortization) are commissions paid to gaming establishments, interchange fees paid to credit and debit card networks, transaction processing fees to our transaction processor, inventory and related costs associated with the sale of our fully integrated kiosks, electronic gaming machines and system sales, check cashing warranties, field service and network operations personnel.

 

Advertising, Marketing and Promotional Costs

We expense advertising, marketing and promotional costs as incurred. Total advertising, marketing and promotional costs, included in operating expenses in the Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income, were $1.2 million, $0.9 million and $1.1 million for the years ended December 31, 2016,  2015 and 2014, respectively.

Research and Development Costs

We conduct research and development activities primarily to develop gaming systems, gaming engines, casino data management systems, casino central monitoring systems, video lottery outcome determination systems, gaming platforms and gaming content, as well as to add enhancements to our existing product lines. We believe our ability to deliver differentiated, appealing products and services to the marketplace is based on our research and development investments, and we expect to continue to make such investments in the future. Research and development costs consist primarily of salaries and benefits, consulting fees and game lab testing fees. Once the technological feasibility of a project has been established, it is transferred from research to development and capitalization of development costs begins until the product is available for general release.

 

Research and development costs were $19.4 million, $19.1 million and $0.8 million for the years ended December 31, 2016,  2015 and 2014, respectively.

Income Taxes

We are subject to income taxes in the United States as well as various states and foreign jurisdictions in which we operate. In accordance with accounting guidance, our income taxes include amounts from domestic and international jurisdictions, plus the provision for U.S. taxes on undistributed earnings of international subsidiaries not deemed to be permanently invested. Since it is our practice and current intent to reinvest the earnings in the international operations of our foreign subsidiaries, U.S. federal income taxes have not been provided on the undistributed earnings of any foreign subsidiaries, except for our GCA (Macau) S.A. subsidiary. Some items of income and expense are not reported in tax returns and the Consolidated Financial Statements in the same year. The tax effect of such temporary differences is reported as deferred income taxes.

Our deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been included in the financial statements or income tax returns. Deferred tax assets and liabilities are determined based upon differences between financial statement carrying amounts of existing assets and their respective tax bases using enacted tax rates expected to apply to taxable income in years in which those temporary differences are expected to be recovered or settled. The effect on the income tax provision or benefit and deferred tax assets and liabilities for a change in rates is recognized in the Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income in the period that includes the enactment date.

When measuring deferred tax assets, certain estimates and assumptions are required to assess whether a valuation allowance should be established by evaluating both positive and negative factors in accordance with accounting guidance. This evaluation requires that we exercise judgment in determining the relative significance of each factor. The assessment of valuation allowance involves significant estimates regarding future taxable income and when it is recognized, the amount and timing of taxable differences, the reversal of temporary differences and the implementation of tax-planning strategies. A valuation allowance is established based on the weight of available evidence, including both positive and negative indicators, if it is more likely than not that a portion, or all, of the deferred tax assets will not be realized. Greater weight is given to evidence that is objectively verifiable, most notably historical results. If we report a cumulative loss from continuing operations before income taxes for a reasonable period of time, this form of negative evidence is difficult to overcome. Therefore, we include certain aspects of our historical results in our forecasts of future taxable income, as we do not have the ability to solely rely on forecasted improvements in earnings to recover deferred tax assets. When we report a cumulative loss position, to the extent our results of operations improve, such that we have the ability to overcome the more likely than not accounting standard, we expect to be able to reverse the valuation allowance in the applicable period of determination. In addition, we rely on deferred tax liabilities in our assessment of the realizability of deferred tax assets if the temporary timing difference is anticipated to reverse in the same period and jurisdiction and the deferred tax liabilities are of the same character as the temporary differences giving rise to the deferred tax assets.

We also follow accounting guidance to account for uncertainty in income taxes as recognized in our consolidated financial statements. The accounting standard creates a single model to address uncertainty in income tax positions and prescribes the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. The standard also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition.

Under this standard, we may recognize tax benefits from an uncertain position only if it is more likely than not that the position will be sustained upon examination by taxing authorities based on the technical merits of the issue. The amount recognized is the largest benefit that we believe has greater than a 50% likelihood of being realized upon settlement. Actual income taxes paid may vary from estimates depending upon changes in income tax laws, actual results of operations, and the final audit of tax returns by taxing authorities. Tax assessments may arise several years after tax returns have been filed.

Employee Benefits Plan

In connection with the acquisition of Everi Games Holding, we merged the Everi Payments 401(k) Plan (“Merged 401(k) Plan”) into the Everi Games Holding 401(k) Plan (“Surviving 401(k) Plan”), which was adopted for domestic employees of Everi Games and Everi Payments and their domestic subsidiaries. The Surviving 401(k) Plan Participant investment elections were not mapped from the current provider as the Merged 401(k) Plan assets were liquidated from their current investments and the proceeds were provided to the new provider. The participant contributions were sent to the new provider into the Surviving 401(k) Plan’s default fund until such time that a participant made investment elections. The Surviving 401(k) Plan structure is similar to the Merged 401(k) Plan and allows employees to defer up to the lesser of the Internal Revenue Code prescribed maximum amount or 100% of their income on a pre-tax basis through contributions to the plan. As a benefit to employees, we match a percentage of these employee contributions (as defined in the plan document). Expenses related to the matching portion of the contributions to the Surviving 401(k) Plan were $1.9 million, $1.3 million and $0.5 million for the years ended December 31, 2016,  2015 and 2014, respectively.

 

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

 

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

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

 

 

 

 

 

 

 

 

Term loan

 

1

 

$

445,900

 

$

490,000

 

Senior secured notes

 

3

 

$

314,900

 

$

335,000

 

Senior unsecured notes

 

1

 

$

297,500

 

$

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 December 31, 2016 and December 31, 2015. The fair value of the senior secured notes was derived using the same rate as the term loan given that both were treated similarly as of December 31, 2016. The fair value of the senior secured notes was derived using a Level 3 input by evaluating the trading activities of similar debt instruments as of December 31, 2015.

 

Foreign Currency Translation

Foreign currency denominated assets and liabilities for those foreign entities for which the local currency is the functional currency are translated into U.S. dollars based on exchange rates prevailing at the end of each year. Revenues and expenses are translated at average exchange rates during the year. The effects of foreign exchange gains and losses arising from these translations are included as a component of other comprehensive income on the Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income. Translation adjustments on intercompany balances of a long-term investment nature are recorded as a component of Accumulated Other Comprehensive Income on our Consolidated Balance Sheets.

Use of Estimates

We have made estimates and judgments affecting the amounts reported in these financial statements and the accompanying notes. The actual results may differ from these estimates. These accounting estimates incorporated into the Consolidated Financial Statements include, but are not limited to:

·

the estimates and assumptions related to the preparation of the unaudited pro forma financial information contained herein;

·

the estimates and assumptions related to the preliminary and final purchase price allocation based on the estimated fair values of the assets acquired and liabilities assumed related to any of our acquisitions;

·

the estimated reserve for warranty expense associated with our check warranty receivables;

·

the estimated reserve for bad debt expense associated with our trade receivables;

·

the estimated reserve for inventory obsolescence;

·

the valuation and recognition of share based compensation;

·

the valuation allowance on our deferred income tax assets;

·

the estimated cash flows in assessing the recoverability of long lived assets;

·

the estimates of future operating performance, weighted average cost of capital (“WACC”) and growth rates as well as other factors used in our annual goodwill and assets impairment evaluations;

·

the renewal assumptions used for customer contracts to estimate the useful lives of such assets; and

·

the judgments used to determine the stages of development and costs eligible for capitalization as internally developed software.

·

the estimated liability for health care claims under our self-insured health care program.

Earnings Applicable to Common Stock

Basic earnings per share is calculated by dividing net income by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect the effect of potential common stock resulting from assumed stock option exercises and vesting of restricted stock unless it is antidilutive.

Share‑Based Compensation

Share-based payment awards result in a cost that is measured at fair value on the award’s grant date.

Our time-based stock options were measured at fair value on the grant date using the Black Scholes model. Our restricted stock awards were measured at fair value based on the stock price on the grant date. The compensation expense is recognized on a straight-line basis over the vesting period of the awards.

Our market-based options granted in 2016 under our 2014 Equity Incentive Plan (the “2014 Plan”) and 2012 Equity Incentive Plan (as amended, the “2012 Plan”)  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.

Our market-based stock options granted in 2015 under the 2014 Plan will vest if our average stock price in any period of 30 consecutive trading days meets certain target prices during a four-year period that commenced on the grant date of these options. If these target prices are not met during the four year period, the unvested shares underlying the options will terminate except if there is a Change in Control (as defined in the 2014 Plan) of the Company, in which case, the unvested shares underlying such options shall become fully vested on the effective date of such change in control transaction.

All market-based options were measured at fair value on the grant date using a lattice-based valuation model based on the median time horizon from the date of grant for these options to the vesting date for those paths that achieved the target threshold(s). The compensation expense is recognized on a straight-line basis over the median vesting periods calculated under such valuation model.

Forfeitures are estimated at the grant date for our time-based and market-based awards, with such estimates updated periodically; and with actual forfeitures recognized currently to the extent they differ from the estimates.

Unless otherwise provided by the administrator of our equity incentive plans, stock options granted under our plans generally expire ten years from the date of grant. In connection with our annual grant in 2015, certain market-based stock option awards were issued that expire seven years from the date of grant. The exercise price of stock options is generally the closing market price of our common stock on the date of the stock option grant.

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 April 2015, the FASB issued Accounting Standards Update (“ASU”) No. 2015-03, which provides guidance to simplify the presentation of debt issuance costs.  These amendments require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. The pronouncement is effective for annual periods beginning after December 15, 2015, and interim periods within those fiscal years, and early adoption is permitted for financial statements that have not been previously issued. This guidance was further clarified in ASU No. 2015-15, which addressed the treatment of debt issuance costs related to line-of credit arrangements. It noted that as ASU No. 2015-03 did not provide guidance on debt issuance costs related to line-of credit arrangements, the SEC would not object to an entity deferring and presenting these specific debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. We adopted the guidance in ASU Nos. 2015-03 and 2015-15 retrospectively to reclassify all debt issuance costs not associated with line-of-credit arrangements from the non-current portion of other assets to contra-liabilities and presented them as reductions to the face amount of each respective long-term debt instrument on our Consolidated Balance Sheets and related notes during the current period.

In January 2015, the FASB issued ASU No. 2015-01, which eliminates the requirement that an entity separately classify, present and disclose extraordinary events and transactions. The pronouncement is effective for annual periods ending after December 15, 2015. A reporting entity also may apply the amendments retrospectively to all prior periods presented in the financial statements. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. We adopted this guidance during the current period.  There was no impact on our Consolidated Financial Statements, as we do not have any extraordinary items.

In August 2014, the FASB issued ASU No. 2014-15, which provides guidance on determining when and how reporting entities must disclose going-concern uncertainties in their financial statements. The pronouncement is effective for annual periods ending after December 15, 2016, and interim periods thereafter, and early adoption is permitted. We adopted this guidance during the current period. There was no impact on our Consolidated Financial Statements.

In June 2014, the FASB issued ASU No. 2014-12, which requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. The standard is effective for annual reporting periods beginning after December 15, 2015, with early adoption permitted. We adopted this guidance during the current period. There was no impact on our Consolidated Financial Statements.

Recent Accounting Guidance Not Yet Adopted

In January 2017, the FASB issued 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 are currently evaluating the impact of adopting this guidance on our Consolidated Financial Statements and disclosures included within Notes to Consolidated Financial Statements.

In January 2017, the FASB issued ASU No. 2017-01, which clarifies the definition of a business. The amendments affect all companies and other reporting organizations that must determine whether they have acquired or sold a business. The amendments are intended to help companies and other organizations evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses.   The new standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. This guidance 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 Consolidated Financial Statements and disclosures included within Notes to 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 Consolidated Financial Statements and disclosures included within Notes to 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 Consolidated Financial Statements and disclosures included within Notes to 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 Consolidated Financial Statements and disclosures included within Notes to 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 an 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 Consolidated Financial Statements and disclosures included within Notes to 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 are currently evaluating the impact of adopting this guidance on our Consolidated Financial Statements and disclosures included within Notes to 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 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 Consolidated Balance Sheets, which will result in the recording of right of use assets and lease obligations and are currently discussed in “Note 13 Commitments and Contingencies.”

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 are currently evaluating the impact of adopting this guidance on our Consolidated Financial Statements and disclosures included within Notes to Consolidated Financial Statements.

In May 2014, the FASB issued ASU No. 2014-09, which creates FASB 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 Consolidated Financial Statements and disclosures included within Notes to 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 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, including additions to our revenue recognition policies to identify performance obligations to customers and significant judgments in 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.

NEWave, Inc.

In April 2014, we acquired all of the outstanding capital stock of NEWave, Inc. (“NEWave”) for an aggregate purchase price of approximately $14.9 million, of which we estimated that approximately $2.5 million would be paid in the second quarter of 2015. On June 30, 2015, a final payment of $2.3 million was remitted. NEWave is a supplier of anti-money laundering compliance, audit and data efficiency software to the gaming industry. The NEWave acquisition did not have a material impact on our results of operations or financial condition.

We have not provided the supplemental pro forma impact of the NEWave acquisition on the revenue and earnings of the combined entity as if the acquisition date had been January 1, 2014, and the amount of revenue and earnings derived from NEWave have not been presented on a supplemental basis as such amounts are not material.

Everi Games Holding Inc.

On December 19, 2014, Holdings completed its acquisition of Everi Games Holding Inc. Pursuant to the terms of the Agreement and Plan of Merger, dated as of September 8, 2014, by and among Holdings, Movie Merger Sub, Inc., a wholly owned subsidiary of Holdings (“Merger Sub”), and Everi Games Holding, Merger Sub merged with and into Everi Games Holding, with Everi Games Holding continuing as the surviving corporation (the “Merger”). In the Merger, Everi Games Holding became a wholly owned subsidiary of Holdings. Also, as a result of the Merger, each outstanding share of common stock, par value $0.01 per share, of Everi Games, other than shares held by Holdings, Everi Games Holding, Merger Sub or their respective subsidiaries, was cancelled and converted into the right to receive $36.50 in cash, without interest, together with the acceleration and full vesting of Everi Games Holding equity awards.

Everi Games designs, manufactures and supplies gaming machines and systems to commercial and Native American casino operators as well as select lottery operators and commercial bingo facility operators. Everi Games’ revenue is generated from the operation of gaming machines in revenue sharing or lease arrangements and from the sale of gaming machines and systems that feature proprietary game themes.

Our combination with Everi Games Holding creates a provider of Payments and Games solutions for our gaming establishment customers. The business combination provides us with: (a) growth opportunities, (b) enhanced scale, diversification and margins, and (c) the ability to increase profitability through cost synergies.

The total purchase consideration for Everi Games Holding was as follows (in thousands, except per share amounts):

 

 

 

 

 

 

    

Amount

 

Purchase consideration

 

 

 

 

Total purchase price for Everi Games common stock (29,948 shares at $36.50 per share)

 

$

1,093,105

 

Payment in respect to Everi Games outstanding equity awards

 

 

56,284

 

Total merger consideration

 

 

1,149,389

 

Repayments of Everi Games debt and other obligations

 

 

25,065

 

Less: Everi Games outstanding cash at acquisition date

 

 

(118,299)

 

Total purchase consideration

 

$

1,056,155

 

 

The Merger was accounted for using the acquisition method of accounting, which requires, among other things, the assets acquired and liabilities assumed be recognized at their respective fair values as of the acquisition date. The excess of the purchase price over those fair values was recorded as goodwill, none of which was deductible for tax purposes. The goodwill recognized is attributable primarily to the income potential from Everi Games penetrating into the Class III commercial casino market, the assembled workforce of Everi Games and expected synergies.

The estimates and assumptions used include the projected timing and amount of future cash flows and discount rates reflecting risk inherent in the future cash flows. The estimated fair values of Multimedia’s assets acquired and liabilities assumed and resulting goodwill were subject to adjustment as the Company finalized its fair value analysis. The significant items for which a final fair value adjustment was applicable and included in the filing of this Annual Report on Form 10-K were most notably: accrued liabilities, the valuation and estimated useful lives of tangible and intangible assets and deferred income taxes. We completed our fair value determinations and recorded the final measurement period adjustments to goodwill during the fourth quarter of 2015 in accordance with the newly adopted guidance set forth in ASU No. 2015-16 with no material change in our fair value determinations; however, there were differences compared to those amounts at December 31, 2014. In accordance with this new guidance and the immaterial nature of the measurement period adjustments, the goodwill associated with the acquisition as shown in this Note 3 section did not change from the amounts disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014.

We analyzed our inventory and fixed asset groups in conjunction with a review of our accrual amounts recorded in connection with the original purchase price allocation estimates. The nature of the identified inventory and undeployed fixed assets were gaming machines and related equipment with no future use that should not have been allocated any value in the original purchase price allocation. The final measurement period adjustments to goodwill were approximately $0.9 million, comprised of $1.1 million related to tangible assets and accrued liabilities and $0.2 million associated with deferred income taxes, partially offset by approximately $0.4 million associated with the tax effect of these measurement period adjustments. We determined the final measurement period adjustments to be immaterial on both a quantitative and a qualitative basis.

The information below reflects the purchase price allocation (in thousands):

 

 

 

 

 

 

    

Amount

 

Purchase price allocation

 

 

 

 

Current assets

 

$

68,548

 

Property, equipment and leasehold improvements, net

 

 

87,283

 

Goodwill

 

 

669,542

 

Other intangible assets, net

 

 

403,300

 

Other receivables, non-current

 

 

5,030

 

Other assets, long-term

 

 

3,392

 

Deferred tax asset, non-current

 

 

22,287

 

Total assets

 

 

1,259,382

 

Current liabilities

 

 

44,291

 

Deferred tax liability, non-current

 

 

158,418

 

Other accrued expenses and liabilities

 

 

518

 

Total liabilities

 

 

203,227

 

Net assets acquired

 

$

1,056,155

 

 

Trade receivables acquired of $24.7 million were considered to be collectible and therefore the carrying amounts were considered to approximate fair value. Inventory acquired of $16.5 million was fair valued based on model-based valuations for which inputs and value drivers were observable.

The following table summarizes acquired tangible assets (in thousands):

 

 

 

 

 

 

 

 

 

 

 

Useful Life

 

Estimated

 

 

    

(years)

    

Fair Value

  

Property, equipment and leased assets

 

 

 

 

 

 

 

 

Gaming equipment

 

2

-

4

 

$

78,201

 

Leasehold and building improvements

 

Lease Term

 

 

2,105

 

Machinery and equipment

 

3

-

5

 

 

4,126

 

Other

 

2

-

7

 

 

2,851

 

Total property, equipment and leased assets

 

 

 

 

 

$

87,283

 

 

The fair value of property, equipment and leased assets was determined using the cost approach as the primary approach for valuing the majority of the personal property. The market approach was used to estimate the value of vehicles. The income approach was used to quantify any economic obsolescence that may be present in the personal property. No economic obsolescence adjustments were made to the personal property, as the business enterprise valuation indicated sufficient cash flows to support the values established through the cost and market approaches.

The following table summarizes acquired intangible assets (in thousands):

 

 

 

 

 

 

 

 

 

 

 

Useful Life

 

Estimated

 

 

    

(years)

    

Fair Value

 

Other intangible assets

 

 

 

 

 

 

 

 

Tradenames and trademarks

 

3

-

7

 

$

14,800

 

Computer software

 

3

-

5

 

 

3,755

 

Developed technology

 

2

-

6

 

 

139,645

 

Customer relationships

 

8

-

12

 

 

231,100

 

Contract rights

 

1

-

7

 

 

14,000

 

Total other intangible assets

 

 

 

 

 

$

403,300

 

 

The fair values of trade names and trademarks and developed technology were determined by applying the income approach utilizing the relief from royalty methodology. The fair value of customer relationships was determined by applying the income approach utilizing the excess earnings methodology. The fair value of contract rights was considered to approximate the carrying amount based on contractual obligations associated with these other intangible assets. The discount rates utilized to estimate the fair value of these other intangible assets ranged from 10.0% to 11.0%.

Everi Payments and Everi Games Holding had different fiscal year ends. Accordingly, the unaudited pro forma combined statements of income for the year ended December 31, 2014 combined historical Everi Consolidated Statements of Income and Comprehensive Income for its year ended December 31, 2014 with historical Everi Games Holding Consolidated Statements of Operations for its year ended September 30, 2014, giving effect to the Merger as if it had occurred on January 1, 2013.

 

The unaudited pro forma combined financial information does not purport to represent the results of operations of Everi that would have actually resulted had the Merger been completed as of the dates indicated, nor should the information be taken as indicative of the future results of operations or financial position of the combined company. The unaudited pro forma combined financial statements do not reflect the impacts of any potential operational efficiencies, cost savings or economies of scale that Everi may achieve with respect to the combined operations of Everi and Everi Games Holding. The unaudited pro forma amounts include the historical operating results of the Company and Everi Games Holding prior to the Merger, with adjustments directly attributable to the Merger. The unaudited pro forma results include increases to depreciation and amortization expense based on the purchased intangible assets and the step-up in basis associated with tangible assets acquired and increases to interest expense, related to debt issued to fund the Merger. Also reflected in the year ended December 31, 2014 are adjustments for the impact of acquisition-related costs and other cost as a result of the Merger of $27.4 million. All adjustments utilized an effective federal statutory tax rate of 35.0%.

The following table reflects selected financial data from the unaudited pro forma consolidated financial information assuming the Merger occurred as of January 1, 2013 (in thousands): 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

 

 

2014

 

Unaudited pro forma results of operations (in thousands, except per share amounts)

 

 

 

 

Revenues

 

$

800,732

 

Net loss

 

 

(5,083)

 

Basic loss per share

 

$

(0.08)

 

Diluted loss per share

 

$

(0.08)

 

 

The financial results for Everi Games Holding included in our Consolidated Statements of Income and Comprehensive Income since the acquisition date of December 19, 2014 reflected revenues of approximately $7.4 million and net loss of approximately $3.0 million, including acquisition-related costs of $1.3 million.

During the years ended December 31, 2015 and 2014, we expensed approximately $2.7 and $10.7 million, respectively, of costs related to the acquisition of Everi Games Holding for financial advisory services, financing related fees, accounting and legal fees and other transaction-related expenses and are included in the Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income within Operating Expenses. These costs do not include any costs related to additional site consolidation or rationalization that we might consider following the closing of the Merger.

 

Resort Advantage, LLC

 

In August 2015, we acquired certain assets of Resort Advantage, LLC (“Resort Advantage”) for an aggregate purchase price of approximately $13.3 million, of which we estimated that approximately $4.7 million would be paid under the provisions of the agreement over a period of 40 months. As of September 30, 2016, a payment of approximately $0.7 million was remitted, with a remaining estimate of approximately $1.0 million to be potentially paid under the provisions of the agreement over the remaining term. Resort Advantage is a supplier of anti-money laundering compliance, audit and data efficiency software to the gaming industry. The Resort Advantage acquisition did not have a material impact on our results of operations or financial condition. We have not provided the supplemental pro forma impact of the Resort Advantage acquisition on the revenue and earnings of the combined entity as if the acquisition date had been January 1, 2014, and the amount of revenue and earnings derived from Resort Advantage have not been presented on a supplemental basis as such amounts are not material.

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 Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income, were $3.1 million, $2.3 million and $2.3 million for the years ended December 31, 2016,  2015 and 2014, respectively. 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 Consolidated Balance Sheets. The outstanding balances of ATM cash utilized by us from Wells Fargo were $285.4 million and $364.5 million as of December 31, 2016 and 2015, 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 years ended December 31, 2016 and 2015.

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 is included within settlement liabilities in the accompanying Consolidated Balance Sheets and was $151.0 million and $84.9 million as of December 31, 2016 and 2015, 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 $8.5 million and $8.8 million at December 31, 2016 and 2015, respectively, and is included in prepaid expenses and other assets on our Consolidated Balance Sheets.

 

TRADE RCEIVABLES
TRADE RECEIVABLES

5. TRADE RECEIVABLES

Trade receivables represent short-term credit granted to customers for which collateral is generally not required. The balance of trade receivables consists of outstanding balances owed to us by gaming establishments and casino patrons. The balance of trade receivables consisted of the following (in thousands):

 

 

 

 

 

 

 

 

At December 31,

 

At December 31,

 

 

2016

   

2015

 

Trade receivables, net

 

 

 

 

 

 

Games trade receivables

$

44,410

 

$

38,064

 

Payments trade receivables

 

7,241

 

 

14,318

 

Total trade receivables, net

$

51,651

 

$

52,382

 

 

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 Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income. 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 Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income. The outstanding balances of the check warranty and general reserves were $2.7 million and $2.0 million, respectively, as of December 31, 2016 and $3.0 million and $0.9 million, respectively, as of December 31, 2015.

A summary activity of the reserve for warranty losses is as follows (in thousands):

 

 

 

 

 

 

    

Amount

 

Balance, December 31, 2013

 

$

2,777

 

Warranty expense provision

 

 

9,029

 

Charge-offs against reserve

 

 

(9,022)

 

Balance, December 31, 2014

 

 

2,784

 

Warranty expense provision

 

 

9,263

 

Charge-offs against reserve

 

 

(9,074)

 

Balance, December 31, 2015

 

 

2,973

 

Warranty expense provision

 

 

8,694

 

Charge-offs against reserve

 

 

(8,972)

 

Balance, December 31, 2016

 

$

2,695

 

 

OTHER RECEIVABLES
OTHER RECEIVABLES

6. OTHER RECEIVABLES

Other receivables include the balance of notes and loans receivable on our games and fully integrated kiosk products; and development agreements, which are generated from reimbursable amounts advanced to tribal customers generally used by the customer to build, expand or renovate its facility.

 

In addition, we had a note receivable with Bee Cave Games, Inc. (“Bee Cave”), which was established prior to our acquisition of Everi Games Holding in December 2014 pursuant to a secured promissory note in the amount of $4.5 million, which bears annual interest at 7%. The note required interest only payments for the first 24 months followed by repayments of principal and interest in 48 equal monthly installments. In connection with the promissory note, the Company received a warrant to purchase the common stock of Bee Cave and recorded a discount to the note for the fair value of the warrant received.

 

In May 2016, Bee Cave failed to pay its scheduled interest-only payment that was due related to its $4.5 million secured promissory note payable to Everi Games, for which we issued a Notice of Default and Acceleration to Bee Cave of our intent to foreclose on its assets in full settlement of the outstanding note obligation under the terms of the promissory note. At such time, we recorded a write-down of approximately $4.3 million related to the Bee Cave note receivable and warrant in operating expenses on the Condensed Consolidated Statements of Loss and Comprehensive Loss. During the third quarter of 2016, we foreclosed on the Bee Cave assets, evaluated its platform, and began to utilize these assets in connection with our social gaming strategy to deliver content from our existing game library. Consequently, we extinguished the note receivable and recorded $0.5 million of developed technology and software within other intangible assets, net on the Condensed Consolidated Balance Sheets at that time.

 

Other receivables also include income taxes receivable and other miscellaneous receivables. The balance of other receivables consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

At December 31,

 

At December 31,

 

 

2016

    

2015

 

Other receivables

 

 

 

 

 

 

Notes and loans receivable, net of discount of $0 and $699 at December 31, 2016 and December 31, 2015, respectively

$

5,096

 

$

9,930

 

Federal and state income tax receivable

 

243

 

 

421

 

Other

 

1,681

 

 

1,232

 

Total other receivables

 

7,020

 

 

11,583

 

Less: non-current portion of notes and loans receivable

 

2,020

 

 

6,655

 

Total other receivables, current portion

$

5,000

 

$

4,928

 

 

PREPAID AND OTHER ASSETS
PREPAID AND OTHER ASSETS

7. 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 Consolidated Balance Sheets.

We reclassified $23.7 million of debt issuance costs related to our outstanding debt from the non-current portion of other assets to contra-liabilities included in long-term debt as of December 31, 2015 in connection with our retrospective adoption of ASU No. 2015-03. The remaining debt issuance costs included in the non-current portion of other assets relate to our line-of-credit arrangements and were not reclassified consistent with our adoption of ASU No. 2015-15.

 

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

 

 

 

 

 

 

 

 

 

 

At December 31,

 

At December 31,

 

 

2016

  

2015

 

Prepaid expenses and other assets

 

 

 

 

 

 

Deposits

$

8,622

 

$

8,946

 

Prepaid expenses

 

5,937

 

 

8,255

 

Other

 

3,489

 

 

3,571

 

Total prepaid expenses and other assets

$

18,048

 

$

20,772

 

 

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

 

 

 

 

 

 

 

 

 

 

At December 31,

 

At December 31,

 

 

 

2016

    

2015

    

 

Other assets

 

 

 

 

 

 

 

Prepaid expenses and deposits

$

3,399

 

$

4,521

 

 

Debt issuance costs of revolving credit

 

689

 

 

919

 

 

Other

 

3,434

 

 

5,934

 

 

Total other assets

$

7,522

 

$

11,374

 

 

 

INVENTORY
INVENTORY

8. 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 December 31,

 

At December 31,

 

 

 

2016

    

2015

 

 

Inventory

 

 

 

 

 

 

 

Raw materials and component parts, net of reserves of $2,155 and $912 at December 31, 2016 and December 31, 2015, respectively

$

12,570

 

$

23,663

 

 

Work-in-progress

 

1,502

 

 

1,495

 

 

Finished goods

 

4,996

 

 

3,580

 

 

Total inventory

$

19,068

 

$

28,738

 

 

 

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

9. PROPERTY, EQUIPMENT AND LEASED ASSETS

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2016

 

At December 31, 2015

 

 

 

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

 

$

123,812

 

$

59,188

 

$

64,624

 

$

91,743

 

$

29,993

 

$

61,750

 

Rental pool - undeployed

 

2

-

4

 

 

13,456

 

 

5,721

 

 

7,735

 

 

11,950

 

 

3,361

 

 

8,589

 

ATM equipment

 

 

5

 

 

 

16,537

 

 

11,189

 

 

5,348

 

 

20,601

 

 

12,885

 

 

7,716

 

Leasehold and building improvements

 

Lease Term

 

 

10,023

 

 

3,698

 

 

6,325

 

 

7,564

 

 

2,038

 

 

5,526

 

Cash advance equipment

 

 

3

 

 

 

8,590

 

 

4,499

 

 

4,091

 

 

7,662

 

 

2,711

 

 

4,951

 

Machinery, office and other equipment

 

2

-

5

 

 

30,424

 

 

20,108

 

 

10,316

 

 

32,313

 

 

14,537

 

 

17,776

 

Total

 

 

 

 

 

$

202,842

 

$

104,403

 

$

98,439

 

$

171,833

 

$

65,525

 

$

106,308

 

 

In the second quarter of 2016, our corporate aircraft was classified as held for sale and sold for $4.8 million during the period. We recognized a $0.9 million loss on the sale of the aircraft, which was included in operating expenses in the Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income for the year ended December 31, 2016. The aircraft was included in machinery, office and other equipment.

 

In connection with the sale of certain assets related to our PokerTek products during the year ended December 31, 2015 for a purchase price of $5.4 million, we recorded a gain of approximately $3.9 million, which was included in operating expenses in our Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income for such period.

 

Depreciation expense related to other property, equipment and leased assets totaled approximately $50.0 million, $45.6 million and $8.7 million for the years ended December 31, 2016,  2015 and 2014, respectively.

 

There was no material impairment of our property, equipment and leased assets for the year ended December 31, 2016. In connection with our fourth quarter 2015 annual financial statement review, we determined that certain of our Games fixed assets either: (a) had economic lives that were no longer supportable and shortened given approximately one year of experience with the Games segment that resulted in an accelerated depreciation charge of approximately $2.6 million; or (b) were fully impaired as there was little to no movement in the portfolio with recent shipments having been returned and no future deployment anticipated that resulted in an accelerated depreciation charge of approximately $1.0 million. Our property, equipment and leased assets were not impaired for the year ended December 31, 2014.

GOODWILL AND OTHER INTANGIBLE ASSETS
GOODWILL AND OTHER INTANGIBLE ASSETS

10. 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.

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 use the Step 2 assessment to determine the impairment.

Goodwill Testing

In performing our annual goodwill impairment tests, we utilize the two-step approach prescribed under ASC 350. The first step required a comparison of the carrying value of each reporting unit to its estimated fair value. To estimate the fair value of our reporting units for Step 1, we used a combination of an income valuation approach and a market valuation approach. The income approach is based on a discounted cash flow (“DCF”) analysis. This method involves estimating the after-tax cash flows attributable to a reporting unit and then discounting the after-tax cash flows to a present value, using a risk-adjusted discount rate. Assumptions used in the DCF require the exercise of significant judgment, including, but not limited to: appropriate discount rates and terminal values, growth rates and the amount and timing of expected future cash flows. The forecasted cash flows are based on our most recent annual budget and projected years beyond. Our budgets and forecasted cash flows are based on estimated future growth rates. We believe our assumptions are consistent with the plans and estimates used to manage the underlying businesses. The discount rates, which are intended to reflect the risks inherent in future cash flow projections, used in the DCF are based on estimates of the WACC of market participants relative to each respective reporting unit. The market approach considers comparable market data based on multiples of revenue or earnings before interest, taxes, depreciation and amortization (“EBITDA”).

If the carrying amount of a reporting unit exceeds its estimated fair value, we are required to perform the second step of the goodwill impairment test to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of a reporting unit’s goodwill to its carrying amount. The implied fair value of goodwill is derived by performing a hypothetical purchase price allocation for the reporting unit as of the measurement date and allocating the reporting unit’s estimated fair value to its assets and liabilities. The residual amount from performing this allocation represents the implied fair value of goodwill. To the extent this implied fair value is below the carrying amount of goodwill, an impairment charge is recorded.

We had approximately $640.5 million of goodwill on our Consolidated Balance Sheets at December 31, 2016 resulting from acquisitions of other businesses. All of our goodwill was subject to our annual goodwill impairment testing.

In connection with our annual goodwill impairment testing process for 2016 and 2015, we determined that our Games reporting unit did not pass the step one test and, therefore, we were required to conduct a step two analysis to determine the amount of impairment, which was approximately $146.3 million and $75.0 million for the years ended December 31, 2016 and 2015, respectively. The fair value substantially exceeded the carrying value for each of the Cash Access, Kiosk Sales and Services, Central Credit and Everi Compliance reporting units as of December 31, 2016 and 2015, respectively. The Company’s aggregate goodwill impairment balance was $221.3 million and $75.0 million as of December 31, 2016 and 2015, respectively. The impairment analysis was primarily based upon limited growth and capital expenditure constraints in the gaming industry, consolidation and increased competition in the gaming manufacturing space, stock market volatility, global and domestic economic uncertainty and lower than forecasted operating profits and cash flows in 2016 and 2015. Based on these indicators, we revised our estimates and assumptions for the Games reporting unit. Management performs its annual forecasting process, which, among other factors, includes reviewing recent historical results, company-specific variables and industry trends. This process is generally completed in the fourth quarter and considered in conjunction with the annual goodwill impairment evaluation. ‎

The annual evaluation of goodwill and other non‑amortizing intangible assets requires the use of estimates about future operating results of each reporting unit to determine its estimated fair value. Changes in forecasted operations can materially affect these estimates, which could materially affect our results of operations. The estimate of fair value requires significant judgment and we base our fair value estimates on assumptions that we believe to be reasonable; but that are unpredictable and inherently uncertain, including: estimates of future growth rates, operating margins and assumptions about the overall economic climate as well as the competitive environment for our reporting units. There can be no assurance that our estimates and assumptions made for purposes of our goodwill testing as of the time of testing will prove to be accurate predictions of the future. If our assumptions regarding business plans, competitive environments or anticipated growth rates are not correct, we may be required to record goodwill impairment charges in future periods, whether in connection with our next annual impairment testing, or earlier, if an indicator of an impairment is present prior to our next annual evaluation.

Our reporting units are identified as operating segments or one level below. Reporting units must: (a) engage in business activities from which they earn revenues and incur expenses; (b) have operating results that are regularly reviewed by our chief operating decision makers to ascertain the resources to be allocated to the segment and assess its performance; and (c) have discrete financial information available. As of December 31, 2016, our reporting units included: Games, Cash Access, Kiosk Sales and Services, Central Credit, and Everi Compliance. During the year ended December 31, 2016, the Company combined its Cash Advance, ATM and Check Services reporting units into a single Cash Access reporting unit to be consistent with the current corporate structure and segment management. The use of different assumptions, estimates or judgments in either step of the goodwill impairment testing process, such as the estimated future cash flows of our reporting units, the discount rate used to discount such cash flows, or the estimated fair value of the reporting units’ tangible and intangible assets and liabilities, could significantly increase or decrease the estimated fair value of a reporting unit or its net assets, and therefore, impact the related impairment charge, if any.

The Company determined, based on changes to our structure and the overall management of the business, that the Cash Advance, ATM, and Check Services reporting units would be combined into a single Cash Access reporting unit. Prior to combining these reporting units, we performed a separate impairment test for each of these former reporting units in addition to the test performed on the combined Cash Access reporting unit during our 2016 assessment. There was no indicated impairment for any of these three reporting units prior to combining them into a single unit.

Key assumptions used in estimating fair value of the Games reporting unit under the income approach included a discount rate 10.0% and a terminal value growth rate of approximately 3.0% for the years ended December 31, 2016 and 2015. Projected compound average revenue growth rates of approximately 5.2% and 7.5% were used for the years ended December 31, 2016 and 2015, respectively. The discounted cash flow analyses included estimated future cash inflows from operations and estimated future cash outflows for capital expenditures.

Key assumptions used in estimating fair value of the Games reporting unit under the market approach were based on observed market multiples of enterprise value to revenue and EBITDA for both comparable publicly traded companies and recent merger and acquisition transactions involving similar companies to estimate appropriate controlling basis multiples to apply to each of the reporting units. Based on the multiples implied by this market data, we selected multiples of revenue of approximately 3.1 to 3.4 times and multiples of EBITDA of 6.5 to 8.3 times for the year ended December 31, 2016. We selected multiples of revenue of approximately 3.6 to 4.8 times and multiples of EBITDA of 7.4 to 8.7 times for the year ended December 31, 2015.

Our goodwill was not impaired for the year ended December 31, 2014 based upon the results of our testing.

The changes in the carrying amount of goodwill are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Cash Access

    

Games

    

Other

    

Total

 

Goodwill

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2014

 

$

157,150

 

$

669,452

 

$

31,311

 

$

857,913

 

Goodwill acquired during the year

 

 

 —

 

 

 —

 

 

6,117

 

 

6,117

 

Goodwill impairment

 

 

 —

 

 

(75,008)

 

 

 —

 

 

(75,008)

 

Foreign translation adjustment

 

 

(115)

 

 

 —

 

 

 —

 

 

(115)

 

Other(1)

 

 

 —

 

 

896

 

 

 —

 

 

896

 

Balance, December 31, 2015

 

$

157,035

 

$

595,340

 

$

37,428

 

$

789,803

 

Goodwill impairment

 

 

 —

 

 

(146,299)

 

 

 —

 

 

(146,299)

 

Foreign translation adjustment

 

 

20

 

 

 —

 

 

 —

 

 

20

 

Other(2)

 

 

 —

 

 

 —

 

 

(2,978)

 

 

(2,978)

 

Balance, December 31, 2016

 

$

157,055

 

$

449,041

 

$

34,450

 

$

640,546

 


(1)

Includes the final 2015 measurement period adjustments associated with the acquisition of our Games business in late 2014.

(2)

Includes the final 2016 measurement period adjustments associated with the acquisition of certain assets of Resort Advantage in late 2015.

 

Other Intangible Assets

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2016

 

At December 31, 2015

 

 

Useful Life

 

 

 

 

Accumulated

 

Net Book

 

 

 

 

Accumulated

 

Net Book

 

    

(years)

    

Cost

    

Amortization

    

Value

    

Cost

    

Amortization

    

Value

Other intangible assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contract rights under development and placement fee agreements

 

1

-

7

 

$

17,742

 

$

6,281

 

$

11,461

 

$

16,453

 

$

7,612

 

$

8,841

Customer contracts

 

7

-

14

 

 

50,975

 

 

40,419

 

 

10,556

 

 

50,177

 

 

34,755

 

 

15,422

Customer relationships

 

8

-

12

 

 

231,100

 

 

42,688

 

 

188,412

 

 

231,100

 

 

21,723

 

 

209,377

Developed technology and software

 

1

-

6

 

 

224,265

 

 

126,721

 

 

97,544

 

 

197,658

 

 

63,591

 

 

134,067

Patents, trademarks and other

 

1

-

17

 

 

27,771

 

 

17,747

 

 

10,024

 

 

28,240

 

 

13,485

 

 

14,755

Total

 

 

 

 

 

$

551,853

 

$

233,856

 

$

317,997

 

$

523,628

 

$

141,166

 

$

382,462

Amortization expense related to other intangible assets totaled approximately $94.6 million, $85.5 million and $14.2 million for the years ended December 31, 2016,  2015 and 2014, respectively. We capitalized $24.2 million and $21.0 million of internal software development costs for the years ended December 31, 2016 and 2015, respectively.

On a quarterly basis, we evaluate our other intangible assets for potential impairment as part of our quarterly review process. There was no material impairment identified for any of our other intangible assets for the years ended December 31, 2016 and 2015. For the year ended December 31, 2014, our online payment processing intangible assets were identified for further testing. We determined that these definite-lived intangible assets were potentially impaired primarily due to a combination of the following factors: (a) legislative constraints at the state and federal level; (b) significant changes in management; and (c) lower than anticipated operating results.

These definite-lived intangible assets were evaluated using an undiscounted cash flow approach to determine if an impairment existed.  As impairment was indicated based on the undiscounted cash flow approach, we discounted the cash flows and applied probability factors to calculate the resulting fair values and compared to the existing carrying value to determine the amount of impairment. The amount of impairment was approximately $3.1 million leaving a revised cost basis of $1.6 million and a remaining life of three years at December 31, 2014. This amount was recorded in Operating Expenses in our Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income. These assets have been valued using level 3 fair value inputs.

The anticipated amortization expense related to other intangible assets, assuming no subsequent impairment of the underlying assets, is as follows (in thousands):

 

 

 

 

 

Anticipated amortization expense

    

Amount

 

2017

 

$

68,765

 

2018

 

 

50,899

 

2019

 

 

40,693

 

2020

 

 

35,978

 

2021

 

 

23,396

 

Thereafter

 

 

84,293

 

Total(1)

 

$

304,024

 


(1)

For the year ended December 31, 2016, the Company had $14.0 million in other intangible assets which had not yet been placed into service.

 

We enter into development and placement fee agreements to provide financing for new gaming facilities or for the expansion or improvement of existing facilities. All or a portion of the funds provided under development agreements are reimbursed to us, while 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 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.

 

In addition, certain development agreements allow the facilities to buy out floor space after advances that are subject to repayment have been repaid. The development agreements typically provide for a portion of the amounts retained by each facility for its share of the operating profits of the facility to be used to repay some or all of the advances recorded as notes receivable, which are included as part of other receivables current and non-current in the Consolidated Balance Sheets. There were no receivables related to development agreements at December 31, 2016 and 2015, respectively. 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 development or 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 $11.3 million and $2.8 million to extend the term of placement fee agreements with a customer for certain of its locations for the years ended December 31, 2016 and 2015, respectively.

 

During the year ended December 31, 2016, we foreclosed on the Bee Cave assets, evaluated its platform, and began to utilize these assets in connection with our social gaming strategy to deliver content from our existing game library. Consequently, we extinguished the note receivable and recorded $0.5 million of developed technology and software within other intangible assets, net on the Consolidated Balance Sheets during the period.

ACCOUNTS PAYABLE AND ACCRUED EXPENSES
ACCOUNTS PAYABLE AND ACCRUED EXPENSES

11. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

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

 

 

 

 

 

 

 

 

At December 31,

 

At December 31,

 

 

2016

   

2015

  

Accounts payable and accrued expenses

 

 

 

 

 

 

Trade accounts payable

$

55,352

 

$

69,182

 

Payroll and related expenses

 

12,305

 

 

8,565

 

Deferred and unearned revenues

 

9,222

 

 

10,836

 

Cash access processing and related expenses

 

7,001

 

 

4,662

 

Accrued taxes

 

2,587

 

 

1,654

 

Accrued interest

 

82

 

 

73

 

Other

 

7,842

 

 

6,540

 

Total accounts payable and accrued expenses

$

94,391

 

$

101,512

 

 

LONG-TERM DEBT
LONG-TERM DEBT

 

12. LONG-TERM DEBT

The following table summarizes our indebtedness (in thousands):

 

 

 

 

 

 

 

 

 

At December 31,

 

At December 31,

 

 

 

2016

  

2015

 

 

Long-term debt

 

 

 

 

 

 

 

Senior secured term loan

$

465,600

 

$

490,000

 

 

Senior secured notes

 

335,000

 

 

335,000

 

 

Senior unsecured notes

 

350,000

 

 

350,000

 

 

Total debt

 

1,150,600

 

 

1,175,000

 

 

Less: debt issuance costs and warrant discount

 

(28,720)

 

 

(35,101)

 

 

Total debt after debt issuance costs and discount

 

1,121,880

 

 

1,139,899

 

 

Less: current portion of long-term debt

 

(10,000)

 

 

(10,000)

 

 

Long-term debt, less current portion