EVERI HOLDINGS INC., 10-Q filed on 5/10/2016
Quarterly Report
Document and Entity Information
3 Months Ended
Mar. 31, 2016
May 2, 2016
Document and Entity Information
 
 
Entity Registrant Name
Everi Holdings Inc. 
 
Entity Central Index Key
0001318568 
 
Document Type
10-Q 
 
Document Period End Date
Mar. 31, 2016 
 
Amendment Flag
false 
 
Current Fiscal Year End Date
--12-31 
 
Entity Current Reporting Status
Yes 
 
Entity Filer Category
Accelerated Filer 
 
Entity Common Stock, Shares Outstanding
 
66,039,338 
Document Fiscal Year Focus
2016 
 
Document Fiscal Period Focus
Q1 
 
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended
Mar. 31, 2016
Mar. 31, 2015
Revenues
$ 205,769 
$ 207,473 
Costs and expenses
 
 
Operating expenses
30,005 
15,841 
Research and development
5,368 
5,436 
Depreciation
12,335 
10,377 
Amortization
23,183 
20,655 
Total costs and expenses
201,984 
179,332 
Operating (loss) income
3,785 
28,141 
Other (income) expense
 
 
Interest expense, net of interest income
24,992 
25,655 
Total other (income) expenses
24,992 
25,655 
(Loss) income from operations before tax
(21,207)
2,486 
Income tax (benefit) provision
(8,056)
2,017 
Net (loss) income
(13,151)
469 
Foreign currency translation
(485)
(873)
Comprehensive (loss) income
(13,636)
(404)
(Loss) earnings per share
 
 
Basic (in dollars per share)
$ (0.20)
$ 0.01 
Diluted (in dollars per share)
$ (0.20)
$ 0.01 
Weighted average common shares outstanding
 
 
Basic (in shares)
66,034 
65,623 
Diluted (in shares)
66,034 
66,492 
Games
 
 
Revenues
48,178 
55,045 
Costs and expenses
 
 
Cost of revenues (exclusive of depreciation and amortization)
8,436 
12,077 
Operating (loss) income
(3,245)
614 
Payments
 
 
Revenues
157,591 
152,428 
Costs and expenses
 
 
Cost of revenues (exclusive of depreciation and amortization)
122,657 
114,946 
Operating (loss) income
$ 7,030 
$ 27,527 
CONSOLIDATED BALANCE SHEETS (USD $)
In Thousands, unless otherwise specified
Mar. 31, 2016
Dec. 31, 2015
Current assets
 
 
Cash and cash equivalents
$ 99,334 
$ 102,030 
Settlement receivables
28,321 
44,933 
Trade receivables, net of allowances for doubtful accounts of $3.0 million and $2.8 million at December 31, 2015 and December 31, 2014, respectively
45,449 
52,382 
Other receivables
4,682 
4,928 
Inventory
29,100 
28,738 
Prepaid expenses and other assets
20,115 
20,772 
Total current assets
227,001 
253,783 
Non-current assets
 
 
Property, equipment and leased assets, net
107,485 
106,308 
Goodwill
789,845 
789,803 
Other intangible assets, net
375,851 
382,462 
Other receivables, non-current
5,718 
6,655 
Other assets, non-current
10,016 
11,374 
Total non-current assets
1,288,915 
1,296,602 
Total assets
1,515,916 
1,550,385 
Current Liabilities
 
 
Settlement liabilities
110,361 
139,819 
Accounts payable and accrued expenses
118,440 
101,512 
Current portion of long-term debt
10,000 
10,000 
Total current liabilities
238,801 
251,331 
Non-current liabilities
 
 
Deferred tax liability, non-current
19,300 
27,644 
Long-term debt, less current portion
1,128,930 
1,129,899 
Other accrued expenses and liabilities
3,601 
4,091 
Total non-current liabilities
1,151,831 
1,161,634 
Total liabilities
1,390,632 
1,412,965 
Commitments and Contingencies (Note 13)
   
   
Stockholders' Equity
 
 
Common stock, $0.001 par value, 500,000 shares authorized and 90,877 and 90,405 shares issued at December 31, 2015 and December 31, 2014, respectively
91 
91 
Additional paid-in capital
259,081 
258,020 
Retained earnings
42,029 
55,180 
Accumulated other comprehensive income
281 
318 
Treasury stock, at cost, 24,849 and 24,816 shares at December 31, 2015 and December 31, 2014, respectively
(176,198)
(176,189)
Total stockholders' equity
125,284 
137,420 
Total liabilities and stockholders' equity
$ 1,515,916 
$ 1,550,385 
CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)
In Millions, except Share data, unless otherwise specified
Mar. 31, 2016
Dec. 31, 2015
CONDENSED CONSOLIDATED BALANCE SHEETS
 
 
Allowances for doubtful accounts
$ 3.8 
$ 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
90,888,000 
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
24,851,000 
24,849,000 
CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)
In Thousands, unless otherwise specified
3 Months Ended
Mar. 31, 2016
Mar. 31, 2015
Cash flows from operating activities
 
 
Net (loss) income
$ (13,151)
$ 469 
Adjustments to reconcile net (loss) income to cash provided by operating activities:
 
 
Depreciation and Amortization
35,518 
31,032 
Amortization of financing costs
1,672 
2,072 
Loss on sale or disposal of assets
611 
Accretion of contract rights
2,097 
2,104 
Provision for bad debts
2,444 
2,266 
Reserve for obsolescence
119 
73 
Stock-based compensation
1,061 
1,793 
Other non-cash items
(38)
231 
Changes in operating assets and liabilities:
 
 
Settlement receivables
16,634 
13,208 
Trade and other receivables
5,749 
(4,716)
Inventory
(497)
4,082 
Prepaid and other assets
2,047 
(547)
Deferred income taxes
(8,343)
1,769 
Settlement liabilities
(29,603)
22,765 
Accounts payable and accrued expenses
8,384 
9,213 
Net cash provided by operating activities
24,704 
85,816 
Cash flows from investing activities
 
 
Capital expenditures
(23,613)
(12,616)
Proceeds from sale of fixed assets
10 
Repayments under development agreements
 
1,217 
Advances under development and placement agreements
(1,000)
(1,255)
Changes in restricted cash and cash equivalents
44 
59 
Net cash used in investing activities
(24,559)
(12,594)
Cash flows from financing activities
 
 
Repayments of credit facility
(2,500)
(17,500)
Debt issuance costs
(480)
(252)
Proceeds from exercise of stock options
 
1,048 
Purchase of treasury stock
(9)
(20)
Net cash used in financing activities
(2,989)
(16,724)
Effect of exchange rates on cash
148 
(580)
Cash and cash equivalents
 
 
Net increase for the period
(2,696)
55,918 
Balance, beginning of the period
102,030 
89,095 
Balance, end of the period
99,334 
145,013 
Supplemental cash disclosures
 
 
Cash paid for interest
8,846 
13,162 
Cash paid for income tax, net
273 
712 
Supplemental non-cash disclosures
 
 
Accrued and unpaid capital expenditures
12,424 
1,173 
Issuance of stock warrants
$ 1,039 
$ 1,395 
BUSINESS
BUSINESS

1.BUSINESS

 

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

 

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

 

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

2.BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

Our unaudited condensed consolidated financial statements included herein have been prepared by us pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Some of the information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States have been condensed or omitted pursuant to such rules and regulations, although we believe the disclosures are adequate to make the information presented not misleading. In the opinion of management, all adjustments (which include normal recurring adjustments) necessary for a fair presentation of results for the interim periods have been made. The results for the three months ended March 31, 2016 are not necessarily indicative of results to be expected for the full fiscal year.  The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2015.

 

There have been no changes to our basis of presentation and significant accounting policies since the most recent filing of our Annual Report on Form 10-K for the fiscal year ended December 31, 2015

 

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 Condensed Consolidated Statements of (Loss) Income and Comprehensive Loss, were $0.2 million and $0.3 million, for the three months ended March 31, 2016 and 2015, 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

 

March 31, 2016

 

Hierarchy

 

Fair Value

 

Balance

 

Term loan

 

1

 

$

455,813

 

$

487,500

 

Senior secured notes

 

3

 

$

313,225

 

$

335,000

 

Senior unsecured notes

 

1

 

$

301,000

 

$

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 March 31, 2016. The fair value of the senior secured notes was derived using the same rate as the term loan given that both were treated similarly.

 

Reclassification of Prior Year Balances

 

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

 

Recent Accounting Guidance

 

Recently Adopted Accounting Guidance

 

In April 2015, the FASB issued 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 other assets, non-current to contra-liabilities to long-term debt 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 but as we do not have any extraordinary items, there was no impact to our 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 implemented this guidance during the current period but this guidance did not have any impact on our financial statements.

Recent Accounting Guidance Not Yet Adopted

 

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

 

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 the Consolidated Financial Statements.

 

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

In May 2014, the FASB issued ASU No. 2014-09, which creates FASB Accounting Standards Codification (“ASC”) Topic 606, “Revenue from Contracts with Customers” and supersedes ASC Topic 605, “Revenue Recognition”. The guidance replaces industry-specific guidance and establishes a single five-step model to identify and recognize revenue. The core principle of the guidance is that an entity should recognize revenue upon transfer of control of promised goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. Additionally, the guidance requires the entity to disclose further quantitative and qualitative information regarding the nature and amount of revenues arising from contracts with customers, as well as other information about the significant judgments and estimates used in recognizing revenues from contracts with customers. The guidance in ASU 2014-09 was further updated by ASU 2016-08 in March 2016, which provides clarification on the implementation of the principal vs 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.  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 are currently evaluating the impact of adopting this guidance on our Consolidated Financial Statements and disclosures included within our Notes to the Consolidated Financial Statements. 

BUSINESS COMBINATIONS
BUSINESS COMBINATIONS

3. BUSINESS COMBINATIONS

 

We account for business combinations in accordance with ASC 805, which requires that the identifiable assets acquired and liabilities assumed be recorded at their estimated fair values on the acquisition date separately from goodwill, which is the excess of the fair value of the purchase price over the fair values of these identifiable assets and liabilities. We include the results of operations of an acquired business as of the acquisition date. We had no material acquisitions for the three months ended March 31, 2016 and 2015.

ATM FUNDING AGREEMENTS
ATM FUNDING AGREEMENTS

4. ATM FUNDING AGREEMENTS

 

Contract Cash Solutions Agreement

 

Our Contract Cash Solutions Agreement with Wells Fargo Bank, N.A. (“Wells Fargo”) allows us to use funds owned by Wells Fargo to provide the currency needed for normal operating requirements for our ATMs. For the use of these funds, we pay Wells Fargo a cash usage fee on the average daily balance of funds utilized multiplied by a contractually defined cash usage rate. These cash usage fees, reflected as interest expense within the Condensed Consolidated Statements of (Loss) Income and Comprehensive Loss, were $0.8 million and $0.5 million for the three months ended March 31, 2016 and 2015, 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 Condensed Consolidated Balance Sheets. The outstanding balances of ATM cash utilized by us from Wells Fargo were $291.0 million and $364.5 million as of March 31, 2016 and December 31, 2015, respectively.

 

In June 2015, we amended the Contract Cash Solutions Agreement to decrease the maximum amount of cash to be provided to us from $500.0 million to $425.0 million and to extend the term of the agreement from November 30, 2015 to June 30, 2018. 

 

We are responsible for any losses of cash in the ATMs under this agreement and we self‑insure for this risk. We incurred no material losses related to this self‑insurance for the three months ended March 31, 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 Condensed Consolidated Balance Sheets and $63.4 million and $84.9 million as of March 31, 2016 and December 31, 2015, respectively.

 

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 March 31,

 

At December 31,

 

 

2016

    

2015

 

 

 

 

 

 

 

 

Trade receivables, net

 

 

 

 

 

 

Games trade receivables

$

36,148

 

$

38,064

 

Payments trade receivables

 

9,301

 

 

14,318

 

Total trade receivables, net

$

45,449

 

$

52,382

 

 

The allowance for doubtful accounts for trade receivables includes reserves related to check warranty receivables as well as a general allowance for non-warranty receivables. On a monthly basis, we evaluate the collectability of the outstanding balances and establish a reserve for the face amount of the expected losses on our receivables. The expense associated with check warranty receivables is included within Payments cost of revenues (exclusive of depreciation and amortization) in the Condensed Consolidated Statements of (Loss) Income and Comprehensive Loss. The expense associated with non-warranty receivables is included within operating expenses in the Condensed Consolidated Statements of (Loss) Income and Comprehensive Loss. The outstanding balance of the check warranty and non-warranty reserves was $2.8 and $3.0 million and $1.0 and $0.9 as of March 31, 2016 and December 31, 2015, respectively.

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, development agreements, which are generated from reimbursable amounts advanced to tribal customers generally used by the customer to build, expand or renovate its facility as well as an agreement with Bee Caves Games, Inc. (“Bee Caves Games”) in July 2014, under which the Company agreed to make a loan pursuant to a secured promissory note in the amount of $4.5 million. In association with the promissory note, the Company received warrants to purchase the common stock of Bee Caves Games and recorded a discount to the note for the fair value of the warrants received. The warrants are included in the balance of other assets, non-current. The note, which bears interest at 7%, requires interest only payments for the first 24 months followed by repayments of principal and interest in 48 equal monthly installments.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At March 31,

 

At December 31,

 

 

2016

    

2015

 

Other receivables

 

 

 

 

 

 

Notes and loans receivable, net of discount of $660 and $699, respectively

$

8,932

 

$

9,930

 

Federal and state income tax receivable

 

421

 

 

421

 

Other

 

1,047

 

 

1,232

 

Total other receivables

 

10,400

 

 

11,583

 

Less: Notes and loans receivable, non-current

 

5,718

 

 

6,655

 

Total other receivables, current portion

$

4,682

 

$

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, restricted cash and other assets. The short-term portion of these assets is included in prepaid and other assets and the long-term portion is included in other assets, non-current.

 

We reclassified $23.7 million of debt issuance costs related to our outstanding debt from other assets, non-current 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 other assets, non-current 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 consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

At March 31,

 

At December 31,

 

 

 

2016

    

2015

 

 

 

 

 

 

 

 

 

 

Prepaid expenses and other assets

 

 

 

 

 

 

 

Prepaid expenses

$

7,637

 

$

8,255

 

 

Deposits

 

8,784

 

 

8,946

 

 

Other

 

3,694

 

 

3,571

 

 

Total prepaid expenses and other assets

$

20,115

 

$

20,772

 

 

 

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

 

 

 

 

 

 

 

 

 

 

At March 31,

 

At December 31,

 

 

 

2016

    

2015

    

 

Other assets, non-current

 

 

 

 

 

 

 

Debt issuance costs

$

862

 

$

919

 

 

Prepaid expenses and deposits, non-current

 

3,891

 

 

4,521

 

 

Other

 

5,263

 

 

5,934

 

 

Total other assets, non-current

$

10,016

 

$

11,374

 

 

 

INVENTORY
INVENTORY

8. 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 FIFO method.

 

Inventory consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

At March 31,

 

At December 31,

 

 

 

2016

    

2015

 

 

Inventory

 

 

 

 

 

 

 

Raw materials and component parts, net of reserves of $900 and $912, respectively

$

22,050

 

$

23,663

 

 

Work in progress

 

1,892

 

 

1,495

 

 

Finished goods

 

5,158

 

 

3,580

 

 

Total inventory

$

29,100

 

$

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 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At March 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

 

$

100,342

 

$

36,859

 

$

63,483

 

$

91,743

 

$

29,993

 

$

61,750

 

Rental pool - undeployed

 

2

-

4

 

 

11,877

 

 

4,024

 

 

7,853

 

 

11,950

 

 

3,361

 

 

8,589

 

ATM equipment

 

 

5

 

 

 

17,129

 

 

9,873

 

 

7,256

 

 

20,601

 

 

12,885

 

 

7,716

 

Leasehold and building improvements

 

Lease Term

 

 

8,679

 

 

2,400

 

 

6,279

 

 

7,564

 

 

2,038

 

 

5,526

 

Cash advance equipment

 

 

3

 

 

 

7,581

 

 

3,080

 

 

4,501

 

 

7,662

 

 

2,711

 

 

4,951

 

Machinery, office and other equipment

 

2

-

5

 

 

34,592

 

 

16,479

 

 

18,113

 

 

32,313

 

 

14,537

 

 

17,776

 

Total

 

 

 

 

 

$

180,200

 

$

72,715

 

$

107,485

 

$

171,833

 

$

65,525

 

$

106,308

 

 

Depreciation expense related to other property, equipment and leased assets totaled approximately $12.3 million and $10.4 million for the three months ended March 31, 2016 and 2015, respectively. Our property, equipment and leased assets were not impaired for the three months ended March 31, 2016 and 2015.

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. The balance of goodwill was $789.8 million at March 31, 2016 and December 31, 2015, respectively.

 

In accordance with ASC 350, we test goodwill at the reporting unit level, which in certain cases may be a component of an operating segment, 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.

 

The estimate of fair value requires significant judgment. We based 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.

 

We did not identify any goodwill impairment for the three months ended March 31, 2016 and 2015.  

Other Intangible Assets

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At March 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

 

$

27,640

 

$

9,709

 

$

17,931

 

$

16,453

 

$

7,612

 

$

8,841

Customer contracts

 

7

-

14

 

 

50,177

 

 

36,152

 

 

14,025

 

 

50,177

 

 

34,755

 

 

15,422

Customer relationships

 

8

-

12

 

 

231,100

 

 

26,964

 

 

204,136

 

 

231,100

 

 

21,723

 

 

209,377

Developed technology and software

 

1

-

6

 

 

204,927

 

 

78,957

 

 

125,970

 

 

197,658

 

 

63,591

 

 

134,067

Patents, trademarks and other

 

1

-

17

 

 

28,458

 

 

14,669

 

 

13,789

 

 

28,240

 

 

13,485

 

 

14,755

Total

 

 

 

 

 

$

542,302

 

$

166,451

 

$

375,851

 

$

523,628

 

$

141,166

 

$

382,462

 

Amortization expense related to other intangible assets totaled approximately $23.2 million and $20.7 million for the three months ended March 31, 2016 and 2015, respectively. We capitalized and placed into service $5.7 million and $1.0 million of software development costs for the three months ended March 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. No impairment was identified for our other intangible assets during our assessment for the three months ended March 31, 2016 and 2015.

 

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 electronic gaming machines (“EGMs”) over the term of the agreement, generally 12 to 83 months and we receive a fixed percentage or flat fee of those machines’ hold per day. Certain of the agreements contain EGM performance standards that could allow the respective facility to reduce a portion of our guaranteed floor space.

 

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 Condensed Consolidated Balance Sheets. 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 $1.0 million and $1.2 million to extend the term of placement fee agreements with a customer for certain of its locations for the three months ended March 31, 2016 and 2015, respectively.

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 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

At March 31,

 

At December 31,

 

 

2016

    

2015

  

Accounts payable and accrued expenses

 

 

 

 

 

 

Trade accounts payable

$

71,823

 

$

67,139

 

Accrued interest

 

15,212

 

 

73

 

Payroll and related expenses

 

7,007

 

 

8,565

 

Deferred and unearned revenues

 

8,844

 

 

10,836

 

Cash access processing and related expenses

 

4,367

 

 

4,662

 

Accrued taxes

 

1,835

 

 

1,654

 

Other

 

9,352

 

 

8,583

 

Total accounts payable and accrued expenses

$

118,440

 

$

101,512

 

 

 

 

 

 

 

 

 

LONG-TERM DEBT
LONG-TERM DEBT

12. LONG-TERM DEBT

 

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

 

 

 

 

 

 

 

 

 

 

At March 31,

 

At December 31,

 

 

 

2016

    

2015

 

 

Long-term debt

 

 

 

 

 

 

 

Senior secured term loan

$

487,500

 

$

490,000

 

 

Senior secured notes

 

335,000

 

 

335,000

 

 

Senior unsecured notes

 

350,000

 

 

350,000

 

 

Total debt

 

1,172,500

 

 

1,175,000

 

 

Less: debt issuance costs and warrant discount

 

(33,570)

 

 

(35,101)

 

 

Total debt after debt issuance costs and discount

 

1,138,930

 

 

1,139,899

 

 

Less: current portion of long-term debt

 

(10,000)

 

 

(10,000)

 

 

Long-term debt, less current portion

$

1,128,930

 

$

1,129,899

 

 

 

We reclassified $23.7 million of debt issuance costs related to our outstanding debt from other assets, non-current 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 other assets, non-current relates to our line-of-credit arrangements and were not reclassified consistent with our adoption of ASU No. 2015-15.

 

Credit Facilities

 

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

 

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

 

The Term Loan had an applicable interest rate of 6.25% as of March 31, 2016 and December 31, 2015.

 

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

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

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

The Credit Agreement contains certain covenants that, among other things, limit Holdings’ ability, and the ability of certain of its subsidiaries, to incur additional indebtedness; sell assets or consolidate or merge with or into other companies; pay dividends or repurchase or redeem capital stock; make certain investments; issue capital stock of subsidiaries; incur liens; prepay, redeem or repurchase subordinated debt; and enter into certain types of transactions with our affiliates. The Credit Agreement also requires Holdings, together with its subsidiaries, to comply with a consolidated secured leverage ratio as well as an annual excess cash flow payment requirement.

Events of default under the Credit Agreement include customary events such as a cross-default provision with respect to other material debt (which includes Everi Payments’ 7.25% Senior Secured Notes due 2021 and 10.00% Senior Unsecured Notes due 2022). In addition, an event of default will occur if Holdings undergoes a change of control. This is defined to include the case where Holdings ceases to own 100% of the equity interests of Everi Payments, or where any person or group acquires a percentage of the economic or voting interests of Holdings’ capital stock of 35% or more (determined on a fully diluted basis), or where a majority of the board of directors of Everi Payments ceases to consist of persons who are directors of Holdings on the closing date of the Credit Facilities or other directors whose nomination for election to the board of directors of Holdings was recommended by a majority of the then continuing directors.

At March 31, 2016, we had approximately $487.5 million of borrowings outstanding under the Term Loan and no borrowings outstanding under the Revolving Credit Facility. We had $50.0 million of additional borrowing availability under the Revolving Credit Facility as of March 31, 2016. The weighted average interest rate on the Credit Facilities was approximately 6.25% for the three months ended March 31, 2016.

We were in compliance with the terms of the Credit Facilities as of March 31, 2016 and December 31, 2015.

Senior Secured Notes and Refinance of Senior Secured Notes

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

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

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

We were in compliance with the terms of the Refinanced Secured Notes as of March 31, 2016 and December 31, 2015.

Senior Unsecured Notes

In December 2014, we issued $350.0 million in aggregate principal amount of 10.0% Unsecured Notes due 2022 (the “Unsecured Notes”). The fees associated with the Unsecured Notes included original issue discounts of approximately $3.8 million and debt issuance costs of approximately $14.0 million.

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

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

In connection with the issuance of the Unsecured Notes, the Company entered into a registration rights agreement pursuant to which the Company agreed, for the benefit of the initial holders of the Unsecured Notes, to file with the SEC, and use its commercially reasonable efforts to cause to become effective, a registration statement relating to an offer to exchange the Unsecured Notes for an issue of SEC-registered notes with terms identical to the Unsecured Notes. On October 23, 2015, we filed a registration statement on Form S-4 with the SEC in accordance with the registration rights agreement outlining our offer to exchange the Unsecured Notes for identical notes without transfer restrictions. The registration statement was declared effective on November 3, 2015, and the exchange offer for the Unsecured Notes was completed on December 4, 2015 with 100% percent participation.

We were in compliance with the terms of the Unsecured Notes as of March 31, 2016 and December 31, 2015.

COMMITMENTS AND CONTINGENCIES
COMMITMENTS AND CONTINGENCIES

13.COMMITMENTS AND CONTINGENCIES

 

Alabama Litigation

 

The Company is currently involved in one lawsuit related to Everi Games Holding’s former charity bingo operations in the State of Alabama, which we believe is not material from a damages perspective. The lawsuit is currently pending in federal court and includes claims related to the alleged illegality of electronic charity bingo in the State of Alabama.

 

Ozetta Hardy v. Whitehall Gaming Center, LLC, et al., a civil action, was filed against Whitehall Gaming Center, LLC (an entity that does not exist), Cornerstone Community Outreach, Inc., and Freedom Trail Ventures, Ltd., in the Circuit Court of Lowndes County, Alabama. On June 3, 2010, Everi Games Holding and other manufacturers were added as defendants. The plaintiffs, who claim to have been patrons of White Hall, allege that Everi Games participated in gambling operations that violated Alabama state law by supplying to White Hall purportedly unlawful electronic bingo machines played by the plaintiffs, and the plaintiffs seek recovery of the monies lost on all electronic bingo games played by the plaintiffs in the six months prior to the filing of the complaint under Ala. Code, Sec 8-1-150(A). The plaintiffs requested that the court certify the action as a class action. On July 2, 2010, the defendants removed the case to the United States District Court for the Middle District of Alabama, Northern Division. The court has not ruled on the plaintiffs' motion for class certification. The Company continues to vigorously defend this matter. Given the inherent uncertainties in this litigation, however, the Company is unable to make any prediction as to the ultimate outcome.

 

Gain Contingency Settlement

 

In January 2014, we filed a complaint against certain third party defendants alleging conspiracy in restraint of competition regarding interchange fees, monopolization by defendants in the relevant market, and attempted monopolization of the defendants in the relevant market. We demanded a trial by jury of all issues so triable. The defendants filed a motion to dismiss on March 13, 2014. A settlement agreement was reached as of January 16, 2015 and on January 22, 2015 the settlement agreement was executed and delivered for which we received $14.4 million in cash and recorded the settlement proceeds in the first quarter of 2015. This settlement is included as a reduction of operating expenses in our Condensed Consolidated Statements of (Loss) Income and Comprehensive Loss for the three months ended March 31, 2015.

 

We are also subject to other claims and suits that arise from time to time in the ordinary course of business. We do not believe the liabilities, if any, which may ultimately result from the outcome of such matters, individually or in the aggregate, will have a material adverse impact on our financial position, liquidity or results of operations.

 

SHAREHOLDERS' EQUITY
SHAREHOLDERS' EQUITY

14.SHAREHOLDERS’ EQUITY

 

Preferred Stock. Our amended and restated certificate of incorporation, as amended, allows our Board of Directors, without further action by stockholders, to issue up to 50,000,000 shares of preferred stock in one or more series and to fix the designations, powers, preferences, privileges and relative participating, optional, or special rights as well as the qualifications, limitations or restrictions of the preferred stock, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences. As of March 31, 2016 and December 31, 2015, we had no shares of preferred stock outstanding.

 

Common Stock. Subject to the preferences that may apply to shares of preferred stock that may be outstanding at the time, the holders of outstanding shares of common stock are entitled to receive dividends out of assets legally available at the times and in the amounts as our Board of Directors may from time to time determine. All dividends are non-cumulative. In the event of the liquidation, dissolution or winding up of Everi, the holders of common stock are entitled to share ratably in all assets remaining after the payment of liabilities, subject to the prior distribution rights of preferred stock, if any, then outstanding. Each stockholder is entitled to one vote for each share of common stock held on all matters submitted to a vote of stockholders. Cumulative voting for the election of directors is not provided for. The common stock is not entitled to preemptive rights and is not subject to conversion or redemption. There are no sinking fund provisions applicable to the common stock. Each outstanding share of common stock is fully paid and non-assessable. As of March 31, 2016 and December 31, 2015, we had 90,887,879 and 90,877,273 shares of common stock issued, respectively.

 

Treasury Stock. Employees may direct us to withhold vested shares of restricted stock to satisfy the minimum statutory withholding requirements applicable to their restricted stock vesting. We repurchased or withheld from restricted stock awards 2,588 and 2,845, shares of common stock, at an aggregate purchase price of $8,933 and $19,743, for the three months ended March 31, 2016 and 2015, respectively, to satisfy the minimum applicable tax withholding obligations related to the vesting of such restricted stock awards.

 

WEIGHTED AVERAGE COMMON SHARES
WEIGHTED AVERAGE COMMON SHARES

15.WEIGHTED AVERAGE COMMON SHARES

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

 

 

 

2016

    

2015

 

    

 

Weighted average shares

 

 

 

 

 

 

 

Weighted average number of common shares outstanding - basic

 

66,034

 

65,623

 

 

 

Potential dilution from equity grants(1)

 

 —

 

869

 

 

 

Weighted average number of common shares outstanding - diluted

 

66,034

 

66,492

 

 

 

 


(1)

The Company was in a net loss position for the three months ended March 31, 2016, and therefore, potential dilution from the application of the treasury stock method was not applicable. The potential dilution excludes the weighted average effect of equity awards to acquire 8.4 million shares of our common stock for the three months ended March 31, 2015 as the application of the treasury stock method, as required, makes them anti-dilutive.

SHARE-BASED COMPENSATION
SHARE-BASED COMPENSATION

16.SHARE-BASED COMPENSATION

 

Equity Incentive Awards

 

Our 2014 Equity Incentive Plan (the 2014 Plan”) and our 2012 Equity Incentive Plan (as amended, the “2012 Plan”) are used to attract and retain the best available personnel, to provide additional incentives to employees, directors and consultants and to promote the success of our business. The 2014 Plan superseded the then current 2005 Stock Incentive Plan (the 2005 Plan”). The 2012 Plan was assumed in connection with the MGAM acquisition and conformed to include similar provisions to those as set forth in the 2014 Plan. Our equity plans are administered by the Compensation Committee of our Board of Directors, which has the authority to select individuals who are to receive options or other equity incentive awards and to specify the terms and conditions of grants of equity incentive awards, the vesting provisions, the terms and the exercise prices.

 

Generally, we grant the following award types: (a) time-based options, (b) cliff-vesting time-based options, (c) market-based options and (d) restricted stock. These awards have varying vesting provisions and expiration periods. For the three months ended March 31, 2016, we granted time-based options.  

 

Our time-based stock options granted under the 2014 Plan vest at a rate of 25% per year on each of the first four yearly anniversaries of the option grant dates. These options expire after a ten-year period.

 

Our market-based stock options granted under the 2014 Plan 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 date of grant for these options.  If these target prices are not met during such four-year period, the unvested shares underlying the options will terminate. However, if the participant’s service to the Company is terminated by the Company without Cause (as defined in the 2014 Plan) within ten days prior to, or within 18 months after, the date a Change in Control (as defined in the 2014 Plan) is consummated, the unvested options granted fully vest. These options expire after a seven-year period.

 

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

 

 

 

 

 

 

 

 

    

Stock Options

    

Restricted Stock

 

 

 

Granted

 

Granted

 

Outstanding, December 31, 2015

 

17,440

 

310

 

Additional authorized shares

 

 —

 

 —

 

Granted

 

565

 

 —

 

Exercised options or vested shares

 

 —

 

(11)

 

Canceled or forfeited

 

(2,789)

 

(152)

 

Outstanding, March 31, 2016

 

15,216

 

147

 

 

The maximum number of shares available for future equity awards both under the 2014 Plan and 2012 Plan is approximately 8.4 million shares of our common stock. There are no shares available for future equity awards under the 2005 Plan.

 

 

Stock Options

 

The fair value of our time-based options was determined using the Black Scholes option pricing model as of the date of grant. For the time-based options granted on February 13, 2016, the assumptions were: (a) risk-free interest rate of 1%; (b) expected term of six years; (c) expected volatility of 49%; and (d) no expected dividend yield. For the time-based options granted on February 25, 2016, the assumptions were: (a) risk-free interest rate of 1%; (b) expected term of five years; (c) expected volatility of 49%; and (d) no expected dividend yield.  There were no options granted for the three months ended March 31, 2015.

 

The following tables present the options activity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

 

    

Weighted

    

 

 

 

 

 

Number of

 

Weighted Average

 

Average Life

 

Aggregate

 

 

 

Common Shares

 

Exercise Price

 

Remaining

 

Intrinsic Value

 

 

 

(in thousands)

 

(per share)

 

(years)

 

(in thousands)

 

Outstanding, December 31, 2015

 

17,440

 

$

7.41

 

6.6

 

$

1,212

 

Granted

 

565

 

 

2.77

 

 

 

 

 

 

Exercised

 

 —

 

 

 —

 

 

 

 

 

 

Canceled or forfeited

 

(2,789)

 

 

7.38

 

 

 

 

 

 

Outstanding, March 31, 2016

 

15,216

 

$

7.24

 

6.5

 

$

14

 

Vested and expected to vest, March 31, 2016

 

13,638

 

$

7.24

 

6.3

 

$

14

 

Exercisable, March 31, 2016

 

8,271

 

$

7.44

 

4.9

 

$

14

 

 

There were 0.6 million options granted for the three months ended March 31, 2016. There were no options granted for the three months ended March 31, 2015. The weighted average grant date fair value per share of the options granted was $1.28 for the three months ended March 31, 2016.  No options were exercised during the three months ended March 31, 2016 but the total intrinsic value of options exercised was $0.4 million for the three months ended March 31, 2015.

 

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

 

There was $13.6 million in unrecognized compensation expense related to options expected to vest as of March 31, 2015. This cost was expected to be recognized on a straight-line basis over a weighted average period of 3.0 years. We recorded $1.6 million in non-cash compensation expense related to options granted that were expected to vest as of March 31, 2015. We received $1.0 million in cash from the exercise of options for the three months ended March 31, 2015.  

 

Restricted Stock

 

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

 

 

 

 

 

 

 

 

 

    

 

    

Weighted

 

 

 

Shares

 

Average Grant

 

 

 

Outstanding

 

Date Fair Value

 

 

 

(in thousands)

 

(per share)

 

Outstanding, December 31, 2015

 

310

 

$

7.11

 

Granted

 

 —

 

 

 —

 

Vested

 

(11)

 

 

7.09

 

Forfeited

 

(152)

 

 

7.12

 

Outstanding, March 31, 2016

 

147

 

$

7.11

 

 

There were no shares of restricted stock granted for the three months ended March 31, 2016 and 2015. The total fair value of restricted stock vested was $24,267 and $0.1 million for the three months ended March 31, 2016 and 2015, respectively.

 

There was $1.7 million in unrecognized compensation expense related to shares of time based restricted stock expected to vest as of March 31, 2016. This cost is expected to be recognized on a straight-line basis over a weighted average period of 2.2 years. There were 10.6 thousand shares of restricted stock that vested and we recorded $0.1 million in non-cash compensation expense related to the restricted stock granted that was expected to vest during the three months ended March 31, 2016.  

 

There was $2.7 million in unrecognized compensation expense related to shares of time-based restricted shares expected to vest as of March 31, 2015. This cost was expected to be recognized on a straight-line basis over a weighted average period of 3.0 years. There were 10.9 thousand shares of time-based restricted shares vested and we recorded $0.2 million in non-cash compensation expense related to the restricted stock granted that was expected to vest for the three months ended March 31, 2015.

INCOME TAXES
INCOME TAXES

17.INCOME TAXES

 

The provision for income tax reflected an effective income tax rate benefit of 38.0% for the three months ended March 31, 2016, which was higher than the statutory federal rate of 35.0% primarily due to state taxes, the lower foreign tax rate applicable to our foreign source income, and the benefit from a research credit, partially offset by non-statutory stock options that expired in 2016. The provision for income tax reflected an effective income tax rate expense of 81.2% for the same period in the prior year, which was higher than the statutory federal rate of 35.0% primarily due to non-statutory stock options that expired in the quarter, and state taxes.

 

We have analyzed filing positions in all of the federal, state and foreign jurisdictions where we are required to file income tax returns, as well as all open tax years in these jurisdictions. As part of the Merger in 2014, the Company recorded $0.7 million of unrecognized tax benefits. The Company has not accrued any penalties and interest for its unrecognized tax benefits.  Other than the unrecognized tax benefit related to the Merger, we believe that our income tax filing positions and deductions will be sustained upon audit and we do not anticipate any adjustments that will result in a material change to our financial position. We may from time to time be assessed interest or penalties by tax jurisdictions, although any such assessments historically have been minimal and immaterial to our financial results. Our policy for recording interest and penalties associated with audits and unrecognized tax benefits is to record such items as a component of income tax expense.

 

SEGMENT INFORMATION
SEGMENT INFORMATION

18.SEGMENT INFORMATION

 

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

 

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

 

·

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

 

·

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

 

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

 

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

 

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

 

The following tables present segment information (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended March 31,

 

 

    

2016

    

2015

    

 

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

 

Games

 

$

48,178

 

$

55,045

 

Payments

 

 

157,591

 

 

152,428

 

Total revenues

 

$

205,769

 

$

207,473

 

 

 

 

 

 

 

 

 

Operating income

 

 

 

 

 

 

 

Games

 

$

(3,245)

 

$

614

 

Payments

 

 

7,030

 

 

27,527

 

Total operating income

 

$

3,785

 

$

28,141

 

 

 

 

 

 

 

 

 

 

 

 

At

 

   

March 31, 2016

    

December 31, 2015

Total assets

 

 

 

 

 

 

Games

 

$

1,083,941

 

$

1,086,147

Payments

 

 

431,975

 

 

464,238

Total assets

 

$

1,515,916

 

$

1,550,385

 

Major Customers. For the three months ended March 31, 2016 and 2015,  no single customer accounted for more than 10% of our revenues. Our five largest customers accounted for approximately 32% and 28% of our total revenue for the three months ended March 31, 2016 and 2015, respectively.

CONDENSED CONSOLIDATING FINANCIAL INFORMATION
CONDENSED CONSOLIDATING FINANCIAL INFORMATION

19.CONDENSED CONSOLIDATING FINANCIAL INFORMATION

 

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

to a person that is not (either before or after giving effect to such transaction) Parent, Subsidiary Issuer or a restricted subsidiary and the Guarantor ceases to be a restricted subsidiary of Subsidiary Issuer as a result of the sale or other disposition; (iii) the designation of the Guarantor as an unrestricted subsidiary in accordance with the indenture governing the Unsecured Notes; or (iv) the legal or covenant defeasance of the Unsecured Notes or the satisfaction and discharge of the indenture governing the Unsecured Notes.

 

Presented below is condensed consolidating financial information for (a) Parent, (b) Subsidiary Issuer, (c) the Guarantor Subsidiaries and (d) our U.S. subsidiaries that are not Guarantor Subsidiaries and our foreign subsidiaries (collectively, the “Non-Guarantor Subsidiaries”) as of March 31, 2016 and the three months ended March 31, 2016 and 2015. The condensed consolidating financial information has been presented to show the nature of assets held and the results of operations and cash flows of Parent, Subsidiary Issuer, the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries assuming that the guarantee structure of the Unsecured Notes had been in effect at the beginning of the periods presented.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2016

 

Parent

    

Subsidiary
Issuer

    

Guarantor
Subsidiaries

    

Non-Guarantor
Subsidiaries

    

Eliminations

    

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Games

$

 —

 

$

 —

 

$

48,178

 

$

 —

 

$

 —

 

$

48,178

Payments

 

 —

 

 

146,386

 

 

7,418

 

 

4,158

 

 

(371)

 

 

157,591

Total revenues

 

 —

 

 

146,386

 

 

55,596

 

 

4,158

 

 

(371)

 

 

205,769

Costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Games cost of revenue (exclusive of depreciation and amortization)

 

 —

 

 

 —

 

 

8,436

 

 

 —

 

 

 —

 

 

8,436

Payments cost of revenue (exclusive of depreciation and amortization)

 

 —

 

 

118,064

 

 

2,342

 

 

2,251

 

 

 —

 

 

122,657

Operating expenses

 

 —

 

 

20,925

 

 

8,974

 

 

477

 

 

(371)

 

 

30,005

Research and development

 

 —

 

 

 —

 

 

5,368

 

 

 —

 

 

 —

 

 

5,368

Depreciation

 

 —

 

 

2,519

 

 

9,786

 

 

30

 

 

 —

 

 

12,335

Amortization

 

 —

 

 

3,100

 

 

19,503

 

 

580

 

 

 —

 

 

23,183

Total costs and expenses

 

 —

 

 

144,608

 

 

54,409

 

 

3,338

 

 

(371)

 

 

201,984

Operating income

 

 —

 

 

1,778

 

 

1,187

 

 

820

 

 

 —

 

 

3,785

Other expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net of interest income

 

 —

 

 

1,933

 

 

22,998

 

 

61

 

 

 —

 

 

24,992

Equity in loss (income) of subsidiaries

 

13,151

 

 

(3,294)

 

 

 —

 

 

 —

 

 

(9,857)

 

 

 —

Total other expenses

 

13,151

 

 

(1,361)

 

 

22,998

 

 

61

 

 

(9,857)

 

 

24,992

(Loss) income from operations before tax

 

(13,151)

 

 

3,139

 

 

(21,811)

 

 

759

 

 

9,857

 

 

(21,207)

Income tax provision (benefit)

 

 —

 

 

113

 

 

(8,422)

 

 

253

 

 

 —

 

 

(8,056)

Net (loss) income

 

(13,151)

 

 

3,026

 

 

(13,389)

 

 

506

 

 

9,857

 

 

(13,151)

Foreign currency translation

 

(485)

 

 

 —

 

 

 —

 

 

(485)

 

 

485

 

 

(485)

Comprehensive (loss) income

$

(13,636)

 

$

3,026

 

$

(13,389)

 

$

21

 

$

10,342

 

$

(13,636)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2015

 

Parent

    

Subsidiary
Issuer

    

Guarantor
Subsidiaries

    

Non-Guarantor
Subsidiaries

    

Eliminations

    

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Games

$

 —

 

$

 —

 

$

55,045

 

$

 —

 

$

 —

 

$

55,045

Payments

 

 —

 

 

141,410

 

 

7,324

 

 

3,830

 

 

(136)

 

 

152,428

Total revenues

 

 —

 

 

141,410

 

 

62,369

 

 

3,830

 

 

(136)

 

 

207,473

Costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Games cost of revenue (exclusive of depreciation and amortization)

 

 —

 

 

 —

 

 

12,077

 

 

 —

 

 

 —

 

 

12,077

Payments cost of revenue (exclusive of depreciation