EVERI HOLDINGS INC., 8-K filed on 10/23/2015
Current report filing
Document and Entity Information
6 Months Ended
Jun. 30, 2015
Document and Entity Information
 
Entity Registrant Name
Everi Holdings Inc. 
Entity Central Index Key
0001318568 
Document Type
8-K 
Document Period End Date
Jun. 30, 2015 
Amendment Flag
false 
Entity Filer Category
Accelerated Filer 
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended 6 Months Ended 12 Months Ended
Jun. 30, 2015
Mar. 31, 2015
Dec. 31, 2014
Sep. 30, 2014
Jun. 30, 2014
Mar. 31, 2014
Dec. 31, 2013
Sep. 30, 2013
Jun. 30, 2013
Mar. 31, 2013
Jun. 30, 2015
Jun. 30, 2014
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2012
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues
$ 206,364 
$ 207,473 
$ 152,055 
$ 145,481 
$ 144,946 
$ 150,571 
$ 140,456 
$ 146,101 
$ 149,065 
$ 146,822 
$ 413,837 
$ 295,517 
$ 593,053 
$ 582,444 
$ 584,486 
Costs and expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of revenues (exclusive of depreciation and amortization)
127,222 
127,023 
 
 
109,375 
113,238 
 
 
 
 
254,245 
222,614 
440,071 
439,794 
436,059 
Operating expenses
26,847 
15,841 
 
 
21,261 
20,039 
 
 
 
 
42,688 
41,299 
95,452 
76,562 
75,806 
Research and Development
4,470 
5,436 
 
 
 
 
 
 
 
 
9,906 
 
804 
Depreciation
10,717 
10,377 
 
 
1,919 
1,927 
 
 
 
 
21,094 
3,846 
8,745 
7,350 
6,843 
Amortization
20,772 
20,655 
 
 
2,769 
2,354 
 
 
 
 
41,427 
5,123 
14,199 
9,588 
9,796 
Total costs and expenses
190,028 
179,332 
 
 
135,324 
137,558 
 
 
 
 
369,360 
272,882 
559,271 
533,294 
528,504 
Operating income
16,336 
28,141 
376 
10,771 
9,622 
13,013 
11,196 
11,420 
13,633 
12,901 
44,477 
22,635 
33,782 
49,150 
55,982 
Other expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense, net of interest income
24,958 
25,655 
 
 
2,083 
1,546 
 
 
 
 
50,613 
3,629 
10,756 
10,265 
15,519 
Loss on extinguishment of debt
12,977 
 
 
 
 
 
 
 
 
12,977 
 
2,725 
 
 
Total other expenses
37,935 
25,655 
 
 
2,083 
1,546 
 
 
 
 
63,590 
3,629 
13,481 
10,265 
15,519 
(Loss) income from operations before tax
(21,599)
2,486 
 
 
7,539 
11,467 
 
 
 
 
(19,113)
19,006 
20,301 
38,885 
40,463 
Income tax (benefit) expense
(8,858)
2,017 
 
 
2,815 
3,978 
 
 
 
 
(6,841)
6,793 
8,161 
14,487 
14,774 
Net (loss) income
(12,741)
469 
(5,749)
5,676 
4,724 
7,489 
5,704 
5,782 
6,776 
6,136 
(12,272)
12,213 
12,140 
24,398 
25,689 
Foreign currency translation
811 
(873)
 
 
381 
 
 
 
 
(62)
382 
(1,258)
269 
218 
Comprehensive (loss) income
$ (11,930)
$ (404)
 
 
$ 5,105 
$ 7,490 
 
 
 
 
$ (12,334)
$ 12,595 
$ 10,882 
$ 24,667 
$ 25,907 
(Loss) earnings per share
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic (in dollars per share)
$ (0.19)
$ 0.01 
$ (0.09)
$ 0.09 
$ 0.07 
$ 0.11 
$ 0.09 
$ 0.09 
$ 0.10 
$ 0.09 
$ (0.19)
$ 0.19 
$ 0.18 
$ 0.37 
$ 0.39 
Diluted (in dollars per share)
$ (0.19)
$ 0.01 
$ (0.09)
$ 0.09 
$ 0.07 
$ 0.11 
$ 0.08 
$ 0.09 
$ 0.10 
$ 0.09 
$ (0.19)
$ 0.18 
$ 0.18 
$ 0.36 
$ 0.38 
Weighted average common shares outstanding
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic (in shares)
65,844 
65,623 
65,608 
65,589 
65,970 
65,910 
65,730 
65,525 
66,116 
66,697 
65,734 
65,940 
65,780 
66,014 
65,933 
Diluted (in shares)
65,844 
66,492 
66,397 
66,747 
67,087 
67,370 
67,394 
66,630 
66,993 
67,882 
65,734 
67,206 
66,863 
67,205 
67,337 
CONDENSED CONSOLIDATED BALANCE SHEETS (USD $)
In Thousands, unless otherwise specified
Jun. 30, 2015
Mar. 31, 2015
Dec. 31, 2014
Jun. 30, 2014
Mar. 31, 2014
Dec. 31, 2013
Dec. 31, 2012
Dec. 31, 2011
Dec. 31, 2010
Current assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$ 165,017 
$ 145,013 
$ 89,095 
$ 161,998 
$ 194,566 
$ 114,254 
$ 153,020 
$ 55,535 
$ 55,535 
Settlement receivables
23,716 
29,787 
43,288 
 
 
38,265 
 
 
 
Trade receivables, net of allowances for doubtful accounts of $2.9 million and $2.8 million at June 30, 2015 and December 31, 2014, respectively
41,834 
39,220 
37,697 
 
 
11,658 
 
 
 
Total other receivables, current portion
11,372 
20,392 
20,553 
 
 
4,605 
 
 
 
Inventory
23,453 
23,050 
27,163 
 
 
9,413 
 
 
 
Prepaid expenses and other assets
21,090 
18,889 
18,988 
 
 
16,674 
 
 
 
Deferred tax asset
9,591 
9,590 
9,591 
 
 
3,102 
 
 
 
Total current assets
296,073 
285,941 
246,375 
 
 
197,971 
 
 
 
Non-current assets
 
 
 
 
 
 
 
 
 
Property, equipment and leasehold improvements, net
104,521 
102,759 
106,085 
 
 
18,710 
 
 
 
Goodwill
857,670 
857,856 
857,913 
 
 
180,084 
180,141 
 
 
Other intangible assets, net
404,132 
420,103 
436,785 
 
 
31,535 
 
 
 
Other receivables, non-current
7,808 
8,593 
9,184 
 
 
699 
 
 
 
Other assets, non-current
36,915 
50,012 
50,943 
 
 
10,386 
 
 
 
Total non-current assets
1,411,046 
1,439,323 
1,460,910 
 
 
329,356 
 
 
 
Total assets
1,707,119 
1,725,264 
1,707,285 
 
 
527,327 
 
 
 
Current Liabilities
 
 
 
 
 
 
 
 
 
Settlement liabilities
141,211 
141,649 
119,157 
 
 
145,022 
 
 
 
Accounts payable and accrued expenses
36,712 
113,543 
104,668 
 
 
53,601 
 
 
 
Current portion of long-term debt
10,000 
10,000 
10,000 
 
 
1,030 
 
 
 
Total current liabilities
267,906 
265,192 
233,825 
 
 
199,653 
 
 
 
Non-current liabilities
 
 
 
 
 
 
 
 
 
Deferred tax liability, non-current
49,808 
59,101 
57,333 
 
 
 
 
 
 
Long-term debt, less current portion
1,157,506 
1,161,731 
1,178,787 
 
 
101,970 
 
 
 
Other accrued expenses and liabilities
4,927 
5,381 
5,867 
 
 
7,100 
 
 
 
Total non-current liabilities
1,212,241 
1,226,213 
1,241,987 
 
 
109,070 
 
 
 
Total liabilities
1,480,147 
1,491,405 
1,475,812 
 
 
308,723 
 
 
 
Commitments and Contingencies (Note 14)
   
   
   
 
 
   
 
 
 
Stockholders' Equity
 
 
 
 
 
 
 
 
 
Common stock, $0.001 par value, 500,000 shares authorized and 90,743 and 90,405 shares issued at June 30, 2015 and December 31, 2014, respectively
91 
91 
90 
 
 
89 
 
 
 
Convertible preferred stock, $0.001 par value, 50,000 shares authorized and 0 shares outstanding at June 30, 2015 and December 31, 2014, respectively
 
   
   
 
 
   
 
 
 
Additional paid-in capital
253,555 
248,491 
245,682 
 
 
231,516 
 
 
 
Retained earnings (deficit)
147,879 
160,621 
160,152 
 
 
148,012 
 
 
 
Accumulated other comprehensive income (loss)
1,507 
696 
1,569 
 
 
2,827 
 
 
 
Treasury stock, at cost, 24,821 and 24,816 shares at June 30, 2015 and December 31, 2014, respectively
(176,060)
(176,040)
(176,020)
 
 
(163,840)
 
 
 
Total stockholders' equity (deficit)
226,972 
233,859 
231,473 
 
 
218,604 
 
 
 
Total liabilities and stockholders' equity
$ 1,707,119 
$ 1,725,264 
$ 1,707,285 
 
 
$ 527,327 
 
 
 
CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)
In Thousands, except Share data, unless otherwise specified
Jun. 30, 2015
Mar. 31, 2015
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2012
Dec. 31, 2011
CONDENSED CONSOLIDATED BALANCE SHEETS
 
 
 
 
 
 
Allowances for doubtful accounts
$ 2,900 
$ 2,700 
$ 2,784 
$ 2,777 
$ 6,908 
$ 6,756 
Common stock par value (in dollars per share)
$ 0.001 
$ 0.001 
$ 0.001 
$ 0.001 
 
 
Common stock, shares authorized
500,000,000 
500,000,000 
500,000,000 
500,000,000 
 
 
Common stock, shares issued
90,743,000 
90,610,000 
90,405,000 
89,233,000 
 
 
Convertible preferred stock, par value (in dollars per share)
$ 0.001 
$ 0.001 
$ 0.001 
$ 0.001 
 
 
Convertible preferred stock, shares authorized
50,000,000 
50,000,000 
50,000,000 
50,000,000 
 
 
Convertible preferred stock, shares outstanding
 
 
Treasury stock, shares
24,821,000 
24,819,000 
24,816,000 
23,303,000 
 
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2014
Dec. 31, 2013
Dec. 31, 2012
Cash flows from operating activities
 
 
 
Net (loss) income
$ 12,140 
$ 24,398 
$ 25,689 
Adjustments to reconcile net income to cash provided by operating activities:
 
 
 
Depreciation and Amortization
22,944 
16,938 
16,639 
Amortization of financing costs
2,035 
1,793 
1,485 
Provision for bad debts
8,991 
7,874 
5,182 
Impairment Loss
3,129 
 
 
Loss on early extinguishment of debt
2,725 
 
 
Stock-based compensation
8,876 
5,078 
6,655 
Other non-cash items
337 
178 
95 
Changes in operating assets and liabilities:
 
 
 
Settlement receivables
(5,156)
(8,793)
50,823 
Other receivables, net
(12,256)
(13,335)
1,196 
Inventory
(850)
(2,286)
134 
Prepaid and other assets
904 
(9,482)
(3,425)
Deferred income taxes
6,613 
13,643 
14,376 
Settlement liabilities
(25,523)
(37,200)
40,530 
Other current liabilities
(378)
5,528 
(1,891)
Net cash provided by operating activities
24,531 
4,334 
157,488 
Cash flows from investing activities
 
 
 
Acquisitions, net of cash acquired
(1,068,000)
 
 
Capital expenditures
(18,021)
(13,900)
(12,786)
Repayments under development agreements
276 
 
 
Changes in restricted cash and cash equivalents
(102)
(90)
255 
Net cash provided by (used in) investing activities
(1,085,847)
(13,990)
(12,531)
Cash flows from financing activities
 
 
 
Repayments of prior credit facility
(103,000)
(18,500)
(52,500)
Debt issuance costs
(52,735)
(764)
(676)
Proceeds from exercise of stock options
5,338 
8,431 
6,655 
Purchase of treasury stock
(12,180)
(18,350)
(262)
Net cash used in financing activities
1,037,423 
(29,183)
(46,783)
Effect of exchange rates on cash
(1,266)
73 
(689)
Cash and cash equivalents
 
 
 
Net increase for the period
(25,159)
(38,766)
97,485 
Balance, beginning of the period
114,254 
153,020 
55,535 
Balance, end of the period
89,095 
114,254 
153,020 
Supplemental cash disclosures
 
 
 
Cash paid for interest
59,274 
8,634 
15,494 
Cash (refunded) paid for income tax, net
962 
711 
665 
Supplemental non-cash disclosures
 
 
 
Non-cash tenant improvements paid by landlord
 
2,930 
 
Accrued and unpaid capital expenditures
731 
1,073 
 
Accrued and unpaid contingent liability for NEWave acquisition
$ 2,463 
 
 
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (USD $)
Share data in Thousands, unless otherwise specified
Total
Common Stock [Member]
Additional Paid In Capital [Member]
Retained Earnings [Member]
Accumulated Other Comprehensive Income [Member]
Treasury Stock [Member]
Balance at Dec. 31, 2011
$ 159,858,000 
$ 86,000 
$ 204,735,000 
$ 97,925,000 
$ 2,340,000 
$ (145,228,000)
Balance (in shares) at Dec. 31, 2011
 
85,651 
 
 
 
 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
Net (loss) income
25,689,000 
 
 
25,689,000 
 
 
Foreign currency translation
218,000 
 
 
 
218,000 
 
Share-based compensation expense
6,655,000 
 
6,655,000 
 
 
 
Exercise of options
6,601,000 
1,000 
6,600,000 
 
 
 
Exercise of options (in shares)
 
1,726 
 
 
 
 
Restricted share vesting withholdings
(262,000)
 
 
 
 
(262,000)
Restricted shares vested (in shares)
 
168 
 
 
 
 
Balance at Dec. 31, 2012
198,759,000 
87,000 
217,990,000 
123,614,000 
2,558,000 
(145,490,000)
Balance (in shares) at Dec. 31, 2012
 
87,545 
 
 
 
 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
Net (loss) income
24,398,000 
 
 
24,398,000 
 
 
Foreign currency translation
269,000 
 
 
 
269,000 
 
Share-based compensation expense
5,078,000 
 
5,078,000 
 
 
 
Exercise of options
8,450,000 
2,000 
8,448,000 
 
 
 
Exercise of options (in shares)
 
1,618 
 
 
 
 
Treasury share repurchases
(18,241,000)
 
 
 
 
(18,241,000)
Restricted share vesting withholdings
(109,000)
 
 
 
 
(109,000)
Restricted shares vested (in shares)
 
70 
 
 
 
 
Balance at Dec. 31, 2013
218,604,000 
89,000 
231,516,000 
148,012,000 
2,827,000 
(163,840,000)
Balance (in shares) at Dec. 31, 2013
 
89,233 
 
 
 
 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
Net (loss) income
12,140,000 
 
 
12,140,000 
 
 
Foreign currency translation
(1,258,000)
 
 
 
(1,258,000)
 
Share-based compensation expense
8,876,000 
 
8,876,000 
 
 
 
Exercise of options
5,291,000 
1,000 
5,290,000 
 
 
 
Exercise of options (in shares)
 
971 
 
 
 
 
Treasury share repurchases
(11,721,000)
 
 
 
 
(11,721,000)
Restricted share vesting withholdings
(459,000)
 
 
 
 
(459,000)
Restricted shares vested (in shares)
 
201 
 
 
 
 
Balance at Dec. 31, 2014
$ 231,473,000 
$ 90,000 
$ 245,682,000 
$ 160,152,000 
$ 1,569,000 
$ (176,020,000)
Balance (in shares) at Dec. 31, 2014
 
90,405 
 
 
 
 
BUSINESS AND BASIS OF PRESENTATION
BUSINESS AND BASIS OF PRESENTATION

1. BUSINESS AND BASIS OF PRESENTATION

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

GCA is dedicated to providing integrated gaming payments solutions, video and mechanical reel gaming content and technology solutions, as well as compliance and efficiency software.  The Company’s Payments business 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 intra-state, Internet-based gaming and lottery activities. The Company’s Games business, under the Multimedia Games brand, 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.

 

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

2. 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 (“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 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 operations.

Acquisition-related Costs

We recognize a liability for acquisition-related costs when the liability is incurred. Acquisition-related costs include 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 income and comprehensive 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 owing 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 other 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 income and comprehensive income.

Inventory

We currently maintain separate inventories for our Payments and Games products.  Our Payments related inventory primarily consists of parts as well as finished goods and work-in-progress and is stated at the lower of cost or market accounted for using the average cost method. Our Games related inventory primarily consists of component parts, completed player terminals and back-office computer equipment and is stated at fair value as a result of the Merger. However, our games segment historically accounted for inventory at lower of cost (first in, first out) or market.  The cost of inventory includes cost of materials, labor, overhead and freight.

Property, Equipment and Leased Assets

Property, equipment and leased gaming equipment 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 three 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 income and comprehensive income.

Property, equipment and leased gaming equipment 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. There was no material impairment for any of our property, equipment, or leasehold improvements for the years ended December 31, 2014, 2013 and 2012.

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 an operating segment. 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 maker 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, 2014, our reporting units included: Cash Advance, ATM, Check Services, Games, Fully Integrated Kiosk Sales and Services, Central Credit, and Anti-Money Laundering and Tax Compliance Software. Our goodwill was not impaired for the years ended December 31, 2014, 2013 and 2012.

Other Intangible Assets

Other intangible assets consist primarily of: (a) customer contracts (rights to provide Payments and Games services to gaming establishment customers), developed technology, trade names and trademarks and contract rights acquired through business combinations; (b) capitalized software development costs; and (c) 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. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. For the year ended December 31, 2014, we recognized $3.1 million of impairment on our other intangible assets. There was no impairment for any of our other intangible assets for the years ended December 31, 2013 and 2012.

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 are included in other assets on the consolidated balance sheets.

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 or goods have been delivered, the price is fixed or determinable and collectability is reasonably assured. We evaluate our revenue streams for proper timing of revenue recognition.

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 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 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 are recognized as revenue when a transaction is initiated and reverse interchange is recognized as revenue on a monthly basis based on the total transactions occurring during the month. 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.

Games Revenues

Games revenue are primarily generated by our gaming operations under development, placement, and participation arrangements in which we provides 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 is 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 operations and other comprehensive 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.

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 ASU No. 2009-13, “Revenue Recognition (Topic 605), Multiple-Deliverable Revenue Arrangements.”  In addition, we apply the guidance from ASU No. 2009-14, “Software (Topic 985), Certain Revenue Arrangements that Include Software Elements,” 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 income and comprehensive income, were $1.1 million, $0.7 million and $0.7 million for the years ended December 31, 2014, 2013 and 2012, respectively.

Research and Development Costs

We conduct research and development activities primarily to develop new gaming systems, gaming engines, casino data management systems, casino central monitoring systems, video lottery outcome determination systems, gaming platforms, and gaming content and to add enhancements to our existing product lines. We believe our ability to deliver differentiated, appealing products and services to the marketplace is based in our research and development investments, and we expect to continue to make such investments in the future. These research and development costs consist primarily of salaries and benefits, consulting fees, game lab testing fees, and an allocation of corporate facilities costs related to these activities. 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 $0.8 million for the year ended December 31, 2014.  As research and development costs relate to our Games segment which was acquired in 2014, there were no material research and development costs for the years ended December 31, 2013 and 2012.

Income Taxes

Income tax expense includes U.S. and international income taxes, plus the provision for U.S. taxes on undistributed earnings of international subsidiaries not deemed to be permanently invested. Since it is management’s practice and 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 GCA Macau. 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.

Employee Benefits Plan

We have a retirement savings plan (the “401(k) Plan”) under Section 401(k) of the Internal Revenue Code covering our employees. The 401(k) Plan 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. Expenses related to the matching portion of the contributions to the 401(k) Plan were $0.5 million, $0.5 million and $0.3 million for the years ended December 31, 2014, 2013 and 2012, 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. 

In determining fair value, we use a hierarchy that includes three levels which are based on the extent to which inputs used in measuring fair value are observable in the market. Level 1 indicates that the fair value is determined by using quoted prices in the active markets for identical investments. Level 2 indicates that the fair value is determined using pricing inputs other than quoted prices in active markets such as models or other valuation methodologies. Level 3 indicates that the fair value is determined using pricing inputs that are unobservable for the investment and include situations where there is little, if any, market activity for the investment. Significant management estimates and judgment are used in the determination of the fair value of level 3 pricing inputs.

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. 

As of December 31, 2014, the fair value of our long-term debt was considered to approximate the carrying amount of each instrument since the Merger occurred on December 19, 2014. As of December 31, 2013, the fair value of our Prior Credit Facility was approximately $104.0 million as compared to a carrying amount of $103.0 million using a Level 2 input.

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 income and comprehensive 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 purchase price allocation based on the estimated fair values of the assets acquired and liabilities assumed of Multimedia Games as of the date of Merger and the acquisition of NEWave;

·

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

·

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 other intangible 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.

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.

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, including our cliff vesting time-based awards, expected to be exercised currently, and in future periods, were measured at fair value on the grant date using the Black Scholes model. Our restricted stock awards expected to be vested currently, and in future periods, 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 awards’ vesting periods.

Our market-based stock options 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 of the Company as defined in the 2014 Equity Incentive Plan, in which case, the unvested shares underlying such options shall become fully vested on the effective date of such change in control transaction. The 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. 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. We classified our balance sheet for short-term and long-term assets and liabilities as a result of the Merger.

Recent Accounting Guidance

Recently Adopted Accounting Guidance

In November 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update (“ASU”) No. 2014-17, which provides guidance on whether and at what threshold an acquired entity that is a business or nonprofit activity can apply pushdown accounting in its separate financial statements. The pronouncement was effective on November 18, 2014. There was no impact of the adoption of ASU No. 2014-17 as we do not apply push-down accounting to our acquired subsidiaries.

Recent Accounting Guidance Not Yet Adopted

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 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 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. This guidance is effective for interim and annual reporting periods beginning after December 15, 2016. Early application is not permitted. 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 Consolidated Financial Statements.

 

BUSINESS COMBINATIONS
3 Months Ended 6 Months Ended 12 Months Ended
Mar. 31, 2015
Jun. 30, 2015
Dec. 31, 2014
BUSINESS COMBINATIONS

3. BUSINESS COMBINATIONS

 

Multimedia Games Holding Company, Inc.

 

On December 19, 2014, Holdings completed its acquisition of Multimedia. Pursuant to the terms of the Agreement and Plan of Merger, dated as of September 8, 2014 (the “Merger Agreement”), by and among Holdings, Movie Merger Sub, Inc., a wholly owned subsidiary of Holdings (“Merger Sub”), and Multimedia, Merger Sub merged with and into Multimedia, with Multimedia continuing as the surviving corporation (the “Merger”). In the Merger, Multimedia 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 Multimedia, other than shares held by Holdings, Multimedia, Merger Sub or their respective subsidiaries, was cancelled and converted into the right to receive $36.50 in cash, without interest (the “Merger Consideration”), together with the consideration paid in connection with the acceleration and full vesting of Multimedia equity awards, (collectively, the “Total Merger Consideration”).

 

Multimedia 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. Multimedia’s revenues are 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.

 

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

 

 

Amount

 

Purchase consideration

 

 

 

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

 

  $

1,093,105

 

Payment in respect to Multimedia Games outstanding equity awards

 

56,284

 

Total merger consideration

 

1,149,389

 

 

 

 

 

Repayments of Multimedia Games debt and other obligations

 

25,065

 

Less: Multimedia 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 is deductible for tax purposes. The goodwill recognized is attributable primarily to the income potential from Multimedia penetrating into the Class III commercial casino market, the assembled workforce of Multimedia 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 are subject to adjustment as we finalize our fair value analysis. The significant items for which a final fair value has not been determined include, but not limited to: accrued liabilities, the valuation and estimated useful lives of tangible and intangible assets and deferred income taxes. We expect to complete our fair value determinations no later than the fourth quarter of 2015. We do not expect our fair value determinations to materially change; however, there may be differences compared to those amounts originally recorded as we complete our fair value analysis.

 

The information below reflects the preliminary 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
(years)

 

Estimated
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
(years)

 

Estimated 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%.

 

We expensed approximately $1.5 million of costs incurred related to the acquisition of Multimedia for financial advisory services, financing related fees, accounting and legal fees and other transaction-related expenses during the three months ended March 31, 2015. These expenses are included in the Condensed Consolidated Statements of Income and Comprehensive Income within operating expenses. These costs do not include any costs related to additional site consolidation or rationalization that we might consider in the future.

 

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 approximately $2.5 million is expected to be paid in the second quarter of 2015. NEWave is a supplier of anti-money laundering compliance, audit and data efficiency software to the gaming industry.

 

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, 2013, and the amount of revenue and earnings derived from NEWave have not been presented on a supplemental basis as such amounts are not material for the three months ended March 31, 2015 and 2014, respectively.

BUSINESS COMBINATIONS

3. BUSINESS COMBINATIONS

 

Multimedia Games Holding Company, Inc.

 

On December 19, 2014, Holdings completed its acquisition of Multimedia. Pursuant to the terms of the Agreement and Plan of Merger, dated as of September 8, 2014 (the “Merger Agreement”), by and among Holdings, Movie Merger Sub, Inc., a wholly owned subsidiary of Holdings (“Merger Sub”), and Multimedia, Merger Sub merged with and into Multimedia, with Multimedia continuing as the surviving corporation (the “Merger”). In the Merger, Multimedia 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 Multimedia, other than shares held by Holdings, Multimedia, Merger Sub or their respective subsidiaries, was cancelled and converted into the right to receive $36.50 in cash, without interest (the “Merger Consideration”), together with the consideration paid in connection with the acceleration and full vesting of certain Multimedia equity awards, (collectively, the “Total Merger Consideration”).

 

Multimedia 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. Multimedia’s revenues are 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.

 

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

 

 

 

 

 

 

 

 

 

 

    

Amount

 

Purchase consideration

 

 

 

 

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

 

$

1,093,105

 

Payment in respect to Multimedia Games outstanding equity awards

 

 

56,284

 

Total merger consideration

 

 

1,149,389

 

Repayments of Multimedia Games debt and other obligations

 

 

25,065

 

Less: Multimedia 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 is deductible for tax purposes. The goodwill recognized is attributable primarily to the income potential from Multimedia penetrating into the Class III commercial casino market, the assembled workforce of Multimedia 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 are subject to adjustment as we finalize our fair value analysis. The significant items for which a final fair value has not been determined include, but not limited to: accrued liabilities, the valuation and estimated useful lives of tangible and intangible assets and deferred income taxes. We expect to complete our fair value determinations no later than the fourth quarter of 2015. We do not expect our fair value determinations to materially change; however, there may be differences compared to those amounts originally recorded as we complete our fair value analysis.

 

The information below reflects the preliminary 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%

 

We expensed approximately $0.4 million and $1.8 million of costs incurred related to the acquisition of Multimedia for financial advisory services, financing related fees, accounting and legal fees and other transaction-related expenses during the three and six months ended June 30, 2015, respectively. These expenses are included in the Condensed Consolidated Statements of Operations 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 in the future.

 

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. As of 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 assets acquired, liabilities assumed and goodwill recorded were not material to the financial statements.

 

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, 2013, and the amount of revenue and earnings derived from NEWave have not been presented on a supplemental basis as such amounts are not material for the three and six months ended June 30, 2015 and 2014, respectively.

BUSINESS COMBINATIONS

3. BUSINESS COMBINATIONS

We account for business combinations in accordance with the accounting standards, which require that the assets acquired and liabilities assumed be recorded at their estimated fair values.

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 approximately $2.5 million is expected to be paid in April 2015. NEWave is a supplier of compliance, audit and data efficiency software to the gaming industry.

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, 2013, and the amount of revenue and earnings derived from NEWave have not been presented on a supplemental basis as such amounts are not material for the twelve months ended December 31, 2014 and 2013, respectively.

Multimedia Games Holding Company, Inc.

On December 19, 2014, Holdings completed its acquisition of Multimedia Games.  Pursuant to the terms of the Agreement and Plan of Merger, dated as of September 8, 2014 (the “Merger Agreement”), by and among Holdings, Movie Merger Sub, Inc., a wholly owned subsidiary of Holdings (“Merger Sub”), and Multimedia Games, Merger Sub merged with and into Multimedia Games, with Multimedia Games continuing as the surviving corporation (the “Merger”).  In the Merger, Multimedia Games 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 Multimedia Games, other than shares held by Holdings, Multimedia Games, Merger Sub or their respective subsidiaries, was cancelled and converted into the right to receive $36.50 in cash, without interest (“Merger Consideration”), together with the acceleration and full vesting of Multimedia equity awards, (collectively, the “Total Merger Consideration”). 

Multimedia 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.  Multimedia 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 Multimedia Games 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 Multimedia Games was as follows (in thousands, except per share amounts):

 

 

 

 

 

 

 

    

Amount

 

Purchase consideration

 

 

 

 

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

 

$

1,093,105

 

Payment in respect to Multimedia Games outstanding equity awards

 

 

56,284

 

Total merger consideration

 

 

1,149,389

 

Repayments of Multimedia Games debt and other obligations

 

 

25,065

 

Less: Multimedia 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 is deductible for tax purposes. The goodwill recognized is attributable primarily to the income potential from Multimedia Games penetrating into the Class III commercial casino market, the assembled workforce of Multimedia 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 are subject to adjustment as the Company finalizes its fair value analysis. The significant items for which a final fair value has not been determined as of the filing of this Annual Report on Form 10-K include accrued liabilities, the valuation and estimated useful lives of tangible and intangible assets and deferred income taxes. We expect to complete our fair value determinations no later than the fourth quarter of 2015. We do not expect our fair value determinations to materially change; however, there may be differences compared to those at December 31, 2014 as we finalize our fair value analysis.

The information below reflects the preliminary 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%.

GCA and Multimedia Games had different fiscal year ends. Accordingly, the unaudited pro forma condensed combined

statements of income for the year ended December 31, 2014 combined historical GCA consolidated statement of income for its year ended December 31, 2014 with historical Multimedia Games consolidated statement 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 condensed combined statements of income for the year ended December 31, 2013 combined historical GCA consolidated statement of income for its year ended December 31, 2013 with historical Multimedia Games consolidated statement of operations for its year ended September 30, 2013, giving effect to the Merger as if it had occurred on January 1, 2013.

The unaudited pro forma condensed combined financial information does not purport to represent the results of operations of GCA 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 condensed combined financial statements do not reflect the impacts of any potential operational efficiencies, cost savings or economies of scale that GCA may achieve with respect to the combined operations of GCA and Multimedia Games. The unaudited pro forma amounts include the historical operating results of the Company and Multimedia Games 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 costs as a result of the Merger of $27.4 million. There were no acquisition-related costs incurred for the year ended December 31, 2013. 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

    

2013

 

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

 

 

 

 

 

 

 

Revenues

 

$

800,732

 

$

771,810

 

Net (loss)

 

 

(5,083)

 

 

(7,003)

 

Basic loss per share

 

 

(0.08)

 

 

(0.11)

 

Diluted loss per share

 

 

(0.08)

 

 

(0.10)

 

 

The financial results for Multimedia Games included in the consolidated statements of operations 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.

Through December 31, 2014, we expensed approximately $10.7 million of costs related to the acquisition of Multimedia Games for financial advisory services, financing related fees, accounting and legal fees and other transaction-related expenses and are included in the consolidated statements of income and comprehensive 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.

ATM FUNDING AGREEMENTS
3 Months Ended 6 Months Ended 12 Months Ended
Mar. 31, 2015
Jun. 30, 2015
Dec. 31, 2014
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 Income and Comprehensive Income, were $0.5 million and $0.6 million for the three months ended March 31, 2015 and 2014, respectively. We are exposed to interest rate risk to the extent that the applicable 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 $255.6 million and $396.3 million as of March 31, 2015 and December 31, 2014, respectively.

 

In June 2012, we amended the Contract Cash Solutions Agreement to increase the maximum amount of cash to be provided to us from $400.0 million to $500.0 million, and to extend the initial term from November 30, 2013 to November 30, 2014. In November 2014, we amended the Contract Cash Solutions Agreement to  extend the term one year until November 30, 2015.

 

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, 2015 and 2014.

 

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 was $71.5 million and $69.3 million as of March 31, 2015 and December 31, 2014, respectively.

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 Operations and Comprehensive (Loss) Income, were $0.5 million and $1.0 million and $0.6 million and $1.2 million for the three and six months ended June 30, 2015 and 2014, respectively. We are exposed to interest rate risk to the extent that the applicable 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 $271.8 million and $396.3 million as of June 30, 2015 and December 31, 2014, respectively.

 

In November 2014, we amended the Contract Cash Solutions Agreement to extend the term one year until November 30, 2015.

 

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 and six months ended June 30, 2015 and 2014.

 

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 was $69.4 million and $69.3 million as of June 30, 2015 and December 31, 2014, respectively.

 

ATM FUNDING AGREEMENTS

4. ATM FUNDING AGREEMENTS

Wells Fargo Contract Cash Solutions Agreement

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.

In June 2012, we amended the Contract Cash Solutions Agreement with Wells Fargo to increase the maximum amount of cash to be provided to us from $400.0 million to $500.0 million, and the initial term of the Contract Cash Solutions Agreement has been extended from November 30, 2013 until November 30, 2015. The outstanding balances of ATM cash utilized by us from Wells Fargo were $396.3 million and $427.1 million as of December 31, 2014 and 2013, respectively.

Under the terms of the Contract Cash Solutions Agreement, we pay a monthly cash usage fee based upon the product of the average daily dollars outstanding in all ATMs multiplied by a contractually defined cash usage rate. This cash usage rate is determined by an applicable LIBOR plus a mutually agreed upon margin.

We are exposed to interest rate risk to the extent that the applicable LIBOR increases.

Cash usage fees, reflected as interest expense within the consolidated statements of income and comprehensive income, were $2.3 million, $2.2 million and $3.1 million for the years ended December 31, 2014, 2013 and 2012, respectively.

We are responsible for any losses of cash in the ATMs under our agreement with Wells Fargo and we self‑insure for this risk. We incurred no material losses related to this self‑insurance for the years ended December 31, 2014 and 2013.

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 $69.3 million and $68.9 million as of December 31, 2014 and 2013, respectively.

 

TRADE RECEIVABLES
3 Months Ended 6 Months Ended 12 Months Ended
Mar. 31, 2015
Jun. 30, 2015
Dec. 31, 2014
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,

 

 

 

2015

 

2014

 

 

 

 

 

 

 

Trade receivables, net

 

 

 

 

 

Games trade receivables

 

  $

30,177

 

  $

28,270

 

Kiosk trade receivables

 

4,301

 

5,247

 

Warranty and other trade receivables

 

4,742

 

4,180

 

 

 

 

 

 

 

Total trade receivables, net

 

  $

39,220

 

  $

37,697

 

 

The material balance of the allowance for doubtful accounts for trade receivables is from 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 these receivables. The warranty expense associated with this reserve is included within cost of revenues (exclusive of depreciation and amortization) in the Condensed Consolidated Statements of Income and Comprehensive Income. The outstanding balance of the warranty reserve was $2.7 and $2.8 million as of March 31, 2015 and December 31, 2014, respectively.

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 June 30,

 

At December 31,

 

 

 

2015

    

2014

 

 

 

 

 

 

 

 

 

 

Trade receivables, net

 

 

 

 

 

 

 

Games trade receivables

$

32,800

 

$

28,270

 

 

Kiosk trade receivables

 

4,723

 

 

5,247

 

 

Warranty and other trade receivables

 

4,311

 

 

4,180

 

 

Total trade receivables, net

$

41,834

 

$

37,697

 

 

 

The material balance of the allowance for doubtful accounts for trade receivables is from 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 these receivables. The warranty expense associated with this reserve is included within cost of revenues (exclusive of depreciation and amortization) in the Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income. The outstanding balance of the warranty reserve was $2.9 and $2.8 million as of June 30, 2015 and December 31, 2014, respectively.

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.  The balance of trade receivables consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

.

At December 31,

 

 

 

2014

    

2013

 

 

 

 

 

 

 

 

 

 

Trade receivables, net

 

 

 

 

 

 

 

Games trade receivables

$

28,270

 

$

 —

 

 

Kiosk trade receivables

 

5,247

 

 

8,262

 

 

Warranty and other trade receivables

 

4,180

 

 

3,396

 

 

Total trade receivables, net

$

37,697

 

$

11,658

 

 

 

The material balance of the allowance for doubtful accounts for trade receivables is from 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 these receivables. The warranty expense associated with this reserve is included within cost of revenues (exclusive of depreciation and amortization) in the consolidated statements of income and comprehensive income.

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

 

 

 

 

 

 

 

    

Amount

 

Balance, December 31, 2011

 

$

6,756

 

Warranty expense provision

 

 

5,226

 

Charge offs against reserve

 

 

(5,074)

 

Balance, December 31, 2012

 

$

6,908

 

Warranty expense provision

 

 

7,874

 

Charge offs against reserve

 

 

(12,005)

 

Balance, December 31, 2013

 

 

2,777

 

Warranty expense provision

 

 

9,029

 

Charge offs against reserve

 

 

(9,022)

 

Balance, December 31, 2014

 

$

2,784

 

 

OTHER RECEIVABLES
3 Months Ended 6 Months Ended 12 Months Ended
Mar. 31, 2015
Jun. 30, 2015
Dec. 31, 2014
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, and 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 Bee Caves Games common stock, 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,

 

 

 

2015

 

2014

 

 

 

 

 

 

 

Other receivables

 

 

 

 

 

Notes and loans receivable, net of discount of $814 and $853, respectively

 

  $

13,261

 

  $

13,939

 

Federal and state income tax receivable

 

15,142

 

15,092

 

Other

 

582

 

706

 

 

 

 

 

 

 

Total other receivables

 

28,985

 

29,737

 

 

 

 

 

 

 

Less: Notes and loans receivable, non-current

 

8,593

 

9,184

 

Total other receivables, current portion

 

  $

20,392

 

  $

20,553

 

 

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, and 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 Bee Caves Games common stock, 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 June 30,

 

At December 31,

 

 

 

2015

    

2014

 

 

Other receivables

 

 

 

 

 

 

 

Notes and loans receivable, net of discount of $776 and $853, respectively

$

10,984

 

$

13,939

 

 

Federal and state income tax receivable

 

7,465

 

 

15,092

 

 

Other

 

731

 

 

706

 

 

Total other receivables

 

19,180

 

 

29,737

 

 

Less: Notes and loans receivable, non-current

 

7,808

 

 

9,184

 

 

Total other receivables, current portion

$

11,372

 

$

20,553

 

 

 

OTHER RECEIVABLES

6. OTHER RECEIVABLES

Other receivables includes the balance of notes and loans receivable on our gaming and fully integrated kiosk products as well as income taxes receivable and other miscellaneous receivables.  The balance of other receivables consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

At December 31,

 

 

 

2014

    

2013

 

 

Other receivables

 

 

 

 

 

 

 

Notes and loans receivable, net of discount of $853 and $0, respectively

$

13,939

 

$

3,249

 

 

Federal and state income tax receivable

 

15,092

 

 

16

 

 

Other

 

706

 

 

2,039

 

 

Total other receivables

 

29,737

 

 

5,304

 

 

Less: Notes and loans receivable, non-current

 

9,184

 

 

699

 

 

Total other receivables, current portion

$

20,553

 

$

4,605

 

 

 

Notes receivable from development agreements are generated from reimbursable amounts advanced under development agreements.  The notes receivable from development agreements balance includes a development agreement with the Chickasaw Nation for the Winstar Casino expansion entered into on November 19, 2012.

On July 17, 2014, Multimedia Games entered into an agreement with Bee Caves Games, Inc. (“Bee Caves Games”) under which Multimedia Games agreed to make a loan pursuant to a secured promissory note in the amount of $4.5 million. In association with the promissory note, Multimedia Games received warrants to purchase Bee Caves Games common stock, and recorded a discount to the note for the fair value of the warrants received. 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.

PREPAID AND OTHER ASSETS
3 Months Ended 6 Months Ended 12 Months Ended
Mar. 31, 2015
Jun. 30, 2015
Dec. 31, 2014
PREPAID AND OTHER ASSETS

7. PREPAID AND OTHER ASSETS

 

Prepaid and other assets include the balance of prepaid expenses, deposits, debt issuance costs 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.

 

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

 

 

At March 31,

 

At December 31,

 

 

 

2015

 

2014

 

 

 

 

 

 

 

Prepaid expenses and other assets

 

 

 

 

 

Prepaid expenses

 

  $

6,935

 

  $

7,163

 

Deposits

 

8,213

 

8,781

 

Other

 

3,741

 

3,044

 

Total prepaid expenses and other assets

 

  $

18,889

 

  $

18,988

 

 

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

 

 

At March 31,

 

At December 31,

 

 

 

2015

 

2014

 

 

 

 

 

 

 

Other assets, non-current

 

 

 

 

 

Debt issuance costs

 

  $

40,012

 

  $

41,109

 

Prepaid expenses and deposits, non-current

 

3,998

 

3,956

 

Other

 

6,002

 

5,878

 

Total other assets non-current

 

  $

50,012

 

  $

50,943

 

 

PREPAID AND OTHER ASSETS

7. PREPAID AND OTHER ASSETS

 

Prepaid and other assets include the balance of prepaid expenses, deposits, debt issuance costs 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.

 

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

 

 

 

 

 

 

 

 

 

 

 

At June 30,

 

At December 31,

 

 

 

2015

    

2014

 

 

 

 

 

 

 

 

 

 

Prepaid expenses and other assets

 

 

 

 

 

 

 

Prepaid expenses

$

7,755

 

$

7,163

 

 

Deposits

 

9,582

 

 

8,781

 

 

Other

 

3,753

 

 

3,044

 

 

Total prepaid expenses and other assets

$

21,090

 

$

18,988

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

At June 30,

 

At December 31,

 

 

 

2015

    

2014

    

 

Other assets, non-current

 

 

 

 

 

 

 

Debt issuance costs

$

26,592

 

$

41,109

 

 

Prepaid expenses and deposits, non-current

 

4,430

 

 

3,956

 

 

Other

 

5,893

 

 

5,878

 

 

Total other assets, non-current

$

36,915

 

$

50,943

 

 

 

PREPAID AND OTHER ASSETS

7. PREPAID AND OTHER ASSETS

Prepaid and other assets include the balance of prepaid expenses, deposits, debt issuance costs 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. 

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