GLOBAL CASH ACCESS HOLDINGS, INC., 10-Q filed on 8/6/2015
Quarterly Report
Document and Entity Information
6 Months Ended
Jun. 30, 2015
Jul. 29, 2015
Document and Entity Information
 
 
Entity Registrant Name
Global Cash Access Holdings, Inc. 
 
Entity Central Index Key
0001318568 
 
Document Type
10-Q 
 
Document Period End Date
Jun. 30, 2015 
 
Amendment Flag
false 
 
Current Fiscal Year End Date
--12-31 
 
Entity Current Reporting Status
Yes 
 
Entity Filer Category
Accelerated Filer 
 
Entity Common Stock, Shares Outstanding
 
65,938,654 
Document Fiscal Year Focus
2015 
 
Document Fiscal Period Focus
Q2 
 
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended 6 Months Ended
Jun. 30, 2015
Jun. 30, 2014
Jun. 30, 2015
Jun. 30, 2014
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
 
 
 
 
Revenues
$ 206,364 
$ 144,946 
$ 413,837 
$ 295,517 
Costs and expenses
 
 
 
 
Cost of revenues (exclusive of depreciation and amortization)
127,222 
109,375 
254,245 
222,614 
Operating expenses
26,847 
21,261 
42,688 
41,299 
Research and Development
4,470 
 
9,906 
 
Depreciation
10,717 
1,919 
21,094 
3,846 
Amortization
20,772 
2,769 
41,427 
5,123 
Total costs and expenses
190,028 
135,324 
369,360 
272,882 
Operating income
16,336 
9,622 
44,477 
22,635 
Other expenses
 
 
 
 
Interest expense, net of interest income
24,958 
2,083 
50,613 
3,629 
Loss on extinguishment of debt
12,977 
 
12,977 
 
Total other expenses
37,935 
2,083 
63,590 
3,629 
(Loss) income from operations before tax
(21,599)
7,539 
(19,113)
19,006 
Income tax (benefit) provision
(8,858)
2,815 
(6,841)
6,793 
Net (loss) income
(12,741)
4,724 
(12,272)
12,213 
Foreign currency translation
811 
381 
(62)
382 
Comprehensive (loss) income
$ (11,930)
$ 5,105 
$ (12,334)
$ 12,595 
(Loss) earnings per share
 
 
 
 
Basic (in dollars per share)
$ (0.19)
$ 0.07 
$ (0.19)
$ 0.19 
Diluted (in dollars per share)
$ (0.19)
$ 0.07 
$ (0.19)
$ 0.18 
Weighted average common shares outstanding
 
 
 
 
Basic (in shares)
65,844 
65,970 
65,734 
65,940 
Diluted (in shares)
65,844 
67,087 
65,734 
67,206 
CONDENSED CONSOLIDATED BALANCE SHEETS (USD $)
In Thousands, unless otherwise specified
Jun. 30, 2015
Dec. 31, 2014
Current assets
 
 
Cash and cash equivalents
$ 165,017 
$ 89,095 
Settlement receivables
23,716 
43,288 
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 
37,697 
Other receivables
11,372 
20,553 
Inventory
23,453 
27,163 
Prepaid expenses and other assets
21,090 
18,988 
Deferred tax asset
9,591 
9,591 
Total current assets
296,073 
246,375 
Non-current assets
 
 
Property, equipment and leasehold improvements, net
104,521 
106,085 
Goodwill
857,670 
857,913 
Other intangible assets, net
404,132 
436,785 
Other receivables, non-current
7,808 
9,184 
Other assets, non-current
36,915 
50,943 
Total non-current assets
1,411,046 
1,460,910 
Total assets
1,707,119 
1,707,285 
Current Liabilities
 
 
Settlement liabilities
141,211 
119,157 
Accounts payable and accrued expenses
116,695 
104,668 
Current portion of long-term debt
10,000 
10,000 
Total current liabilities
267,906 
233,825 
Non-current liabilities
 
 
Deferred tax liability, non-current
49,808 
57,333 
Long-term debt, less current portion
1,157,506 
1,178,787 
Other accrued expenses and liabilities
4,927 
5,867 
Total non-current liabilities
1,212,241 
1,241,987 
Total liabilities
1,480,147 
1,475,812 
Commitments and Contingencies (Note 13)
   
   
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 
90 
Additional paid-in capital
253,555 
245,682 
Retained earnings
147,879 
160,152 
Accumulated other comprehensive income
1,507 
1,569 
Treasury stock, at cost, 24,821 and 24,816 shares at June 30, 2015 and December 31, 2014, respectively
(176,060)
(176,020)
Total stockholders' equity
226,972 
231,473 
Total liabilities and stockholders' equity
$ 1,707,119 
$ 1,707,285 
CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)
In Millions, except Share data, unless otherwise specified
Jun. 30, 2015
Dec. 31, 2014
CONDENSED CONSOLIDATED BALANCE SHEETS
 
 
Allowances for doubtful accounts
$ 2.9 
$ 2.8 
Common stock par value (in dollars per share)
$ 0.001 
$ 0.001 
Common stock, shares authorized
500,000,000 
500,000,000 
Common stock, shares issued
90,743,000 
90,405,000 
Convertible preferred stock, par value (in dollars per share)
$ 0.001 
$ 0.001 
Convertible preferred stock, shares authorized
50,000,000 
50,000,000 
Convertible preferred stock, shares outstanding
Treasury stock, shares
24,821,000 
24,816,000 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (USD $)
In Thousands, unless otherwise specified
6 Months Ended
Jun. 30, 2015
Jun. 30, 2014
Cash flows from operating activities
 
 
Net (loss) income
$ (12,272)
$ 12,213 
Adjustments to reconcile net income to cash provided by operating activities:
 
 
Depreciation and Amortization
62,521 
8,969 
Amortization of financing costs
3,730 
942 
Loss/(gain) on sale or disposal of assets
374 
(21)
Accretion of contract rights
4,092 
 
Provision for bad debts
4,370 
4,229 
Loss on early extinguishment of debt
12,977 
 
Stock-based compensation
3,954 
5,409 
Other non-cash items
(20)
 
Changes in operating assets and liabilities:
 
 
Trade and other receivables
(75)
(3,772)
Settlement receivables
19,544 
13,257 
Inventory
3,761 
(2,269)
Prepaid and other assets
(18,396)
(117)
Deferred income taxes
(7,525)
5,611 
Settlement liabilities
22,240 
29,553 
Accounts payable and accrued expenses
27,116 
1,425 
Net cash provided by operating activities
126,391 
75,429 
Cash flows from investing activities
 
 
Acquisitions, net of cash acquired
(2,257)
(11,845)
Capital expenditures
(29,660)
(7,493)
Proceeds from sale of fixed assets
29 
213 
Repayments under development agreements
2,392 
 
Advances under development and placement agreements
(1,255)
 
Changes in restricted cash and cash equivalents
60 
(45)
Net cash used in investing activities
(30,691)
(19,170)
Cash flows from financing activities
 
 
Repayments against prior credit facility
 
(7,000)
Repayments of credit facility
(5,000)
 
Repayments of secured notes
(350,000)
 
Proceeds from issuance of secured notes
335,000 
 
Debt issuance costs
(1,154)
 
Proceeds from exercise of stock options
1,673 
4,613 
Purchase of treasury stock
(40)
(6,604)
Net cash used in financing activities
(19,521)
(8,991)
Effect of exchange rates on cash
(257)
476 
Cash and cash equivalents
 
 
Net increase for the period
75,922 
47,744 
Balance, beginning of the period
89,095 
114,254 
Balance, end of the period
165,017 
161,998 
Supplemental cash disclosures
 
 
Cash paid for interest
25,107 
3,504 
Cash (refunded) paid for income tax, net
(6,184)
508 
Supplemental non-cash disclosures
 
 
Accrued and unpaid capital expenditures
5,091 
1,253 
Accrued and unpaid contingent liability for NEWave acquisition
 
2,463 
Issuance of stock warrants
$ 2,246 
 
BUSINESS
BUSINESS

1.BUSINESS

 

Overview

 

Global Cash Access Holdings, Inc. (“Holdings”) is a holding company, the 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”). Unless otherwise indicated, the terms the “Company,” “we,” “us” and “our” refer to Holdings together with its consolidated subsidiaries.

 

GCA is dedicated to providing video and mechanical reel gaming content and technology solutions, integrated gaming payments solutions and compliance and efficiency software. The Company’s Games business 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. 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 intrastate, Internet-based gaming and lottery activities.

 

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

2.BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

Our unaudited condensed consolidated financial statements included herein have been prepared by us pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Some of the information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States have been condensed or omitted pursuant to such rules and regulations, although we believe the disclosures are adequate to make the information presented not misleading. In the opinion of management, all adjustments (which include normal recurring adjustments) necessary for a fair presentation of results for the interim periods have been made. The results for the three and six months ended June 30, 2015 are not necessarily indicative of results to be expected for the full fiscal year.  The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

 

There have been no changes to our basis of presentation and significant accounting policies since the most recent filing of our Annual Report on Form 10-K, except for the following:

 

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 field service and network operations personnel, those direct costs related to the inventory sold for electronic gaming machines (“EGMs”), fully integrated kiosks and system sales, commissions paid to gaming establishments, interchange fees paid to credit and debit card networks and transaction processing fees to our transaction processor.

 

Research and Development Costs

We conduct research and development activities primarily to develop and enhance our Games and Payments platforms, as well as game content and features. We believe our ability to deliver differentiated, appealing products and services to the marketplace is based in part on 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, and game lab testing fees. Once the technological feasibility of a project has been established, it is transferred from research to development, and capitalization of development costs continues until the product is available for general release.

 

Advertising, Marketing and Promotional Costs

 

We expense advertising, marketing and promotional costs as incurred. Total advertising, marketing and promotional costs, included in operating expenses in the Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income, were $0.5 million and $0.8 million and $0.2 million and $0.4 million for the three and six months ended June 30, 2015 and 2014, respectively.

 

Fair Values of Financial Instruments

 

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

 

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 active markets for identical investments. Level 2 indicates that the fair value is determined using observable 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.

 

The following table presents the fair value and carrying value of our long-term debt as of June 30, 2015 (amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Level of

    

 

 

    

Carrying

 

 

 

Hierarchy

 

Fair Value

 

Value

 

Term loan

 

1

 

$

498,713

 

$

495,000

 

Senior secured notes

 

3

 

$

345,888

 

$

335,000

 

Senior unsecured notes

 

1

 

$

336,000

 

$

350,000

 

 

The senior secured notes were fair valued using a Level 3 input by evaluating the trading activities of similar debt instruments as there was no market activity as of June 30, 2015.  The senior unsecured notes were syndicated in April 2015 and transitioned from level 3 to level 1 on the fair value hierarchy as of June 30, 2015. 

 

At December 31, 2014, the fair value of our long-term debt was considered to approximate the carrying amount as our acquisition of Multimedia occurred on December 19, 2014, for which our long-term debt was incurred.

 

Business Segments

 

During the first quarter of 2015, we changed our organizational structure as part of our transformation to a Games and Payments company providing solutions to the gaming industry. As a result, information that our chief operating decision-making group regularly reviews for purposes of allocating resources and assessing performance changed. Therefore, beginning in the first quarter of 2015, we are reporting our financial performance based on our new segments described in “Note 18.  Segment Information”. We have presented prior period amounts to conform to the way we now internally manage and monitor segment performance beginning in 2015. This change had no impact on our condensed consolidated financial statements.

 

Recent Accounting Guidance

 

Recent Accounting Guidance Not Yet Adopted

 

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

 

In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-03, which provides guidance to simplify the presentation of debt issuance costs.  These amendments require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts.  The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. The pronouncement is effective for annual periods beginning after December 15, 2015, and interim periods within those fiscal years, and early adoption is permitted for financial statements that have not been previously issued. We are currently evaluating the impact of adopting this guidance on our condensed consolidated financial statements and disclosures included within Notes to the Condensed Consolidated Financial Statements.

 

In January 2015, the FASB issued ASU No. 2015-01, which requires that an entity separately classify, present and disclose extraordinary events and transactions. The pronouncement is effective for annual periods ending after December 15, 2015. A reporting entity also may apply the amendments retrospectively to all prior periods presented in the financial statements. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. We are currently evaluating the impact of adopting this guidance on our condensed consolidated financial statements and disclosures included within Notes to the Condensed Consolidated Financial Statements.

 

In August 2014, the FASB issued ASU No. 2014-15, which provides guidance on determining when and how reporting entities must disclose going-concern uncertainties in their financial statements. The pronouncement is effective for annual periods ending after December 15, 2016, and interim periods thereafter, and early adoption is permitted. We are currently evaluating the impact of adopting this guidance on our condensed consolidated financial statements and disclosures included within Notes to the Condensed 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 condensed consolidated financial statements and disclosures included within Notes to the Condensed Consolidated Financial Statements.

 

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

BUSINESS COMBINATIONS
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.

ATM FUNDING AGREEMENTS
ATM FUNDING AGREEMENTS

4. ATM FUNDING AGREEMENTS

 

Contract Cash Solutions Agreement

 

Our Contract Cash Solutions Agreement with Wells Fargo Bank, N.A. (“Wells Fargo”) allows us to use funds owned by Wells Fargo to provide the currency needed for normal operating requirements for our ATMs. For the use of these funds, we pay Wells Fargo a cash usage fee on the average daily balance of funds utilized multiplied by a contractually defined cash usage rate. These cash usage fees, reflected as interest expense within the Condensed Consolidated Statements of 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.

 

TRADE RCEIVABLES
TRADE RECEIVABLES

5. TRADE RECEIVABLES

 

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

 

 

 

 

 

 

 

 

 

.

At 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.

OTHER RECEIVABLES
OTHER RECEIVABLES

6. OTHER RECEIVABLES

 

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

 

 

 

PREPAID AND OTHER ASSETS
PREPAID AND OTHER ASSETS

7. PREPAID AND OTHER ASSETS

 

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

 

 

 

INVENTORY
INVENTORY

8. INVENTORY

 

We currently maintain separate inventories for our Games and Payments businesses. Our Games inventory primarily consists of component parts, completed player terminals and back office computer equipment. This inventory was stated at the lower of cost or market and accounted for using the first in, first out method during the current reporting period; whereas the inventory that existed at the time of the Merger was stated at fair value. The cost of inventory includes cost of materials, labor, overhead and freight. Our Payments inventory primarily consists of parts as well as finished goods and work-in-progress.  This inventory was stated at the lower of cost or market accounted for using the average cost method.

 

Inventory consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

At June 30,

 

At December 31,

 

 

 

2015

    

2014

 

 

Inventory

 

 

 

 

 

 

 

Raw materials and component parts, net of reserves of $142 and $22, respectively

$

19,387

 

$

21,151

 

 

Work in progress

 

1,403

 

 

803

 

 

Finished goods

 

2,663

 

 

5,209

 

 

Total inventory

$

23,453

 

$

27,163

 

 

 

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

9. PROPERTY, EQUIPMENT AND LEASED ASSETS

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At June 30, 2015

 

At December 31, 2014

 

 

 

Useful Life

 

 

 

 

Accumulated

 

Net Book

 

 

 

Accumulated

 

Net Book

 

 

    

(Years)

   

  Cost  

   

Depreciation

   

Value

   

Cost

   

Depreciation

   

Value

 

Property, equipment and leased assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental pool - deployed

 

2

-

4

 

$

78,058

 

$

13,992

 

$

64,066

 

$

70,295

 

$

876

 

$

69,419

 

Rental pool - undeployed

 

2

-

4

 

 

14,831

 

 

2,699

 

 

12,132

 

 

10,562

 

 

151

 

 

10,411

 

ATM equipment

 

 

 

5

 

 

20,818

 

 

14,692

 

 

6,126

 

 

23,572

 

 

16,544

 

 

7,028

 

Office, computer and other equipment

 

 

 

3

 

 

16,745

 

 

10,543

 

 

6,202

 

 

15,238

 

 

8,848

 

 

6,390

 

Leasehold and building improvements

 

Lease Term

 

 

6,142

 

 

1,456

 

 

4,686

 

 

6,289

 

 

895

 

 

5,394

 

Machinery and equipment

 

3

-

5

 

 

5,282

 

 

538

 

 

4,744

 

 

3,395

 

 

34

 

 

3,361

 

Cash advance equipment

 

 

 

3

 

 

6,620

 

 

2,159

 

 

4,461

 

 

3,372

 

 

1,873

 

 

1,499

 

Other

 

2

-

5

 

 

2,524

 

 

420

 

 

2,104

 

 

2,772

 

 

189

 

 

2,583

 

Total

 

 

 

 

 

$

151,020

 

$

46,499

 

$

104,521

 

$

135,495

 

$

29,410

 

$

106,085

 

 

Depreciation expense related to other property, equipment and leased assets totaled approximately $10.7 million and $21.1 million and $1.9 million and $3.8 million for the three and six months ended June 30, 2015 and 2014, respectively. Our property, equipment and leased assets were not impaired for the three and six months ended June 30, 2015 and 2014.

GOODWILL AND OTHER INTANGIBLE ASSETS
GOODWILL AND OTHER INTANGIBLE ASSETS

10. GOODWILL AND OTHER INTANGIBLE ASSETS

 

Goodwill

 

Goodwill represents the excess of the purchase price over the identifiable tangible and intangible assets acquired plus liabilities assumed arising from business combinations. The balance of goodwill was $857.7 million and $857.9 million at June 30, 2015 and December 31, 2014, respectively. Our goodwill was not impaired for the three and six months ended June 30, 2015 and 2014. Additionally, no impairment was identified during our annual impairment testing as of October 1, 2014.

 

In accordance with ASC 350, we test goodwill at the reporting unit level, which in certain cases may be a component of an operating segment, for impairment on an annual basis and between annual tests if events and circumstances indicate it is more likely than not that the fair value of a reporting unit is less than its carrying amount.

 

The estimate of fair value requires significant judgment. We based our fair value estimates on assumptions that we believe to be reasonable but that are unpredictable and inherently uncertain, including estimates of future growth rates and operating margins and assumptions about the overall economic climate and the competitive environment for our reporting units. There can be no assurance that our estimates and assumptions made for purposes of our goodwill and identifiable intangible asset testing as of the time of testing will prove to be accurate predictions of the future. If our assumptions regarding business plans, competitive environments or anticipated growth rates are not correct, we may be required to record goodwill and/or intangible asset impairment charges in future periods, whether in connection with our next annual impairment testing or earlier, if an indicator of an impairment is present before our next annual evaluation.

 

Other Intangible Assets

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At June 30, 2015

 

At December 31, 2014

 

 

Useful Life

 

 

 

 

Accumulated

 

Net Book

 

 

 

 

Accumulated

 

Net Book

 

    

(years)

    

Cost

    

Amortization

    

Value

    

Cost

    

Amortization

    

Value

Other intangible assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contract rights under development and placement fee agreements

 

1

-

7

 

$

16,387

 

$

4,092

 

$

12,295

 

$

14,000

 

$

301

 

$

13,699

Customer contracts

 

7

-

14

 

 

43,938

 

 

32,221

 

 

11,717

 

 

43,938

 

 

29,931

 

 

14,007

Customer relationships

 

8

-

12

 

 

231,100

 

 

11,240

 

 

219,860

 

 

231,100

 

 

733

 

 

230,367

Developed technology and software

 

1

-

6

 

 

184,242

 

 

40,679

 

 

143,563

 

 

174,417

 

 

14,604

 

 

159,813

Patents, trademarks and other

 

1

-

17

 

 

27,841

 

 

11,144

 

 

16,697

 

 

27,856

 

 

8,957

 

 

18,899

Total

 

 

 

 

 

$

503,508

 

$

99,376

 

$

404,132

 

$

491,311

 

$

54,526

 

$

436,785

 

Amortization expense related to other intangible assets totaled approximately $20.8 million and $41.4 million and $2.8 million and $5.1 million for the three and six months ended June 30, 2015 and 2014, respectively. We capitalized and placed into service $4.7 million and $5.7 million and $4.5 million and $4.9 million of software development costs for the three and six months ended June 30, 2015 and 2014, respectively.

 

On a quarterly basis, we evaluate our other intangible assets for potential impairment as part of our quarterly review process. No impairment was identified for our other intangible assets during our assessment for the three and six months ended June 30, 2015 and 2014.

 

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

 

In addition, certain development agreements allow the facilities to buy out floor space after advances that are subject to repayment have been repaid. The development agreements typically provide for a portion of the amounts retained by each facility for its share of the operating profits of the facility to be used to repay some or all of the advances recorded as notes receivable. Placement fees and amounts advanced in excess of those to be reimbursed by the customer for real property and land improvements are allocated to intangible assets and are generally amortized over the term of the contract, which is recorded as a reduction of revenue generated from the facility. In the past we have, and in the future, we may, by mutual agreement, amend these agreements to reduce our floor space at the facilities. Any proceeds received for the reduction of floor space is first applied against the intangible asset for that particular development or placement fee agreement, if any, and the remaining net book value of the intangible asset is prospectively amortized on a straight-line method over the remaining estimated useful life.

 

On January 15, 2015, Multimedia paid a placement fee of approximately $1.2 million to the Chickasaw Nation to extend the placement of 118 units in one of its location in Oklahoma for an additional term of 60 months.

ACCOUNTS PAYABLE AND ACCRUED EXPENSES
ACCOUNTS PAYABLE AND ACCRUED EXPENSES

11.ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 

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

 

 

 

 

 

 

 

 

 

 

 

At June 30,

 

At December 31,

 

 

 

2015

    

2014

  

 

Accounts payable and accrued expenses

 

 

 

 

 

 

 

Trade accounts payable

$

52,169

 

$

48,962

 

 

Accrued interest

 

26,698

 

 

3,387

 

 

Payroll and related expenses

 

7,275

 

 

10,889

 

 

Deferred and unearned revenues

 

9,308

 

 

8,016

 

 

Cash access processing and related expenses

 

3,535

 

 

4,414

 

 

Accrued taxes

 

1,999

 

 

3,195

 

 

Other

 

15,711

 

 

25,805

 

 

Total accounts payable and accrued expenses

$

116,695

 

$

104,668

 

 

 

 

 

 

 

 

 

 

 

LONG-TERM DEBT
LONG-TERM DEBT

12. LONG-TERM DEBT

 

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

 

 

 

 

 

 

 

 

 

 

 

 

At June 30,

 

At December 31,

 

 

 

2015

    

2014

 

 

Long-term debt

 

 

 

 

 

 

 

Senior secured term loan

$

495,000

 

$

500,000

 

 

Senior secured notes

 

335,000

 

 

350,000

 

 

Senior unsecured notes

 

350,000

 

 

350,000

 

 

Total debt

 

1,180,000

 

 

1,200,000

 

 

Less: original issue and warrant discount

 

(12,494)

 

 

(11,213)

 

 

Total debt after discount

 

1,167,506

 

 

1,188,787

 

 

Less: current portion of long-term debt

 

(10,000)

 

 

(10,000)

 

 

Long-term debt, less current portion

$

1,157,506

 

$

1,178,787

 

 

 

Credit Facilities

 

In December 2014, we entered into a credit agreement that provided for a $500.0 million six-year senior secured term loan that matures in 2020 (the “Term Loan”) and a $50.0 million five-year revolver that matures in 2019 (the “Revolving Credit Facility”, and together with the Term Loan, the “Credit Facilities”). The fees associated with the Credit Facilities included original issue discounts of approximately $7.5 million and debt issuance costs of approximately $13.9 million.

 

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

 

The Revolving Credit Facility remained undrawn as of June 30, 2015.

 

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

 

Voluntary prepayments of the Term Loan and the Revolving Credit Facility and voluntary reductions in the unused commitments are permitted in whole or in part, in minimum amounts as set forth in the credit agreement governing the Credit Facilities, with prior notice but without premium or penalty, except that certain refinancing transactions of the Term Loan within twelve months after the closing of the Credit Facilities will be subject to a prepayment premium of 1.00% of the principal amount repaid.

 

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

 

The Term Loan had an applicable interest rate of 6.25% as of June 30, 2015 and December 31, 2014.

 

We were in compliance with the terms of the Credit Facilities as of June 30, 2015 and December 31, 2014.

 

Senior Secured Notes and Refinance of Senior Secured Notes

 

In December 2014, we issued $350.0 million in aggregate principal amount of 7.75% Senior Secured Notes due 2021 (the “Secured Notes”). The fees associated with the Secured Notes included debt issuance costs of approximately $13.6 million.

 

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

 

The Secured Notes were acquired by the initial purchasers pursuant to the terms of a purchase agreement.  Under the terms of the purchase agreement, during a one year period following the closing and upon prior notice from the initial purchasers, the Company was required to use commercially reasonable efforts to aid the initial purchasers in the resale of the Secured Notes, including by preparing an updated offering memorandum and participating in reasonable marketing efforts including road shows, to the extent required therein. Alternatively, GCA had the ability to redeem the Secured Notes from the initial purchasers without penalty.

 

On April 15, 2015, the Company entered into a note purchase agreement (the “Note Purchase Agreement”) among GCA, CPPIB Credit Investments III Inc. (the “Purchaser”), and Deutsche Bank Trust Company Americas, as collateral agent (the “Collateral Agent”), and issued $335.0 million in aggregate principal amount of its 7.25% Senior Secured Notes due 2021 (the “Refinanced Secured Notes”) in a private offering to the Purchaser. With the proceeds from the issuance of the Refinanced Secured Notes, GCA redeemed, in full, the Company’s then outstanding Secured Notes from the initial purchasers in accordance with the terms of the indenture governing the Secured Notes. In connection with the issuance of the Refinanced Secured Notes during the second quarter of 2015, we expensed $13.0 million of related debt issuance costs and fees to “Loss on extinguishment of debt” associated with the redeemed Senior Secured Notes that were outstanding prior to the refinance transaction.

 

In connection with the issuance of the Refinanced Secured Notes and pursuant to the terms of the Note Purchase Agreement, the Company issued to the Purchaser a warrant to purchase 700,000 shares of Holdings’ common stock, with an exercise price equal to $9.88 per share, representing a 30% premium to the volume-weighted average price of Holdings’ common stock for the ten trading days prior to the issuance of the warrant. The warrant expires on the sixth anniversary of the date of issuance. The number of shares issuable pursuant to the warrant and the warrant exercise price are subject to adjustment for stock splits, reverse stock splits, stock dividends, mergers and certain other events. The warrants were valued at $2.2 million using a modified Black-Scholes model and were accounted for as a debt discount.

 

We were in compliance with the terms of the Secured Notes as of June 30, 2015 and December 31, 2014.

 

Senior Unsecured Notes

 

In December 2014, we issued $350 million in aggregate principal amount of 10.0% Senior Unsecured Notes due 2022 (the “Unsecured Notes”). The fees associated with the Unsecured Notes included original issue discounts of approximately $3.8 million and debt issuance costs of approximately $14.0 million.

 

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

 

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

 

In connection with the issuance of the Unsecured Notes, the Company entered into a registration rights agreement pursuant to which the Company agreed, for the benefit of the initial holders of the Unsecured Notes, to file with the SEC, and use its commercially reasonable efforts to cause to become effective, a registration statement relating to an offer to exchange the Unsecured Notes for an issue of SEC-registered notes (the “Exchange Notes”) with terms identical to the Unsecured Notes (except that the Exchange Notes will not be subject to restrictions on transfer or to any increase in annual interest rate as described below). Under certain circumstances, including if applicable interpretations of the staff of the SEC do not permit the Company to effect the exchange offer, the Company and the guarantors must use their commercially reasonable efforts to cause to become effective a shelf registration statement relating to resales of the Unsecured Notes and to keep that shelf registration statement effective until the first anniversary of the date such shelf registration statement becomes effective, or such shorter period that will terminate when all Unsecured Notes covered by the shelf registration statement have been sold. The obligation to complete the exchange offer and/or file a shelf registration statement will terminate on the second anniversary of the date of the Registration Rights Agreement. If the exchange offer is not completed (or, if required, the shelf registration statement is not declared effective) on or before December 19, 2015, the annual interest rate borne by the Unsecured Notes will be increased by 0.25% per annum for the first 90-day period immediately following such date and by an additional 0.25% per annum with respect to each subsequent 90-day period, up to a maximum additional rate of 1.00% per annum thereafter until the exchange offer is completed or the shelf registration statement is declared effective, at which time the interest rate will revert to the original interest rate on the date the Unsecured Notes were originally issued.

 

We were in compliance with the terms of the Unsecured Notes as of June 30, 2015 and December 31, 2014.

COMMITMENTS AND CONTINGENCIES
COMMITMENTS AND CONTINGENCIES

13.COMMITMENTS AND CONTINGENCIES

 

Multimedia Shareholder Litigation

 

In connection with the Merger, certain actions were filed by putative shareholders of Multimedia in the United States District Court for the Western District of Texas (the “Texas Federal Action”) and the District Court of Travis County, Texas (the “Texas State Court Action”). In both the Texas Federal Action and the Texas State Court Action, plaintiffs alleged that Multimedia’s directors breached their fiduciary duties to Multimedia and/or its shareholders because, among other things, the Merger allegedly involved an unfair price, an inadequate sales process, self-dealing and unreasonable deal protection devices. The complaints further alleged that Holdings and its formerly wholly owned merger subsidiary, Merger Sub, aided and abetted those purported breaches of fiduciary duty.

 

On November 20, 2014, the defendants in the Texas Federal Action reached an agreement in principle with the plaintiffs in the Texas Federal Action regarding settlement of all claims asserted on behalf of the alleged class of Multimedia shareholders and on behalf of Multimedia, and that agreement is reflected in a memorandum of understanding. In connection with the settlement contemplated by the memorandum of understanding, Multimedia agreed to make certain additional disclosures in its proxy statement related to the Merger, which disclosure Multimedia made in a Current Report on Form 8-K filed on November 21, 2014. In addition, the defendants in the Texas Federal Action agreed not to oppose an application by plaintiffs in the Texas Federal Action for an attorneys’ fee award from the United States District Court for the Western District of Texas (the “District Court”) of up to $310,000. As contemplated in the memorandum of understanding, the parties entered into a Stipulation of Non-Opt Out Class and Derivative Settlement (the “Stipulation”) as of April 7, 2015, which was filed with the District Court on April 16, 2015. The Stipulation is subject to customary conditions, including District Court approval.

 

On April 16, 2015, Plaintiffs filed an unopposed motion for preliminary approval of the Stipulation. On April 22, 2015, the District Court entered an order preliminarily approving the Stipulation, providing for notice of the settlement to be provided to certain Multimedia shareholders and scheduling a hearing for final approval of the Stipulation on August 7, 2015. On July 10, 2015, Plaintiffs filed an unopposed motion for final approval of the Stipulation.  The deadline for class members to file objections to the Stipulation passed on July 17, 2015.  As of August 3, 2015, no such objections had been filed. There can be no assurance that the District Court will finally approve the Stipulation. In such event, the settlement as reflected in the Stipulation may be terminated.

 

The Texas State Court Action remains pending as of August 3, 2015, the date these condensed consolidated financial statements were issued. All of the defendants have filed answers containing general denials in that action. The Stipulation preliminarily approved in the Texas Federal Action includes a release of the claims asserted in the Texas State Court Action.

 

Alabama Litigation

 

The Company is currently involved in one lawsuit and recently resolved another, as further described below, related to Multimedia’s former charity bingo operations in the State of Alabama, neither of which it believes is material from a damages perspective. The active lawsuit is currently pending in federal court and the resolved lawsuit was pending in federal court, and both include claims related to the alleged illegality of electronic charity bingo in the State of Alabama.

 

Dollie Williams, et al., v. Macon County Greyhound Park, Inc., et al., a civil action, was filed on March 8, 2010, in the United States District Court for the Middle District of Alabama, Eastern Division, against Multimedia and others. The plaintiffs, who claim to have been patrons of VictoryLand, allege that Multimedia participated in gambling operations that violated Alabama state law by supplying to VictoryLand purportedly unlawful electronic bingo machines played by the plaintiffs, and the plaintiffs seek recovery of the monies lost on all electronic bingo games played by the plaintiffs in the six months prior to the filing of the complaint under Ala. Code Sec. 8-1-150(A). The plaintiffs have requested that the court certify the action as a class action. On March 29, 2013, the court entered an order granting the plaintiffs' motion for class certification. On April 12, 2013, the defendants jointly filed a petition with the Eleventh Circuit Court of Appeals seeking permission to appeal the court's ruling on class certification. On June 18, 2013, the Eleventh Circuit Court of Appeals entered an order granting the petition to appeal. Following briefing and oral argument, on April 2, 2014, the Eleventh Circuit Court of Appeals entered an order reversing the district court's ruling on class certification and remanding the case to the district court. The parties reached a settlement that became final upon approval of the bankruptcy court overseeing the bankruptcy of one of the plaintiffs. The lawsuit was dismissed with prejudice by court order dated June 10, 2015.

 

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

 

Gain Contingency Settlement

 

In January 2014, we filed a complaint against certain third party defendants alleging conspiracy in restraint of competition regarding interchange fees, monopolization by defendants in the relevant market, and attempted monopolization of the defendants in the relevant market. We demanded a trial by jury of all issues so triable. The defendants filed a motion to dismiss on March 13, 2014. A settlement agreement was made as of January 16, 2015 and on January 22, 2015 the settlement agreement was executed and delivered for which we received $14.4 million in cash and recorded the settlement proceeds in the first quarter of 2015. This settlement is included as a reduction of operating expenses in our Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income for the six months ended June 30, 2015.

 

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

 

SHAREHOLDERS' EQUITY
SHAREHOLDERS' EQUITY

14.SHAREHOLDERS’ EQUITY

 

Preferred Stock. Our amended and restated certificate of incorporation, as amended, allows our Board of Directors, without further action by stockholders, to issue up to 50,000,000 shares of preferred stock in one or more series and to fix the designations, powers, preferences, privileges and relative participating, optional, or special rights as well as the qualifications, limitations or restrictions of the preferred stock, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences. As of June 30, 2015 and December 31, 2014, we had no shares outstanding of preferred stock.

 

Common Stock. Subject to the preferences that may apply to shares of preferred stock that may be outstanding at the time, the holders of outstanding shares of common stock are entitled to receive dividends out of assets legally available at the times and in the amounts as our Board of Directors may from time to time determine. All dividends are non-cumulative. In the event of the liquidation, dissolution or winding up of the Company, the holders of common stock are entitled to share ratably in all assets remaining after the payment of liabilities, subject to the prior distribution rights of preferred stock, if any, then outstanding. Each stockholder is entitled to one vote for each share of common stock held on all matters submitted to a vote of stockholders. Cumulative voting for the election of directors is not provided for. The common stock is not entitled to preemptive rights and is not subject to conversion or redemption. There are no sinking fund provisions applicable to the common stock. Each outstanding share of common stock is fully paid and non-assessable. As of June 30, 2015 and December 31, 2014, we had 90,743,001 and 90,405,450 shares of common stock issued, respectively.

 

Treasury Stock. Employees may direct us to withhold vested shares of restricted stock to satisfy the minimum statutory withholding requirements applicable to their restricted stock vesting. We repurchased or withheld from restricted stock awards 2,599 and 5,444, and 11,963 and 43,129 shares of common stock, at an aggregate purchase price of $20,167 and $39,910, and $0.1 million and $0.4 million, for the three and six months ended June 30, 2015 and 2014, respectively, to satisfy the minimum applicable tax withholding obligations related to the vesting of such restricted stock awards.

 

WEIGHTED AVERAGE COMMON SHARES
WEIGHTED AVERAGE COMMON SHARES

15.WEIGHTED AVERAGE COMMON SHARES

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2015

    

2014

 

    

2015

    

2014

 

Weighted average shares

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding - basic

 

65,844

 

65,970

 

 

65,734

 

65,940

 

Potential dilution from equity grants(1)

 

 —

 

1,117

 

 

 —

 

1,266

 

Weighted average number of common shares outstanding - diluted

 

65,844

 

67,087

 

 

65,734

 

67,206

 

 


(1)

The Company was in a net loss position for the three and six months ended June 30, 2015, and therefore, no potential dilution from the application of the treasury stock method was applicable. The potential dilution excludes the weighted average effect of equity awards to acquire 7.5 million and 6.5 million of our common stock for the three and six months ended June 30, 2014 as the application of the treasury stock method, as required, makes them anti-dilutive.

SHARE-BASED COMPENSATION
SHARE-BASED COMPENSATION

16.SHARE-BASED COMPENSATION

 

Equity Incentive Awards

 

Our 2014 Equity Incentive Plan (the “2014 Plan”) is used to attract and retain the best available personnel, to provide additional incentives to employees, directors and consultants and to promote the success of our business.  The 2014 Plan superseded the then current 2005 Stock Incentive Plan (the “2005 Plan”). The 2014 Plan is administered by our Compensation Committee of our Board of Directors, which has the authority to select individuals who are to receive options or other equity incentive awards and to specify the terms and conditions of grants of options or other equity incentive awards, the vesting provisions, the term and the exercise price.

 

Generally, we grant the following award types: (a) time-based options, (b) cliff-vesting time-based options, (c) market-based options and (d) restricted stock.   These awards have varying vesting provisions and expiration periods. For the three and six months ended June 30, 2015, we granted time-based options and market-based options.  

 

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

 

Our market-based stock options granted under the 2014 Plan vest if our average stock price in any period of 30 consecutive trading days meets certain target prices during a four-year period that commenced on the date of grant for these options.  If these target prices are not met during such four-year period, the unvested shares underlying the options will terminate, however, upon the Participant’s termination of Service if the Participant’s Service is terminated by the Participating Company without Cause within ten days prior to, or within eighteen (18) months after, the date a Change in Control is consummated, the unvested options granted would become fully vested.  These options expire after a seven-year period.

 

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

 

 

 

 

 

 

 

 

    

Stock Options

    

Restricted Stock

 

 

 

Granted

 

Granted

 

Outstanding, December 31, 2014

 

13,626

 

440

 

Additional authorized shares

 

 —

 

 —

 

Granted

 

6,097

 

 —

 

Exercised options or vested shares

 

(315)

 

(22)

 

Canceled or forfeited

 

(1,694)

 

(1)

 

Outstanding, June 30, 2015

 

17,714

 

417

 

 

The maximum number of shares available for future equity awards under the 2014 Plan is approximately 6.6 million shares of our common stock; and there are no shares available for future equity awards under the 2005 Plan.

 

 

Stock Options

 

The fair value of time-based options was determined as of the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:

 

 

 

 

 

 

 

 

 

 

Six months ended

 

 

June 30,

 

    

2015

    

2014

    

Risk-free interest rate

 

1

%  

1

%  

Expected life of options (in years)

 

4

 

4

 

Expected volatility

 

43

%  

54

%  

Expected dividend yield

 

0

%  

0

%  

 

The fair value of market-based options was determined as of the date of grant using a lattice-based option valuation model. For the market-based options issued in the second quarter 2015, the assumptions were: (a) risk-free interest rate of 1%; (b) measurement period of four years; (c) expected volatility of 47%; and (d) no expected dividend yield.

 

 

The following tables present the options activity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

 

    

Weighted

    

 

 

 

 

 

Number of

 

Weighted Average

 

Average Life

 

Aggregate

 

 

 

Common Shares

 

Exercise Price

 

Remaining

 

Intrinsic Value

 

 

 

(in thousands)

 

(per share)

 

(years)

 

(in thousands)

 

Outstanding, December 31, 2014

 

13,626

 

$

7.64

 

6.5

 

$

9,148

 

Granted

 

6,097

 

 

7.74

 

 

 

 

 

 

Exercised

 

(315)

 

 

5.39

 

 

 

 

 

 

Canceled or forfeited

 

(1,694)

 

 

10.13

 

 

 

 

 

 

Outstanding, June 30, 2015

 

17,714

 

$

7.48

 

7.0

 

$

12,446

 

Vested and expected to vest, June 30, 2015

 

14,717

 

$

7.43

 

6.8

 

$

11,780

 

Exercisable, June 30, 2015

 

6,651

 

$

7.30

 

4.4

 

$

8,785

 

 

There were $6.1 million options granted for the three and six months ended June 30, 2015. There were 3.0 million and 5.0 million options granted for the three and six months ended June 30, 2014, respectively. The weighted average grant date fair value per share of the options granted was $2.49 for the three and six months ended June 30, 2015. The weighted average grant date fair value per share of the options granted was $2.86 and $3.27 for the three and six months ended June 30, 2014, respectively. The total intrinsic value of options exercised was $0.3 million and $0.8 million and $0.7 million and $2.4 million for the three and six months ended June 30, 2015 and 2014, respectively.

 

There was $21.8 million in unrecognized compensation expense related to options expected to vest as of June 30, 2015. This cost was expected to be recognized on a straight-line basis over a weighted average period of 3.0 years. We received $1.7 million in proceeds from the exercise of options and recorded $3.5 million in non-cash compensation expense related to options granted that were expected to vest for the six months ended June 30, 2015.

 

There was $15.6 million in unrecognized compensation expense related to options expected to vest as of June 30, 2014.  This cost was expected to be recognized on a straight-line basis over a weighted average period of 2.9 years. We recorded $4.6 million in non-cash compensation expense related to options granted that were expected to vest as of June 30, 2014. We received $4.6 million in cash from the exercise of options for the six months ended June 30, 2014.

 

 

Restricted Stock

 

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

 

 

 

 

 

 

 

 

 

    

 

    

Weighted

 

 

 

Shares

 

Average Grant

 

 

 

Outstanding

 

Date Fair Value

 

 

 

(in thousands)

 

(per share)

 

Outstanding, December 31, 2014

 

440

 

$

7.11

 

Granted

 

 —

 

 

 —

 

Vested

 

(22)

 

 

7.09

 

Forfeited

 

(1)

 

 

7.09

 

Outstanding, June 30, 2015

 

417

 

$

7.11

 

 

There were no shares of restricted stock granted for the three and six months ended June 30, 2015 and 2014.  The total fair value of restricted stock vested was $0.1 million and $0.2 million and $0.4 million and $1.4 million for the three and six months ended June 30, 2015 and 2014, respectively.

 

There was $2.5 million in unrecognized compensation expense related to shares of time based restricted shares expected to vest as of June 30, 2015. This cost is expected to be recognized on a straight-line basis over a weighted average period of 2.8 years. There were 21,700 shares of restricted stock that vested and we recorded $0.4 million in non-cash compensation expense related to the restricted stock granted that was expected to vest during the six months ended June 30, 2015.

 

There was $1.4 million in unrecognized compensation expense related to shares of time-based restricted shares expected to vest as of June 30, 2014. This cost was expected to be recognized on a straight-line basis over a weighted average period of 2.6 years. There were 0.2 million shares of time-based restricted shares vested and we recorded $0.8 million in non-cash compensation expense related to the restricted stock granted that was expected to vest for the six months ended June 30, 2014.

INCOME TAXES
INCOME TAXES

17.INCOME TAXES

 

The provision for income tax reflected an effective income tax rate benefit of 41.0% and 35.8% for the three and six months ended June 30, 2015, respectively, which was higher than the statutory federal rate of 35.0% primarily due to state taxes and the lower foreign tax rate applicable to our foreign source income, partially offset by non-statutory stock options that expired in 2015. The provision for income tax reflected an effective income tax rate expense of 37.3% and 35.7% for the same periods in the prior year, which was higher than the statutory federal rate of 35.0% primarily due to state taxes, an increase in our valuation allowance for certain foreign losses and non-cash compensation expenses related to stock options, partially offset by a lower foreign tax rate applicable to our foreign source income.

 

We have analyzed filing positions in all of the federal, state and foreign jurisdictions where we are required to file income tax returns, as well as all open tax years in these jurisdictions. As part of the Merger, the Company recorded $0.7 million of unrecognized tax benefits as of December 31, 2014, which is consistent with the balance as of June 30, 2015. Other than the unrecognized tax benefit related to the Merger, we believe that our income tax filing positions and deductions will be sustained upon audit and we do not anticipate any adjustments that will result in a material change to our financial position. We may from time to time be assessed interest or penalties by tax jurisdictions, although any such assessments historically have been minimal and immaterial to our financial results. Our policy for recording interest and penalties associated with audits and unrecognized tax benefits is to record such items as a component of income tax expense.

 

SEGMENT INFORMATION
SEGMENT INFORMATION

18.SEGMENT INFORMATION

 

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

 

Since the most recent filing of our Annual Report on Form 10-K, and in connection with the Merger, our chief operating decision-making group has determined the following to be the operating segments for which we conduct business: (a) Games, and (b) Payments. Each of these segments is monitored by our management for performance against its internal forecast and is consistent with our internal management reporting.

 

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

 

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

 

Corporate overhead and depreciation and amortization expenses were allocated to the segments either through specific identification or based on a reasonable methodology.

 

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

 

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

 

The following tables present segment information (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended June 30,

 

 

For the Six Months Ended June 30,

 

    

2015

    

2014

    

 

2015

    

2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

Games

 

$

54,868

 

$

 —

 

 

$

109,913

 

$

 —

Payments

 

 

151,496

 

 

144,946

 

 

 

303,924

 

 

295,517

Total revenues

 

$

206,364

 

$

144,946

 

 

$

413,837

 

$

295,517

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

 

 

 

 

 

 

 

 

 

 

 

Games

 

$

4,199

 

$

 —

 

 

$

4,813

 

$

 —

Payments

 

 

12,137

 

 

9,622

 

 

 

39,664

 

 

22,635

Total operating income

 

$

16,336

 

$

9,622

 

 

$

44,477

 

$

22,635

 

 

 

 

 

 

 

 

 

 

 

 

At

 

 

June 30, 2015

    

December 31, 2014

Total assets

 

 

 

 

 

 

Games

 

$

1,229,054

 

$

1,242,822

Payments

 

 

478,065

 

 

464,463

Total assets

 

$

1,707,119

 

$

1,707,285

 

Major customers. For the three and six months ended June 30, 2015 and 2014, no single customer accounted for more than 10% of our revenues. Our five largest customers accounted for approximately 28% and 30% of our total revenue for both the three and six months ended June 30, 2015 and 2014, respectively.

SUBSEQUENT EVENTS
SUBSEQUENT EVENTS

19.SUBSEQUENT EVENTS

 

As of August 5, 2015, we had not identified, and were not aware of, any subsequent events for the three and six months ended June 30, 2015.

 

 

BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)

Basis of Presentation

 

Our unaudited condensed consolidated financial statements included herein have been prepared by us pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Some of the information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States have been condensed or omitted pursuant to such rules and regulations, although we believe the disclosures are adequate to make the information presented not misleading. In the opinion of management, all adjustments (which include normal recurring adjustments) necessary for a fair presentation of results for the interim periods have been made. The results for the three and six months ended June 30, 2015 are not necessarily indicative of results to be expected for the full fiscal year.  The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

 

There have been no changes to our basis of presentation and significant accounting policies since the most recent filing of our Annual Report on Form 10-K, except for the following:

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 field service and network operations personnel, those direct costs related to the inventory sold for electronic gaming machines (“EGMs”), fully integrated kiosks and system sales, commissions paid to gaming establishments, interchange fees paid to credit and debit card networks and transaction processing fees to our transaction processor.

Research and Development Costs

We conduct research and development activities primarily to develop and enhance our Games and Payments platforms, as well as game content and features. We believe our ability to deliver differentiated, appealing products and services to the marketplace is based in part on 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, and game lab testing fees. Once the technological feasibility of a project has been established, it is transferred from research to development, and capitalization of development costs continues until the product is available for general release.

 

Advertising, Marketing and Promotional Costs

 

We expense advertising, marketing and promotional costs as incurred. Total advertising, marketing and promotional costs, included in operating expenses in the Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income, were $0.5 million and $0.8 million and $0.2 million and $0.4 million for the three and six months ended June 30, 2015 and 2014, respectively.

 

Fair Values of Financial Instruments

 

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

 

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 active markets for identical investments. Level 2 indicates that the fair value is determined using observable 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.

 

The following table presents the fair value and carrying value of our long-term debt as of June 30, 2015 (amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Level of

    

 

 

    

Carrying

 

 

 

Hierarchy

 

Fair Value

 

Value

 

Term loan

 

1

 

$

498,713

 

$

495,000

 

Senior secured notes

 

3

 

$

345,888

 

$

335,000

 

Senior unsecured notes

 

1

 

$

336,000

 

$

350,000

 

 

The senior secured notes were fair valued using a Level 3 input by evaluating the trading activities of similar debt instruments as there was no market activity as of June 30, 2015.  The senior unsecured notes were syndicated in April 2015 and transitioned from level 3 to level 1 on the fair value hierarchy as of June 30, 2015. 

 

At December 31, 2014, the fair value of our long-term debt was considered to approximate the carrying amount as our acquisition of Multimedia occurred on December 19, 2014, for which our long-term debt was incurred.

Business Segments

 

During the first quarter of 2015, we changed our organizational structure as part of our transformation to a Games and Payments company providing solutions to the gaming industry. As a result, information that our chief operating decision-making group regularly reviews for purposes of allocating resources and assessing performance changed. Therefore, beginning in the first quarter of 2015, we are reporting our financial performance based on our new segments described in “Note 18.  Segment Information”. We have presented prior period amounts to conform to the way we now internally manage and monitor segment performance beginning in 2015. This change had no impact on our condensed consolidated financial statements.

Recent Accounting Guidance

 

Recent Accounting Guidance Not Yet Adopted

 

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

 

In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-03, which provides guidance to simplify the presentation of debt issuance costs.  These amendments require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts.  The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. The pronouncement is effective for annual periods beginning after December 15, 2015, and interim periods within those fiscal years, and early adoption is permitted for financial statements that have not been previously issued. We are currently evaluating the impact of adopting this guidance on our condensed consolidated financial statements and disclosures included within Notes to the Condensed Consolidated Financial Statements.

 

In January 2015, the FASB issued ASU No. 2015-01, which requires that an entity separately classify, present and disclose extraordinary events and transactions. The pronouncement is effective for annual periods ending after December 15, 2015. A reporting entity also may apply the amendments retrospectively to all prior periods presented in the financial statements. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. We are currently evaluating the impact of adopting this guidance on our condensed consolidated financial statements and disclosures included within Notes to the Condensed Consolidated Financial Statements.

 

In August 2014, the FASB issued ASU No. 2014-15, which provides guidance on determining when and how reporting entities must disclose going-concern uncertainties in their financial statements. The pronouncement is effective for annual periods ending after December 15, 2016, and interim periods thereafter, and early adoption is permitted. We are currently evaluating the impact of adopting this guidance on our condensed consolidated financial statements and disclosures included within Notes to the Condensed 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 condensed consolidated financial statements and disclosures included within Notes to the Condensed Consolidated Financial Statements.

 

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

BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Tables)
Schedule of fair value and carrying value of our borrowings

 

The following table presents the fair value and carrying value of our long-term debt as of June 30, 2015 (amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Level of

    

 

 

    

Carrying

 

 

 

Hierarchy

 

Fair Value