The accompanying condensed notes are an integral part of these consolidated financial statements.
The accompanying condensed notes are an integral part of these consolidated financial statements.
The accompanying condensed notes are an integral part of these consolidated financial statements.
Condensed Notes to Consolidated Financial Statements (Unaudited)
Note 1 – Nature of Business and Basis of Presentation
Overview
Golden Entertainment, Inc. and its wholly owned subsidiaries (collectively, the “Company” or “Golden”) is a diversified group of gaming companies that focus on distributed gaming (including tavern gaming) and casino and resort operations. The Company’s common stock is traded on the NASDAQ Global Market, and the Company’s ticker symbol is “GDEN.”
The Company conducts its business through two reportable operating segments: Distributed Gaming and Casinos. The Company’s Distributed Gaming segment involves the installation, maintenance and operation of gaming and amusement devices in certain strategic, high-traffic, non-casino locations (such as grocery stores, convenience stores, restaurants, bars, taverns, saloons and liquor stores) in Nevada and Montana, and the operation of traditional, branded taverns targeting local patrons, primarily in the greater Las Vegas, Nevada metropolitan area. The Company’s Casinos segment consists of the Rocky Gap Casino Resort in Flintstone, Maryland (“Rocky Gap”) and three casinos in Pahrump, Nevada: Pahrump Nugget Hotel Casino, Gold Town Casino and Lakeside Casino & RV Park.
Basis of Presentation
The unaudited consolidated financial statements of the Company have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) applicable to interim financial information. Accordingly, certain information normally included in the annual financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) has been condensed and/or omitted. For further information, please refer to the audited consolidated financial statements of the Company for the year ended December 31, 2016 and the notes thereto included in the Company’s Annual Report on Form 10-K previously filed with the SEC. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company’s results for the periods presented. Results for interim periods should not be considered indicative of the results to be expected for the full year.
The accompanying unaudited consolidated financial statements include the accounts of the Company and its subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation. Certain minor reclassifications have been made to the prior year period amounts to conform to the current presentation.
Net Income Per Share
For all periods, basic net income per share is calculated by dividing net income by the weighted-average common shares outstanding. Diluted net income per share in profitable periods reflects the effect of all potentially dilutive common shares outstanding by dividing net income by the weighted-average of all common and potentially dilutive shares outstanding. In the event of a net loss, diluted shares are not considered because of the anti-dilutive effect.
New Accounting Pronouncements
Changes to GAAP are established by the Financial Accounting Standards Board (“FASB”), in the form of Accounting Standards Updates (“ASUs”) to the FASB's Accounting Standards Codification. The Company considers the applicability and impact of all ASUs. While management continues to assess the possible impact on the Company's consolidated financial statements of the future adoption of new accounting standards that are not yet effective, management currently believes that the following new standards may have a material impact on the Company's financial statements and disclosures:
In May 2017, the FASB issued ASU 2017-09,
Compensation – Stock Compensation
, which amends the scope of modification accounting for share-based payment arrangements. ASU 2017-09 provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting. The standard is effective for annual periods beginning after December 15, 2017 and interim periods therein, and early adoption is permitted. The Company will adopt the standard as of January 1, 2018.
In January 2017, the FASB issued ASU 2017-04,
Intangibles – Goodwill and Other
, which addresses goodwill impairment testing. Instead of determining goodwill impairment by calculating the implied fair value of goodwill, an entity should perform goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. ASU 2017-04 is effective for annual periods beginning after December 15, 2019 and interim periods therein, with early adoption permitted. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01,
Business Combinations
, which clarified the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions of assets or businesses. The standard is effective for annual periods beginning after December 15, 2017 and interim periods therein. The Company will adopt the standard as of January 1, 2018.
4
In February 2016, the FASB issued ASU 2016-02,
Leases
, which replaces the
existing guidance. ASU 2016-02 requires a dual approach
for lessee accounting under which a lessee would account for leases as finance leases or operating leases. Both finance leases and operating leases will result in the lessee recognizing a right-of-use
asset and a corresponding lease liability. ASU 2016-02 is effective for annual periods beginning after December 15, 2018 and interim periods therein, with early adoption permitted. The Company is currently evaluating the impact of this guidance on its con
solidated financial statements.
In May 2014, the FASB issued a comprehensive new revenue recognition model, ASU 2014-09,
Revenue from Contracts with Customers
,
which created a new Topic 606 (“ASC 606”). The new guidance is intended to clarify the principles for recognizing revenue and to develop a common revenue standard for GAAP applicable to revenue transactions. Existing industry guidance will be eliminated, including revenue recognition guidance specific to the gaming industry. The FASB has recently issued several amendments to the standard, including clarification on accounting for and identifying performance obligations. This guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those reporting periods. The guidance should be applied using the full retrospective method or retrospectively with the cumulative effect initially applying the guidance recognized at the date of initial application. The Company anticipates adopting this standard effective January 1, 2018. The Company is currently in the process of its analysis and anticipates this standard will have a material effect on its consolidated financial statements. As described below, the Company expects the most significant effect will be related to the accounting for customer loyalty programs and casino promotional allowances. However, the quantitative effects of these changes have not yet been determined and are still being analyzed. The Company is currently assessing the full effect that the adoption of this standard will have on its financial statements.
The customer loyalty programs affect revenues from the Company’s four core business operations: gaming, food and beverage, rooms and other operations. Currently, the Company estimates the cost of fulfilling the redemption of player rewards, after consideration of breakage, based upon the cost of historical redemptions. Upon adoption of the new guidance, player rewards will no longer be recorded at cost, and a deferred revenue model will be used to account for the classification and timing of revenue recognized as well as the classification of related expenses when player rewards are redeemed.
Additionally, the Company expects to see a significant decrease in food and beverage and room revenues because the practice of including the retail value of goods and services provided to customers without charge in gross revenue with a corresponding offset in promotional allowances to arrive at net revenue will be discontinued.
No other recently issued accounting standards that are not yet effective have been identified that management believes are likely to have a material impact on the Company's financial statements.
Note 2 – Acquisitions
Montana Acquisitions
On January 29, 2016, the Company completed the acquisition of approximately 1,100 gaming devices, as well as certain other non-gaming assets and the right to operate within certain locations, from C. Lohman Games, Inc., Rocky Mountain Gaming, Inc. and Brandy’s Shoreliner Restaurant, Inc. (the “Initial Montana Acquisition”). The total consideration for the transaction was $20.1 million, including the issuance of $0.5 million of the Company’s common stock (comprising 50,252 shares at fair value at issuance of $9.95 per share). In connection with the Initial Montana Acquisition, the Company is required to pay the sellers contingent consideration of up to a total of $2.0 million in cash paid in four quarterly payments beginning in September 2017, subject to certain potential adjustments. See Note 9,
Financial Instruments and Fair Value Measurements
, for further discussion regarding the estimated fair value of the contingent consideration.
On April 22, 2016, the Company completed the acquisition of approximately 1,800 gaming devices, as well as amusement devices and certain other non-gaming assets and the right to operate within certain locations, from Amusement Services, LLC (the “Second Montana Acquisition”, and, together with the Initial Montana Acquisition, the “Montana Acquisitions”). The total consideration for the transaction was $25.7 million.
Acquisition Method of Accounting
The Company followed the acquisition method of accounting for the Montana Acquisitions per ASC 805 guidance. In accordance with ASC 805, the Company allocated the purchase price for each Montana Acquisition to the tangible and intangible assets acquired and liabilities assumed based on their fair values, which were determined primarily by management with assistance from third-party appraisals. The excess of the purchase prices over those fair values was recorded as goodwill.
5
The allocation of the $20.1 million purchase price of the Initial Montana Acquisition was finalized in the first quarter of 2017 and as of the date of the acquisiti
on, was comprised of the following:
(In thousands)
|
|
Final Purchase
Price Allocation
|
|
Cash and cash equivalents
|
|
$
|
1,700
|
|
Property and equivalents
|
|
|
2,350
|
|
Intangible assets
|
|
|
14,400
|
|
Goodwill
|
|
|
1,680
|
|
Total acquired assets
|
|
$
|
20,130
|
|
The intangible assets acquired in the Initial Montana Acquisition and the related weighted-average useful lives of definite-lived intangible assets were as follows:
(In thousands)
|
|
Useful
Life
|
|
As Recorded,
at Fair Value
|
|
Customer relationships
|
|
15 years
|
|
$
|
9,800
|
|
Non-competition agreements
|
|
5 years
|
|
|
3,900
|
|
Trade name
|
|
4 years
|
|
|
500
|
|
Other
|
|
15 years
|
|
|
200
|
|
Total intangible assets acquired
|
|
|
|
$
|
14,400
|
|
The allocation of the $25.7 million purchase price of the Second Montana Acquisition was finalized in the second quarter of 2017 and as of the date of acquisition, was comprised of the following:
(In thousands)
|
|
Final Purchase
Price Allocation
|
|
Cash and other current assets
|
|
$
|
404
|
|
Property and equipment
|
|
|
7,839
|
|
Intangible assets
|
|
|
11,400
|
|
Goodwill
|
|
|
6,013
|
|
Total acquired assets
|
|
$
|
25,656
|
|
The intangible assets acquired in the Second Montana Acquisition and the related weighted-average useful lives of definite-lived intangible assets were as follows:
(In thousands)
|
|
Useful
Life
|
|
As Recorded,
at Fair Value
|
|
Customer relationships
|
|
15 years
|
|
$
|
9,100
|
|
Non-competition agreements
|
|
5 years
|
|
|
1,800
|
|
Trade name
|
|
4 years
|
|
|
200
|
|
Other
|
|
15 years
|
|
|
300
|
|
Total intangible assets acquired
|
|
|
|
$
|
11,400
|
|
The goodwill recognized in the Montana Acquisitions was primarily attributable to potential expansion and future development of, and anticipated synergies from, the acquired businesses and is expected to be deductible for income tax purposes. The Company's estimation of the fair value of the assets acquired in the Montana Acquisitions as of the respective dates of the acquisitions was determined based on certain valuations and analyses.
The Company reports the results of operations from each of the Montana Acquisitions, subsequent to their respective closing dates, within its Distributed Gaming segment. For the three months ended June 30, 2017 and 2016, net revenues from the Montana Acquisitions totaled $15.4 million and $12.9 million, respectively. For the six months ended June 30, 2017 and 2016, net revenues from the Montana Acquisitions totaled $30.6 million and $16.9 million, respectively. For each of the three months ended June 30, 2017 and 2016, transaction-related costs for the Montana Acquisitions totaled less than $0.1 million. For each of the six months ended June 30, 2017 and 2016, transaction-related costs for the Montana Acquisitions totaled $0.2 million. All transaction-related costs for the Montana Acquisitions were included in preopening expenses. The Company may incur additional transaction-related costs related to the Montana Acquisitions in future periods. Pro forma information is not being presented as there is no practicable method to
6
calculate pro forma earnings
given that the Montana Acq
uisitions were asset purchases that represented only a component of the businesses of the sellers. As a result, historical financial information obtained would have required significant estimates.
Note 3 – Property and Equipment, Net
The following table summarizes the components of property and equipment, net:
(In thousands)
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
Land
|
|
$
|
12,766
|
|
|
$
|
12,470
|
|
Building and site improvements
|
|
|
88,039
|
|
|
|
77,515
|
|
Furniture and equipment
|
|
|
79,590
|
|
|
|
75,740
|
|
Construction in process
|
|
|
5,057
|
|
|
|
5,246
|
|
Property and equipment
|
|
|
185,452
|
|
|
|
170,971
|
|
Less: Accumulated depreciation
|
|
|
(43,424
|
)
|
|
|
(33,390
|
)
|
Property and equipment, net
|
|
$
|
142,028
|
|
|
$
|
137,581
|
|
Depreciation expense was $5.4 million and $4.9 million for the three months ended June 30, 2017 and 2016, respectively, and $10.0 million and $9.2 million for the six months ended June 30, 2017 and 2016, respectively.
Note 4 – Goodwill and Intangible Assets, Net
Goodwill consisted of the following:
(In thousands)
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
Distributed Gaming
|
|
$
|
97,859
|
|
|
$
|
97,859
|
|
Casinos
|
|
|
7,796
|
|
|
|
7,796
|
|
Total Goodwill
|
|
$
|
105,655
|
|
|
$
|
105,655
|
|
Goodwill was acquired in connection with the 2015 acquisition of Sartini Gaming, Inc. through a merger transaction (the “Merger”), as well as the Montana Acquisitions. See Note 2,
Acquisitions
, for a description of the intangible assets acquired through the Montana Acquisitions.
Intangible assets, net, consisted of the following:
|
|
June 30, 2017
|
|
|
|
Weighted-
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
|
Average Life
|
|
Carrying
|
|
|
Cumulative
|
|
|
Intangible
|
|
(In thousands)
|
|
Remaining
|
|
Value
|
|
|
Amortization
|
|
|
Assets, Net
|
|
Indefinite-lived intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gaming licenses
|
|
Indefinite
|
|
$
|
960
|
|
|
$
|
—
|
|
|
$
|
960
|
|
Trade names
|
|
Indefinite
|
|
|
12,200
|
|
|
|
—
|
|
|
|
12,200
|
|
Other
|
|
Indefinite
|
|
|
185
|
|
|
|
—
|
|
|
|
185
|
|
|
|
|
|
|
13,345
|
|
|
|
—
|
|
|
|
13,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortizing intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
12.7 years
|
|
|
78,100
|
|
|
|
(9,654
|
)
|
|
|
68,446
|
|
Player relationships
|
|
9.9 years
|
|
|
7,300
|
|
|
|
(1,232
|
)
|
|
|
6,068
|
|
Gaming license
|
|
10.8 years
|
|
|
2,100
|
|
|
|
(577
|
)
|
|
|
1,523
|
|
Non-compete agreements
|
|
3.5 years
|
|
|
6,000
|
|
|
|
(1,813
|
)
|
|
|
4,187
|
|
Other
|
|
8.7 years
|
|
|
1,769
|
|
|
|
(421
|
)
|
|
|
1,348
|
|
|
|
|
|
|
95,269
|
|
|
|
(13,697
|
)
|
|
|
81,572
|
|
Balance, June 30, 2017
|
|
|
|
$
|
108,614
|
|
|
$
|
(13,697
|
)
|
|
$
|
94,917
|
|
7
|
|
December 31, 2016
|
|
|
|
Weighted-
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
|
Average Life
|
|
Carrying
|
|
|
Cumulative
|
|
|
Intangible
|
|
(In thousands)
|
|
Remaining
|
|
Value
|
|
|
Amortization
|
|
|
Assets, Net
|
|
Indefinite-lived intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gaming licenses
|
|
Indefinite
|
|
$
|
960
|
|
|
$
|
—
|
|
|
$
|
960
|
|
Trade names
|
|
Indefinite
|
|
|
12,200
|
|
|
|
—
|
|
|
|
12,200
|
|
Other
|
|
Indefinite
|
|
|
110
|
|
|
|
—
|
|
|
|
110
|
|
|
|
|
|
|
13,270
|
|
|
|
—
|
|
|
|
13,270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortizing intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
13.2 years
|
|
|
78,100
|
|
|
|
(6,932
|
)
|
|
|
71,168
|
|
Player relationships
|
|
10.4 years
|
|
|
7,300
|
|
|
|
(910
|
)
|
|
|
6,390
|
|
Gaming license
|
|
11.4 years
|
|
|
2,100
|
|
|
|
(508
|
)
|
|
|
1,592
|
|
Non-compete agreements
|
|
4.0 years
|
|
|
6,000
|
|
|
|
(1,168
|
)
|
|
|
4,832
|
|
Other
|
|
9.5 years
|
|
|
1,648
|
|
|
|
(297
|
)
|
|
|
1,351
|
|
|
|
|
|
|
95,148
|
|
|
|
(9,815
|
)
|
|
|
85,333
|
|
Balance, December 31, 2016
|
|
|
|
$
|
108,418
|
|
|
$
|
(9,815
|
)
|
|
$
|
98,603
|
|
Total amortization expense related to intangible assets was $2.0 million for both the three months ended June 30, 2017 and 2016, and $3.9 million and $3.4 million for the six months ended June 30, 2017 and 2016, respectively.
Note 5 – Long-Term Debt
Long-term debt, net was comprised of the following:
(In thousands)
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
Term Loans
|
|
$
|
144,000
|
|
|
$
|
150,000
|
|
Revolving Credit Facility
|
|
|
27,000
|
|
|
|
30,000
|
|
Capital lease obligations
|
|
|
4,520
|
|
|
|
1,970
|
|
Notes payable
|
|
|
3,202
|
|
|
|
3,777
|
|
Total long-term debt
|
|
|
178,722
|
|
|
|
185,747
|
|
Less: Unamortized debt issuance costs
|
|
|
(1,928
|
)
|
|
|
(2,305
|
)
|
|
|
|
176,794
|
|
|
|
183,442
|
|
Less: Current portion, net of unamortized debt issuance costs
|
|
|
(15,401
|
)
|
|
|
(15,752
|
)
|
Long-term debt, net
|
|
$
|
161,393
|
|
|
$
|
167,690
|
|
Credit Agreement
As of June 30, 2017, the facilities under the Company’s Credit Agreement with Capital One, National Association (as administrative agent) and the lenders named therein (the “Credit Agreement”) consisted of $160.0 million in senior secured term loans (“Term Loans”) and a $50.0 million Revolving Credit Facility. The facilities mature on July 31, 2020. Borrowings under the Credit Agreement bear interest, at the Company’s option, at either (1) the highest of the federal funds rate plus 0.50%, the Eurodollar rate for a one-month interest period plus 1.00%, or the administrative agent’s prime rate as announced from time to time, or (2) the Eurodollar rate for the applicable interest period, plus in each case, an applicable margin based on the Company’s leverage ratio. For the six months ended June 30, 2017 and 2016, the weighted-average effective interest rate on the Company’s outstanding borrowings under the Credit Agreement was approximately 3.4%.
The Company was in compliance with its financial covenants under the Credit Agreement as of June 30, 2017.
8
Note 6 – Promotional Allowances
The retail value of food and beverages, rooms and other services furnished to customers without charge, including coupons for discounts when redeemed, is included in gross revenues and then deducted as promotional allowances. The estimated retail value of the promotional allowances was as follows:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
(In thousands)
|
|
June 30, 2017
|
|
|
June 30, 2016
|
|
|
June 30, 2017
|
|
|
June 30, 2016
|
|
Food and beverage
|
|
$
|
4,870
|
|
|
$
|
4,179
|
|
|
$
|
9,705
|
|
|
$
|
8,197
|
|
Rooms
|
|
|
627
|
|
|
|
504
|
|
|
|
1,160
|
|
|
|
959
|
|
Other
|
|
|
172
|
|
|
|
221
|
|
|
|
293
|
|
|
|
294
|
|
Total promotional allowances
|
|
$
|
5,669
|
|
|
$
|
4,904
|
|
|
$
|
11,158
|
|
|
$
|
9,450
|
|
The estimated cost of providing these promotional allowances, which is primarily included in gaming expenses, was as follows:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
(In thousands)
|
|
June 30, 2017
|
|
|
June 30, 2016
|
|
|
June 30, 2017
|
|
|
June 30, 2016
|
|
Food and beverage
|
|
$
|
3,423
|
|
|
$
|
3,089
|
|
|
$
|
6,781
|
|
|
$
|
6,103
|
|
Rooms
|
|
|
188
|
|
|
|
190
|
|
|
|
352
|
|
|
|
381
|
|
Other
|
|
|
33
|
|
|
|
135
|
|
|
|
116
|
|
|
|
216
|
|
Total estimated cost of promotional allowances
|
|
$
|
3,644
|
|
|
$
|
3,414
|
|
|
$
|
7,249
|
|
|
$
|
6,700
|
|
Note 7 – Stock Incentive Plans and Share-Based Compensation
Overview
On August 27, 2015, the Board of Directors of the Company approved the Golden Entertainment, Inc. 2015 Incentive Award Plan (the “2015 Plan”), which was approved by the Company’s shareholders at the Company’s 2016 annual meeting. The 2015 Plan authorizes the issuance of stock options, restricted stock, restricted stock units (“RSUs”), dividend equivalents, stock payment awards, stock appreciation rights, performance bonus awards and other incentive awards. The 2015 Plan authorizes the grant of awards to employees, non-employee directors and consultants of the Company and its subsidiaries. Options generally have a ten-year term. Except as provided in any employment agreement between the Company and the employee, if an employee is terminated (voluntarily or involuntarily), any unvested options as of the date of termination will be forfeited.
The maximum number of shares of the Company’s common stock for which grants may be made under the 2015 Plan is 2.25 million shares, plus an annual increase on each January 1 during the ten-year term of the 2015 Plan equal to the lesser of 1.8 million shares, 4% of the total shares of the Company’s common stock outstanding (on an as-converted basis) and such smaller amount as may be determined by the Board in its sole discretion. In addition, the maximum aggregate number of shares of common stock that may be subject to awards granted to any one participant during a calendar year is 2.0 million shares. The annual increase on January 1, 2017 was 889,259 shares.
The 2015 Plan provides that no stock option or stock appreciation right (even if vested) may be exercised prior to the earlier of August 1, 2018 or immediately prior to the consummation of a change in control of the Company that would result in an “ownership change” as defined in Section 382 of the Internal Revenue Code of 1986, as amended. There were 3,644,928 stock options outstanding under the 2015 Plan as of June 30, 2017, of which 870,205 had vested. As of June 30, 2017, a total of 227,744 shares of the Company’s common stock remained available for grants of awards under the 2015 Plan.
In June 2007, the Company’s shareholders approved the 2007 Lakes Stock Option and Compensation Plan (the “2007 Plan”), which is authorized to grant a total of 1.25 million shares of the Company’s common stock. Vested options are exercisable for ten years from the date of grant; however, if the employee is terminated (voluntarily or involuntarily), any unvested options as of the date of termination will be forfeited. There were 673,675 stock options outstanding under the 2007 Plan as of June 30, 2017, 391,040 of which had vested. As of June 30, 2017, no shares of the Company’s common stock remained available for grants of awards under the 2007 Plan.
Stock Options
The Company uses the Black-Scholes option pricing model to estimate the fair value and compensation cost associated with employee incentive stock options, which requires considerable judgment, including estimating stock price volatility, expected option life and forfeiture rates. The Company develops estimates based on historical data and market information, which can change significantly over time. There were 130,570 and 977,570 options granted in the three and six months ended June 30, 2017, respectively, with weighted-average grant date fair values of $9.42 and $6.36 per share, respectively. There were 63,070 and 223,070 stock options
9
granted in the three and six months ended June 30, 2016, respectively, with weighted-average grant date fair values of $4.99 and $4.2
4 per share, respectively.
Share-based compensation expense related to stock options was $1.2 million and $0.5 million for the three months ended June 30, 2017 and 2016, respectively, and $2.2 million and $0.9 million for the six months ended June 30, 2017 and 2016, respectively.
The following table summarizes the Company’s stock option activity during the six months ended June 30, 2017 and 2016:
|
|
Number of Common Shares
|
|
|
Weighted-
|
|
|
|
Options
|
|
|
|
|
|
|
Available
|
|
|
Average
|
|
|
|
Outstanding
|
|
|
Exercisable
|
|
|
for Grant
|
|
|
Exercise Price
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2016
|
|
|
3,402,481
|
|
|
|
411,029
|
|
|
|
274,596
|
|
|
$
|
9.02
|
|
Authorized
|
|
|
—
|
|
|
|
|
|
|
|
889,259
|
|
|
|
—
|
|
Granted
|
|
|
977,570
|
|
|
|
|
|
|
|
(977,570
|
)
|
|
|
14.25
|
|
Exercised
|
|
|
(19,989
|
)
|
|
|
|
|
|
|
—
|
|
|
|
7.70
|
|
Cancelled
|
|
|
(41,459
|
)
|
|
|
|
|
|
|
41,459
|
|
|
|
11.94
|
|
Balance at June 30, 2017
|
|
|
4,318,603
|
|
|
|
391,040
|
|
|
|
227,744
|
|
|
$
|
10.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2015
|
|
|
2,419,529
|
|
|
|
724,529
|
|
|
|
837,635
|
|
|
$
|
8.16
|
|
Authorized
|
|
|
—
|
|
|
|
|
|
|
|
874,709
|
|
|
|
—
|
|
Granted
|
|
|
223,070
|
|
|
|
|
|
|
|
(223,070
|
)
|
|
|
11.19
|
|
Exercised
|
|
|
(294,956
|
)
|
|
|
|
|
|
|
—
|
|
|
|
11.21
|
|
Cancelled
|
|
|
(10,000
|
)
|
|
|
|
|
|
|
10,000
|
|
|
|
9.33
|
|
Balance at June 30, 2016
|
|
|
2,337,643
|
|
|
|
429,573
|
|
|
|
1,499,274
|
|
|
$
|
8.75
|
|
As of June 30, 2017, the outstanding stock options had a weighted-average remaining contractual life of 7.9 years, weighted-average exercise price of $10.19 per share and an aggregate intrinsic value of $45.4 million. As of June 30, 2017, the outstanding exercisable stock options had a weighted-average remaining contractual life of 1.3 years, weighted-average exercise price of $4.34 per share and an aggregate intrinsic value of $6.4 million.
There were no options exercised during the three months ended June 30, 2017. During the three months ended June 30, 2016, there was 135,330 options exercised. There were 19,989 and 294,956 options exercised during the six months ended June 30, 2017 and 2016, respectively. There was no intrinsic value of options exercised during the three months ended June 30, 2017 and $0.9 million total intrinsic value of options exercised during the three months ended June 30, 2016. The total intrinsic value of options exercised was $0.1 million and $1.6 million for the six months ended June 30, 2017 and 2016, respectively. The Company’s unrecognized share-based compensation expense related to stock options was approximately $14.3 million as of June 30, 2017, which is expected to be recognized over a weighted-average period of 2.9 years.
The Company issues new shares of common stock upon the exercise of stock options.
Restricted Stock Units
There were 70,648 RSUs outstanding under the 2015 Plan as of June 30, 2017, none of which had vested. Share-based compensation expense related to RSUs was $0.8 million and $1.2 million for the three and six months ended June 30, 2017, respectively. There was no RSU activity during the six months ended June 30, 2016. As of June 30, 2017, there was approximately $0.4 million of total unrecognized share-based compensation expense related to unvested RSUs, all of which is expected to be recognized in 2017.
Note 8 – Income Taxes
The Company’s effective tax rate was (67.5)% and 11.7% for the six months ended June 30, 2017 and 2016, respectively. For the six months ended June 30, 2017 and 2016, the effective tax rate differed from the federal tax rate of 35% due to partial release of the valuation allowance for deferred tax assets and changes in the valuation allowance for deferred taxes, respectively.
Income tax benefit was $2.8 million for the six months ended June 30, 2017, which was attributed primarily to a partial release of valuation allowance. Income tax expense was $0.7 million for the six months ended June 30, 2016, which was attributed primarily to tax amortization of indefinite-lived intangibles and measurement period adjustments to goodwill.
Deferred tax assets are evaluated by considering historical levels of income, estimates of future taxable income and the impact of tax planning strategies. The Company's financial results include the reversal of a portion of the valuation allowance recorded against the deferred tax assets of the Company. This reversal resulted in the recognition of a $2.8 million income tax benefit for the six months
10
ended
June 30, 2017
. The Company has performed a continuing evaluation of its deferred tax asset valuation allowance on a quarterly basis. The Company concluded that, eff
ective December 31, 2016, it is more likely than not that the Company will generate sufficient taxable income within the applicable net operating loss carry-forward periods to realize a portion of its deferred tax assets. This conclusion, and the resulting
partial reversal of the deferred tax asset valuation allowance, is based upon consideration of several factors, including the Company's completion of
seven
consecutive quarters of profitability, its demonstrated ability in such quarters to meet or exceed
budgets, and its forecast of future profitability.
The Company's income taxes receivable was $0.2 million as of June 30, 2017, and $2.3 million as of December 31, 2016. The decrease in income taxes receivable was primarily due to the collection of a $2.2 million tax refund which was released in connection with the settlement of an IRS audit related to 2012 taxable losses carried back to a prior year.
In connection with the Merger, on July 31, 2015, the Company entered into a NOL Preservation Agreement with The Blake L. Sartini and Delise F. Sartini Family Trust (the “Sartini Trust”), Lyle A. Berman (a director and shareholder of the Company), as well as certain other shareholders of the Company affiliated with Mr. Berman or that are trusts for which Neil Sell, a director of the Company, serves as trustee. The NOL Preservation Agreement is intended to help minimize the risk of an “ownership change,” within the meaning of Section 382 of the Internal Revenue Code of 1986, as amended (“Section 382”), that would limit the Company’s ability to utilize its federal net operating loss carryforwards to offset future taxable income.
As of June 30, 2017, the Company had approximately $62.2 million of net operating loss carryforwards (“NOLs”) which begin to expire in 2032. These NOLs have the potential to be used to offset future ordinary taxable income and reduce future cash tax liabilities. However, under the Purchase Agreement for the American acquisition, the Company has agreed to issue 4,046,494 shares of its common stock to ACEP Holdings at the closing of the Transaction. The Company anticipates that the issuance of such shares will result in an “ownership change” under Section 382 that will generally limit the amount of NOLs the Company can utilize annually. Following the closing of the Transaction, the amount of NOLs the Company can utilize in a given year will be limited to an amount equal to the aggregate fair market value of the Company’s common stock immediately prior to the ownership change, multiplied by the long-term exempt interest rate in effect for the month of the ownership change. As of June 30, 2017, the long-term exempt interest rate was 2.09%.
Note 9 – Financial Instruments and Fair Value Measurements
Overview
The authoritative accounting guidance for fair value measurements specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company's market assumptions. These inputs create the following fair value hierarchy:
|
•
|
Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
|
|
•
|
Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
|
|
•
|
Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions.
|
Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Thus, assets and liabilities categorized as Level 3 may be measured at fair value using inputs that are observable (Levels 1 and 2) and unobservable (Level 3). Management's assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of assets and liabilities and their placement within the fair value hierarchy levels.
Balances Measured at Fair Value
For the Company’s cash and cash equivalents, accounts receivable and payable, short-term borrowings and accrued and other current liabilities, the carrying amounts approximate fair value because of the short duration of these financial instruments. As of June 30, 2017 and December 31, 2016, the fair value of the Company’s long-term debt approximated the carrying value based upon the Company’s expected borrowing rate for debt with similar remaining maturities and comparable risk.
In connection with the Montana Acquisitions, the Company recognized the acquired assets at fair value. For the Initial Montana Acquisition, these amounts were finalized during the first quarter of 2017. The Second Montana Acquisition amounts were finalized during the second quarter of 2017. All amounts are recognized as Level 3 measurements due to the subjective nature of the unobservable inputs used to determine the fair values. Additionally, in connection with the Initial Montana Acquisition, the Company is required to pay the sellers contingent consideration of up to a total of $2.0 million in cash paid in four quarterly payments beginning in September 2017, subject to certain potential adjustments based upon the availability of certain gaming machines and, if applicable, the performance of replacement games. The fair value of the Company’s contingent consideration recorded in connection with the Initial Montana Acquisition was estimated to be $2.0 million as of June 30, 2017 and is recorded in “Other accrued expenses” and
11
“Other long-term obligations” on the Company’s consolidated balance sheet. Changes to the estimated fair value of the co
ntingent consideration will be recognized in earnings of the Company. See Note 2,
Acquisitions
, for a discussion of the Montana Acquisitions.
Balances Measured at Fair Value on a Non-recurring Basis
The identified intangible assets acquired in connection with the Initial Montana Acquisition and the Second Montana Acquisition have been valued using unobservable (Level 3) inputs at a fair value of $14.4 million and $11.4 million, respectively (see Note 2,
Acquisitions
).
The Company owns various parcels of developed and undeveloped land relating to its casinos in Pahrump, Nevada. The Company performs an impairment analysis on the land it owns at least quarterly and determined that no impairment had occurred as of June 30, 2017 and December 31, 2016.
Note 10 – Commitments and Contingencies
Agreement to Acquire American Casino & Entertainment Properties, LLC
On June 10, 2017, the Company entered into a membership interest purchase agreement (the “Purchase Agreement”) to acquire all of the outstanding equity interest of American Casino & Entertainment Properties, LLC (“American”) (the “Transaction”). The selling members include W2007/ACEP Managers Voteco, LLC (“ACEP Voteco”) and W2007/ACEP Holdings, LLC (“ACEP Holdings” and, together with ACEP Voteco, the “Sellers”), affiliates of Whitehall Street Real Estate Fund 2007, a real estate private equity fund managed by the Merchant Banking Division of Goldman Sachs & Co. LLC. The aggregate consideration to be paid by the Company under the Purchase Agreement is $850 million, consisting of $781 million in cash and 4,046,494 shares of Golden common stock, subject to customary adjustments relating to the net working capital and indebtedness of American as of the closing of the Transaction.
The Company also entered into a debt financing commitment letter (the “Debt Commitment Letter”) and obtained financing commitments (the “Debt Commitments”) that includes senior secured first and second lien credit facilities in the amount of $900 million and $200 million, respectively. The first lien facility includes an $800 million term loan and a $100 million unfunded revolving credit facility. The availability of the borrowing under the Debt Commitments is subject to the satisfaction of certain customary conditions. The use of the aggregate proceeds includes paying the cash portion of the purchase price, fees and expenses incurred by the Company in connection with the Transaction, and refinancing of the Company’s existing senior credit facility. The consortium of lenders includes JPMorgan Chase Bank, N.A. (“JPMorgan”), Credit Suisse AG and Credit Suisse Securities (USA) LLC (together, “Credit Suisse”), Macquarie Capital (USA) Inc. and Macquarie Capital Funding LLC (together, “Macquarie”), and Morgan Stanley Senior Funding, Inc. (“Morgan Stanley” and together with JPMorgan, Credit Suisse and Macquarie, the “Financing Sources”).
American owns and operates four casino hotel properties in Nevada, comprising the Stratosphere Casino, Hotel & Tower, Arizona Charlie’s Decatur and Arizona Charlie’s Boulder in Las Vegas, and the Aquarius Casino Resort in Laughlin. Upon completion of the Transaction, the Company will operate over 15,800 slot machines, 114 table games and more than 5,100 hotel rooms across eight casino properties and almost 1,000 distributed gaming locations.
The consummation of the Transaction is subject to customary closing conditions, including, among others, the expiration of any applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act, obtaining applicable gaming authority regulatory approvals, the absence of a material adverse effect regarding American and performance and compliance in all material respects with agreements and covenants contained in the Purchase Agreement. The obligation of the Company to consummate the Transaction is not subject to a financing condition. The Transaction is expected to close in the fourth quarter of 2017.
The Purchase Agreement includes customary termination provisions for both the Company and the Sellers. The Sellers will be entitled to receive a termination fee from the Company equal to $20 million under certain circumstances. In addition, following a termination each party will remain liable to the other for any willful material breach of the provisions of the Purchase Agreement. Both the Company and the Sellers have the right to terminate the Purchase Agreement if the closing has not occurred by January 10, 2018, subject to the right of either party to extend such date to March 10, 2018 if all of the conditions to closing the Transaction have been satisfied other than the required approvals of gaming authorities and/or the expiration of the waiting period under the Hart-Scott-Rodino Act.
In connection with the closing of the Transaction, the Company and ACEP Holdings will enter into certain additional ancillary agreements which are attached as exhibits to the Purchase Agreement, including a stockholder’s agreement that will provide for, among other things, a 90-day restriction on sales of Golden common stock by the Sellers (subject to certain exceptions) and a standstill agreement, and a registration rights agreement with respect to the shares of Golden common stock to be issued at the closing and certain other customary agreements.
The foregoing descriptions of the Purchase Agreement and the Debt Commitment Letter are not complete and are qualified in their entirety by reference to the full text of the Purchase Agreement and the Debt Commitment Letter.
12
Re
nt Expense and Future Minimum Lease Payments
The Company leases its branded tavern locations, office headquarters building, equipment and vehicles under noncancelable operating leases that are not subject to contingent rents. The original terms of the current branded tavern location leases range from one to 15 years with various renewal options from one to 15 years. The Company has operating leases with related parties for certain of its tavern locations and its office headquarters building. See Note 12,
Related Party Transactions
, for more detail. Gaming device placement contracts in the form of space lease agreements are also accounted for as operating leases. Under space lease agreements, the Company pays fixed monthly rental fees for the right to install, maintain and operate its gaming devices at business locations, which are recorded in gaming expenses.
Operating lease rental expense, which is calculated on a straight-line basis, net of surcharge revenue, associated with all operating leases was as follows:
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
(In thousands)
|
|
June 30, 2017
|
|
|
June 30, 2016
|
|
|
June 30, 2017
|
|
|
June 30, 2016
|
|
Rent expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Space lease agreements
|
|
$
|
9,112
|
|
|
$
|
10,309
|
|
|
$
|
18,639
|
|
|
$
|
20,446
|
|
Related party leases
|
|
|
505
|
|
|
|
703
|
|
|
|
1,081
|
|
|
|
1,405
|
|
Other operating leases
|
|
|
3,343
|
|
|
|
2,814
|
|
|
|
6,528
|
|
|
|
5,541
|
|
|
|
$
|
12,960
|
|
|
$
|
13,826
|
|
|
$
|
26,248
|
|
|
$
|
27,392
|
|
As of June 30, 2017, future minimum operating lease payments, excluding contingent rents, were as follows:
|
|
Remainder
of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
Thereafter
|
|
|
Total
|
|
Minimum operating lease payments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Space lease agreements
|
|
$
|
14,111
|
|
|
$
|
27,304
|
|
|
$
|
26,282
|
|
|
$
|
6,648
|
|
|
$
|
2,966
|
|
|
$
|
1,820
|
|
|
$
|
79,131
|
|
Related party leases
|
|
|
939
|
|
|
|
1,890
|
|
|
|
1,902
|
|
|
|
1,914
|
|
|
|
1,927
|
|
|
|
9,109
|
|
|
|
17,681
|
|
Other operating leases
|
|
|
5,972
|
|
|
|
11,087
|
|
|
|
10,472
|
|
|
|
10,322
|
|
|
|
9,687
|
|
|
|
86,153
|
|
|
|
133,693
|
|
|
|
$
|
21,022
|
|
|
$
|
40,281
|
|
|
$
|
38,656
|
|
|
$
|
18,884
|
|
|
$
|
14,580
|
|
|
$
|
97,082
|
|
|
$
|
230,505
|
|
The current and long-term obligations under capital leases are included in “Current portion of long-term debt, net” and “Long-term debt, net,” respectively. The majority of the capital leases relate to vehicles with minimum lease payment terms of three to four years. During the first quarter of 2017, the Company entered into a capital lease agreement with a related party for one of its tavern locations. See Note 12,
Related Party Transactions
, for more detail.
As of June 30, 2017, future minimum capital lease payments, excluding contingent rents, were as follows:
|
|
Remainder
of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
|
|
Thereafter
|
|
|
Total
|
|
Minimum capital lease payments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Furniture and equipment
|
|
$
|
368
|
|
|
$
|
786
|
|
|
$
|
775
|
|
|
$
|
717
|
|
|
$
|
332
|
|
|
|
|
$
|
–
|
|
|
$
|
2,978
|
|
Related party property leases
|
|
|
75
|
|
|
|
150
|
|
|
|
150
|
|
|
|
150
|
|
|
|
150
|
|
|
|
|
|
1,751
|
|
|
|
2,426
|
|
Less: Amounts representing interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(884
|
)
|
Total obligations under capital leases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,520
|
|
Participation and Revenue Share Agreements
The Company also enters into gaming device placement contracts in the form of participation and revenue share agreements. Under revenue share agreements, the Company pays the business location a percentage of the gaming revenue generated from the Company’s gaming devices placed at the location, rather than a fixed monthly rental fee. Under participation agreements, the business location holds the applicable gaming license and retains a percentage of the gaming revenue that it generates from the Company’s gaming devices. During the three and six months ended June 30, 2017, the total contingent payments recognized by the Company (recorded in gaming expenses) under revenue share and participation agreements were $36.7 million and $71.5 million, respectively, including $0.3 million and $0.6 million, respectively, under revenue share and participation agreements with related parties, as described in Note 12,
Related Party Transactions
. During the three and six months ended June 30, 2016, the total contingent payments recognized by the Company (recorded in gaming expenses) under revenue share and participation agreements were $32.7 million and $60.9 million, respectively, including
$0.3 million and $0.8 million, respectively, under revenue share and participation agreements with related parties
.
13
The Company also enters into amusement device and ATM placement contracts in the form of revenue share agreements. Under these revenue share agreements, the Company pays the business location a percentage of the non-gaming revenue generated from the Compan
y’s amusement devices and ATMs placed at the location. During the three months ended June 30, 2017 and 2016, the total contingent payments recognized by the Company (recorded in other operating expenses) for amusement devices and ATMs under such agreements
were $0.4 million and $0.3 million, respectively. During the six months ended June 30, 2017 and 2016, the total contingent payments recognized by the Company (recorded in other operating expenses) for amusement devices and ATMs under such agreements were
$0.8 million and $0.3 million, respectively.
Employment Agreements
The Company has entered into at-will employment agreements with each of the Company’s executive officers. Under each employment agreement, in addition to the executive’s annual base salary, the executive is entitled to participate in the Company’s incentive compensation programs applicable to executive officers of the Company. The executives are also eligible to participate in all health benefits, insurance programs, pension and retirement plans and other employee benefit and compensation arrangements. Each executive is also provided with other benefits as set forth in his employment agreement. In the event of a termination without “cause” or a “constructive termination” of the Company’s executive officers (as defined in their respective employment agreements), the Company could be liable for estimated severance payments of up to $6.1 million for Mr. Sartini, $1.9 million for Stephen A. Arcana, $1.9 million for Charles H. Protell, $1.6 million for Sean T. Higgins, $0.7 million for Blake L. Sartini II, and $0.4 million for Gary A. Vecchiarelli (assuming each officer’s respective annual salary and health benefit costs as of June 30, 2017 are the amounts in effect at the time of termination and excluding potential expense related to acceleration of stock options).
Miscellaneous Legal Matters
From time to time, the Company is involved in a variety of lawsuits, claims, investigations and other legal proceedings arising in the ordinary course of business. Although lawsuits, claims, investigations and other legal proceedings are inherently uncertain and their results cannot be predicted with certainty, the Company believes that the resolution of its currently pending matters will not have a material adverse effect on its business, financial condition, results of operations or liquidity. In addition, it is possible that an unfavorable resolution of one or more such proceedings could in the future materially and adversely affect the Company’s business, financial condition, results of operations or liquidity in a particular period.
In February and April 2017, several former employees filed two separate purported class action lawsuits against the Company in the District Court of Clark County, Nevada, and on behalf of similarly situated individuals employed by the Company in the State of Nevada. The lawsuits allege the Company violated certain Nevada labor laws including payment of an hourly wage below the statutory minimum wage without providing a qualified health insurance plan and an associated failure to pay proper overtime compensation. The complaints seek, on behalf of the plaintiffs and members of the putative class, an unspecified amount of damages (including punitive damages), injunctive and equitable relief, and an award of attorneys’ fees, interest and costs. These cases are at an early stage in the proceedings, and the Company is therefore unable to make a reasonable estimate of the probable loss or range of losses, if any, that might arise from these matters. Therefore, the Company has not recorded any amount for the claims as of the date of this filing. While legal proceedings are inherently unpredictable and no assurance can be given as to the ultimate outcome of these matters, based on management’s current understanding of the relevant facts and circumstances, the Company believes that these proceedings should not have a material adverse effect on the Company’s financial position, results of operations or cash flows.
Note 11 – Segment Information
The Company conducts its business through two reportable operating segments: Distributed Gaming and Casinos. The Company’s Distributed Gaming segment involves the installation, maintenance and operation of gaming and amusement devices in certain strategic, high-traffic, non-casino locations (such as grocery stores, convenience stores, restaurants, bars, taverns, saloons and liquor stores) in Nevada and Montana, and the operation of traditional, branded taverns targeting local patrons, primarily in the greater Las Vegas, Nevada metropolitan area. The Company’s Casinos segment includes results of operations and assets related to Rocky Gap in Flintstone, Maryland and its three casino properties in Pahrump, Nevada. The Corporate and Other segment includes the Company’s cash and cash equivalents and corporate overhead. Costs recorded in the Corporate and Other segment have not been allocated to the Company’s reportable operating segments because these costs are not easily allocable and to do so would not be practical.
Results of Operations - Segment Net Income (Loss), Net Revenues and Adjusted EBITDA
The Company evaluated its segments’ profitability based upon Adjusted EBITDA, which represents earnings before interest expense and other non-operating income (expense), income taxes, depreciation and amortization, preopening expenses, acquisition and merger expenses, regulatory licensing costs, litigation expense, share-based compensation expense, executive severance and sign-on bonuses, impairments and other gains and losses, as applicable.
14
The following tables set forth, for the periods indicated, certain operating data for the Company’s segments, and reconciles Adjusted EBITDA to net income (loss):
|
|
Three Months Ended June 30, 2017
|
|
(In thousands)
|
|
Distributed
Gaming
|
|
|
Casinos
|
|
|
Corporate
and Other
|
|
|
Consolidated
|
|
Net revenues
|
|
$
|
84,187
|
|
|
$
|
26,210
|
|
|
$
|
96
|
|
|
$
|
110,493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
|
13,478
|
|
|
|
6,934
|
|
|
|
(5,409
|
)
|
|
|
15,003
|
|
Acquisition expenses
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,066
|
)
|
|
|
(2,066
|
)
|
Share-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,322
|
)
|
|
|
(2,322
|
)
|
Preopening expenses
|
|
|
(400
|
)
|
|
|
—
|
|
|
|
(174
|
)
|
|
|
(574
|
)
|
Litigation
|
|
|
—
|
|
|
|
—
|
|
|
|
(55
|
)
|
|
|
(55
|
)
|
Depreciation and amortization
|
|
|
(4,942
|
)
|
|
|
(2,025
|
)
|
|
|
(441
|
)
|
|
|
(7,408
|
)
|
Income (loss) from operations
|
|
|
8,136
|
|
|
|
4,909
|
|
|
|
(10,467
|
)
|
|
|
2,578
|
|
Non-operating income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(278
|
)
|
|
|
43
|
|
|
|
(1,765
|
)
|
|
|
(2,000
|
)
|
Total non-operating income (expense), net
|
|
|
(278
|
)
|
|
|
43
|
|
|
|
(1,765
|
)
|
|
|
(2,000
|
)
|
Income (loss) before income tax benefit (provision)
|
|
|
7,858
|
|
|
|
4,952
|
|
|
|
(12,232
|
)
|
|
|
578
|
|
Income tax benefit
|
|
|
—
|
|
|
|
—
|
|
|
|
1,135
|
|
|
|
1,135
|
|
Net income (loss)
|
|
$
|
7,858
|
|
|
$
|
4,952
|
|
|
$
|
(11,097
|
)
|
|
$
|
1,713
|
|
|
|
Three Months Ended June 30, 2016
|
|
(In thousands)
|
|
Distributed
Gaming
|
|
|
Casinos
|
|
|
Corporate
and Other
|
|
|
Consolidated
|
|
Net revenues
|
|
$
|
77,765
|
|
|
$
|
24,709
|
|
|
$
|
84
|
|
|
$
|
102,558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
|
11,361
|
|
|
|
6,843
|
|
|
|
(4,903
|
)
|
|
|
13,301
|
|
Merger expenses
|
|
|
—
|
|
|
|
—
|
|
|
|
(434
|
)
|
|
|
(434
|
)
|
Share-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
(450
|
)
|
|
|
(450
|
)
|
Preopening expenses
|
|
|
(429
|
)
|
|
|
—
|
|
|
|
(90
|
)
|
|
|
(519
|
)
|
Depreciation and amortization
|
|
|
(4,597
|
)
|
|
|
(1,916
|
)
|
|
|
(334
|
)
|
|
|
(6,847
|
)
|
Income (loss) from operations
|
|
|
6,335
|
|
|
|
4,927
|
|
|
|
(6,211
|
)
|
|
|
5,051
|
|
Non-operating income expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(40
|
)
|
|
|
(1
|
)
|
|
|
(1,599
|
)
|
|
|
(1,640
|
)
|
Total non-operating expense, net
|
|
|
(40
|
)
|
|
|
(1
|
)
|
|
|
(1,599
|
)
|
|
|
(1,640
|
)
|
Income (loss) before income tax provision
|
|
|
6,295
|
|
|
|
4,926
|
|
|
|
(7,810
|
)
|
|
|
3,411
|
|
Income tax provision
|
|
|
—
|
|
|
|
—
|
|
|
|
(611
|
)
|
|
|
(611
|
)
|
Net income (loss)
|
|
$
|
6,295
|
|
|
$
|
4,926
|
|
|
$
|
(8,421
|
)
|
|
$
|
2,800
|
|
15
|
|
Six Months Ended June 30, 2017
|
|
(In thousands)
|
|
Distributed
Gaming
|
|
|
Casinos
|
|
|
Corporate
and Other
|
|
|
Consolidated
|
|
Net revenues
|
|
$
|
166,446
|
|
|
$
|
50,518
|
|
|
$
|
175
|
|
|
$
|
217,139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
|
26,584
|
|
|
|
13,236
|
|
|
|
(11,248
|
)
|
|
|
28,572
|
|
Acquisition expenses
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,066
|
)
|
|
|
(2,066
|
)
|
Share-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
(3,749
|
)
|
|
|
(3,749
|
)
|
Preopening expenses
|
|
|
(609
|
)
|
|
|
—
|
|
|
|
(237
|
)
|
|
|
(846
|
)
|
Litigation
|
|
|
—
|
|
|
|
—
|
|
|
|
(55
|
)
|
|
|
(55
|
)
|
Depreciation and amortization
|
|
|
(9,576
|
)
|
|
|
(3,596
|
)
|
|
|
(788
|
)
|
|
|
(13,960
|
)
|
Income (loss) from operations
|
|
|
16,399
|
|
|
|
9,640
|
|
|
|
(18,143
|
)
|
|
|
7,896
|
|
Non-operating income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(320
|
)
|
|
|
39
|
|
|
|
(3,402
|
)
|
|
|
(3,683
|
)
|
Total non-operating income (expense), net
|
|
|
(320
|
)
|
|
|
39
|
|
|
|
(3,402
|
)
|
|
|
(3,683
|
)
|
Income (loss) before income tax benefit (provision)
|
|
|
16,079
|
|
|
|
9,679
|
|
|
|
(21,545
|
)
|
|
|
4,213
|
|
Income tax benefit
|
|
|
—
|
|
|
|
—
|
|
|
|
2,842
|
|
|
|
2,842
|
|
Net income (loss)
|
|
$
|
16,079
|
|
|
$
|
9,679
|
|
|
$
|
(18,703
|
)
|
|
$
|
7,055
|
|
|
|
Six Months Ended June 30, 2016
|
|
(In thousands)
|
|
Distributed
Gaming
|
|
|
Casinos
|
|
|
Corporate
and Other
|
|
|
Consolidated
|
|
Net revenues
|
|
$
|
146,349
|
|
|
$
|
47,122
|
|
|
$
|
121
|
|
|
$
|
193,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
|
21,582
|
|
|
|
11,607
|
|
|
|
(9,340
|
)
|
|
|
23,849
|
|
Merger expenses
|
|
|
—
|
|
|
|
—
|
|
|
|
(475
|
)
|
|
|
(475
|
)
|
Share-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
(855
|
)
|
|
|
(855
|
)
|
Preopening expenses
|
|
|
(989
|
)
|
|
|
—
|
|
|
|
(103
|
)
|
|
|
(1,092
|
)
|
Depreciation and amortization
|
|
|
(8,295
|
)
|
|
|
(3,686
|
)
|
|
|
(658
|
)
|
|
|
(12,639
|
)
|
Income (loss) from operations
|
|
|
12,298
|
|
|
|
7,921
|
|
|
|
(11,431
|
)
|
|
|
8,788
|
|
Non-operating income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(75
|
)
|
|
|
(1
|
)
|
|
|
(3,021
|
)
|
|
|
(3,097
|
)
|
Other, net
|
|
|
—
|
|
|
|
—
|
|
|
|
18
|
|
|
|
18
|
|
Total non-operating expense, net
|
|
|
(75
|
)
|
|
|
(1
|
)
|
|
|
(3,003
|
)
|
|
|
(3,079
|
)
|
Income (loss) before income tax provision
|
|
|
12,223
|
|
|
|
7,920
|
|
|
|
(14,434
|
)
|
|
|
5,709
|
|
Income tax provision
|
|
|
—
|
|
|
|
—
|
|
|
|
(670
|
)
|
|
|
(670
|
)
|
Net income (loss)
|
|
$
|
12,223
|
|
|
$
|
7,920
|
|
|
$
|
(15,104
|
)
|
|
$
|
5,039
|
|
Total Segment Assets
The Company's assets by segment consisted of the following amounts:
(In thousands)
|
|
Distributed
Gaming
|
|
|
Casinos
|
|
|
Corporate
and Other
|
|
|
Eliminations
|
|
|
Consolidated
|
|
Balance at June 30, 2017
|
|
$
|
294,202
|
|
|
$
|
104,780
|
|
|
$
|
76,934
|
|
|
$
|
(53,398
|
)
|
|
$
|
422,518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2016
|
|
$
|
294,822
|
|
|
$
|
108,418
|
|
|
$
|
69,236
|
|
|
$
|
(53,398
|
)
|
|
$
|
419,078
|
|
Note 12 – Related Party Transactions
As of June 30, 2017, the Company leased its office headquarters building and one tavern location from a company 33% beneficially owned by Blake L. Sartini, 5% owned by a trust for the benefit of Mr. Sartini’s immediate family members (including Blake L. Sartini, II) for which Mr. Sartini serves as trustee, and 3% beneficially owned by Stephen A. Arcana, and leased two tavern locations, one of which the Company accounts for as a capital lease, from companies controlled by Mr. Sartini through a trust for the benefit of Mr. Sartini’s immediate family members (including Blake L. Sartini, II) for which Mr. Sartini serves as trustee. The lease for the Company’s office headquarters building expires on July 31, 2025. The rent expense for the office headquarters building was $0.3 million during each of the three months ended June 30, 2017 and 2016 and $0.6 million during each of the six months ended June 30, 2017 and 2016. There was no amount owed by the Company with respect to such lease as of June 30, 2017. The leases for the tavern locations have remaining terms of
16
up to 11 years. The rent expense for the
tavern locations was $0.3 million and $0.4 million during the three months ended June 30, 2017 and 2016, respectively, and $0.5 million and $0.8 million during the six months ended June 30, 2017 and 2016, respectively. There was no amount owed by the Comp
any with respect to such leases as of June 30, 2017. Additionally, a portion of the office headquarters building was sublet to a company owned or controlled by Mr. Sartini through February 28, 2017. There was no rental income for the three months ended Jun
e 30, 2017. There was less than $0.1 million of rental income for the three months ended June 30, 3016. Rental income for the sublet portion of the office headquarters building during each of the six months ended June 30, 2017 and 2016 was less than $0.1 m
illion. Mr. Sartini serves as the Chairman of the Board, President and Chief Executive Officer of the Company and is co-trustee of the Sartini Trust, which is a significant shareholder of the Company. Mr. Arcana serves as the Executive Vice President and C
hief Operating Officer of the Company. As of June 30, 2017, all of these related party lease agreements were in place prior to the consummation of the Merger, other than two lease agreements entered into in 2016.
In April 2016, the Audit Committee of the Board of Directors approved the Company’s entering into an aircraft timesharing agreement between the Company and Sartini Enterprises, Inc., a company controlled by Mr. Sartini. Pursuant to the agreement, the Company will reimburse Sartini Enterprises, Inc. for direct costs and expenses incurred by Company employees traveling on Company business on the private aircraft owned by Sartini Enterprises Inc. In June 2017, the Audit Committee approved the Company’s entering into a second aircraft timesharing agreement between the Company and Sartini Enterprises, Inc. on similar terms for a private aircraft leased by Sartini Enterprises Inc. During the three and six months ended June 30, 2017, the Company paid less than $0.1 million, and as of June 30, 2017 the Company owed less than $0.1 million, under the aircraft timesharing agreements.
Mr. Sartini’s son, Blake L. Sartini, II (“Mr. Sartini II”), serves as Senior Vice President of Distributed Gaming of the Company. Mr. Sartini II has an employment agreement that was approved by both the Audit Committee and Compensation Committee of the Board of Directors, which was amended and restated in March 2017. The amended and restated employment agreement provides for an annual base salary of $375,000, of which approximately $180,000 was earned during the six months ended June 30, 2017. Additionally, Mr. Sartini II is eligible for a target annual bonus equal to 50% of his base salary. Mr. Sartini II also participates in the Company's equity award and benefit programs. In 2017, Mr. Sartini II received a grant of 75,000 options to purchase the Company’s common stock with an exercise price of $13.50 per share, which stock options will vest over a four-year period (but pursuant to the 2015 Plan such stock options may not be exercised prior to August 1, 2018 except in limited circumstances).
One of the distributed gaming locations at which the Company’s gaming devices are located is owned in part by Sean T. Higgins, who serves as the Company’s Chief Legal Officer and Executive Vice President of Development, Compliance and Government Affairs. This arrangement was in place prior to Mr. Higgins joining the Company on March 28, 2016. Net revenues and gaming expenses recorded by the Company from the use of the Company’s gaming devices at this location during the period in which the agreement was with a related party were each $0.3 million during each of the three months ended June 30, 2017 and 2016
.
Net revenues and gaming expenses recorded by the Company from the use of the Company’s gaming devices at this location during the period in which the agreement was with a related party were each $0.6 million during the six months ended June 30, 2017, and were each $0.3 million
during the six months ended June 30, 2016.
No amounts were owed to the Company and no amounts were due and payable by the Company related to this arrangement as of June 30, 2017.
Three of the distributed gaming locations at which the Company’s gaming devices are located are owned in part by the spouse of Matthew W. Flandermeyer, the former Executive Vice President and Chief Financial Officer of the Company. Net revenues and gaming expenses recorded by the Company from the use of the Company’s gaming devices at these three locations were $0.4 million and $0.3 million, respect
ively, during the three months ended June 30, 2016 and $0.9 million and $0.8 million, respectively, during the six months ended June 30, 2016.
Mr. Flandermeyer ceased to be an employee of the Company and a related party in November 2016. The gaming expenses recorded by the Company represent amounts retained by the counterparty (with respect to the two locations that are subject to participation agreements) or paid to the counterparty (with respect to the location that is subject to a revenue share agreement) from the operation of the gaming devices. All of the agreements were in place prior to the consummation of the Merger.
One distributed gaming location at which the Company’s gaming devices are located was owned in part by Terrence L. Wright, who serves on the Board of Directors of the Company, who divested his interest in such distributed gaming location in March 2016. Net revenues and gaming expenses recorded by the Company from the use of the Company’s gaming devices at this location during the period in which the agreement was with a related party were $0.1 million during the six months ended June 30, 2016. This agreement was in place prior to the consummation of the Merger.
In connection with the Merger, Lyle A. Berman, who serves on the Board of the Directors of the Company, entered into a three-year consulting agreement with the Company that pays his wholly owned consulting firm $200,000 annually, plus reimbursements for certain health insurance, administrative assistant and office costs. Expenses recorded by the Company for the agreement with Mr. Berman
were less than $0.1 million for
each of the three months ended June 30, 2017 and 2016 and $0.1 million for each of the six months ended June 30, 2017 and 2016. There were no amounts due and payable by the Company
at June 30, 2017
.
Additionally, in connection with the Merger, Timothy J. Cope, who serves on the Board of Directors of the Company entered into a short-term consulting agreement for the period from July 31, 2015 to April 1, 2016 under which Mr. Cope was paid a total of $140,000, plus reimbursement of certain health insurance costs. Expenses recorded by the Company for the agreement with Mr. Cope were $0.1 million for the six months ended June 30, 2016.
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