Attached files
| file | filename |
|---|---|
| EX-32 - EXHIBIT 32 - PlayAGS, Inc. | ex32-2016123110xka.htm |
| EX-31.2 - EXHIBIT 31.2 - PlayAGS, Inc. | ex312-2016123110xka.htm |
| EX-31.1 - EXHIBIT 31.1 - PlayAGS, Inc. | ex311-2016123110xka.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Amendment No. 1)
(Mark One) | |
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
for the fiscal year ended December 31, 2016
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
for the transition period from to .
Commission file number 000-55119
PLAYAGS, INC.
(Exact name of registrant as specified in its charter)
Nevada | 46-3698600 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) | |
5475 S. Decatur Blvd., Ste #100 Las Vegas, NV 89118 |
(Address of principal executive offices) (Zip Code) |
(702) 722-6700 |
(Registrant’s telephone number, including area code) |
AP GAMING HOLDCO, INC. | ||||
(Former name, former address and former fiscal year, if changed since last report)
Securities to be registered pursuant to Section 12(b) of the Act: None
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o (Note: The registrant is a voluntary filer of reports required to be filed under section 13 or 15(d) of the Securities Exchange Act of 1934).
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No x*
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer x (Do not check if a smaller reporting company) | Smaller reporting company o | Emerging growth company x | ||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
Neither the registrant’s voting common stock nor its non-voting common stock are publicly traded, and accordingly have no market value as of June 30, 2016, the last business day of the registrant’s most recently completed second fiscal quarter. As of March 7, 2017, there were 100 shares of the Registrant’s Class A common stock, $.01 par value per share, and 15,041,361 shares of the Registrant’s Class B common stock, $.01 par value per share, outstanding.
*The Company does not have any public stockholders. Accordingly, it does not maintain an investor relations website where Interactive Data Files would be posted.
EXPLANATORY NOTE
PlayAGS, Inc. (formerly, AP Gaming Holdco, Inc.) (the “Company”) is filing this Amendment No. 1 on Form 10-K/A (the “Amendment”) to its annual report on Form 10-K for the fiscal year ended December 31, 2016, which was originally filed with the Securities and Exchange Commission on March 10, 2017 (the “Original Filing”).
During the second and third quarters of 2017, the Company identified the Report of Independent Registered Public Accounting Firm, included in Item 8, “Financial Statements and Supplemental Data,” did not include reference to the financial statement schedules as being management’s responsibility. The exclusion of such reference from the Report of Independent Registered Public Accounting Firm was due to an administrative oversight. The Company concluded, based on its evaluation of both quantitative and qualitative factors, that this correction was not material to any of its previously issued consolidated financial statements. In addition, the Company elected to make certain minor edits to the notes to the financial statements.
This Amendment amends the Original Filing with respect to Item 8, “Financial Statements and Supplemental Data.”
As required by Rule 12b-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), new certifications of our principal executive officer and principal financial officer are also being filed as exhibits 31.1, 31.2 and 32.1 to this Amendment. Similarly, revised XBRL exhibits are being filed as exhibits to this Amendment. As a result, Item 15, “Exhibits, Financial Statement Schedules”, has also been modified.
This Amendment should be read in conjunction with the Original Filing, which continues to speak as of the date of the Original Filing. Accordingly, this Amendment does not reflect events occurring after the filing of the Original Filing or modify or update any related or other disclosures. This Amendment should be read in conjunction with our other filings made with the Securities and Exchange Commission subsequent to March 10, 2017.
TABLE OF CONTENTS
iv
PART II
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by this item is contained in the financial statements listed in Item 15. “Exhibits and Financial Statement Schedules” of this Amendment.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a)(1). Financial Statements.
Included in Part II of this Amendment:
(a)(2). Financial Statement Schedules.
We have omitted certain other financial statement schedules because they are not required or are not applicable, or the required information is shown in the financial statements or notes to the financial statements. We have included Schedule I - Condensed Financial Information of the Registrant and Schedule II - Valuation and Qualifying Accounts.
(a)(3). Exhibits.
Incorporated by Reference | ||||||
Exhibit Number | Exhibit Description | Filed Herewith | Form | Exhibit | Filing Date/Period End Date | |
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | X | — | — | — | ||
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | X | — | — | — | ||
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | X | — | — | — | ||
101.IN | XBRL Instance Document | X | — | — | — | |
101.SCH | XBRL Taxonomy Extension Schema Document | X | — | — | — | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | X | — | — | — | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | X | — | — | — | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | X | — | — | — | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | X | — | — | — | |
v
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
PLAYAGS, INC. | |||||
Date: | December 18, 2017 | By: | /s/ KIMO AKIONA | ||
Name: | Kimo Akiona | ||||
Title: | Treasurer (Principal Financial and Accounting Officer) | ||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature | Title | Date | ||
/s/ DAVID LOPEZ | President and Chief Executive Officer (Principal Executive Officer) | December 18, 2017 | ||
David Lopez | ||||
/s/ KIMO AKIONA | Chief Financial Officer, Chief Accounting Officer and Treasurer (Principal Financial and Accounting Officer) | December 18, 2017 | ||
Kimo Akiona | ||||
/s/ DAVID SAMBUR | Director | December 18, 2017 | ||
David Sambur | ||||
/s/ DANIEL COHEN | Director | December 18, 2017 | ||
Daniel Cohen | ||||
vi
ITEM 1. FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of PlayAGS, Inc.
In our opinion, the accompanying consolidated balance sheet and the related consolidated statement of operations and comprehensive loss, of changes in stockholders’ equity, and of cash flows present fairly, in all material respects, the financial position of PlayAGS, Inc. (formerly, AP Gaming Holdco, Inc.) and its subsidiaries as of December 31, 2016, and the results of their operations and their cash flows for the year ended December 31, 2016 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the index appearing under Item 15(a)(2) present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audit. We conducted our audit of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States) and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
As discussed in Note 6 to the consolidated financial statements, the Company changed the manner in which it presents debt issuance costs in 2016.
/s/ PricewaterhouseCoopers LLP
Las Vegas, Nevada
March 10, 2017
F-1
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
PlayAGS, Inc.
We have audited the accompanying consolidated balance sheet of PlayAGS, Inc. (formerly, AP Gaming Holdco, Inc.) (the Company) as of December 31, 2015, and the related consolidated statements of operations and comprehensive loss, changes in stockholders’ equity and cash flows for the years ended December 31, 2015 and 2014. Our audits also included the financial statement schedules listed in the Index at item 15(a)2. These financial statements and schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of PlayAGS, Inc. as of December 31, 2015, and the consolidated results of its operations and its cash flows for the years ended December 31, 2015 and 2014, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Las Vegas, Nevada
March 9, 2016
F-2
PLAYAGS, INC.
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share and per share data)
December 31, | |||||||
2016 | 2015 | ||||||
Assets | |||||||
Current assets | |||||||
Cash and cash equivalents | $ | 17,977 | $ | 35,722 | |||
Restricted cash | 100 | 100 | |||||
Accounts receivable, net of allowance of $1,972 and $113, respectively | 24,035 | 23,653 | |||||
Inventories | 10,729 | 7,087 | |||||
Prepaid expenses | 2,609 | 4,642 | |||||
Deposits and other | 3,052 | 2,440 | |||||
Total current assets | 58,502 | 73,644 | |||||
Property and equipment, net | 67,926 | 66,699 | |||||
Goodwill | 251,024 | 253,851 | |||||
Deferred tax asset | 9 | 37 | |||||
Intangible assets | 232,877 | 290,356 | |||||
Other assets | 23,754 | 26,560 | |||||
Total assets | $ | 634,092 | $ | 711,147 | |||
Liabilities and Stockholders’ Equity | |||||||
Current liabilities | |||||||
Accounts payable | $ | 8,790 | $ | 4,776 | |||
Accrued liabilities | 17,702 | 18,254 | |||||
Current maturities of long-term debt | 6,537 | 6,919 | |||||
Total current liabilities | 33,029 | 29,949 | |||||
Long-term debt | 547,238 | 533,290 | |||||
Deferred tax liability - noncurrent | 6,957 | 15,347 | |||||
Other long-term liabilities | 30,440 | 32,024 | |||||
Total liabilities | 617,664 | 610,610 | |||||
Commitments and contingencies (Note 14) | |||||||
Stockholders' equity | |||||||
Preferred stock at $0.01 par value; 100,000 shares authorized, no shares issued and outstanding | — | — | |||||
Common stock at $0.01 par value; 30,000,100 shares authorized; 100 Class A Shares issued and outstanding at December 31, 2016 and 2015, and 14,931,529 Class B Shares issued and outstanding at December 31, 2016 and 2015. | 149 | 149 | |||||
Additional paid-in capital | 177,276 | 177,276 | |||||
Accumulated deficit | (156,451 | ) | (75,077 | ) | |||
Accumulated other comprehensive (loss) income | (4,546 | ) | (1,811 | ) | |||
Total stockholders’ equity | 16,428 | 100,537 | |||||
Total liabilities and stockholders’ equity | $ | 634,092 | $ | 711,147 | |||
The accompanying notes are an integral part of these consolidated financial statements.
F-3
PLAYAGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(amounts in thousands, except per share data)
Year ended December 31, | |||||||||||
2016 | 2015 | 2014 | |||||||||
Revenues | |||||||||||
Gaming operations | $ | 154,857 | $ | 117,013 | $ | 68,981 | |||||
Equipment sales | 11,949 | 6,279 | 3,159 | ||||||||
Total revenues | 166,806 | 123,292 | 72,140 | ||||||||
Operating expenses | |||||||||||
Cost of gaming operations(1) | 26,736 | 23,291 | 14,169 | ||||||||
Cost of equipment sales(1) | 6,237 | 1,548 | 1,607 | ||||||||
Selling, general and administrative | 46,108 | 40,088 | 19,456 | ||||||||
Research and development | 21,346 | 14,376 | 4,856 | ||||||||
Write downs and other charges | 3,262 | 11,766 | 7,068 | ||||||||
Depreciation and amortization | 80,181 | 61,662 | 33,405 | ||||||||
Total operating expenses | 183,870 | 152,731 | 80,561 | ||||||||
Loss from operations | (17,064 | ) | (29,439 | ) | (8,421 | ) | |||||
Other expense (income) | |||||||||||
Interest expense | 59,963 | 41,642 | 17,235 | ||||||||
Interest income | (57 | ) | (82 | ) | (42 | ) | |||||
Other expense (income) | 7,404 | 3,635 | 573 | ||||||||
Loss before income taxes | (84,374 | ) | (74,634 | ) | (26,187 | ) | |||||
Income tax benefit (expense) | 3,000 | 36,089 | (2,189 | ) | |||||||
Net loss | (81,374 | ) | (38,545 | ) | (28,376 | ) | |||||
Foreign currency translation adjustment | (2,735 | ) | (2,099 | ) | 289 | ||||||
Total comprehensive loss | $ | (84,109 | ) | $ | (40,644 | ) | $ | (28,087 | ) | ||
Basic and diluted loss per common share: | |||||||||||
Basic | $ | (5.45 | ) | $ | (2.98 | ) | $ | (2.84 | ) | ||
Diluted | $ | (5.45 | ) | $ | (2.98 | ) | $ | (2.84 | ) | ||
Weighted average common shares outstanding: | |||||||||||
Basic | 14,932 | 12,918 | 10,000 | ||||||||
Diluted | 14,932 | 12,918 | 10,000 | ||||||||
(1) exclusive of depreciation and amortization
The accompanying notes are an integral part of these consolidated financial statements.
F-4
PLAYAGS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS’ EQUITY
(in thousands)
PlayAGS, Inc. | ||||||||||||||||||
Common Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Income (loss) | Total Stockholders’ Equity | ||||||||||||||
Balance at January 1, 2014 | 100 | $ | 99,900 | $ | (8,156 | ) | $ | (1 | ) | $ | 91,843 | |||||||
Net loss | — | — | (28,376 | ) | — | (28,376 | ) | |||||||||||
Foreign currency translation adjustment | — | — | — | 289 | 289 | |||||||||||||
Balance at December 31, 2014 | 100 | 99,900 | (36,532 | ) | 288 | 63,756 | ||||||||||||
Net loss | — | — | (38,545 | ) | — | (38,545 | ) | |||||||||||
Foreign currency translation adjustment | — | — | — | (2,099 | ) | (2,099 | ) | |||||||||||
Issuance of common stock | 49 | 77,376 | — | — | 77,425 | |||||||||||||
Balance at December 31, 2015 | 149 | 177,276 | (75,077 | ) | (1,811 | ) | 100,537 | |||||||||||
Net loss | — | — | (81,374 | ) | — | (81,374 | ) | |||||||||||
Foreign currency translation adjustment | — | — | — | (2,735 | ) | (2,735 | ) | |||||||||||
Balance at December 31, 2016 | 149 | $ | 177,276 | $ | (156,451 | ) | $ | (4,546 | ) | $ | 16,428 | |||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-5
PLAYAGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Year ended December 31, | |||||||||||
2016 | 2015 | 2014 | |||||||||
Cash flows from operating activities | |||||||||||
Net loss | $ | (81,374 | ) | $ | (38,545 | ) | $ | (28,376 | ) | ||
Adjustments to reconcile net loss to net cash provided by operating activities: | |||||||||||
Depreciation and amortization | 80,181 | 61,662 | 33,405 | ||||||||
Accretion of contract rights under development agreements and placement fees | 4,702 | 496 | 58 | ||||||||
Amortization of deferred loan costs and discount | 3,542 | 2,446 | 1,242 | ||||||||
Payment-in-kind interest capitalized | 15,396 | 8,507 | 481 | ||||||||
Provision (benefit) for bad debts | 2,290 | 106 | (450 | ) | |||||||
Imputed interest income | — | (18 | ) | (36 | ) | ||||||
Loss on disposition of assets | 1,149 | 1,439 | 1,936 | ||||||||
Impairment of assets | 4,749 | 4,989 | 2,475 | ||||||||
(Benefit) provision of deferred income tax | (7,998 | ) | (38,645 | ) | 2,189 | ||||||
Changes in assets and liabilities that relate to operations: | |||||||||||
Accounts receivable | (3,191 | ) | (342 | ) | (973 | ) | |||||
Inventories | 307 | 1,144 | 806 | ||||||||
Prepaid expenses | 2,021 | (1,466 | ) | (1,349 | ) | ||||||
Deposits and other | (315 | ) | 11,531 | (241 | ) | ||||||
Other assets, non-current | 467 | 869 | (1,476 | ) | |||||||
Accounts payable and accrued liabilities | 12,567 | (4,770 | ) | 2,791 | |||||||
Net cash provided by (used in) operating activities | 34,493 | 9,403 | 12,482 | ||||||||
Cash flows from investing activities | |||||||||||
Business acquisitions, net of cash acquired | — | (374,347 | ) | (10,345 | ) | ||||||
Collection of notes receivable | — | 323 | 205 | ||||||||
Change in Canadian tax receivable | — | — | (154 | ) | |||||||
Purchase of intangible assets | (1,311 | ) | (6,102 | ) | (9,259 | ) | |||||
Software development and other expenditures | (6,526 | ) | (6,476 | ) | (5,127 | ) | |||||
Proceeds from disposition of assets | 87 | 29 | 569 | ||||||||
Purchases of property and equipment | (32,879 | ) | (15,277 | ) | (9,811 | ) | |||||
Net cash used in investing activities | (40,629 | ) | (401,850 | ) | (33,922 | ) | |||||
Cash flows from financing activities | |||||||||||
Borrowings under the revolving facility | — | 11,500 | 10,000 | ||||||||
Repayments under the revolving facility | — | (21,500 | ) | — | |||||||
Proceeds from issuance of debt | — | 369,400 | — | ||||||||
Payments on debt | (6,987 | ) | (4,743 | ) | (2,036 | ) | |||||
Payment of previous acquisition obligation | (1,125 | ) | (10,000 | ) | — | ||||||
Payment of financed placement fee obligations | (3,516 | ) | — | — | |||||||
Repurchase of shares issued to management | (50 | ) | (1,277 | ) | — | ||||||
Proceeds from issuance of common stock | — | 77,425 | — | ||||||||
Proceeds from employees in advance of common stock issuance | 75 | 579 | 1,969 | ||||||||
Payment of deferred loan costs | — | (3,837 | ) | (73 | ) | ||||||
Net cash provided by financing activities | (11,603 | ) | 417,547 | 9,860 | |||||||
Effect of exchange rates on cash and cash equivalents | (6 | ) | (58 | ) | 518 | ||||||
Increase (decrease) in cash and cash equivalents | (17,745 | ) | 25,042 | (11,062 | ) | ||||||
Cash and cash equivalents, beginning of period | 35,722 | 10,680 | 21,742 | ||||||||
Cash and cash equivalents, end of period | $ | 17,977 | $ | 35,722 | $ | 10,680 | |||||
Supplemental cash flow information: | |||||||||||
Cash paid during the period for interest | $ | 40,060 | $ | 30,203 | $ | 15,315 | |||||
Cash paid during the period for taxes | $ | 1,247 | $ | 840 | $ | — | |||||
Non-cash investing and financing activities: | |||||||||||
Non-cash consideration given in business acquisitions | $ | — | $ | 17,233 | $ | 11,500 | |||||
Financed placement fees | $ | — | $ | 12,391 | $ | — | |||||
Financed purchase property and equipment | $ | 2,662 | $ | 5,800 | $ | 2,717 | |||||
The accompanying notes are an integral part of these consolidated financial statements.
F-6
NOTE 1. DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
PlayAGS, Inc. (formerly, AP Gaming Holdco, Inc.) (the “Company,” “AP Gaming,” “we,” “us,” or “our”) is a leading designer and supplier of gaming products and services for the gaming industry. We operate in legalized gaming markets across the globe and provide state-of-the-art, value-add products in three distinct segments: Electronic Gaming Machines (“EGM”), which includes server-based systems and back-office systems that are used by Class II Native American and Mexican gaming jurisdictions and Class III Native American, commercial and charity jurisdictions; Table Products (“Table Products”), which includes live felt table games, side-bets and progressives as well as our newly introduced card shuffler, “DEX”; and Interactive Social Casino Games(“Interactive”), which provides social casino games on desktop and mobile devices. Each segment's activities include the design, development, acquisition, manufacturing, marketing, distribution, installation and servicing of a distinct product line.
The Company filed a Registration Statement on Form 10 on December 12/19/2013, which went effective under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), on December 19, 2013.
Electronic Gaming Machines
Our EGM segment offers a selection of video slot titles developed for the global marketplace, which currently includes ICON, Halo, Colossal Diamonds cabinet (“Big Red”), and Orion. In addition to providing complete EGM units, we offer conversion kits that allow existing game titles to be converted to other game titles offered within that operating platform.
Table Products
Our table products include live proprietary table products and side-bets, as well as ancillary table products. Products include both internally developed and acquired proprietary table products, side-bets, and table technology related to blackjack, poker, baccarat, craps and roulette. We have acquired a number of popular brands, including In-Bet, Buster Blackjack, Double Draw Poker and Criss Cross Poker that are based on traditional well-known public domain games such as blackjack and poker; however, these proprietary games provide intriguing betting options that offer more excitement and greater volatility to the player, ultimately enhancing our casino customers’ profitability. Our Tornado product is unique in that it allows players to control the spin of the roulette ball by pressing a remote ball activation device. We believe this mechanism enhances player interaction without altering traditional roulette rules and procedures; similarly, our Double Ball Roulette game creates a unique game experience by allowing players to use two balls instead of one.
Interactive
Our social gaming products are primarily delivered through our mobile apps, Lucky Play Casino and Vegas Fever. The apps contain several game titles available for consumers to play for fun and with coins that they purchase through the app. Some of our most popular social games include content that is also popular in land-based settings such as Colossal Diamonds, So Hot, and Monkey in the Bank.
Principles of Consolidation
The accompanying consolidated financial statements include the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. Certain amounts in the consolidated financial statements for the previous years have been reclassified to be consistent with the current year presentation. These reclassifications had no effect on the previously reported net loss.
F-7
Use of Estimates
The preparation of financial statements in conformity with GAAP requires the Company to make decisions based upon estimates, assumptions, and factors considered relevant to the circumstances. Such decisions include the selection of applicable accounting principles and the use of judgment in their application, the results of which impact reported amounts and disclosures. Changes in future economic conditions or other business circumstances may affect the outcomes of the estimates and assumptions. Accordingly, actual results could differ materially from those anticipated.
Revenue Recognition
Gaming Operations
Gaming operations revenue is earned by providing customers with gaming machines, gaming machine content licenses, back-office equipment and linked progressive systems, which are collectively referred to as gaming equipment, under participation arrangements. The participation arrangements convey the right to use the equipment (i.e. gaming machines and related integral software) for a stated period of time, which typically ranges from one to three years and then the contract continues on a month-to-month basis thereafter. In some instances, the Company will enter arrangements for longer periods of time; however, many of these arrangements include the ability of the customer to cancel the contract and return the games to the Company, a provision which renders their contracts effectively month-to-month contracts. Primarily due to these factors, our participation arrangements are accounted for as operating leases. In some instances, we will offer a free trial period during which no revenue is recognized. If during or at the conclusion of the trial period the customer chooses to enter into a lease for the gaming equipment, we commence revenue recognition according to the terms of the agreement.
Under participation arrangements, the Company retains ownership of the gaming equipment installed at the customer facilities and receives either revenue based on a percentage of the win per day generated by the gaming equipment or a daily fee. Thus, in our consolidated financial statements the Company records revenue monthly related to these arrangements and the gaming equipment is recorded in property and equipment, net on our balance sheet and depreciated over the expected life of the gaming equipment.
The majority of the Company’s leases require the Company to provide maintenance throughout the entire term of the lease. In some cases, a performance guarantee exists that, if not met, provides the customer with the right to return the gaming machines to the Company. This performance guarantee is considered a cancellation clause, a provision which renders their contracts effectively month-to-month contracts. Accordingly, the Company accounts for these contract in a similar manner with its other operating leases as described above. Whether contractually required or not, the Company develops and provides new gaming titles throughout the life of the lease. Certain arrangements require a portion of the win per day to be retained by the customer to fund facility-specific marketing, advertising and promotions. These amounts retained by the customer reduce the monthly revenue recognized on each arrangement.
Gaming operations revenue is also earned from the licensing of table product content and is earned and recognized on a fixed monthly rate. Our social gaming products earn revenue from the sale of virtual coins or chips, which is recorded when the purchased coins or chips are used by the customer.
Equipment Sales
Revenues from the stand-alone product sales or separate accounting units are recorded when:
• | Pervasive evidence of an arrangement exists; |
• | The sales price is fixed and determinable; |
• | Delivery has occurred and services have been rendered; and |
• | Collectability is reasonably assured. |
Equipment sales are generated from the sale of gaming machines and licensing rights to game content software that is installed in the gaming machine, parts, and other ancillary equipment. Also included within the deliverables are delivery, installation and training, all of which occur within a few days of arriving at the customer location. Gaming equipment sales do not include maintenance beyond a standard warranty period. The recognition of revenue from the sale of gaming devices occurs as title and risk of loss have passed to the customer and all other revenue recognition criteria have been satisfied. As the
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combination of game content software and the tangible gaming device function together to deliver the product’s essential functionality, revenue from the sale of gaming devices is recognized under U.S. GAAP revenue recognition guidance.
The Company enters into revenue arrangements that may consist of multiple deliverables of its products.
For example, gaming equipment arrangements may include the sale of gaming machines and game content conversion kits.
Revenue associated with arrangements with multiple deliverables is allocated to separate units of accounting if (1) the deliverables have value to the customer on a stand-alone basis or (2) the arrangement includes a general right of return relative to the delivered items, delivery or performance of the undelivered items is considered probable and substantially in the control of the Company.
At the inception of a multiple element arrangement, fees under the arrangement are allocated to deliverables based on their relative selling price. When applying the relative selling price method, a hierarchy is used for estimating the selling price based first on vendor-specific objective evidence (“VSOE”), then third-party evidence (“TPE”) and finally management’s estimate of the selling price (“ESP”). Revenue for each unit of accounting is recognized when the relevant recognition criteria for each respective element has been met.
Cash and Cash Equivalents
Cash and cash equivalents consist primarily of deposits held at major banks and other marketable securities with original maturities of 90 days or less.
Restricted Cash
Restricted cash amounts represent funds held in escrow as collateral for the Company’s surety bonds for various gaming authorities and funds held to ensure the availability of funds to pay wide-area progressive jackpot awards.
Receivables, Allowance for Doubtful Accounts
Accounts receivable are stated at face value less an allowance for doubtful accounts. The Company maintains an allowance for doubtful accounts related to accounts receivable and notes receivable, which are non-interest bearing, deemed to have a high risk of collectability. The Company reviews the accounts receivable and notes receivable on a monthly basis to determine if any receivables will potentially be uncollectible. The Company analyzes historical collection trends and changes in the customers’ payment patterns, customer concentration, and credit worthiness when evaluating the adequacy of the allowance for doubtful accounts. A large percentage of receivables are with Native American tribes and the Company has concentrations of credit risk with several tribes. The Company includes any receivable balances that are determined to be uncollectible in the overall allowance for doubtful accounts. Changes in the assumptions or estimates reflecting the collectability of certain accounts could materially affect the allowance for both accounts and notes receivable.
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The following provides financial information concerning the change in our allowance for doubtful accounts (in thousands):
Allowance for Accounts Receivables Year ended December 31, 2016 | |||||||||||||||||||
Beginning Balance | Charge-offs | Recoveries | Provision | Ending Balance | |||||||||||||||
Accounts receivable, current | $ | 113 | $ | (431 | ) | $ | — | $ | 2,290 | $ | 1,972 | ||||||||
Allowance for Accounts Receivables Year ended December 31, 2015 | |||||||||||||||||||
Beginning Balance | Charge-offs | Recoveries | Provision | Ending Balance | |||||||||||||||
Accounts receivable, current | $ | 29 | $ | (22 | ) | $ | — | $ | 106 | $ | 113 | ||||||||
Allowance for Accounts Receivables Year ended December 31, 2014 | |||||||||||||||||||
Beginning Balance | Charge-offs | Recoveries | Provision | Ending Balance | |||||||||||||||
Accounts receivable, current | $ | 9 | $ | (36 | ) | $ | — | $ | 56 | $ | 29 | ||||||||
Inventories
Inventories consist primarily of parts and supplies that are used to repair and maintain machinery and equipment as well as EGMs in production and finished goods held for sale. Inventories are stated at net realizable value. Cost of inventories is determined using the first-in, first-out (“FIFO”) method for all components of inventory. The Company regularly reviews inventory quantities and updates estimates for the net realizable value of inventories. This process includes examining the carrying values of parts and ancillary equipment in comparison to the current fair market values for such equipment (less costs to sell or dispose). Some of the factors involved in this analysis include the overall levels of the inventories, the current and projected sales levels for such products, the projected markets for such products and the costs required to sell the products, including refurbishment costs. Changes in the assumptions or estimates could materially affect the inventory carrying value.
Property and Equipment
The cost of gaming equipment, consisting of gaming equipment as well as other property and equipment, is depreciated over their estimated useful lives, using the straight-line method for financial reporting. The Company capitalizes costs incurred for the refurbishment of used gaming equipment that is typically incurred to refurbish a machine in order to return it to its customer location. The refurbishments extend the life of the gaming equipment beyond the original useful life. Repairs and maintenance costs are expensed as incurred. The Company routinely evaluates the estimated lives used to depreciate assets. The estimated useful lives are as follows:
Gaming equipment | 3 to 6 years |
Other property and equipment | 3 to 6 years |
The Company reviews its property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. The Company groups long-lived assets for impairment analysis at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities, which is typically at the individual gaming machine level or at the cabinet product line level. Impairment testing is performed and losses are estimated when indicators of impairment are present and the estimated undiscounted cash flows are not sufficient to recover the assets’ carrying amount.
When the estimated undiscounted cash flows are not sufficient to recover the asset’s carrying amount, an impairment loss is measured to the extent the fair value of the asset is less than its carrying amount.
The Company measures recoverability of assets to be held and used by comparing the carrying amount of an asset to future cash flows expected to be generated by the asset. The Company’s policy is to impair, when necessary, excess or obsolete gaming machines on hand that it does not expect to be used. Impairment is based upon several factors, including estimated
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forecast of gaming machine demand for placement into casinos. While the Company believes that the estimates and assumptions used in evaluating the carrying amount of these assets are reasonable, different assumptions could affect either the carrying amount or the estimated useful lives of the assets, which could have a significant impact on the results of operations and financial condition.
Intangible Assets
The Company reviews its identifiable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment losses are recognized for identifiable intangibles, other than goodwill, when indicators of impairment are present and the estimated undiscounted cash flows are not sufficient to recover the assets’ carrying amount.
When the estimated undiscounted cash flows are not sufficient to recover the intangible asset’s carrying amount, an impairment loss is measured to the extent the fair value of the asset is less than its carrying amount.
Certain trade names have an indefinite useful life and the Company tests these trade names for possible impairment at least annually, on October 1, or whenever events or changes in circumstances indicate that the carrying value may be impaired. We perform a qualitative assessment to determine if it is more likely than not that the fair value of the asset is less than its carrying amount. If we believe, as a result of our qualitative assessment, that it is more likely than not that the fair value of the asset is less than its carrying amount, the quantitative impairment test is required.
Costs of Computer Software
Internally developed gaming software represents the Company’s internal costs to develop gaming titles to utilize on the Company’s gaming machines. Internally developed gaming software is stated at cost and amortized over the estimated useful lives of the software, using the straight-line method. Software development costs are capitalized once technological feasibility has been established and are amortized when the software is placed into service. The computer software we develop reaches technological feasibility when a working model of the computer software is available. Any subsequent software maintenance costs, such as bug fixes and subsequent testing, are expensed as incurred. Discontinued software development costs are expensed when the determination to discontinue is made. Software development costs are amortized over the expected life of the title or group of titles, if applicable, to amortization expense.
On a quarterly basis, or more frequently if circumstances warrant, the Company compares the net book value of its internally developed computer software to the net realizable value on a title or group of title basis. The net realizable value is determined based upon certain assumptions, including the expected future revenues and net cash flows of the gaming titles or group of gaming titles utilizing that software, if applicable.
Goodwill
The excess of the purchase price of an acquired business over the estimated fair value of the assets acquired and the liabilities assumed is recorded as goodwill. The Company tests for possible impairment of goodwill at least annually, on October 1, or when circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. The Company has the option to begin with a qualitative assessment, commonly referred to as “Step 0”, to determine whether it is more likely than not that the reporting unit’s fair value of goodwill is less than its carrying value. This qualitative assessment may include, but is not limited to, reviewing factors such as the general economic environment, industry and market conditions, changes in key assumptions used since the most recently performed valuation and overall financial performance of the reporting units. If the Company determines that it is more likely than not that a reporting unit’s fair value is less than its carrying value, the Company performs a quantitative goodwill impairment analysis, and depending upon the results of that measurement, the recorded goodwill may be written down and charged to income from operations when its carrying amount exceeds its estimated fair value.
Acquisition Accounting
The Company applies the provisions of ASC 805, “Business Combinations” (ASC 805), in accounting for business acquisitions. It requires us to recognize separately from goodwill the fair value of assets acquired and liabilities assumed on the acquisition date. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed. Significant estimates and assumptions are required
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to value assets acquired and liabilities assumed at the acquisition date as well as contingent consideration, where applicable. These estimates are inherently uncertain and subject to refinement and typically include the calculation of an appropriate discount rate and projection of the cash flows associated with each acquired asset. As a result, during the measurement period, which may be up to one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the fair value of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the consolidated statements of operations.
Fair Value of Financial Instruments
The Company applies the provisions of ASC 820, “Fair Value Measurements” (ASC 820) to its financial assets and liabilities. Fair value is defined as a market-based measurement intended to estimate the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. ASC 820 also established a fair value hierarchy, which requires an entity to maximize the use of observable inputs when measuring fair value. These inputs are categorized as follows:
• | Level 1 - quoted prices in an active market for identical assets or liabilities; |
• | Level 2 - quoted prices in an active market for similar assets or liabilities, inputs other than quoted prices that are observable for similar assets or liabilities, inputs derived principally from or corroborated by observable market data by correlation or other means; and |
• | Level 3 - valuation methodology with unobservable inputs that are significant to the fair value measurement. |
The carrying values of the Company’s cash and cash equivalents, restricted cash, receivables and accounts payable approximate fair value because of the short term maturities of these instruments. The fair value of our long-term debt is based on the quoted market prices for similar issues (Level 2 inputs). The estimated fair value of our long-term debt was $557.8 million and $529.2 million as of December 31, 2016 and 2015, respectively.
Accounting for Income Taxes
We conduct business globally and are subject to income taxes in U.S. federal, state, local, and foreign jurisdictions. Determination of the appropriate amount and classification of income taxes depends on several factors, including estimates of the timing and probability of realization of deferred income taxes, reserves for uncertain income tax positions and income tax payment timing.
We account for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. Taxes on income of our foreign subsidiaries are provided at the tax rates applicable to the tax jurisdictions in which they are located. Future tax benefits are recognized to the extent that realization of those benefits is considered more likely than not and a valuation allowance is established for deferred tax assets which do not meet this threshold.
The recoverability of certain deferred tax assets is based in part on estimates of future income and the timing of temporary differences, and the failure to fully realize such deferred tax assets could result in a higher tax provision in future periods.
We apply the accounting guidance to our uncertain tax positions and under the guidance, we may recognize a tax benefit from an uncertain position only if it is more likely than not that the position will be sustained upon examination by taxing authorities based on the technical merits of the issue. The amount recognized in the financial statements is the largest benefit that we believe has greater than a 50% likelihood of being realized upon settlement.
We are required to make significant judgments when evaluating our uncertain tax positions and the related tax benefits. We believe our assumptions are reasonable; however, there is no guarantee that the final outcome of the related matters will not differ from the amounts reflected in our income tax provisions and accruals. We adjust our liability for uncertain tax positions based on changes in facts and circumstances such as the closing of a tax audit or changes in estimates. Our income tax provision may be impacted to the extent that the final outcome of these tax positions is different than the amounts recorded.
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Contingencies
The Company assesses its exposures to loss contingencies including claims and legal proceedings and accrues a liability if a potential loss is considered probable and the amount can be estimated. Significant judgment is required in both the determination of probability and the determination as to whether an exposure is reasonably estimable. Because of uncertainties related to these matters, if the actual loss from a contingency differs from management’s estimate, there could be a material impact on the results of operations or financial position. Operating expenses, including legal fees, associated with contingencies are expensed when incurred.
Concentrations of Credit Risk
Financial instruments, which potentially subject the Company to concentration of credit risk, consist primarily of cash and cash equivalents and accounts receivable, net. Cash equivalents are investment-grade, short-term debt instruments consisting of treasury bills which are maintained with high credit quality financial institutions under repurchase agreements. Cash and cash equivalents are in excess of Federal Deposit Insurance Corporation (“FDIC”) insurance limits. As of December 31, 2016 and 2015, the Company did not have cash equivalents.
Revenue from gaming operations is concentrated in the Class II gaming and casino industry, primarily located in Oklahoma. For the years ended December 31, 2016, 2015 and 2014, approximately 15%, 20% and 30% of our gaming revenue was derived from one customer, respectively. Another customer accounted for approximately 10% of our gaming operations revenue for the year ended December 31, 2016, with no concentrations noted for the years ended December 31, 2015 and 2014.
For the year ended December 31, 2016, approximately 10% of our gaming revenue was derived in Mexico. For the years ended December 31, 2015 and 2014, the company did not have a concentration of revenue from Mexico exceeding 10%. The Company had one customer with accounts receivable, net equaling approximately 10% of total outstanding accounts receivable, net at December 31, 2016 and none at December 31, 2015 and 2014.
Foreign Currency Translation
The financial statements of the Company’s foreign subsidiaries are translated into U.S. dollars at the period end rate of exchange for asset and liability accounts and the weighted average rate of exchange for income statement accounts. The effects of these translations are recorded as a component of accumulated other comprehensive (loss) income in stockholders’ equity.
Advertising Costs
Advertising costs are expensed as incurred. Advertising costs for the year ended December 31, 2016, 2015 and 2014 were $0.7 million, $0.2 million and $0.3 million, respectively.
Research and Development
Research and development costs related primarily to software product development costs and is expensed as incurred until technological feasibility has been established. Employee related costs associated with product development are included in research and development.
Recently Issued Accounting Pronouncements
In May 2014, the FASB issued an accounting standards update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which clarifies the principles for recognizing revenue from contracts with customers. The amendment outlines a single comprehensive model for entities to depict the transfer of goods or services to customers in amounts that reflect the payment to which a company expects to be entitled in exchange for those goods or services. The amendment also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which deferred the effective date of ASU 2014-09 to annual periods, and interim reporting periods within those annual periods, beginning after December 15, 2017. The ASU may be adopted using either a full retrospective transition method or a modified retrospective transition method and will be adopted by the Company on January
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1, 2018. The Company does not expect adoption of the new revenue standards to have a material impact on its consolidated financial statements as the majority of our revenue is recognized under lease accounting guidance.
In June 2014, the FASB issued ASU No. 2014-12, Compensation—Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved After the Requisite Service Period. The amendments clarify the proper method of accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. This ASU requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. The performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. The Company adopted the guidance in the current year and it did not have a material effect on our financial condition, results of of operations or cash flows.
In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements - Going Concern: Disclosure of Uncertainties About an Entity's Ability to Continue as a Going Concern. The ASU requires management to assess an entity’s ability to continue as a going concern and to provide related footnote disclosures in certain circumstances. Substantial doubt about an entity's ability to continue as a going concern exists when relevant conditions and events, consolidated in the aggregate, indicate that it is probable that an entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued. Currently, there is no guidance in U.S. GAAP for management's responsibility to perform an evaluation. Under the update, management's evaluation is to be performed when preparing financial statements for each annual and interim reporting period and based on relevant conditions and events that are known and reasonably knowable at the date that the financial statements are issued. The Company adopted the guidance on January 1, 2016 and it did not have a material effect on our financial condition, results of operations or cash flows.
In January 2015, the FASB issued ASU No. 2015-01, Income Statement-Extraordinary and Unusual Items: Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items. ASU 2015-01 eliminates from GAAP the concept of extraordinary items. The presentation and disclosure guidance for items that are unusual in nature or occur infrequently will be retained and will be expanded to include items that were previously classified as extraordinary. ASU 2015-01 is effective for the Company on January 1, 2016, with earlier adoption permitted using either a prospective or retrospective method. This ASU did not have a material effect on our financial condition, results of operations or cash flows.
In April 2015, the FASB issued ASU No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. ASU 2015-03 intends to simplify the presentation of debt issuance costs by requiring 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. In August 2015, the FASB issued ASU 2015-15 which clarifies that the guidance issued in April 2015 does not apply to line-of-credit arrangements. According to ASU 2015-15, line-of-credit arrangements will continue to present debt issuance costs as an asset and subsequently amortize the deferred debt issuance costs ratably over the term of the arrangement. ASU 2015-03 is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The Company adopted the guidance on January 1, 2016, with retrospective application in the accompanying Condensed Consolidated Balance Sheet at December 31, 2015. This change in accounting principle resulted in net deferred financing costs of $7.8 million incurred in connection with the issuance of the Company's long-term debt (excluding revolving credit facilities) at December 31, 2015 being reclassified as a direct reduction of the long-term debt balance. The presentation of the net deferred financing costs incurred in connection with the issuance of the Company's revolving credit facilities as of December 31, 2015, are not affected by the adoption of this new accounting guidance and are included in other assets in the accompanying Consolidated Balance Sheet.
In July 2015, the FASB issued ASU No. 2015-11, Inventory: Simplifying the Measurement of Inventory. ASU 2015-11 changes the criteria for measuring inventory within the scope of the ASU. Inventory will now be measured at the lower of cost and net realizable value, while the concept of market value will be eliminated. The ASU defines net realizable value as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The ASU will be effective for the Company beginning on January 1, 2017. The Company does not expect the provisions of the ASU to have a material effect on our financial condition, results of operations or cash flows.
In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments. ASU 2015-16 eliminates the requirement to retrospectively apply adjustments made to
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provisional amounts recognized in a business combination. It requires that an acquirer recognize and disclose adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined, which should be calculated as if the accounting had been completed at the acquisition date. The Company adopted the guidance on January 1, 2016. The amendments in this ASU was applied prospectively to adjustments to provisional amounts that occur after the effective date of this ASU with earlier application permitted for financial statements that have not been issued. This guidance did not have a material effect on our financial position, results of operations or cash flows.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 intends to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The adoption of this guidance is expected to result in a significant portion of our operating leases, where we are the lessee, to be recognized on our Consolidated Balance Sheets. The guidance requires lessees and lessors to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years with earlier adoption permitted. The Company is currently evaluating the provisions of the amendment and the impact on its future consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230). ASU 2016-15 intends to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the provisions of ASU 2016-15 to have a material effect on our financial condition, results of operations or cash flows.
NOTE 2. ACQUISITIONS
Cadillac Jack
On May 29, 2015, the Company acquired 100% of the equity of Amaya Americas Corporation (“Cadillac Jack”), a leading provider of Class II gaming machines for the North American tribal gaming market, with key regions of operation within Alabama, Mexico, and Wisconsin. This acquisition is expected to create growth opportunities in Class II and Class III jurisdictions and expands the Company’s geographic footprint with an EGM installed base of approximately 10,500 units. The combined management teams are complementary and possess years of combined experience that is expected to allow us to effectively grow and improve our business.
The acquisition was funded primarily from cash proceeds of incremental borrowings on our existing term loans, the issuance of senior secured PIK notes, as described in Note 6, and the issuance of additional common stock, as described in Note 7. The consideration also included a promissory note to the seller, Amaya Inc., for $12.0 million, as described in Note 6, as well as a contingent receivable that was recorded at its estimated fair value on the date of the acquisition. The contingent receivable is related to a clause in the stock purchase agreement allowing for a refund of up to $25.0 million if certain deactivated gaming machines in Mexico are not in operation by November 29, 2016. As of December 31, 2016 the estimated fair value of the contingent receivable is recorded in other long-term assets. In the first quarter 2017, the Company reached an agreement with Amaya, Inc. to receive $5.1 million for this contingent receivable.
The following summarizes the consideration paid for Cadillac Jack (in thousands):
Contractual cash purchase price adjusted for working capital | $ | 369,760 | ||
Seller note | 12,000 | |||
Contingent receivable | (1,300 | ) | ||
Total consideration | $ | 380,460 | ||
We have recorded Cadillac Jack’s assets acquired and liabilities assumed based on our estimates of their fair values at the acquisition date. The determination of the fair values of the assets acquired and liabilities assumed (and the related determination of estimated lives of depreciable and amortizable tangible and identifiable intangible assets) requires significant judgment and estimates. The estimates and assumptions used include the projected timing and amount of future cash flows and discount rates that reflect risk inherent in the future cash flows.
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The allocation of the purchase price to the estimated fair values of the assets acquired and the liabilities assumed was as follows (in thousands):
At May 29, 2015 | ||||
Currents assets(1) | $ | 34,871 | ||
Property and equipment | 29,634 | |||
Goodwill | 171,497 | |||
Intangible assets | 199,752 | |||
Other long-term assets | 23,828 | |||
Total assets | 459,582 | |||
Current liabilities | 8,636 | |||
Deferred tax liability non-current | 51,486 | |||
Other long-term liabilities | 19,000 | |||
Total equity purchase price | $ | 380,460 | ||
(1) Current assets includes $4.2 million of cash acquired.
Based on our estimates, the total consideration exceeded the aggregate estimated fair value of the acquired assets and assumed liabilities at the acquisition date and has been recorded as goodwill. We attribute this goodwill to our enhanced financial scale and geographic diversification, opportunities for synergies, assembled workforce and other strategic benefits. None of the goodwill associated with the acquisition is deductible for income tax purposes and, as such, no deferred taxes have been recorded related to goodwill.
We included an estimated value of $8.3 million in current assets above and in deposits and other in the consolidated balance sheet related to the value of stock options held by employees of Cadillac Jack. The stock options entitled the holder to purchase shares of Amaya Inc., the former global parent of Cadillac Jack, based on the holder’s continued employment at Cadillac Jack through the vesting date, which was November 29, 2015.
Our estimates of the fair values of depreciable tangible assets are as follows (in thousands):
Fair values at May 29, 2015 | Average remaining useful life (in years) | |||||
Gaming equipment | $ | 23,065 | 1 - 5 | |||
Other property and equipment | 6,569 | 2 - 3 | ||||
Total property and equipment | $ | 29,634 | ||||
Our estimates of the fair values of identifiable intangible assets are as follows (in thousands):
Fair values at May 29, 2015 | Average remaining useful life (in years) | |||||
Trade names | $ | 3,000 | 5 | |||
Brand names | 10,600 | 3 - 5 | ||||
Customer relationships | 107,000 | 5 - 12 | ||||
Gaming software and technology platforms | 79,152 | 2 - 7 | ||||
Total intangible assets | $ | 199,752 | ||||
The fair value of gaming equipment and other personal property assets as well as the fair value of gaming content software was primarily determined using cost approaches in which we determined an estimated reproduction or replacement cost, as applicable.
The estimated fair values of acquired trade names, brand names and gaming technology platforms was primarily determined using the royalty savings method, which is a risk-adjusted discounted cash flow approach. The gaming technology platforms include $30.0 million of in-process research and development. The royalty savings method values an intangible asset
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by estimating the royalties saved through ownership of the asset. The royalty savings method requires identifying the future revenue that would be impacted by the trade name or intellectual property (or royalty-free rights to the assets), multiplying it by a royalty rate deemed to be avoided through ownership of the asset and discounting the projected royalty savings amounts back to the acquisition date. The royalty rate used in such valuation was based on a consideration of market rates for similar categories of assets.
The estimated fair values of customer relationships was determined using the excess earnings method, which is a risk-adjusted discounted cash flow approach that determines the value of an intangible asset as the present value of the cash flows attributable to such asset after excluding the proportion of the cash flows that are attributable to other assets. The contribution to the cash flows that are made by other assets - such as fixed assets, working capital, workforce and other intangible assets - was estimated through contributory asset capital charges. The value of the acquired customer relationship asset is the present value of the attributed post-tax cash flows, net of the post-tax return on fair value attributed to the other assets.
The estimated fair value of deferred income taxes was determined by applying the appropriate enacted statutory tax rate to the temporary differences that arose on the differences between the financial reporting value and tax basis of the assets acquired and liabilities assumed. We recorded liabilities for estimated uncertain tax positions in other long-term liabilities and a related indemnification receivable in other long-term assets.
The revenue and net loss of Cadillac Jack from the acquisition date through December 31, 2015, are presented below and are included in our consolidated statements of operations and comprehensive loss. These amounts are not necessarily indicative of the results of operations that Cadillac Jack would have realized if it had continued to operate as a stand-alone company during the period presented, primarily due to the elimination of certain headcount and administrative costs since the acquisition date resulting from integration activities or due to costs that are now reflected in our unallocated corporate costs and not allocated to Cadillac Jack.
From May 29, 2015 through December 31, 2015 | ||||
Revenue | $ | 46,075 | ||
Net loss | $ | 17,133 | ||
The following unaudited pro forma statements of operations give effect to the Cadillac Jack acquisition as if it had been completed on January 1, 2014. The unaudited pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of what the operating results actually would have been during the periods presented had the acquisition been completed on January 1, 2014. In addition, the unaudited pro forma financial information does not purport to project future operating results. This information is preliminary in nature and subject to change based on final purchase price adjustments. The pro forma statements of operations do not reflect: (1) any anticipated synergies (or costs to achieve synergies) or (2) the impact of non-recurring items directly related to the Cadillac Jack acquisition.
Year ended December 31, | |||||||
2015 | 2014 | ||||||
Revenue | $ | 156,110 | $ | 160,341 | |||
Net loss | $ | 54,682 | $ | 83,709 | |||
Gamingo Limited
On June 15, 2015, the Company purchased 100% of the equity of Gamingo Limited (formerly known as “RocketPlay”, currently known as “AGSi”), a leading gaming company developing social casino titles for mobile devices. With primary offices in San Francisco and Tel Aviv, AGSi’s flagship product, Lucky Play Casino, gives players a casino-quality experience with EGMs, table products, tournaments, and live events. The total consideration of $8.8 million includes an estimated $5.0 million of contingent consideration that is payable based on the operating results of AGSi during a twelve-month measurement period that ended on December 31, 2016. The amount of the contingent consideration recorded was estimated at the purchase date and is subject to change based on changes in the estimated operating results of AGSi and has been recorded in other long-term liabilities in the consolidated balance sheet. As of December 31, 2015 the recorded value of the contingent consideration was written off in full to write downs and other charges based on the estimated fair value on that date.
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We have recorded AGSi’s assets acquired and liabilities assumed based on our preliminary estimates of their fair values at the acquisition date. The allocation of the consideration given was allocated to the estimated fair values of the assets acquired and the liabilities assumed, which primarily included $4.9 million of goodwill and $4.2 million of identifiable intangible assets to be amortized over a weighted average period of 3 years.
Intellectual Property Acquisitions
During the quarter ended September 30, 2015, the Company acquired certain intangible assets related to the purchase of table products and table product related intellectual property. Some of the acquisitions were accounted for as an acquisition of a business and the assets acquired and liabilities assumed were measured based on our preliminary estimates of their fair values at the acquisition dates. The total consideration of $10.0 million includes an estimated $1.5 million of contingent consideration that is payable periodically based on a percentage of product revenue earned on the related table products. The amount of the contingent consideration recorded was estimated at the purchase date and is subject to change based on changes in the estimated product revenue and has been recorded in other long-term liabilities in the consolidated balance sheet. The consideration was allocated primarily to goodwill for $3.4 million and intangible assets for $5.7 million, which will be amortized over a weighted average period of 8.5 years.
2014 Acquisitions
On May 6, 2014, the Company purchased 100% of the equity of C2 Gaming, LLC (“C2 Gaming”) for $23.3 million in cash, subject to terms outlined in the equity purchase agreement (the “C2 Acquisition Agreement”). C2 Gaming is an innovative manufacturer and developer of EGMs based in Las Vegas, Nevada. The purchase was expected to provide for the distribution of C2 Gaming’s platform and content to an increased number of markets in the United States. The acquisition was funded by an initial cash payment and an agreement to pay the sellers $9.0 million on the one-year anniversary of the closing of the acquisition, which was paid during the quarter ended June 30, 2015. The acquisition also included an amount of contingent consideration of $3.0 million that was payable upon the satisfaction of certain milestones, including the submission and approval of video slot platforms to various jurisdictions as outlined in the C2 Acquisition Agreement.
The following summarizes the consideration paid for C2 Gaming (in thousands):
Paid at close | $ | 11,000 | ||
One-year payment | 9,000 | |||
Contingent consideration | 3,000 | |||
Working capital adjustment | 273 | |||
Total consideration | $ | 23,273 | ||
During the year ended December 31, 2014, the Company paid $0.5 million of the contingent consideration. In May 2015, the C2 Acquisition Agreement was amended to reduce the remaining contingent consideration liability of $2.5 million to $2.1 million and to acknowledge that the milestones of the C2 Acquisition Agreement were satisfied. In July 2015, the Company paid $1.0 million of the contingent consideration, reducing the balance to $1.1 million, which was paid in January 2016.
The allocation of the purchase price to the estimated fair values of the assets acquired and the liabilities assumed was as follows (in thousands):
At May 6, 2014 | ||||
Current assets | $ | 545 | ||
Property and equipment | 534 | |||
Goodwill | 13,744 | |||
Intangible assets | 8,722 | |||
Total assets | 23,545 | |||
Total liabilities | 272 | |||
Total equity purchase price | $ | 23,273 | ||
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Our estimates of the fair values of depreciable tangible assets were as follows (in thousands):
Fair values at May 6, 2014 | Average remaining useful life (in years) | |||||
Property and equipment | $ | 534 | 1 - 5 | |||
Our estimates of the fair values of identifiable intangible assets were as follows (in thousands):
Fair values at May 6, 2014 | Average remaining useful life (in years) | |||||
Gaming software and technology platforms | $ | 3,685 | 3 - 5 | |||
Customer relationships | 5,037 | 7 | ||||
Total intangible assets | $ | 8,722 | ||||
The fair value of property and equipment as well as the fair value of gaming content software was determined using cost approaches in which we determined an estimated reproduction or replacement cost, as applicable.
The estimate of the fair value of the acquired gaming software and technology platforms was determined using the relief from royalty method under the income approach, which is a risk-adjusted discounted cash flow approach. The relief from royalty method values an intangible asset by estimating the royalties saved through ownership of the asset.
The estimate of the fair value of the acquired customer relationships was determined using the excess earnings method, which is a risk-adjusted discounted cash flow approach that determines the value of an intangible asset as the present value of the cash flows attributable to such asset after excluding the proportion of the cash flows that are attributable to other assets.
The goodwill recorded as a results of the acquisition is deductible for tax purposes and is attributed to enhanced financial scale, expanded video slot platforms and other strategic benefits. Some of the values and amounts used in the initial application of purchase accounting for our consolidated balance sheet were based on estimates and assumptions.
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment, net consist of the following (in thousands):
December 31, 2016 | December 31, 2015 | ||||||
Gaming equipment | $ | 108,635 | $ | 89,361 | |||
Other property and equipment | 13,900 | 14,976 | |||||
Less: Accumulated depreciation | (54,609 | ) | (37,638 | ) | |||
Total property and equipment, net | $ | 67,926 | $ | 66,699 | |||
Gaming equipment and other property and equipment are depreciated over the respective useful lives of the assets ranging from three to six years. Depreciation expense was $27.0 million, $23.4 million and $16.8 million for the years ended December 31, 2016, 2015 and 2014, respectively.
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NOTE 4. GOODWILL AND INTANGIBLES
There were no accumulated impairments of goodwill as of December 31, 2016. Changes in the carrying amount of goodwill are as follows (in thousands):
Gross Carrying Amount | |||||||||||||||
EGM | Table Products | Interactive | Total | ||||||||||||
Balance at December 31, 2014 | $ | 77,617 | $ | — | $ | — | $ | 77,617 | |||||||
Acquisition - Cadillac Jack | 171,497 | — | — | 171,497 | |||||||||||
Acquisition - AGSi | — | — | 4,855 | 4,855 | |||||||||||
Acquisition - Intellectual Property | — | 2,600 | — | 2,600 | |||||||||||
Foreign currency adjustments | (2,282 | ) | — | — | (2,282 | ) | |||||||||
Other | (409 | ) | — | (27 | ) | (436 | ) | ||||||||
Balance at December 31, 2015 | 246,423 | 2,600 | 4,828 | 253,851 | |||||||||||
Foreign currency adjustments | (3,627 | ) | — | — | (3,627 | ) | |||||||||
Purchase accounting adjustment | — | 800 | — | 800 | |||||||||||
Balance at December 31, 2016 | $ | 242,796 | $ | 3,400 | $ | 4,828 | $ | 251,024 | |||||||
The Company performed an annual impairment test on each of its reporting units as of October 1, 2016. For the EGM and Table Product reporting units we began with a qualitative assessment, commonly referred to as “Step 0”, and determined it is not more likely than not that the EGM and Table Product reporting units’ fair value of goodwill are less than their carrying value. This qualitative assessment primarily relied on the significant amount of cushion determined in prior year quantitative analyses, favorable current forecasts compared to those used in the prior year analysis, the general economic environment and industry and market conditions.
For the Interactive reporting unit, which has a goodwill carrying value of $4.8 million, the Company performed a quantitative, or “Step 1” analysis. In performing the interim Step 1 goodwill impairment test for our Interactive reporting unit, we estimated the fair value of the Interactive reporting unit using an income approach that analyzed projected discounted cash flows. We used projections of revenues and operating costs with estimated growth rates during the forecast period, capital expenditures and cash flows that considered historical and estimated future results and general economic and market conditions, as well as the estimated impact of planned business and operational strategies. The estimates and assumptions used in the discounted cash flow analysis included a terminal year long-term growth rate of 4.0% and an overall discount rate of 15% based on our weighted average cost of capital for the Company and premiums for the small size of the reporting unit and forecast risk.
The Step 1 analysis determined that the Interactive reporting unit’s fair value was greater than its carrying value.
Intangible assets consist of the following (in thousands):
December 31, 2016 | December 31, 2015 | ||||||||||||||||||||||||
Useful Life (years) | Gross Value | Accumulated Amortization | Net Carrying Value | Gross Value | Accumulated Amortization | Net Carrying Value | |||||||||||||||||||
Indefinite lived trade names | Indefinite | $ | 12,126 | $ | — | $ | 12,126 | $ | 12,126 | $ | — | $ | 12,126 | ||||||||||||
Trade and brand names | 7 | 13,600 | (4,671 | ) | 8,929 | 13,600 | (1,721 | ) | 11,879 | ||||||||||||||||
Customer relationships | 7 | 165,078 | (49,528 | ) | 115,550 | 170,927 | (26,676 | ) | 144,251 | ||||||||||||||||
Contract rights under development and placement fees | 1 - 7 | 16,488 | (5,235 | ) | 11,253 | 16,311 | (548 | ) | 15,763 | ||||||||||||||||
Gaming software and technology platforms | 1 - 7 | 123,596 | (49,014 | ) | 74,582 | 116,930 | (23,735 | ) | 93,195 | ||||||||||||||||
Intellectual property | 10 - 12 | 12,780 | (2,343 | ) | 10,437 | 14,030 | (888 | ) | 13,142 | ||||||||||||||||
$ | 343,668 | $ | (110,791 | ) | $ | 232,877 | $ | 343,924 | $ | (53,568 | ) | $ | 290,356 | ||||||||||||
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Intangible assets are amortized over their respective estimated useful lives ranging from one to twelve years. Amortization expense related to intangible assets was $53.2 million, $38.3 million and $16.6 million for the years ended December 31, 2016, 2015 and 2014, respectively.
Management reviews intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. For the years ended December 31, 2015 and 2014, the Company recognized impairment charges related to internally developed gaming titles of $3.4 million and $1.4 million, respectively. There were no impairments related to internally developed gaming titles for the year ended December 31, 2016.
The Company enters into development agreements and placement fee agreements with certain customers to secure floor space under lease agreements for its gaming machines. Amounts paid in connection with the development agreements are repaid to the Company in accordance with the terms of the agreement, whereas placements fees are not reimbursed. For development agreements in the form of a loan, interest income is recognized on the repayment of the notes based on the stated rate or, if not stated explicitly in the development agreement, on an imputed interest rate. If the stated interest rate is deemed to be other than a market rate or zero, a discount is recorded on the note receivable as a result of the difference between the stated and market rate and a corresponding intangible asset is recorded. The intangible asset is recognized in the financial statements as a contract right under development agreement and amortized as a reduction in revenue over the term of the agreement. Placement fees can be in the form of cash paid upfront or free lease periods and are accreted over the life of the contract and the expense is recorded as a reduction of revenue. We recorded a reduction of gaming operations revenue from the accretion of contract rights under development agreements and placement fees of $4.7 million and $0.5 million for the years ended December 31, 2016 and 2015, respectively. The amount amortized in 2014 was nominal.
The estimated amortization expense of definite-lived intangible assets as well as the accretion of contract rights under development and placement fees, for each of the next five years and thereafter is as follows (in thousands):
Amortization Expense | Placement Fee Accretion | |||||
For the year ended December 31, | ||||||
2017 | $ | 50,153 | $ | 4,564 | ||
2018 | 48,626 | 3,794 | ||||
2019 | 42,064 | 2,609 | ||||
2020 | 25,951 | 57 | ||||
2021 | 7,655 | 39 | ||||
Thereafter | 35,050 | 189 | ||||
Total | $ | 209,499 | $ | 11,252 | ||
NOTE 5. ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
December 31, | |||||||
2016 | 2015 | ||||||
Salary and payroll tax accrual | $ | 6,594 | $ | 5,851 | |||
Taxes payable | 2,128 | 2,440 | |||||
Accrued interest | 2 | 8 | |||||
C2 Gaming contingent consideration (see Note 2) | — | 1,125 | |||||
Placement fees payable | 4,000 | 4,525 | |||||
Accrued other | 4,978 | 4,305 | |||||
Total accrued liabilities | $ | 17,702 | $ | 18,254 | |||
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NOTE 6. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
December 31, | |||||||
2016 | 2015 | ||||||
Senior secured credit facilities: | |||||||
Term loans, interest at LIBOR or base rate plus 8.25% (9.25% at December 31, 2016), net of unamortized discount of $15.1 million and $18.2 million at December 31, 2016 and December 31, 2015, respectively. | $ | 395,581 | $ | 396,717 | |||
Senior secured PIK notes, net of unamortized discount of $3.5 million and $3.9 million at December 31, 2016 and December 31, 2015, respectively. | 133,286 | 118,764 | |||||
Seller notes | 20,116 | 18,902 | |||||
Equipment long-term note payable and capital leases | 4,792 | 5,826 | |||||
Total debt(1) | 553,775 | 540,209 | |||||
Less: Current portion | (6,537 | ) | (6,919 | ) | |||
Long-term debt | $ | 547,238 | $ | 533,290 | |||
(1) Pursuant to the adoption of ASU 2015-03, debt issuance costs of $7.8 million were deducted from the carrying amount of related debt as of December 31, 2015.
Senior Secured Credit Facilities
On December 20, 2013, the Company entered into our senior secured credit facilities, which consisted of $155.0 million in term loans and a $25.0 million revolving credit facility. On May 29, 2015, the Company entered into incremental facilities for $265.0 million in term loans and on June 1, 2015, the Company entered into an incremental agreement for an additional $15.0 million of incremental revolving commitments. The proceeds of the incremental term loans were used primarily to pay the consideration for the Cadillac Jack acquisition.
The term loans will mature on December 20, 2020, and the revolving credit facility will mature on December 20, 2018. The term loans require scheduled quarterly payments in amounts equal to 0.25% of the original aggregate principal amount of the term loans, with the balance due at maturity. Borrowings under the term loans bear interest at a rate equal to, at the Company’s option, either LIBOR or the base rate, subject to an interest rate floor plus an applicable margin rate. Borrowings under the revolving credit facility bear interest at a rate equal to, at the Company’s option, either LIBOR or the base rate plus an applicable margin rate. In addition, on a quarterly basis, the Company is required to pay each lender under the revolving credit facility a commitment fee in respect of any unused commitments thereunder at a rate of 0.50% per annum.
The senior secured credit facilities are guaranteed by AP Gaming Holdings, LLC, the AP Gaming I, LLC’s (the “Borrower”) material, wholly owned domestic subsidiaries (subject to certain exceptions), and are secured by a pledge by AP Gaming Holdings, LLC of the Borrower’s equity interest directly held by AP Gaming Holdings, LLC and a pledge of substantially all of the existing and future property and assets of the Borrower and the subsidiary guarantors, subject to certain exceptions. The senior secured credit facilities require that the Borrower maintain a maximum net first lien leverage ratio set at a maximum of 5.5 to 1. The senior secured credit facilities contain limitations on additional indebtedness, guarantees, incurrence of liens, investments and distributions, as defined. The senior secured credit facilities also contain customary events of default included in similar financing transactions, including, among others, failure to make payments when due, default under other material indebtedness, breach of covenants, breach of representations and warranties, involuntary or voluntary bankruptcy, and material judgments. The Company was in compliance with the covenants of the senior secured credit facilities at December 31, 2016.
Senior Secured PIK Notes
On May 29, 2015, the Company entered into a note purchase agreement with AP Gaming Holdings, LLC, as subsidiary guarantor (the “Subsidiary Guarantor”), Deutsche Bank AG, London Branch, as purchaser (the “Purchaser”), and Deutsche Bank Trust Company Americas, as collateral agent. Pursuant to the agreement, the Company issued $115.0 million of its 11.25% senior secured PIK notes due 2021 (the “Notes”) at an issue price of 97% of the principal amount thereof to the Purchaser in a private placement exempt from registration under the Securities Act of 1933, as amended. The Notes are secured
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by the Company’s equity in its subsidiary AP Gaming, Inc., subject to certain limitations including those imposed by gaming laws, and are unconditionally guaranteed by the Subsidiary Guarantor.
Interest on the Notes will accrue at a rate of 11.25% per annum. The Company may elect to pay interest due on the Notes in cash, by increasing the principal of the outstanding Notes or by issuing new Notes (“PIK interest”) for the entire amount of the interest payment or by paying interest partially in cash and partially in PIK interest. Interest on the Notes will accrue from the date of issuance and will be payable on the dates described in more detail in the agreement. The Notes will mature on May 28, 2021. The net proceeds of the Notes were used primarily to finance the Cadillac Jack acquisition.
The Notes contain limitations on additional indebtedness, guarantees, incurrence of liens, investments and distributions, as defined. The Notes also contains customary events of default included in similar transactions, including, among others, failure to make payments when due, acceleration of other material indebtedness, breach of covenants, breach of representations and warranties, involuntary or voluntary bankruptcy, and material judgments. At December 31, 2016, the Notes totaled $133.3 million, which includes capitalized interest of $21.8 million.
Seller Notes
On December 20, 2013, the Company issued two promissory notes (the “AGS Seller Notes”) to AGS Holdings, LLC, in the amounts of $2.2 million and $3.3 million, to the previous owners of the Company’s primary operating company. At December 31, 2016, notes payable related to the AGS Seller Notes totaled $7.1 million, which includes capitalized interest of $1.6 million. The AGS Seller Notes accrue interest on the unpaid principal balance at 8.5% per annum and shall be payable semi-annually in arrears on June 30 and December 31, commencing on June 30, 2014. Any interest accrued and payable on any interest payment date will be paid by capitalizing such interest and adding it to (and thereby increasing) the outstanding principal amount of this AGS Seller Notes. All principal and interest under the AGS Seller Notes is due and payable on June 18, 2021, the maturity date. The Company may prepay from time to time all or any portion of the outstanding principal balance due under the AGS Seller Notes.
On May 29, 2015, the Company issued a promissory note to Amaya Inc. (the “Amaya Seller Note”) with an initial principal amount of $12.0 million to satisfy the conditions set forth in the stock purchase agreement for Cadillac Jack. The Amaya Seller Note accrues interest on the unpaid principal amount at 5.0% per annum and is payable semi-annually on June 30 and December 31 (and on May 29, 2023, the maturity date of the note), commencing on June 30, 2015. All interest accrued and payable on any interest payment date will be paid by capitalizing such interest and adding it to (and thereby increasing) the outstanding principal amount of the Amaya Seller Note. All principal under the note is due and payable on May 29, 2023. The Amaya Seller Note is required to be prepaid under certain circumstances, such as refinancing our senior secured credit facilities or a public equity offering as described in the note agreement. The Company may prepay from time to time all or any portion of the outstanding principal balance due under the Amaya Seller Note. The Amaya Seller Note includes certain covenants and events of default that are customary for instruments of this type. At December 31, 2016, the Amaya Seller Note totaled $13.0 million, which includes capitalized interest of $1.0 million.
Equipment Long Term Note Payable and Capital Leases
The Company has entered into a financing agreement to purchase certain gaming devices, systems and related equipment and has entered into leases for servers and equipment that are accounted for as capital leases.
Scheduled Maturities of Long-Term Debt
Aggregate contractual future principal payments (excluding the effects of repayments for excess cash flow) of long-term debt for the years following December 31, 2016, are as follows (in thousands):
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For the year ending December 31, | |||
2017 | $ | 6,537 | |
2018 | 6,350 | ||
2019 | 4,605 | ||
2020 | 397,953 | ||
2021 | 143,920 | ||
Thereafter | 12,998 | ||
Total scheduled maturities | 572,363 | ||
Unamortized debt discount and debt issuance costs | (18,588 | ) | |
Total long-term debt | $ | 553,775 | |
NOTE 7. STOCKHOLDERS’ EQUITY
Common Stock
The Company’s common stock consists of two classes: class A voting common stock (“Class A Shares”) and class B non-voting common stock (“Class B Shares”). The holders of the Class A Shares are entitled to one vote per share on all matters to be voted on by the stockholders of the Company. The holders of the Class A Shares have no economic rights or privileges, including rights in liquidation, and have no right to receive dividends or any other distributions. The holders of the Class B Shares have no right to vote on any matter to be voted on by the stockholders of the Company. Each holder of Class B Shares is entitled to share equally, share for share, dividends declared, as well as any distributions to the stockholders, and in the event of the Company’s liquidation, dissolution or winding up, is entitled to share ratably in any remaining assets after payment of or provision for liabilities and the liquidation on preferred stock, if any.
On April 28, 2014, our controlling stockholder exchanged its 10,000,000 Class A Shares for 10,000,000 Class B Shares. On May 29, 2015, we issued an additional 4,931,529 Class B Shares to our controlling stockholder for total proceeds of $77.4 million. The funds received from the May 2015 issuance of Class B Shares were used, in addition to proceeds from the issuance of long-term debt, to fund the acquisition of Cadillac Jack.
As of December 31, 2016, 108,307 Class B Shares issued to “Management Holder,” as defined in the Securityholders Agreement dated April 28, 2014 (the “Securityholders Agreement”) were outstanding. The Class B Shares were sold to the Management Holder and are not considered issued for accounting purposes as they contain a substantive performance condition, a “Qualified Public Offering,” as defined in the Securityholders Agreement, which must be probable for the Management Holder to benefit from the ownership of the shares. As a result, shares issued to the Management Holder are not considered issued for accounting purposes until such time that the performance condition is probable and the Company has recorded a liability in other long-term liabilities of $1.3 million for the proceeds from the sale of the Class B Shares. No share-based compensation expense for Class B Shares has been recognized and none will be recognized for these shares until the performance condition is considered to be probable.
Class B Shares that are held by a Management Holder are subject to repurchase rights (the “Repurchase Rights”), as outlined in Section 6 of the Securityholders Agreement, that are contingent on the Management Holder’s termination. The Repurchase Rights enable the Company to recover the Class B Shares issued to a Management Holder without transferring any appreciation of the fair value of the stock to the Management Holder upon certain terminations of the Management Holder’s employment prior to a “Qualified Public Offering”, as defined in the Securityholders Agreement. If a Management Holder’s employment is terminated by the Company prior to the consummation of a Qualified Public Offering for “Cause”, as defined in the Securityholders Agreement, or is terminated by such Management Holder without “Good Reason”, as defined in the Securityholders Agreement, then the Company shall have the right to repurchase all or any portion of the Class B Shares held by such Management Holder for the lesser of original cost and fair market value. If a Management Holder’s employment is terminated by the Company prior to the consummation of a Qualified Public Offering other than as described above and in the Securityholders Agreement, then the Company shall have the right to repurchase all or any portion of the Class B Shares held by such Management Holder for fair market value.
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NOTE 8. WRITE DOWNS AND OTHER CHARGES
During the year ended December 31, 2016, the Company recognized $3.3 million in write-downs and other charges, driven by a $3.3 million impairment of an intangible asset related to a customer contract that the Company expects will provide less benefit than originally estimated from the Cadillac Jack acquisition (a level 3 fair value measurement based on a decrease in projected cash flows). The value of the intangible asset was written down to $1.1 million at an interim date and subsequently fully amortized by December 31, 2016. Additionally the Company recorded a write-down of long-lived assets of $2.0 million related to older generation gaming machines (level 3 fair value measurement based on projected cash flow for the specific assets) in which the long-lived assets were written down to $0, and losses from the disposal of assets of $1.0 million. These charges were offset by a $3.0 million fair value adjustment to a contingent consideration receivable related to the Cadillac Jack acquisition (level 3 fair value measurement based on expected and probable future realization of the receivable).
For the year ended December 31, 2015, the Company recognized $11.8 million in write-downs and other charges primarily related to acquisition related charges of $8.2 million. The Company also recognized a full impairment to intangible assets of $3.4 million related to game titles (level 3 fair value measurement based on projected cash flows for the specific game titles), write offs related to prepaid royalties of $1.3 million, losses from the disposal of assets of $1.3 million and the impairment of long-lived assets of $0.2 million (level 3 fair value measurement based on projected cash flow for the specific assets with an estimated fair value of $0), fair value adjustment of $3.4 million to the asset associated with the stock options of Amaya, Inc. described in Note 2 (level 2 fair value measurement primarily based on the stock price of Amaya, Inc. with a final estimated fair value of $4.9 million), partially offset by write downs of primarily contingent consideration of $6.1 million that is described in Note 2 (level 3 fair value measurements based on projected cash flows).
For the year ended December 31, 2014, the Company recognized $7.1 million in write-downs and other charges primarily related to acquisition charges of $2.8 million, losses from the disposal of assets of $1.9 million, an impairment to intangible assets of $1.4 million (level 3 fair value measurement based on projected cash flow for the specific assets) and an impairment of long-lived assets of $0.8 million (level 3 fair value measurement based on projected cash flow for the specific assets).
NOTE 9. BASIC AND DILUTED LOSS PER SHARE
The Company computes net income (loss) per share in accordance with accounting guidance that requires presentation of both basic and diluted earnings per share (“EPS”) on the face of the consolidated statement of operations and comprehensive income (loss). Basic EPS is computed by dividing net income (loss) for the period by the weighted average number of shares outstanding during the period. Basic EPS excludes Class B Shares issued to Management Holders until the performance condition or termination event is considered probable (see Note 7). Until such time, the Class B Shares issued to Management Holders will be included in the calculation of diluted EPS using the treasury stock method and are treated as stock options. Diluted EPS is computed by dividing net income (loss) for the period by the weighted average number of common shares outstanding during the period, increased by potentially dilutive common shares that were outstanding during the period. Diluted EPS excludes all potential dilutive shares if their effect is anti-dilutive. Potentially dilutive common shares include stock options and restricted stock (see Note 11).
There were no potentially dilutive securities for the years ended December 31, 2016, 2015, 2014.
Excluded from the calculation of diluted EPS for the year ended December 31, 2016 and December 31, 2015, were 50,000 restricted shares and 0.3 million stock options, as such securities were anti-dilutive. Excluded from the calculation of diluted EPS for the year ended December 31, 2014, were 50,000 restricted shares and 0.4 million stock options, as such securities were anti-dilutive.
NOTE 10. BENEFIT PLANS
The Company has established a 401(k) defined contribution plan (the “401(k) Plan”) for its employees. The 401(k) Plan allows employees to contribute up to 15% of their pretax earnings, and the Company may match a percentage of the contributions on a discretionary basis. The expense associated with the 401(k) Plan for the years ended December 31, 2016, 2015 and 2014 was $0.9 million, $0.6 million and $0.3 million, respectively. The increase in the expense associated with the 401(k) Plan in each year is primarily attributable to increased headcount and participation.
On April 28, 2014, the board of directors of the Company approved the 2014 Long-Term Incentive Plan (“LTIP”). Under the LTIP, the Company is authorized to grant nonqualified stock options, rights to purchase Class B Shares, restricted stock, restricted stock units and other awards to be settled in, or based upon, Class B Shares to persons who are directors and employees of and consultants to the Company or any of its subsidiaries on the date of the grant. The LTIP will terminate ten
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years after approval by the board. Subject to adjustments in connection with certain changes in capitalization, the maximum number of Class B Shares that may be delivered pursuant to awards under the LTIP is 1,250,000. As of December 31, 2016, approximately 200,000 shares remain available for issuance.
NOTE 11. SHARE-BASED COMPENSATION
Stock Options
The Company has granted stock awards to eligible participants under the LTIP. The stock awards include options to purchase the Company’s Class B Shares. These stock options include a combination of service and market conditions, as further described below. In addition, these stock options include a performance vesting condition, a Qualified Public Offering (see Note 7), which is not considered to be probable as of December 31, 2016. As a result, no share-based compensation expense for stock options has been recognized and none will be recognized for these stock awards until the performance condition is considered to be probable. The amount of unrecognized compensation expense associated with stock options was $6.1 million and for restricted stock was $0.5 million at December 31, 2016. When the performance condition is considered probable, the stock awards will vest in accordance with the underlying service and market conditions.
The Company calculated the grant date fair value of stock options that vest over a service period using the Black Scholes model. For stock options that contain a market condition related to the return on investment that the Company’s stockholders achieve, the options were valued using a lattice-based option valuation model. The assumptions used in these calculations are noted in the following table. Expected volatilities are based on implied volatilities from comparable companies. The expected time to liquidity is based on management’s estimate. The risk-free rate is based on the U.S. Treasury yield curve for a term equivalent to the estimated time to liquidity. The expected dividend yield is 0% for all stock awards.
Year Ended December 31, | |||||
2016 | 2015 | 2014 | |||
Option valuation assumptions: | |||||
Expected dividend yield | —% | —% | —% | ||
Expected volatility | 56% | 55% | 73% | ||
Risk-free interest rate | 1.64% | 1.69% | 1.63% | ||
Expected term (in years) | 6.3 | 6.4 | 5.0 | ||
Stock option awards represent options to purchase Class B Shares and are granted pursuant to the Company’s LTIP, and include options that the Company primarily classifies as Tranche A, Tranche B and Tranche C.
Tranche A options are eligible to vest in equal installments of 20% on each of the first five anniversaries of the date of the grant, subject to continued employment with the Company or its subsidiaries in addition to the performance vesting condition of a Qualified Public Offering described above. In the event of a termination of employment without cause or as a result of death or disability, any such time based options which would have vested on the next applicable vesting date shall become vested, and the remaining unvested time based options shall be forfeited. In addition, upon a Change in Control (as defined in the Company’s 2014 Long-Term Incentive Plan), subject to continued employment through the date of the Change in Control, all outstanding unvested time based options shall immediately vest. An initial public offering does not qualify as a Change in Control as it relates to the vesting of stock options.
All other option awards are eligible to vest upon the satisfaction of certain performance conditions (collectively, “Performance Options”) in addition to the performance vesting condition of a Qualified Public Offering described above. Tranche B options are eligible to vest based on achievement of an Investor IRR equal to or in excess of 20%, subject to a minimum cash-on-cash return of 2.5 times the Investor Investment (as such terms are defined in the Company’s 2014 Long-Term Incentive Plan). Tranche C options are eligible to vest based on achievement of an Investor IRR equal to or in excess of 25%, subject to a minimum cash-on-cash return of 3.0 times the Investor Investment. In the event of a termination of employment without cause or as a result of death or disability, any Performance Options which are outstanding and unvested will remain eligible to vest subject to achievement of such performance targets (without regard to the continued service requirement) until the first anniversary of the date of such termination. As of December 31, 2016, the Company had 381,666 Performance Options outstanding.
F-26
A summary of the changes in stock options outstanding during the year ended December 31, 2016, is as follows:
Number of Options | Weighted Average Exercise Price | Weighted Average Remaining Contract Term (years) | Aggregate Intrinsic Value | |||||||||
Options outstanding as of December 31, 2015 | 765,375 | $ | 12.46 | |||||||||
Granted | 247,600 | $ | 17.01 | |||||||||
Canceled | (117,875 | ) | $ | 15.25 | ||||||||
Options outstanding as of December 31, 2016 | 895,100 | $ | 13.35 | 8.2 | $ | 3,457,748 | ||||||
No options expired or were forfeited for the year ended December 31, 2016.
The following is provided for stock options granted:
Year Ended December 31, | |||||||||||
2016 | 2015 | 2014 | |||||||||
Weighted average grant date fair value | $ | 8.96 | $ | 7.44 | $ | 5.38 | |||||
Restricted awards
During the year ended December 31, 2014, the Company granted 50,000 restricted Class B Shares that vest in five equal installments on each of the first five anniversaries of the grant date in addition to the performance vesting condition of a Qualified Public Offering described above. As of December 31, 2016, the Company had 50,000 unvested restricted shares outstanding with a weighted average grant date fair value of $10. No restricted stock was granted, canceled or forfeited during the years ended December 31, 2016 and 2015. This restricted stock includes a service condition and a performance vesting condition (a Qualified Public Offering), which was not considered to be probable of occurring as of December 31, 2016. As a result, no share-based compensation expense was recognized for the years ended December 31, 2016, 2015 and 2014, and none will be recognized for restricted stock until the performance condition is considered to be probable. When the performance condition is considered probable, the stock awards will vest in accordance with the underlying service condition.
NOTE 12. RESTRUCTURING
We recorded no employee termination and restructuring costs during the year ended December 31, 2016. We recorded employee termination and restructuring costs of $1.4 million and $1.2 million during the years ended December 31, 2015 and 2014, respectively. We do not anticipate additional costs associated with the following plans in excess of amounts accrued below. Employee termination and restructuring costs are classified in selling, general and administrative as well as research and development expense and have been recorded for the following restructuring plans.
Cadillac Jack Integration Plan
In June 2015, we took actions to reduce the staff in all of our locations and to streamline our operations and cost structure. The Company has also entered into retention agreements with certain employees that will be paid upon the completion of their service period.
The following table summarizes the change in our restructuring accruals for the year ended December 31, 2016 (in thousands), which is included in accounts payable and accrued liabilities in the consolidated balance sheets:
December 31, 2015 | Charge to expense | Cash paid | December 31, 2016 | ||||||||||||
Accrued severance | $ | 37 | $ | — | $ | 37 | $ | — | |||||||
Total | $ | 37 | $ | — | $ | 37 | $ | — | |||||||
F-27
NOTE 13. INCOME TAXES
The components of loss before provision for income taxes are as follows (in thousands):
Year ended December 31, | |||||||||||
2016 | 2015 | 2014 | |||||||||
Domestic | $ | (69,020 | ) | $ | (66,728 | ) | $ | (26,187 | ) | ||
Foreign | (15,354 | ) | (7,906 | ) | — | ||||||
Loss before provision for income taxes | $ | (84,374 | ) | $ | (74,634 | ) | $ | (26,187 | ) | ||
The income tax (benefit) expense is as follows (in thousands):
Year ended December 31, | |||||||||||
2016 | 2015 | 2014 | |||||||||
Current: | |||||||||||
Federal | $ | (958 | ) | $ | 932 | $ | — | ||||
State | 113 | (10 | ) | 7 | |||||||
Foreign | 5,865 | 1,424 | — | ||||||||
Total current income tax expense | 5,020 | 2,346 | 7 | ||||||||
Deferred: | |||||||||||
Federal | (7,550 | ) | (34,589 | ) | 2,005 | ||||||
State | (31 | ) | (2,506 | ) | 177 | ||||||
Foreign | (439 | ) | (1,340 | ) | — | ||||||
Total deferred income (benefit) expense | (8,020 | ) | (38,435 | ) | 2,182 | ||||||
Income tax (benefit) expense | $ | (3,000 | ) | $ | (36,089 | ) | $ | 2,189 | |||
The reconciliation of income tax at the federal statutory rate to the actual effective income tax rate (benefit) is as follows:
Year ended December 31, | ||||||||
2016 | 2015 | 2014 | ||||||
Federal statutory rate | (35.0 | )% | (35.0 | )% | (34.0 | )% | ||
Foreign rate differential | 0.2 | % | 0.7 | % | — | % | ||
State income taxes, net of federal benefit | — | % | (2.5 | )% | (0.8 | )% | ||
Nondeductible loan costs | 1.8 | % | 1.5 | % | — | % | ||
Nondeductible transaction costs | — | % | 1.6 | % | — | % | ||
Other differences | 3.2 | % | 0.2 | % | 0.6 | % | ||
Expiration of tax credits | 1.9 | % | — | % | — | % | ||
Uncertain tax positions | 0.6 | % | 0.3 | % | — | % | ||
Valuation allowance | 23.7 | % | (15.2 | )% | 42.6 | % | ||
(3.6 | )% | (48.4 | )% | 8.4 | % | |||
F-28
The components of the net deferred tax liability consist of the following (in thousands):
December 31, | |||||||
2016 | 2015 | ||||||
Deferred tax assets: | |||||||
Accrued expenses | $ | 662 | $ | 608 | |||
Allowance for bad debt | 1,175 | 1,176 | |||||
Payroll accruals | 1,818 | 2,085 | |||||
Foreign tax credits | 9,541 | 8,834 | |||||
Net operating loss carryforwards | 47,019 | 35,862 | |||||
Property and equipment, net | 1,830 | — | |||||
Research and development credits | 1,420 | 1,569 | |||||
Loan costs and interest | 3,441 | 3,519 | |||||
Other | 1,654 | 2,017 | |||||
Total deferred tax assets | 68,560 | 55,670 | |||||
Valuation allowance | (28,211 | ) | (8,274 | ) | |||
Deferred tax assets, net of valuation allowance | $ | 40,349 | $ | 47,396 | |||
Deferred tax liabilities: | |||||||
Prepaid expenses and other | $ | (512 | ) | $ | (1,033 | ) | |
Intangible assets | (46,785 | ) | (60,309 | ) | |||
Property and equipment, net | — | (1,364 | ) | ||||
Deferred tax liabilities | (47,297 | ) | (62,706 | ) | |||
Net deferred tax liabilities | $ | (6,948 | ) | $ | (15,310 | ) | |
In general, it is the practice and intention of the Company to reinvest the earnings of its non-U.S. subsidiaries in those operations. Due to cumulative foreign losses, there is no deferred tax liability recorded for unremitted foreign earnings.
The Company assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to realize the existing deferred tax assets. On the basis of this evaluation, as of December 31, 2016, a valuation allowance of $28.2 million has been established against deferred tax assets.
The Company’s Mexican customers are required under the U.S.-Mexico tax treaty to withhold 10% of their payments due to the Company for license fees, which can be used as foreign tax credits on the Company’s U.S. federal income tax return. The foreign tax credits are not refundable, but can be carried forward for 10 years to offset future tax liability. Of the Company’s $9.5 million in foreign tax credits, approximately $1.7 million begin to expire starting in 2017. In addition, the Company has $1.4 million of research and development credits which begin to expire in 2028. A full valuation allowance has been recorded on the foreign tax credits and research and development credits.
The Company has net operating loss (“NOL”) carryforwards for U.S. federal purposes of $115.9 million, in foreign jurisdictions of $18.6 million and various U.S. states of $43.6 million. The U.S. federal NOL carryforwards begin to expire in 2031, the Mexican NOL carryforwards begin to expire in 2021, and the U.S. state NOL carryforwards begin to expire in 2018.
The Company has uncertain tax positions with respect to prior tax filings. The uncertain tax positions, if asserted by taxing authorities, would result in utilization of the Company’s tax credit and operating loss carryovers. The credit and operating loss carryovers presented as deferred tax assets are reflected net of these unrecognized tax benefits.
F-29
The Company had the following activity for unrecognized tax benefits in 2016 and 2015 (amounts in thousands):
December 31, 2016 | December 31, 2015 | |||||
Balance-beginning of year | $ | 29,523 | $ | — | ||
Acquisitions | — | 29,701 | ||||
Increases based on tax positions of the current year | 1,005 | 795 | ||||
Decreases due to lapse of statute | (236 | ) | — | |||
Increases based on tax positions of the prior years | 1,963 | — | ||||
Decreases based on tax positions of the prior years | (664 | ) | — | |||
Currency translation adjustments | (1,427 | ) | (973 | ) | ||
Balance-end of year | $ | 30,164 | $ | 29,523 | ||
As of December 31, 2014, we have not recorded a reserve for unrecognized tax benefits or penalties.
The Company applies a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company recognizes the impact of a tax position in the financial statements when the position is more likely than not of being sustained on audit based on the technical merits of the position.
The total amount of unrecognized tax benefits as of December 31, 2016 was $30.2 million. Of this amount, $11.5 million, if recognized, would be included in our Consolidated Statements of Operations and Comprehensive Loss and have an impact on our effective tax rate. The Company does not anticipate a material reduction of its liability for unrecognized tax benefits before December 31, 2017.
The Company recognizes interest and penalties accrued for unrecognized tax benefits in income tax expense. Related to the unrecognized tax benefits noted above, the Company accrued penalties and interest of $0.4 million during 2016 and in total, as of December 31, 2016, has recognized a liability for penalties and interest of $8.4 million.
The Company entered into an indemnification agreement with the prior owners of Cadillac Jack whereby the prior owners have agreed to indemnify the Company for changes in tax positions by taxing authorities for periods prior to the acquisition. As of December 31, 2016, an indemnification receivable of $16.4 million has been recorded as an other asset in the financial statements. This amount includes the indemnification of the original pre-acquisition tax positions along with any related accrued interest and penalties and is also recorded as a liability for unrecognized tax benefits in other long-term liabilities. The Company concluded that it is probable the indemnification receivable is realizable based on an evaluation of the ability of Cadillac Jack’s prior owner, including a review of its public filings, that demonstrates its financial resources are sufficient to support the amount recorded. If the related unrecognized tax benefits are subsequently recognized, a corresponding charge to relieve the associated indemnification receivables would be recognized in our Consolidated Statements of Operations and Comprehensive Loss and have an impact on operating income.
NOTE 14. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases administrative and warehouse facilities and certain equipment under non-cancelable operating leases. Rent expense was $2.5 million, $2.0 million, and $0.8 million for the years ended December 31, 2016, 2015 and 2014, respectively.
F-30
Future minimum lease payments under these leases in excess of one year as of December 31, 2016 are as follows (in thousands):
For the year ended December 31, | |||
2017 | $ | 1,533 | |
2018 | 1,177 | ||
2019 | 1,054 | ||
2020 | 1,091 | ||
2021 | 649 | ||
Thereafter | 157 | ||
Total | $ | 5,661 | |
Other commitments and contingencies
The Company is subject to federal, state and Native American laws and regulations that affect both its general commercial relationships with its Native American tribal customers, as well as the products and services provided to them. Periodically, the Company reviews the status of each significant matter and assesses the potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and the amount can be estimated, the Company accrues a liability for the estimated loss. If a potential loss from any claim or legal proceeding is considered reasonably possible, the Company discloses an estimate of the possible loss or range of possible loss, or a statement that such an estimate cannot be made. There are no matters that meet the criteria for disclosure outlined above. Significant judgment is required in both the determination of probability and the determination as to whether an exposure is reasonably estimable. Because of uncertainties related to these matters, accruals are based only on the best information available at the time. As additional information becomes available, the Company reassesses the potential liability related to their pending claims and litigation and may revise its estimates. Such revisions in the estimates of the potential liabilities could have a material impact on the results of operations and financial condition.
NOTE 15. OPERATING SEGMENTS
In the fourth quarter of fiscal year 2016, the Company revised its business segment disclosures to report results by segment in accordance with the “management approach.” The management approach designates the internal reporting used by our chief operating decision maker, who is our Chief Executive Officer, for making decisions and assessing performance of our reportable segments.
See Note 1 for a detailed discussion of our three segments. Each segment’s activities include the design, development, acquisition, manufacturing, marketing, distribution, installation and servicing of its product lines. We evaluate the performance of our operating segments based on revenues and segment adjusted EBITDA.
Segment revenues include leasing, licensing, or selling of products within each reportable segment. Segment adjusted EBITDA includes the revenues and operating expenses from each segment adjusted for depreciation, amortization, write downs and other charges, accretion of placement fees, non-cash stock compensation expense, as well as other costs such as certain acquisitions and integration related costs including restructuring and severance charges; legal and litigation expenses including settlement payments; new jurisdictions and regulatory licensing costs; non-cash charges on capitalized installation and delivery; contract cancellation fees; and other adjustments primarily composed of professional fees incurred by the Company for projects, corporate and public filing compliance and other costs deemed to be non-recurring in nature. Revenues in each segment are attributable to third parties and segment operating expenses are directly associated with the product lines included in each segment such as research and development, product approval costs, product-related litigation expenses, sales commissions and other directly-allocable sales expenses. Cost of gaming operations and cost of equipment sales primarily include the cost of products sold, service, manufacturing overhead, shipping and installation.
Segment adjusted EBITDA excludes other income and expense, income taxes and certain expenses that are managed outside of the operating segments.
F-31
The following provides financial information concerning our reportable segments for the years ended December 31:
2016 | 2015 | 2014 | |||||||||
Revenues by segment | |||||||||||
EGM | $ | 156,407 | $ | 119,617 | $ | 72,028 | |||||
Table Products | 2,674 | 1,672 | 112 | ||||||||
Interactive | 7,725 | 2,003 | — | ||||||||
Total Revenues | 166,806 | 123,292 | 72,140 | ||||||||
Adjusted EBITDA by segment | |||||||||||
EGM | 91,729 | 66,267 | 40,552 | ||||||||
Table Products | (1,663 | ) | (1,402 | ) | (343 | ) | |||||
Interactive | (4,727 | ) | (2,518 | ) | — | ||||||
Subtotal | 85,339 | 62,347 | 40,209 | ||||||||
Write downs and other: | |||||||||||
Loss on disposal of long lived assets | 978 | 1,275 | 1,937 | ||||||||
Impairment of long lived assets | 5,295 | 4,993 | 2,327 | ||||||||
Fair value adjustments to contingent consideration and other items | (3,000 | ) | (2,667 | ) | — | ||||||
Acquisition costs | (11 | ) | 8,165 | 2,804 | |||||||
Depreciation and amortization | 80,181 | 61,662 | 33,405 | ||||||||
Accretion of placement fees(1) | 4,702 | 496 | 58 | ||||||||
Non-cash stock compensation | — | 4,911 | — | ||||||||
Acquisitions & integration related costs including restructuring & severance | 5,411 | 7,818 | 3,582 | ||||||||
Legal & litigation expenses including settlement payments | 1,565 | 1,916 | 450 | ||||||||
New jurisdictions and regulatory licensing costs | 1,315 | 256 | 266 | ||||||||
Non-cash charge on capitalized installation and delivery | 1,680 | 1,441 | 643 | ||||||||
Non-cash charges and loss on disposition of assets | 2,478 | 234 | 561 | ||||||||
Other adjustments | 1,809 | 1,286 | 2,597 | ||||||||
Interest expense | 59,963 | 41,642 | 17,235 | ||||||||
Interest income | (57 | ) | (82 | ) | (42 | ) | |||||
Other expense (income) | 7,404 | 3,635 | 573 | ||||||||
Loss before income taxes | $ | (84,374 | ) | $ | (74,634 | ) | $ | (26,187 | ) | ||
(1) Non-cash expense related to the accretion of contract rights under development agreements and placement fees.
The Company’s Chief Operating Decision Maker (the “CODM”) does not receive a report with a measure of total assets or capital expenditures for each reportable segment as this information is not used for the evaluation of segment performance. The CODM assesses the performance of each segment based on adjusted EBITDA and not based on assets or capital expenditures due to the fact that two of the Company’s reportable segments, Table Products and Interactive, are not capital intensive. Any capital expenditure information is provided to the CODM on a consolidated basis. Therefore, the Company has not provided asset and capital expenditure information by reportable segment.
F-32
The following provides financial information concerning our operations by geographic area for the years ended December 31 (in thousands):
Year ended December 31, | |||||||||||
Revenue: | 2016 | 2015 | 2014 | ||||||||
United States | 138,510 | 110,392 | 72,140 | ||||||||
Other | 28,296 | 12,900 | — | ||||||||
166,806 | 123,292 | 72,140 | |||||||||
Year ended December 31, | |||||||||||
Long-lived assets, end of year: | 2016 | 2015 | 2014 | ||||||||
United States | $ | 70,208 | $ | 63,858 | $ | 44,045 | |||||
Other | 5,169 | 6,909 | 69 | ||||||||
$ | 75,377 | $ | 70,767 | $ | 44,114 | ||||||
NOTE 16. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables present selected quarterly financial information for 2016 and 2015, as previously reported (in thousands).
Quarter ended March 31, 2016 | Quarter ended June 30, 2016 | Quarter ended September 30, 2016 | Quarter ended December 31, 2016 | ||||||||||||
Consolidated Income Statement Data: | |||||||||||||||
Revenues | $ | 40,235 | $ | 42,618 | $ | 41,208 | $ | 42,745 | |||||||
Gross profit[1] | 33,792 | 32,599 | 33,799 | 33,643 | |||||||||||
Loss from operations | (4,206 | ) | (4,338 | ) | (7,117 | ) | (1,403 | ) | |||||||
Net (loss) income | (21,066 | ) | (18,839 | ) | (21,235 | ) | (20,234 | ) | |||||||
Basic loss per share | (1.41 | ) | (1.26 | ) | (1.42 | ) | (1.36 | ) | |||||||
Diluted loss per share | (1.41 | ) | (1.26 | ) | (1.42 | ) | (1.36 | ) | |||||||
Quarter ended March 31, 2015 | Quarter ended June 30, 2015 | Quarter ended September 30, 2015 | Quarter ended December 31, 2015 | ||||||||||||
Consolidated Income Statement Data: | |||||||||||||||
Revenues | $ | 18,795 | $ | 26,296 | $ | 38,105 | $ | 40,096 | |||||||
Gross profit[1] | 15,516 | 20,429 | 30,641 | 31,867 | |||||||||||
Loss from operations | (3,736 | ) | (11,339 | ) | (13,017 | ) | (1,347 | ) | |||||||
Net (loss) income | (9,235 | ) | 2,849 | (23,279 | ) | (8,880 | ) | ||||||||
Basic income (loss) per share | (0.92 | ) | 0.24 | (1.56 | ) | (0.69 | ) | ||||||||
Diluted income (loss) per share | (0.92 | ) | 0.24 | (1.56 | ) | (0.69 | ) | ||||||||
[1] Gross profit is total revenues less cost of gaming operations and cost of equipment sales, exclusive of depreciation and amortization.
F-33
ITEM 15(a)(2). FINANCIAL STATEMENT SCHEDULES
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
PLAYAGS, INC.
(PARENT COMPANY ONLY)
CONDENSED BALANCE SHEETS
(in thousands, except share data)
December 31, | |||||||
2016 | 2015 | ||||||
Assets | |||||||
Current assets | |||||||
Cash and cash equivalents | $ | 10,171 | $ | 25,972 | |||
Prepaid expenses | 40 | 63 | |||||
Total current assets | 10,211 | 26,035 | |||||
Deferred tax asset | — | 3,528 | |||||
Investment in subsidiaries | 153,926 | 203,390 | |||||
Total assets | $ | 164,137 | $ | 232,953 | |||
Liabilities and Stockholders’ Equity | |||||||
Current liabilities | |||||||
Accounts payable and accrued liabilities | $ | 36 | $ | — | |||
Intercompany payables | 93 | 20 | |||||
Total current liabilities | 129 | 20 | |||||
Long-term debt | 146,284 | 131,125 | |||||
Other long-term liabilities | 1,296 | 1,271 | |||||
Total liabilities | 147,709 | 132,416 | |||||
Stockholders’ equity: | |||||||
Common stock | 149 | 149 | |||||
Additional paid-in capital | 177,276 | 177,276 | |||||
Retained earnings | (156,451 | ) | (75,077 | ) | |||
Accumulated other comprehensive loss | (4,546 | ) | (1,811 | ) | |||
Total stockholders’ equity | 16,428 | 100,537 | |||||
Total liabilities and stockholders’ equity | $ | 164,137 | $ | 232,953 | |||
F-34
PLAYAGS, INC.
(PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF OPERATIONS
(in thousands)
Year ended December 31, | |||||||||||
2016 | 2015 | 2014 | |||||||||
Operating expenses | |||||||||||
Selling, general and administrative | $ | 231 | $ | 546 | $ | 1,512 | |||||
Total operating expenses | 231 | 546 | 1,512 | ||||||||
Loss from operations | (231 | ) | (546 | ) | (1,512 | ) | |||||
Other expense (income) | |||||||||||
Equity in net loss of subsidiaries | 62,450 | 33,405 | 26,870 | ||||||||
Interest expense | 15,165 | 8,123 | — | ||||||||
Interest income | — | (1 | ) | (6 | ) | ||||||
Loss before income taxes | (77,846 | ) | (42,073 | ) | (28,376 | ) | |||||
Income tax benefit (expense) | (3,528 | ) | 3,528 | — | |||||||
Net loss | (81,374 | ) | (38,545 | ) | (28,376 | ) | |||||
Foreign currency translation adjustment | (2,735 | ) | (2,099 | ) | 289 | ||||||
Total comprehensive loss | $ | (84,109 | ) | $ | (40,644 | ) | $ | (28,087 | ) | ||
F-35
PLAYAGS, INC.
(PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands, except per share data)
Year ended December 31, | |||||||||||
2016 | 2015 | 2014 | |||||||||
Cash flows from operating activities | |||||||||||
Net loss | $ | (81,374 | ) | $ | (38,545 | ) | $ | (28,376 | ) | ||
Adjustments to reconcile net loss to net cash (used in) provided by operating activities: | |||||||||||
Amortization of deferred loan costs and discount | 340 | 143 | — | ||||||||
Payment-in-kind interest capitalized | 14,819 | 7,980 | — | ||||||||
Equity in net loss of subsidiaries | 62,450 | 33,405 | 26,870 | ||||||||
(Benefit) provision of deferred income tax | 3,528 | (3,528 | ) | — | |||||||
Changes in assets and liabilities that relate to operations: | |||||||||||
Prepaid expenses | 23 | 6 | (69 | ) | |||||||
Intercompany payable/receivable | 148 | 455 | 455 | ||||||||
Accounts payable and accrued liabilities | 35 | (24 | ) | 24 | |||||||
Net cash (used in) provided by operating activities | (31 | ) | (108 | ) | (1,096 | ) | |||||
Cash flows from investing activities | |||||||||||
Investment in subsidiaries | (15,720 | ) | (172,484 | ) | (11,635 | ) | |||||
Distributions received from subsidiaries | — | 1,322 | 2,737 | ||||||||
Net cash used in investing activities | (15,720 | ) | (171,162 | ) | (8,898 | ) | |||||
Cash flows from financing activities | |||||||||||
Proceeds from issuance of debt | — | 111,550 | — | ||||||||
Proceeds from issuance of common stock | — | 77,425 | — | ||||||||
Proceeds from employees in advance of common stock issuance | — | 579 | 1,969 | ||||||||
Repurchase of shares issued to management | (50 | ) | (277 | ) | — | ||||||
Payment of deferred loan costs | — | (548 | ) | — | |||||||
Net cash provided by financing activities | (50 | ) | 188,729 | 1,969 | |||||||
Increase (decrease) in cash and cash equivalents | (15,801 | ) | 17,459 | (8,025 | ) | ||||||
Cash and cash equivalents, beginning of period | 25,972 | 8,513 | 16,538 | ||||||||
Cash and cash equivalents, end of period | $ | 10,171 | $ | 25,972 | $ | 8,513 | |||||
Non-cash investing and financing activities: | |||||||||||
Subsidiary payment for share repurchase on Company’s behalf | $ | — | $ | 1,000 | $ | — | |||||
Intercompany payable settled as distribution | $ | — | $ | 890 | $ | — | |||||
Incurrence of Amaya Seller Note | $ | — | $ | 12,000 | $ | — | |||||
F-36
PLAYAGS, INC.
(PARENT COMPANY ONLY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The parent company financial statements of PlayAGS, Inc. (formerly, AP Gaming Holdco, Inc.) (the “ Parent Company”) should be read in conjunction with the Company’s consolidated financial statements and the accompanying notes thereto. For purposes of these condensed financial statements, the Parent Company’s wholly owned and majority owned subsidiaries are recorded based upon its proportionate share of the subsidiaries’ net assets (similar to presenting them on the equity method).
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted since this information is included in the Company’s consolidated financial statements included elsewhere in this Form 10-K.
NOTE 2 - COMMITMENTS AND CONTINGENCIES
The Parent Company is a holding company and, as a result, its ability to pay dividends is dependent on its subsidiaries’ ability to obtain funds and its subsidiaries' ability to provide funds to it. Restrictions are imposed by its subsidiaries' debt instruments, which significantly restrict certain key subsidiaries holding a majority of its assets from making dividends or distributions to the Parent Company. These restrictions are subject to certain exceptions for affiliated overhead expenses as defined in the agreements governing the debt instruments, unless certain financial and non-financial criteria have been satisfied.
Long-term debt of the Parent Company consists of the senior secured PIK notes and the Amaya Seller Note as described below.
Senior Secured PIK Notes
On May 29, 2015, the Company entered into a note purchase agreement with AP Gaming Holdings, LLC, as subsidiary guarantor (the “Subsidiary Guarantor”), Deutsche Bank AG, London Branch, as purchaser (the “Purchaser”), and Deutsche Bank Trust Company Americas, as collateral agent. Pursuant to the agreement, the Company issued $115.0 million of its 11.25% senior secured PIK notes due 2021 (the “Notes”) at an issue price of 97% of the principal amount thereof to the Purchaser in a private placement exempt from registration under the Securities Act of 1933, as amended. The Notes are secured by the Company’s equity in its subsidiary AP Gaming, Inc., subject to certain limitations including those imposed by gaming laws, and are unconditionally guaranteed by the Subsidiary Guarantor.
Interest on the Notes will accrue at a rate of 11.25% per annum. The Company may elect to pay interest due on the Notes in cash, by increasing the principal of the outstanding Notes or by issuing new Notes (“PIK interest”) for the entire amount of the interest payment or by paying interest partially in cash and partially in PIK interest. Interest on the Notes will accrue from the date of issuance and will be payable on the dates described in more detail in the agreement. The Notes will mature on May 28, 2021. The net proceeds of the Notes were used primarily to finance the Cadillac Jack acquisition.
The Notes contain limitations on additional indebtedness, guarantees, incurrence of liens, investments and distributions, as defined. The Notes also contains customary events of default included in similar transactions, including, among others, failure to make payments when due, acceleration of other material indebtedness, breach of covenants, breach of representations and warranties, involuntary or voluntary bankruptcy, and material judgments. At December 31, 2016, the Notes totaled $133.3 million, which includes capitalized interest of $21.8 million.
Seller Note
On May 29, 2015, the Company issued a promissory note to Amaya Inc. (the “Amaya Seller Note”) with an initial principal amount of $12.0 million to satisfy the conditions set forth in the stock purchase agreement for Cadillac Jack. The Amaya Seller Note accrues interest on the unpaid principal amount at 5.0% per annum and is payable semi-annually on June 30 and December 31 (and on May 29, 2023, the maturity date of the note), commencing on June 30, 2015. All interest accrued and payable on any interest payment date will be paid by capitalizing such interest and adding it to (and thereby increasing) the outstanding principal amount of the Amaya Seller Note. All principal under the note is due and payable on May 29, 2023. The
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Amaya Seller Note is required to be prepaid under certain circumstances described in more detail in the note agreement. The Company may prepay from time to time all or any portion of the outstanding principal balance due under the Amaya Seller Note. The Amaya Seller Note includes certain covenants and events of default that are customary for instruments of this type. At December 31, 2016, the Amaya Seller Note totaled $13.0 million, which includes capitalized interest of $1.0 million.
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SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Tax-related valuation allowance | Balance at the beginning of period | Charged to tax expense/(benefit) | Purchase accounting adjustments | Impact of foreign currency exchange rate | Balance at the end of period | ||||||||||||||
Year ended December 31, 2016 | $ | 8,274 | $ | 19,962 | $ | — | $ | (25 | ) | $ | 28,211 | ||||||||
Year ended December 31, 2015 | $ | 14,260 | $ | (11,787 | ) | $ | 5,727 | $ | 74 | $ | 8,274 | ||||||||
Year ended December 31, 2014 | $ | 3,050 | $ | 11,210 | $ | — | $ | — | $ | 14,260 | |||||||||
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