ITEM 1. FINANCIAL STATEMENTS
AP GAMING HOLDCO, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share and per share data)
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March 31, 2015
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December 31, 2014
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(unaudited)
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Assets
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Current assets
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|
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Cash and cash equivalents
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$
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11,311
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|
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$
|
10,680
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Restricted cash
|
100
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100
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Accounts receivable, net of allowance of $45 and $29, respectively
|
8,287
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8,835
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Notes receivable—current portion
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225
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|
305
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Inventories, net
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2,964
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|
3,175
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Prepaid expenses
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2,557
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2,091
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Deposits and other
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2,237
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2,007
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Total current assets
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27,681
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27,193
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Gaming equipment, vehicles and other equipment, net
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41,086
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40,769
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Deferred loan costs, net
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5,177
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5,343
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Goodwill
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77,181
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77,617
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Intangible assets, net
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98,635
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101,885
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Other assets
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3,384
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3,345
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Total assets
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$
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253,144
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$
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256,152
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Liabilities and Stockholders’ Equity
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Current liabilities
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Accounts payable and accrued liabilities
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$
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25,024
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$
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22,795
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Accrued interest
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524
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499
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Customer deposits on gaming machine leases
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—
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22
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Current maturities of long-term debt
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2,513
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2,495
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Deferred tax liability
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749
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528
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Total current liabilities
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28,810
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26,339
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Other long-term liabilities
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2,297
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—
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Long-term debt
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164,714
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164,194
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Deferred tax liability - noncurrent
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2,559
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1,863
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Total liabilities
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198,380
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192,396
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Commitments and contingencies (Note 19)
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Stockholders’ Equity:
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Preferred stock at $0.01 par value; 100,000 shares authorized, no shares issued and outstanding
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—
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—
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Common stock at $0.01 par value; 30,000,100 shares authorized; 100 Class A Shares issued and outstanding at March 31, 2015 and December 31, 2014, and 10,000,000 Class B Shares issued and outstanding at March 31, 2015 and December 31, 2014, respectively.
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100
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100
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Additional Paid-in capital
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99,900
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99,900
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Accumulated deficit
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(45,767
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)
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(36,532
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)
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Accumulated other comprehensive income
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531
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288
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Total stockholders’ equity
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54,764
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63,756
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Total liabilities and stockholders’ equity
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$
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253,144
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$
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256,152
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The accompanying notes are an integral part of these condensed consolidated financial statements.
AP GAMING HOLDCO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(amounts in thousands, except per share data)
(unaudited)
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Three months ended March 31,
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2015
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2014
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Revenues
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Gaming revenue
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$
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18,567
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$
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16,728
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Equipment sales
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228
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430
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Total revenues
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18,795
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17,158
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Operating expenses
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Gaming operating expenses
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2,900
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2,404
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Cost of equipment sales
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85
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175
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Loss on disposition of assets
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313
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171
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General and administrative
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6,634
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5,237
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Selling and marketing
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1,085
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623
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Write downs and other charges
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3,168
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128
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Depreciation and amortization
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8,346
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8,008
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Total operating expenses
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22,531
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16,746
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(Loss) income from operations
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(3,736
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)
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412
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Other expense (income)
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Interest expense
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4,272
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4,036
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Interest income
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(9
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)
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(1
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)
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Other expense
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476
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237
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Loss before income taxes
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(8,475
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)
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(3,860
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)
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Income tax expense
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(760
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)
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(672
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)
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Net loss
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(9,235
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)
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(4,532
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)
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Foreign currency translation adjustment
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243
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183
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Total comprehensive loss
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$
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(8,992
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)
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$
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(4,349
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)
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Basic and diluted loss per common share:
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Basic
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$
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(0.92
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)
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(0.45
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)
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Diluted
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(0.92
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)
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(0.45
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)
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Weighted average common shares outstanding:
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Basic
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10,000
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10,000
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Diluted
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10,000
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10,000
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The accompanying notes are an integral part of these condensed consolidated financial statements.
AP GAMING HOLDCO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
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Three months ended March 31,
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2015
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|
2014
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Cash flows from operating activities
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Net loss
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$
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(9,235
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)
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$
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(4,532
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)
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Adjustments to reconcile net loss to net cash provided by operating activities:
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Depreciation and amortization
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8,346
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8,008
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Accretion of contract rights under development agreements and customer agreements
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55
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12
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Amortization of deferred loan costs and discount
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322
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295
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Provision for bad debts
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12
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1
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Imputed interest income
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(8
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)
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—
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Loss on disposition of assets
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313
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171
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Provision for deferred income tax
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760
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616
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Changes in assets and liabilities that relate to operations:
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Decrease in accounts receivable and notes receivable
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536
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1,432
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Decrease (increase) in inventories, net
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211
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(123
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)
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Increase in prepaid expenses
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(467
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)
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(599
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)
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Increase in deposits and other
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(596
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)
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60
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Increase in other assets, non-current
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(376
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)
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(292
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)
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Increase (decrease) in accounts payable and accrued liabilities
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4,371
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(590
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)
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Increase in accrued interest
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26
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102
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(Increase) decrease in customer deposits on gaming machine leases
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(22
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)
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22
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Net cash provided by operating activities
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4,248
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4,583
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Cash flows from investing activities
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Collections under notes receivable
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88
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—
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Increase in Canadian tax receivable
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—
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(199
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)
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Purchase of intangible assets
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(333
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)
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(307
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)
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Software development and other
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(1,018
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)
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(1,366
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)
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Proceeds from disposition of assets
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4
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43
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Purchases of gaming equipment, vehicles and other equipment
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(3,374
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)
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(2,627
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)
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Net cash used in investing activities
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(4,633
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)
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(4,456
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)
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Cash flows from financing activities
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Borrowings under the revolving facility
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1,000
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—
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Payments on debt
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(617
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)
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(388
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)
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Proceeds from employees on early exercise of options
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182
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—
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Payment of deferred loan costs
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—
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(73
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)
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Net cash provided by (used in) financing activities
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565
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(461
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)
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Effect of exchange rates on cash and cash equivalents
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451
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225
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Increase (decrease) in cash and cash equivalents
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631
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(109
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)
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Cash and cash equivalents, beginning of period
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10,680
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21,742
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Cash and cash equivalents, end of period
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$
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11,311
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$
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21,633
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Supplemental cash flow information:
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Cash paid during the period for interest
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$
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4,263
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$
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3,621
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Non-cash investing and financing activities:
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Financed purchase of equipment
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$
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—
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$
|
906
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The accompanying notes are an integral part of these condensed consolidated financial statements.
AP GAMING HOLDCO INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1. ORGANIZATION AND BUSINESS
Organization
AP Gaming Holdco, Inc. (the “Company,” “AP Gaming,” “we,” “us,” or “our”) is a leading designer and manufacturer of gaming products for the casino floor. The Company’s roots are in Class II gaming machines for the Native American gaming market with an emerging presence in a broad range of commercial markets in the United States. As of
March 31, 2015
, the Company had approximately
8,630
gaming machines in approximately
260
gaming facilities in
20
U.S. states, with approximately
205
gaming facilities under revenue sharing agreements and approximately
55
facilities under daily fixed fee agreements. The majority of our systems are used by Native American gaming operators in both Class II and Class III environments and the Illinois video gaming terminal, or VGT, market. Our products include electronic gaming machines, server-based systems and back-office systems that are used by casinos and other gaming locations.
In the third quarter 2014, the Company began manufacturing and developing table games products through the acquisitions of
Casino War Blackjack, Inc.
(“War Blackjack”) and other intellectual property related to table games products. The Company provides table games products, which include live table games and side bets to enhance our casino operators’ table games operations, to our licensed casino operators on a fixed monthly fee. As of
March 31, 2015
, the Company had approximately
450
table game units under monthly fixed fee arrangements.
The Acquisition
On September 16, 2013, AGS Holdings, LLC (“AGS Holdings”), AGS Capital, LLC (“AGS Capital”) and AP Gaming Acquisition, LLC (“AP Gaming Acquisition”), an indirect wholly owned subsidiary of the Company and an affiliate of Apollo Global Management, LLC (“Apollo”), entered into an Equity Purchase Agreement (as subsequently amended and restated on December 3, 2013, the “Acquisition Agreement”). The Acquisition Agreement provided for the purchase of
100%
of the equity of AGS Capital from AGS Holdings, LLC (the “Acquisition”) by AP Gaming Acquisition for an aggregate purchase price of approximately
$220.5 million
. The Acquisition was consummated on December 20, 2013 (the “Closing Date”).
The Acquisition was financed in part by the Senior Secured Credit Facilities (as defined herein), which are comprised of the
$155 million
Term Facility and the
$25 million
Revolving Facility (each, as defined herein). AP Gaming I, LLC, an indirect wholly owned subsidiary of AP Gaming, is the borrower of the Senior Secured Credit Facilities, which are guaranteed by AP Gaming Holdings, LLC (“AP Gaming Holdings”), AP Gaming I, LLC’s direct parent company, and each of AP Gaming I, LLC’s direct and indirect material wholly owned domestic subsidiaries including AGS Capital. Additionally, the Company issued
10,000,000
Class A shares of common stock at
$0.01
par value to Apollo Gaming Holdings, L.P. The total cost to acquire all the outstanding shares was
$100,000,000
. The source of the funds for the acquisition of the Company was provided by committed equity capital contributed by certain equity funds managed by Apollo.
C2 Gaming, LLC acquisition
On May 6, 2014, a wholly owned subsidiary of the Company entered into an agreement to purchase
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 dated May 6, 2014 (“C2 Acquisition Agreement”). The acquisition was initially funded by a
$10.0 million
draw on our Revolving Facility and available cash on hand. The remaining purchase price is expected to be funded with either existing cash or existing availability on the Revolving Facility. C2 Gaming is an innovative manufacturer and developer of slot machines based in Las Vegas, Nevada. The purchase will provide for the distribution of C2 Gaming’s platform and content to an increased number of markets in the United States (see Note 3).
Table Games
On July 1, 2014, a wholly owned subsidiary of the Company entered into an agreement to purchase
100%
of the equity of
War Blackjack for approximately
$1.3 million
in cash, subject to terms outlined in the Stock Purchase Agreement, dated July 1, 2014 (“War Blackjack Acquisition Agreement”). The acquisition closed on July 18, 2014 and was funded by available cash on hand. War Blackjack is an innovative manufacturer and developer of table and electronic games based in Las Vegas, Nevada.
Cadillac Jack acquisition
On March 30, 2015, AGS, LLC (“AGS”), a subsidiary of the Company, entered into a stock purchase agreement (the “Stock Purchase Agreement”) with Amaya Inc., a corporation organized under the laws of Quebec (“Seller”), and Cadillac Jack, Inc., a Georgia corporation (“Cadillac Jack”). Pursuant to the terms of the Stock Purchase Agreement, AGS will purchase from Seller, through a series of transactions, all of the issued and outstanding common stock, par value
$0.01 per share
, of Cadillac Jack (the “Cadillac Jack Acquisition”), for an aggregate consideration comprised of (i)
$370.0 million
in cash, subject to certain adjustments, and (ii) a promissory note with an initial principal amount of
$12.0 million
, as it may be adjusted pursuant to the terms of the Stock Purchase Agreement. In addition, in connection with AGS’s signing of the Stock Purchase Agreement, the Company and AP Gaming I, LLC, a subsidiary of the Company, obtained binding commitment letters from third party lenders to provide debt financing in an amount, together with a separate commitment by the Company to provide equity financing, sufficient to permit AGS to consummate the Cadillac Jack Acquisition. The close of the Cadillac Jack Acquisition is anticipated to complete in 2015, subject to required regulatory approvals and customary closing conditions.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The accompanying condensed consolidated financial statements have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, certain disclosures required by generally accepted accounting principles (“GAAP”) are omitted or condensed in these condensed consolidated financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) that are necessary to present fairly the Company's financial position, results of operations and cash flows for the interim periods have been made. The interim results reflected in these condensed consolidated financial statements are not necessarily indicative of results to be expected for the full fiscal year. The accompanying condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2014
.
Principles of Consolidation
The accompanying condensed consolidated financial statements include the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
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 Revenue
Gaming revenue is of a recurring nature and is generated by providing customers with gaming terminals, gaming terminal content licenses and back-office equipment, which are collectively referred to as gaming equipment, under participation arrangements. These participation arrangements are accounted for as operating leases pursuant to ASC 840, Leases. These arrangements are considered to be leases, as the agreements convey the right to use the equipment (i.e. gaming machines and related integral software) for a stated period of time. Under these arrangements, the Company retains ownership of the gaming equipment installed at customer facilities, and receives either revenue based on a percentage of the win per day generated by the gaming equipment or a daily fee. 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, requires the Company to replace or remove the gaming machines from the customer’s floor. 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 facilities’ win per day to be set aside to be used to fund facility-specific marketing, advertising, promotions and service. These amounts are offset against revenue. Gaming revenue is also derived from the licensing of table games content and is earned and recognized on a fixed monthly rate.
Equipment Sales
Revenues from the stand-alone product sales or separate accounting units are recorded when:
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•
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Pervasive evidence of an arrangement exists;
|
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•
|
The sales price is fixed and determinable;
|
|
|
•
|
Delivery has occurred and services have been rendered; and
|
|
|
•
|
Collectability is probable.
|
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 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 general revenue recognition guidance.
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.
Notes Receivable and Development Agreements
The Company enters into development agreements to provide financing for new tribal gaming facilities, or for the expansion of existing facilities. The agreements generally come in two forms. The first is 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 is recorded. The intangible 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. The second is in the form of an advance that is not expected to be repaid. These advances are accounted for as customer rights and amortized over the term of the agreement as a reduction in revenue. In both scenarios, the customer commits to a fixed number of gaming terminal placements in the facility, and the Company receives a fixed percentage of those gaming terminals’ win per day over the term of the agreement or a daily fee per gaming terminal. Certain agreements contain performance standards for the gaming terminals that could allow the facility to reduce a portion of the guaranteed floor space. In the event a portion of the guaranteed floor space is reduced, the Company would reduce the associated intangible asset. Interest income related to notes receivable is recorded as interest income in the accompanying condensed consolidated statement of operations and comprehensive loss.
Generally, the Company utilizes the term of a contract to amortize the intangible assets associated with development agreements. The Company reviews the carrying value of these contract rights at least annually, or whenever changes in circumstances indicate the carrying value of these assets may not be recoverable. While management believes that the estimates and assumptions used in evaluating the carrying value of these assets are reasonable, different assumptions could materially affect either the carrying value or the estimated useful lives of the contract rights.
The Company accrues interest, if applicable, on its notes receivables per the terms of the agreement. Interest is not accrued on past due notes receivable, or individual amounts that the Company has determined and specifically identified as not collectible. The Company will resume accruing interest to the extent payments are being received and collectability is determined to be highly probable.
The Company assesses the impairment of notes whenever events or changes in circumstances indicate the carry value may not be realized. Impairment is measured based on the present value of the expected future cash flows and is recorded as bad debt expense in the period of assessment. The Company had no allowance for notes receivable as of
March 31, 2015
and
December 31, 2014
.
Allowance for Doubtful Accounts
The Company maintains an allowance for doubtful accounts related to accounts receivable and notes receivable 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 that have their reservations and gaming operations in the state of Oklahoma, 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 trade and notes receivable.
Inventories
Inventories consist primarily of parts and supplies that are used to repair and maintain machinery and equipment. Inventories are stated at the lower of cost or market. 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.
Gaming Equipment, Vehicles and Other Equipment
The cost of gaming equipment, consisting of fixed-base player terminals, file servers and other support equipment as well as vehicles and other equipment, is depreciated over their estimated useful lives, using the straight-line method for financial reporting. 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
|
Vehicles and other equipment
|
3 to 6 years
|
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 terminals on hand that it does not expect to be used. Impairment is based upon several factors, including estimated forecast of gaming terminal 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.
Impairment of the definite-lived intangible assets is reviewed at a minimum once a quarter. When the estimated undiscounted cash flows are not sufficient to recover the intangible assets’ carrying amount, an impairment loss is measured to the extent the fair value of the asset is less than its carrying amount.
The “American Gaming Systems” trade name has an indefinite useful life. The Company does not amortize the indefinite lived trade name, but instead tests for possible impairment at least annually, on October 1, or when circumstances warrant. 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. There were no indicators of impairment to warrant testing of the Company’s intangible assets for the three months ended
March 31, 2015
.
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 terminals. Internally developed gaming software is accounted for under FASB ASC Topic 985-20,
Costs of Software to Be Sold, Leased or Marketed
, and is stated at cost, which is amortized over the estimated useful lives of the software, generally 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. Generally, 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 developments 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 entities that are considered to be purchases of businesses 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, and 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 the reporting unit is not at risk of failing the qualitative assessment, no impairment testing is required. If the Company determines that it is at risk of failing the qualitative assessment, the Company is required to perform an annual goodwill impairment review, 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. There were no indicators of impairment for the Company’s goodwill for the three months ended March 31, 2015.
Deferred Loan Costs
Deferred loan costs consist of various debt issuance costs and are being amortized using the effective-interest method over the life of the related loans. The Company recognized amortization expense related to loan costs of
$0.2 million
and
$0.2 million
for the three months ended
March 31, 2015
and
2014
, respectively, which was included in interest expense in the accompanying condensed consolidated statements of operations and comprehensive loss.
Acquisition Accounting
We follow acquisition accounting for all acquisitions that meet the business combination definition. Acquisition accounting requires us to measure the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest at the acquisition-date fair value. While we use our best estimates and assumptions as part of the purchase price allocation process to accurately value assets acquired and liabilities assumed at the acquisition date, our estimates are inherently uncertain and subject to refinement.
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 as of
March 31, 2015
was
$170.4 million
.
Accounting for Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. 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 of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that included the enactment date. 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.
Research and Development
The Company conducts research and development activities primarily to develop new gaming platforms and gaming content. These research and development costs consist primarily of salaries and benefits and are expensed as incurred. Once the technological feasibility of a project has been established, capitalization of development costs begins until the product is available for general release. Research and development expenses were
$0.7 million
and
$0.6 million
for the three months ended
March 31, 2015
and
2014
, respectively, and is included as a component of general and administrative expense in the accompanying condensed consolidated statements of operations and comprehensive loss.
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.
Foreign Currency Translation
The financial statements of the Company’s Canadian subsidiary are translated into U.S. dollars at the year-end rate of exchange for asset and liability accounts and the average rate of exchange for income statement accounts. The effects of these translations are recorded as a component of other accumulated comprehensive income in stockholders’ equity.
Recently Issued Accounting Pronouncements
In May 2014, the FASB issued 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. The amendment is effective for annual periods, and interim reporting periods within those annual periods, beginning after December 15, 2016 and may be adopted using either a full retrospective transition method or a modified retrospective transition method. Early adoption is not permitted. The Company is currently evaluating the provisions of the amendment and the impact on its future consolidated financial statements.
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 amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after
December 15, 2015. Earlier adoption is permitted. The Company is currently evaluating the provisions of ASU 2014-12 and has not yet determined the impact on its financial position, results of operations or cash flows.
In August 2014, the FASB issued an accounting standards update that 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 will adopt this standard effective January 1, 2017. The Company is currently assessing the impact the adoption of this standard will have on its consolidated financial statements.
NOTE 3. ACQUISITIONS
The Acquisition
As discussed in Note 1 to the consolidated financial statements, on September 16, 2013, the Company acquired, through a wholly owned subsidiary,
100%
of the equity in AGS Capital from AGS Holdings. The Acquisition was consummated on December 20, 2013.
The contractual purchase price of
$220.3 million
, a seller note of
$2.2 million
, the settlement of
$3.3 million
in contingent consideration resulting in an additional seller note of
$3.3 million
issued in January 2014, and a working capital reduction of
$5.3 million
, resulted in an aggregate purchase price of
$220.5 million
. The contingent consideration of
$3.3 million
was based on certain financial performance metrics that were achieved between signing and closing.
The following summarizes the consideration paid for the Acquisition of AGS Capital (in thousands):
|
|
|
|
|
|
Contractual cash purchase price
|
|
$
|
220,300
|
|
Seller notes
|
|
5,531
|
|
Working capital adjustment
|
|
(5,340
|
)
|
Total consideration
|
|
$
|
220,491
|
|
During the Company’s continued review of the allocation of the purchase price to the identified tangible and intangible assets, the Company refined certain assumptions used in the calculation of the internally developed gaming software. As a result the Company reduced the value of the acquired internally developed gaming software by
$1.5 million
with a corresponding increase to goodwill in the first quarter of 2014.
As a result of an immaterial error correction (see Note 6), the Company reduced the value of the acquired gaming equipment, vehicles and other equipment, net by
$1.6 million
with a corresponding increase to goodwill. The decrease to the gaming equipment, vehicles and other equipment, net was a result of the removal of installation and delivery costs that were included in the fair value of the gaming machines in the valuation.
An allocation of the purchase price has been made to major categories of assets and liabilities based on management’s estimates. 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 December 20, 2013
|
|
|
Currents assets
|
|
$
|
17,858
|
|
Gaming equipment, vehicles and other equipment, net
|
|
47,170
|
|
Goodwill
|
|
63,437
|
|
Intangible assets
|
|
97,512
|
|
Other long-term assets
|
|
1,616
|
|
Total assets
|
|
227,593
|
|
Total liabilities
|
|
7,102
|
|
Total equity purchase price
|
|
$
|
220,491
|
|
Our estimates of the fair values of depreciable tangible assets are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Fair values at December 20, 2013
|
|
Average remaining useful life (in years)
|
Gaming equipment, vehicles and other
|
|
$
|
47,170
|
|
|
1 - 5
|
Our estimates of the fair values of identifiable intangible assets are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Fair values at December 20, 2013
|
|
Average remaining useful life (in years)
|
Trade name - “American Gaming Systems”
|
|
$
|
12,126
|
|
|
Indefinite
|
Trade name - “Gambler’s Choice”
|
|
809
|
|
|
7
|
Customer agreements and relationships
|
|
60,112
|
|
|
7
|
Third party licenses
|
|
11,520
|
|
|
3 - 5
|
Internally developed gaming software
|
|
10,872
|
|
|
1 - 5
|
Purchased software
|
|
2,073
|
|
|
1 - 5
|
|
|
$
|
97,512
|
|
|
|
C2 Gaming, LLC acquisition
As discussed in Note 1 to the consolidated financial statements, on May 6, 2014,
a wholly owned subsidiary of the Company entered into an agreement to purchase
100%
of the equity of
C2 Gaming, LLC (“C2 Gaming”) for
$23.3 million
in cash, subject to terms outlined in the C2 Acquisition Agreement. The acquisition was initially funded by a
$10.0 million
draw on our Revolving Facility (as defined herein) and available cash on hand. The consideration paid for the acquisition of C2 Gaming consisted of the following (in thousands):
|
|
|
|
|
|
Paid at close
|
|
$
|
11,000
|
|
One-year payment
|
|
9,000
|
|
Contingent consideration
|
|
3,000
|
|
Working capital adjustment
|
|
273
|
|
Total consideration
|
|
$
|
23,273
|
|
The acquisition of C2 Gaming was consummated on May 6, 2014. The one-year payment of
$9.0 million
is due to the sellers on the one-year anniversary of the closing of the acquisition. The contingent consideration of
$3.0 million
is subject to the satisfaction of certain milestones, including the submittal and approval of video slot platforms to various jurisdictions as outlined in the C2 Acquisition Agreement. During the year ended December 31, 2014, the Company paid
$0.5 million
of the contingent consideration. As these milestones were considered to be probable of being met within one year, the remaining
$2.5 million
liability approximates fair value. The remaining purchase price is expected to be funded by existing cash or existing availability on the Revolving Facility.
An allocation of the purchase price has been made to major categories of assets and liabilities based on management’s estimates. 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
|
|
Gaming equipment, vehicles and other equipment, net
|
|
534
|
|
Goodwill
|
|
13,744
|
|
Intangible assets
|
|
8,722
|
|
Total assets
|
|
23,545
|
|
Total liabilities
|
|
272
|
|
Total equity purchase price
|
|
$
|
23,273
|
|
Our estimates of the fair values of depreciable tangible assets are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Fair values at May 6, 2014
|
|
Average remaining useful life (in years)
|
Gaming equipment, vehicles and other
|
|
$
|
534
|
|
|
1 - 5
|
Our estimates of the fair values of identifiable intangible assets are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Fair values at May 6, 2014
|
|
Average remaining useful life (in years)
|
Colossal platform
|
|
$
|
1,559
|
|
|
5
|
Colossal titles
|
|
2,126
|
|
|
3
|
Colossal customer agreements and relationships
|
|
5,037
|
|
|
7
|
|
|
$
|
8,722
|
|
|
|
NOTE 4. ACCUMULATED OTHER COMPREHENSIVE INCOME
The following table presents the changes by component, net of tax, in accumulated other comprehensive income of the Company (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
|
Accumulated other comprehensive income
|
December 31, 2014
|
|
$
|
288
|
|
|
$
|
288
|
|
Current period other comprehensive gain
|
|
243
|
|
|
243
|
|
March 31, 2015
|
|
$
|
531
|
|
|
$
|
531
|
|
NOTE 5. CONTRACT RIGHTS UNDER DEVELOPMENT AGREEMENTS AND CUSTOMER AGREEMENTS
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. 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. For the three months ended
March 31, 2015
and
2014
,
$55,000
and
$12,000
, respectively, were recorded as a reduction of gaming revenue from the accretion of contract rights under development agreements and customer agreements.
NOTE 6. GAMING EQUIPMENT, VEHICLES AND OTHER EQUIPMENT
Gaming equipment, vehicles and other equipment consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
March 31, 2015
|
|
December 31, 2014
|
Gaming equipment
|
$
|
52,941
|
|
|
$
|
50,516
|
|
Vehicles and other equipment
|
7,830
|
|
|
6,681
|
|
Less: Accumulated depreciation
|
(19,685
|
)
|
|
(16,428
|
)
|
Total gaming equipment, vehicles and other equipment, net
|
$
|
41,086
|
|
|
$
|
40,769
|
|
Gaming equipment, vehicles and other equipment are depreciated over the respective useful lives of the assets ranging from
three
to
six
years. Depreciation expense was
$3.9 million
and
$4.3 million
for the three months ended
March 31, 2015
and
2014
, respectively.
Immaterial Error Correction
The Company determined that costs to install and deliver leased gaming machines were being capitalized and incorrectly depreciated over the useful life of the machine rather than capitalized as initial direct costs and amortized over the term of the lease in accordance with ASC 840-20-35-2. Additionally, the Company determined the gaming machines associated with our gaming equipment leases in Illinois should have been depreciated over
6 years
as compared to
5 years
given this period represents the estimated term of leases in Illinois and the fact that this represents the useful life in this jurisdiction. In the second quarter of 2014, the Company recorded the cumulative effect of the analysis performed which resulted in a decrease of
$2.0 million
to gaming equipment with a corresponding increase to goodwill, an increase of
$0.2 million
and
$0.4 million
to deposits and other and other assets, respectively, and a reduction of
$0.3 million
in depreciation expense related to the period from the Acquisition date to the second quarter of 2014. In the first quarter of 2015, the Company further refined its analysis and as a result increased gaming equipment by
$0.8 million
, decreased goodwill by
$0.4 million
, decreased deposits and other and other assets by
$0.4 million
and
$0.1 million
, respectively, increased depreciation expense by
$0.3 million
and decreased gaming operating expenses by
$0.2 million
. We have performed an evaluation to determine if the financial statement impact resulting from these errors in accounting was material, considering both quantitative and qualitative factors. Based on this
materiality analysis, we concluded that correcting the cumulative error would be immaterial to the current year financial statements and a correction of the errors, individually and in the aggregate, would not have a material impact to any individual prior period financial statements.
NOTE 7. GOODWILL AND INTANGIBLES
Changes in the carrying amount of goodwill are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2015
|
|
December 31, 2014
|
|
Gross Carrying amount
|
|
Accumulated
Impairment
|
|
Net Carrying
Value
|
|
Gross Carrying amount
|
|
Accumulated
Impairment
|
|
Net Carrying
Value
|
Goodwill
|
$
|
77,181
|
|
|
$
|
—
|
|
|
$
|
77,181
|
|
|
$
|
77,617
|
|
|
$
|
—
|
|
|
$
|
77,617
|
|
Intangible assets consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2015
|
|
December 31, 2014
|
|
Useful life (years)
|
|
Gross
Value
|
|
Accumulated
Amortization
|
|
Net Carrying
Value
|
|
Gross
Value
|
|
Accumulated
Amortization
|
|
Net Carrying
Value
|
Trade name - “American Gaming Systems”
|
Indefinite
|
|
$
|
12,126
|
|
|
$
|
—
|
|
|
$
|
12,126
|
|
|
$
|
12,126
|
|
|
$
|
—
|
|
|
$
|
12,126
|
|
Trade name - “Gambler’s Choice”
|
7
|
|
809
|
|
|
(148
|
)
|
|
661
|
|
|
809
|
|
|
(119
|
)
|
|
690
|
|
Customer agreements and relationships as a result of purchase accounting in connection with the Acquisition
|
7
|
|
60,112
|
|
|
(10,988
|
)
|
|
49,124
|
|
|
60,112
|
|
|
(8,841
|
)
|
|
51,271
|
|
Customer agreements and relationships as a result of the C2 Gaming acquisition
|
7
|
|
5,037
|
|
|
(652
|
)
|
|
4,385
|
|
|
5,037
|
|
|
(472
|
)
|
|
4,565
|
|
Customer agreements
|
1 - 7
|
|
980
|
|
|
(113
|
)
|
|
867
|
|
|
678
|
|
|
(58
|
)
|
|
620
|
|
Covenants not to compete
|
3
|
|
10
|
|
|
(1
|
)
|
|
9
|
|
|
10
|
|
|
—
|
|
|
10
|
|
Third party licenses
|
3 - 5
|
|
11,520
|
|
|
(3,028
|
)
|
|
8,492
|
|
|
11,520
|
|
|
(2,437
|
)
|
|
9,083
|
|
Internally developed gaming software
|
1 - 5
|
|
15,430
|
|
|
(4,438
|
)
|
|
10,992
|
|
|
14,504
|
|
|
(3,509
|
)
|
|
10,995
|
|
Acquired intellectual property
|
10 - 20
|
|
7,316
|
|
|
(279
|
)
|
|
7,037
|
|
|
10,965
|
|
|
(811
|
)
|
|
10,154
|
|
Purchased software
|
1 - 5
|
|
6,474
|
|
|
(1,532
|
)
|
|
4,942
|
|
|
2,854
|
|
|
(483
|
)
|
|
2,371
|
|
|
|
|
$
|
119,814
|
|
|
$
|
(21,179
|
)
|
|
$
|
98,635
|
|
|
$
|
118,615
|
|
|
$
|
(16,730
|
)
|
|
$
|
101,885
|
|
Intangibles are amortized over the respective estimated useful lives of the assets ranging from
one
to
fifteen
years. Amortization expense related to intangibles was
$4.5 million
and
$3.7 million
for the three months ended
March 31, 2015
and
2014
, respectively. Included in depreciation and amortization expense is amortization of internally developed software of
$0.9 million
and
$0.8 million
for the three months ended
March 31, 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
three
months ended
March 31, 2015
and
2014
, the Company did not recognize an impairment charge related to intangible assets.
NOTE 8. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
March 31, 2015
|
|
December 31, 2014
|
Trade accounts payable
|
$
|
971
|
|
|
$
|
1,266
|
|
Salary and payroll tax accrual
|
4,231
|
|
|
3,002
|
|
Accrued commission
|
360
|
|
|
351
|
|
C2 Gaming one-year payout (see Note 3)
|
9,000
|
|
|
9,000
|
|
C2 Gaming contingent consideration (see Note 3)
|
2,500
|
|
|
2,500
|
|
Proceeds from employees in advance of common stock issuance
|
—
|
|
|
1,969
|
|
Accrued other
|
7,962
|
|
|
4,707
|
|
Total accounts payable and accrued liabilities
|
$
|
25,024
|
|
|
$
|
22,795
|
|
NOTE 9. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
March 31, 2015
|
|
December 31, 2014
|
$155 million Term Facility, interest above LIBOR or base rate (9.25% at March, 2015), net of unamortized discount of $4.8 and $5.0 million at March 31, 2015 and December 31, 2014, respectively.
|
$
|
148,214
|
|
|
$
|
148,447
|
|
$25 million Revolving Facility, interest above LIBOR or base rate (8.42% at March 31, 2015).
|
11,000
|
|
|
10,000
|
|
Equipment long-term note payable
|
2,001
|
|
|
2,230
|
|
Seller notes
|
6,012
|
|
|
6,012
|
|
Total debt
|
167,227
|
|
|
166,689
|
|
Less—Amounts due within one year
|
(2,513
|
)
|
|
(2,495
|
)
|
Long-term debt
|
$
|
164,714
|
|
|
$
|
164,194
|
|
Senior Secured Credit Facilities
Concurrent with the consummation of the Acquisition, on the Closing Date the Company entered into our senior secured credit facilities, which consist of a
$155 million
term loan facility (the “Term Facility”) and a
$25 million
revolving credit facility (the “Revolving Facility” and, together with the Term Facility, the “Senior Secured Credit Facilities”). AP Gaming I, LLC (the “Borrower”), a wholly owned indirect subsidiary of AP Gaming, is the borrower under the Senior Secured Credit Facilities and Citigroup Global Markets Inc., Credit Suisse Securities (USA) LLC, Deutsche Bank Securities Inc. and Nomura Securities International, Inc. acted as joint lead arrangers and joint bookrunners for the Senior Secured Credit Facilities.
The proceeds of the Term Facility were used by the Borrower, together with the proceeds of the equity contribution and other sources of funds, to pay the consideration for the Acquisition, to refinance the Company’s existing credit facilities and to pay the costs and expenses of the Acquisition and other related transactions. The proceeds of the Revolving Facility will be used by the Borrower from time to time for general corporate purposes and other purposes agreed to with the lenders. In May 2014, the Company drew
$10.0 million
on the Revolving Facility, the proceeds of which were used to partially finance the acquisition of C2 Gaming. As of
March 31, 2015
,
$11.0 million
was outstanding under the Revolving Facility.
The Term Facility will mature on the seventh anniversary of the Closing Date, and the Revolving Facility will mature on the fifth anniversary of the Closing Date. The Term Facility requires 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 Facility bear interest at a rate equal to, at the Borrower’s option, either LIBOR or the base rate, subject to an interest rate floor plus an applicable margin rate. Borrowings under the Revolving Facility bear interest at a rate equal to, at the Borrower’s option, either LIBOR or the base rate plus an applicable margin rate. In addition, on a quarterly basis, the Borrower is required to pay each lender under the Revolving 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, the Borrower’s material, wholly owned domestic subsidiaries (subject to certain exceptions), and are secured by a pledge by AP Gaming Holdings of the Borrower’s equity interest directly held by AP Gaming Holdings 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 beginning with the first quarter ending June 30, 2014. 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
March 31, 2015
.
In connection with the Acquisition, the Company issued
two
promissory notes (the “Seller Notes”) to AGS Holdings, LLC, in the amounts of
$2.2 million
and
$3.3 million
, to satisfy the conditions set forth in the Acquisition Agreement. At
March 31, 2015
, notes payable related to the Seller Notes totaled
$6.0 million
, which included
$0.5 million
in capitalized interest. The 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 (and on the Maturity Date), 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 Seller Notes. All principal under the Seller Notes are 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 Seller Notes.
In January 2014, the Company entered into a financing agreement to purchase certain gaming devices and/or systems and related equipment in the amount of
$2.7 million
. The agreement requires monthly payments commencing
90
days from the date of delivery with a term of
34
months at an annual fixed interest rate of
7.5%
.
NOTE 10. STOCKHOLDERS’ EQUITY
Common Stock
The Company is authorized to issue up to
30,000,100
shares of its common stock,
$0.01
par value per share. After the Acquisition, the Company restructured its common stock into
two
classes: class A voting common stock (“Class A Shares”) and class B non-voting common stock (“Class B Shares”), with Apollo Gaming Holdings, L.P. holding
10,000,000
Class A Shares. On April 28, 2014, upon receipt of all required governmental regulatory approvals, Apollo Gaming Holdings, L.P. exchanged its
10,000,000
Class A Shares for
10,000,000
Class B Shares, and the Company issued
100
Class A Shares to AP Gaming VoteCo, LLC. 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. As of March 31, 2015, the Company had
10,205,648
shares of its common stock legally issued and outstanding, which consist of
100
Class A Shares,
10,000,000
Class B Shares and
205,548
Class B Shares issued to “Management Holders,” as defined in the Securityholders Agreement dated April 28, 2014 (the “Securityholders Agreement”). The Class B Shares issued to Management Holders are not considered issued for accounting purposes as further described below.
On April 28, 2014, the Company issued
20,000
Class B Shares to its President and Chief Executive Officer for
$0.2 million
, which shares were subsequently repurchased by the Company on August 7, 2014. On August 8, 2014, the Company entered into subscription agreements to issue
196,875
Class B Shares to certain employees, which shares were issued upon the Company obtaining approval for such issuance from the Nevada Gaming Commission in January 2015. This issuance qualifies as shares issued to a Management Holder. 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 Management Holders 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 lessor 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. The Qualified Public Offering represents a substantive performance condition that must be met for the Management Holder to benefit from the ownership of the shares. As a result, in accordance with ASC 718, shares issued to Management Holders are not considered issued for accounting purposes until such time that the performance condition is met.
On March 11, 2015, the Company entered into subscription agreements to issue
20,673
Class B Shares to Management Holders. Additionally, the
12,000
Class B shares previously issued to each of the Company’s former Chief Financial Officer and former Chief Operating Officer on August 8, 2014, were repurchased by the Company on March 16, 2015, and May 1, 2015, respectively, upon their resignations.
Preferred Stock
The Company is authorized to issue up to
100,000
shares of preferred stock,
$0.01
par value per share, of which
none
were issued as of
March 31, 2015
. The Board of Directors is expressly authorized to provide for the issuance of all or any shares of the preferred stock in one or more classes or series, to fix the number of shares constituting such series, and to increase or decrease the number of shares of any such series (but not below the number of shares thereof then outstanding) and to fix for each such class or series such voting powers, full or limited, or no voting powers, and such distinctive designations, powers, preferences and relative, participating, optional or other special rights and such qualifications, limitations or restrictions thereof, as shall be stated and expressed in the resolution or resolutions adopted by a majority of the entire Board providing for the issuance of such class or series including, without limitation, the authority to provide that any such class or series may be (a) subject to redemption at such time or times and at such price or prices, (b) entitled to receive dividends (which may be cumulative or noncumulative) at such rates, on such conditions, and at such times, and payable in preference to, or in such relation to, the dividends payable on any other class or classes or any other series, (c) entitled to such rights upon the dissolution of, or upon any distribution of the assets of, the Company, or (d) convertible into, or exchangeable for, shares of any other class or classes of stock, or of any other series of the same or any other class or classes of stock, of the Company at such price or prices or at such rates of exchange and with such adjustments, all as may be stated in such resolution or resolutions. Notwithstanding the foregoing, the rights of each holder of the preferred stock shall be subject at all times to compliance with all gaming and other statutes, laws, rules and regulations applicable to the Company and such holder at that time.
NOTE 11. RELATED PARTY TRANSACTIONS
The Company has a separate exclusive distributor agreement with Game Ingenuity, LLC (“Game Ingenuity”) (in which a related party was a principal) to place or sell games developed utilizing Game Ingenuity intellectual property into all markets where the Company is licensed or will be licensed within one year from the placement of the first game, or as otherwise mutually agreed between the parties. During the
three
months ended
March 31, 2014
, the Company incurred
$24,000
in expenses as part of this agreement. The principal of Game Ingenuity is no longer an employee of the Company as of May 2014.
In July 2014, the Company entered into an intellectual property purchase agreement to purchase intellectual property developed by an employee of the Company. The Company pays royalties to the employee based on revenue generated from games developed by the employee. For the three months ended
March 31, 2015
, the Company incurred approximately
$812
in expense as part of the agreement.
NOTE 12. WRITE DOWNS AND OTHER CHARGES
The condensed consolidated statements of operation and comprehensive loss include various non-routine transactions or related party consulting fees. During the
three
months ended
March 31, 2015
, the Company recognized
$3.2 million
in write-downs and other charges primarily related to legal and professional fees for the acquisition of Cadillac Jack. During the
three
months ended
March 31, 2014
, the Company recognized
$0.1 million
in write downs and other charges related to impairment of prepaid royalties.
NOTE 13. BASIC AND DILUTED LOSS PER SHARE
The Company computes net 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 condensed consolidated statement of operations and comprehensive loss. Basic EPS is computed by dividing net 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 10). Class B Shares issued to Management Holders will be included in the calculation of Diluted EPS using the treasury stock method. Diluted EPS is computed by dividing net income 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 15).
There were
no
potentially dilutive securities for the
three
months ended
March 31, 2014
.
Excluded from the calculation of diluted EPS for the
three
months ended
March 31, 2015
, are
50,000
restricted shares and
0.4 million
stock options, as such securities were anti-dilutive.
NOTE 14. 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 three months ended
March 31, 2015
and
2014
, was
$0.1 million
and
$65,000
, respectively.
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 settleable 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 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
.
NOTE 15. 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 10), which is not considered to be probable as of
March 31, 2015
. 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. When the performance condition is considered probable, the stock awards will vest in accordance with the underlying service and market conditions.
The Company granted options to purchase
95,625
Class B Shares on March 11, 2015, with an exercise price of
$14.64
. These stock options were designated as Tranche A options, Tranche B options, and Tranche C options, collectively “the Options”. The Options expire on the tenth anniversary of the grant date. The vesting conditions of the options granted during the three months ended March 31, 2015, are consistent with previously granted options.
The Company calculated the grant date fair value of the fully vested stock options and the Tranche A options using the Black Scholes model, and the Tranche B and Tranche C options 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. The grant date fair value, and related assumptions, of Options granted in the first quarter of 2015 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Tranche
|
Grant Date
|
Outstanding
|
Fair Value (Per Share)
|
Total Fair Value
|
Assumptions
|
Tranche A Options
|
March 11, 2015
|
31,875
|
|
$
|
9.51
|
|
$
|
303,149
|
|
|
Risk free interest rate
|
1.8
|
%
|
Expected term
|
6.5 years
|
|
Expected volatility
|
70.0
|
%
|
Tranche B Options
|
March 11, 2015
|
31,875
|
|
$
|
8.01
|
|
$
|
255,325
|
|
|
Risk free interest rate
|
1.5
|
%
|
Time to liquidity event
|
4.5 years
|
|
Expected volatility
|
75.0
|
%
|
Forward expected volatility rate
|
55.0
|
%
|
Forward risk free interest rate
|
2.7
|
%
|
Tranche C Options
|
March 11, 2015
|
31,875
|
|
$
|
7.42
|
|
$
|
236,546
|
|
|
Risk free interest rate
|
1.5
|
%
|
Time to liquidity event
|
4.5 years
|
|
Expected volatility
|
75.0
|
%
|
Forward expected volatility rate
|
55.0
|
%
|
Forward risk free interest rate
|
2.7
|
%
|
Total
|
95,625
|
|
|
$
|
795,020
|
|
|
The
75,000
options to purchase Class B Shares previously granted to the Company’s former Chief Financial Officer were canceled upon his resignation in accordance with the option agreement.
Restricted Stock
No
restricted stock was granted, canceled or forfeited during the
three
months ended
March 31, 2015
.
NOTE 16. RESTRUCTURING
In June 2014, the Company took steps to reduce current and future expenses by reducing staff in our technology and game development division that operated primarily out of our Toronto location. The Las Vegas location now serves as the primary location for our technology and game development division. The Company entered into retention agreements with certain employees that extend through July 2015. During the
three
months ended
March 31, 2015
, the Company expensed approximately
$0.2 million
in restructuring costs related to termination benefits and expects to incur an additional
$0.2 million
related to retention agreements with certain employees.
The following table summarizes the change in our severance accrual for the
three
months ended
March 31, 2015
(in thousands), which is included in accounts payable and accrued liabilities in the condensed consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2014
|
|
Charge to expense
|
|
Cash paid
|
|
Costs settled
|
|
March 31, 2015
|
Accrued severance
|
$
|
127
|
|
|
$
|
—
|
|
|
$
|
(50
|
)
|
|
$
|
—
|
|
|
$
|
77
|
|
Accrued retention bonuses
|
273
|
|
|
163
|
|
|
(273
|
)
|
|
—
|
|
|
163
|
|
Total
|
$
|
400
|
|
|
$
|
163
|
|
|
$
|
(323
|
)
|
|
$
|
—
|
|
|
$
|
240
|
|
NOTE 17. INCOME TAXES
The Company's effective income tax rate for the three months ended
March 31, 2015
, was
(9.0)%
. The difference between the federal statutory rate of
35%
and the Company's effective tax rate for the three months ended
March 31, 2015
, was primarily due to valuation allowance considerations and amortization of indefinite lived intangible assets. The Company's effective income tax rate for the three months ended
March 31, 2014
was
(17.4)%
. The difference between the federal statutory rate of
35%
and the Company's effective tax rate for the three months ended
March 31, 2014
was primarily due to valuation allowance considerations and amortization of indefinite life intangibles.
NOTE 18. 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. 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 their estimates. Such revisions in the estimates of the potential liabilities could have a material impact on the results of operations and financial condition.
On October 11, 2011, the Company entered into a licensing agreement with Ripley’s Entertainment to develop casino games based in the “Ripley’s Believe it or Not” brand. The licensing agreement, which guarantees Ripley’s Entertainment
$0.6 million
in royalties, commenced upon the execution of the agreement and expires on September 30, 2015, subject to
one
year renewals at the option of the Company. The Company paid a prepaid royalty of
$0.2 million
upon execution of the agreement and paid an additional
$0.2 million
in each of October 2012 and October 2014 under the terms of the agreement.
On October 5, 2012, the Company entered into a licensing agreement with Freemantle Media North America, Inc. (“Freemantle”) to develop casino games based in the “Family Feud” brand. The licensing agreement, which guarantees Freemantle
$0.7 million
in royalties, commenced on October 5, 2012 and expires on December 31, 2017, subject to a
three
year renewal at the option of the Company. The Company paid a prepaid royalty of
$0.2 million
upon execution of the agreement and advanced an additional
$0.2 million
in October 2014 under the terms of the agreement.
NOTE 19. SUBSEQUENT EVENTS
In connection with the preparation of its condensed consolidated financial statements as of and for the three months ended
March 31, 2015
, the Company has evaluated subsequent events through
May 15, 2015
, to determine whether any of these events required recognition or disclosure, as required by FASB ASC Topic 855,
Subsequent Events
.
Results of Operations
The following tables set forth certain selected condensed consolidated financial data for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
2015
|
|
2014
|
Consolidated Statements of Operations:
|
|
|
|
Gaming revenue
|
$
|
18,567
|
|
|
$
|
16,728
|
|
Equipment sales
|
228
|
|
|
430
|
|
Total revenues
|
18,795
|
|
|
17,158
|
|
Operating expenses
|
|
|
|
Gaming operating expenses
|
2,900
|
|
|
2,404
|
|
Cost of equipment sales
|
85
|
|
|
175
|
|
Loss on disposition of assets
|
313
|
|
|
171
|
|
General and administrative
|
6,634
|
|
|
5,237
|
|
Selling and marketing
|
1,085
|
|
|
623
|
|
Write downs and other charges
|
3,168
|
|
|
128
|
|
Depreciation and amortization
|
8,346
|
|
|
8,008
|
|
Total operating expenses
|
22,531
|
|
|
16,746
|
|
(Loss) income from operations
|
(3,736
|
)
|
|
412
|
|
Interest expense
|
4,272
|
|
|
4,036
|
|
Interest income
|
(9
|
)
|
|
(1
|
)
|
Other expense
|
476
|
|
|
237
|
|
Loss before income taxes
|
$
|
(8,475
|
)
|
|
$
|
(3,860
|
)
|
Three Months Ended
March 31, 2015
compared to the Three Months Ended
March 31, 2014
Total Revenues
Total revenues were
$18.8 million
for the three months ended
March 31, 2015
compared to
$17.2 million
for the three months ended
March 31, 2014
, which represents
an increase
of
$1.6 million
, or
9.3%
. Gaming revenues were
$18.6 million
for the three months ended
March 31, 2015
compared to
$16.7 million
for the three months ended
March 31, 2014
, which represents
an increase
of
$1.9 million
, or
11.4%
. The
increase
in gaming revenue was primarily due to improved game performance as a result of increasing the install base of gaming machines that run on our Colossal platform, which have historically been our best performing games.
Operating Expenses
Gaming operating expenses.
Total gaming operating expenses were
$2.9 million
for the three months ended
March 31, 2015
, compared to
$2.4 million
for the three months ended
March 31, 2014
, which represents
an increase
of
$0.5 million
, or
20.8%
. The
increase
is primarily due to an increase of $0.6 million in amortization of installation and delivery costs and an increase in tribal fees, partially offset by a decrease in commissions no longer paid to C2 Gaming as a result of acquiring C2 Gaming in May 2014.
General and administrative.
General and administrative costs were
$6.6 million
for the three months ended
March 31, 2015
compared to
$5.2 million
for the three months ended
March 31, 2014
, which represents
an increase
of
$1.4 million
, or
26.9%
. The
increase
is primarily due to a $0.9 million increase in payroll and related expenses as a result of the acquisition of C2 Gaming, a $0.3 million increase in rent as a result of a new corporate headquarters, $0.2 in retention bonuses related to the Toronto restructuring and a $0.3 million increase in legal fees related to litigation matters, partially offset by a $0.5 million decrease in legal and professional fees related to the filing of our Form 10 on December 18, 2013.
Selling and marketing.
Selling and marketing costs were
$1.1 million
for the three months ended
March 31, 2015
, compared to
$0.6 million
for the three months ended
March 31, 2014
, which represents
an increase
of
$0.5 million
, or
83.3%
. The
increase
is primarily attributed to an increased headcount in our table games sales department and an increase in trades shows and marketing expenses related to our table games products.
Write downs and other charges.
Write downs and other charges were
$3.2 million
for the three months ended
March 31, 2015
compared to
$0.1 million
for the three months ended
March 31, 2014
, which represents
an increase
of
$3.1 million
. The
increase
is primarily attributed to legal and professional fees for the acquisition of Cadillac Jack.
Depreciation and amortization.
Depreciation and amortization was
$8.3 million
for the three months ended
March 31, 2015
, compared to
$8.0 million
for the three months ended
March 31, 2014
, which represents
an increase
of
$0.3 million
, or
3.8%
. The increase is primarily due to an increase in capital expenditures during 2014, partially offset by several capital expenditures reaching the end of their useful life in 2014.
Other Expense (Income), net
Interest expense.
Interest expense was
$4.3 million
for the three months ended
March 31, 2015
, and
$4.0 million
for the three months ended
March 31, 2014
, which represents
an increase
of
$0.3 million
, or
7.5%
. The increase is primarily attributed to the increase in the principal amounts outstanding under the Term Loan Facility and the Revolving Facility at
March 31, 2015
.
Liquidity and Capital Resources
We expect that primary ongoing liquidity requirements for the year ended December 31, 2015 will be for capital expenditures of between $15 million and $25 million, working capital, debt servicing, game development and other customer acquisition activities. We expect to finance these liquidity requirements through a combination of cash on hand and cash flows from operating activities.
Part of our overall strategy includes consideration of expansion opportunities, underserved markets and acquisition and other strategic opportunities that may arise periodically. We may require additional funds in order to execute on such strategic growth, and may incur additional debt or issue additional equity to finance any such transactions. We cannot assure you that we will be able to obtain such debt or issue any such additional equity on acceptable terms or at all.
In connection with AGS’s signing of the Stock Purchase Agreement, the Company and AP Gaming I, LLC, a subsidiary of the Company, obtained binding commitment letters from third party lenders to provide debt financing in an amount, together with a separate commitment by the Company to provide equity financing, sufficient to permit AGS to consummate the Cadillac Jack Acquisition.
As of
March 31, 2015
, we had
$11.3 million
in cash and cash equivalents and
$172.1 million
of outstanding indebtedness, which consisted of
$153.1 million
of outstanding indebtedness under our Term Facility,
$11.0 million
outstanding under our Revolving Facility and
$8.0 million
in other long-term debt agreements. As of
December 31, 2014
, we had
$10.7 million
in cash and cash equivalents and
$173.6 million
, which consisted of
$155.4 million
of outstanding indebtedness under our Term Facility,
$10.0 million
outstanding under our Revolving Facility and
$8.2 million
in other long-term debt agreements.
Concurrent with the consummation of the Acquisition, on December 20, 2013 (the “Closing Date”) we entered into our senior secured credit facilities, which consist of a $155 million Term Facility and a $25 million Revolving Facility. AP Gaming I, LLC (the “Borrower”), a wholly owned indirect subsidiary of AP Gaming, is the borrower under the Senior Secured Credit Facilities and Citigroup Global Markets Inc., Credit Suisse Securities (USA) LLC, Deutsche Bank Securities Inc. and Nomura Securities International, Inc. acted as joint lead arrangers and joint bookrunners for the Senior Secured Credit Facilities.
The proceeds of the Term Facility were used by the Borrower, together with the proceeds of the equity contribution and other sources of funds, to pay the consideration for the Acquisition, to refinance the Company’s existing credit facilities and to pay the costs and expenses of the Acquisition and other related transactions. The proceeds of the Revolving Facility, of which
$14.0 million
was available as of
March 31, 2015
, will be used by the Borrower from time to time for general corporate purposes and other purposes agreed to with the lenders. In May 2014, the Company drew
$10.0 million
on the Revolving Facility, the proceeds of which were used to partially finance the purchase of C2 Gaming. The Company intends to pay the remaining balance of the purchase price for C2 Gaming, equal to approximately $11.5 million, either through available cash on hand or the remaining availability on the Revolving Facility. We believe the remaining availability on our Revolving Facility, as well as expected positive future cash flows, will be sufficient to meet our short-term and long-term liquidity requirements.
The Term Facility will mature on the seventh anniversary of the Closing Date, and the Revolving Facility will mature on the fifth anniversary of the Closing Date. The Term Facility requires 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 Facility bear interest at a rate equal to, at the Borrower’s option, either LIBOR or the base rate, subject to an interest rate floor plus an applicable margin rate. Borrowings under the Revolving Facility bear interest at a rate equal to, at the Borrower’s option, either LIBOR or the base rate, plus an applicable margin rate. In addition, on a quarterly basis, the Borrower is required to pay each lender under the Revolving Facility a commitment fee in respect of any unused commitments thereunder at a rate of
0.50% per annum. As of
March 31, 2015
,
$11.0 million
was outstanding under the Revolving Facility. The Company can draw all of the amounts available under the Revolving Facility without violating any debt covenants.
The Senior Secured Credit Facilities are guaranteed by AP Gaming Holdings, the Borrower’s material, wholly owned domestic subsidiaries (subject to certain exceptions) and AP Gaming NV, LLC, and are secured by a pledge by AP Gaming Holdings of the Borrower’s equity interest directly held by AP Gaming Holdings and a pledge of substantially all of the existing and future property and assets of the Borrower and the subsidiary guarantors and AP Gaming NV, LLC, 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 beginning with the first quarter ending June 30, 2014. 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.
In October 2013, AGS Capital entered into financing agreements to purchase 450 gaming machines from various third party suppliers for lease to a company that operates and service slot routes in Illinois. The agreements require monthly payments of interest and principle and have terms ranging from 24 to 36 months and carry an interest rate from 8.0% to 8.5%. The amounts due under these financing agreements were paid in full in connection with the Acquisition.
In January 2014, we entered into a financing agreement to purchase certain gaming devises and/or systems and related equipment in the amount of $2.7 million. The agreement requires monthly payments commencing 90 days from the date of delivery with a term of 36 months at an annual fixed interest rate of 7.5%.
There were no material changes to the Company’s contractual obligations outside of the ordinary course of business during the three months ended
March 31, 2015
. Based on our current business plan, we believe that our existing cash balances, cash generated from operations and availability under the Revolving Facility will be sufficient to meet our anticipated cash needs for at least the next twelve months. As of
March 31, 2015
, we are in compliance with the Senior Secured Credit Facilities, including the maximum net first lien leverage ratio. However, our future cash requirements could be higher than we currently expect as a result of various factors. Our ability to meet our liquidity needs could be adversely affected if we suffer adverse results of operations, or if we violate the covenants and restrictions to which we are subject under the credit facility. Additionally, our ability to generate sufficient cash from our operating activities is subject to general economic, political, regulatory, financial, competitive and other factors beyond our control. Our business may not generate sufficient cash flow from operations, and future borrowings may not be available to us under our existing credit facility in an amount sufficient to enable us to pay our service or repay our indebtedness or to fund our other liquidity needs, and we may be required to seek additional financing through credit facilities with other lenders or institutions or seek additional capital through private placements or public offerings of equity or debt securities.
The following table summarizes our historical cash flows (in thousands):
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
2015
|
|
2014
|
Cash Flow Information:
|
|
|
|
Net cash provided by operating activities
|
$
|
4,248
|
|
|
$
|
4,583
|
|
Net cash used in investing activities
|
(4,633
|
)
|
|
(4,456
|
)
|
Net cash provided by (used in) financing activities
|
565
|
|
|
(461
|
)
|
Effect of exchange rates on cash and cash equivalents
|
451
|
|
|
225
|
|
Net increase (decrease) in cash and cash equivalents
|
$
|
631
|
|
|
$
|
(109
|
)
|
Operating activities
The Company has historically produced a loss from operations due mainly to the capital nature of the business and the resulting depreciation and amortization expense. For the
three
months ended
March 31, 2015
, net cash provided by operating activities was
$4.2 million
compared to
$4.6 million
for the
three
months ended
March 31, 2014
, representing a decrease of $0.4 million. The decrease is primarily due to a $4.0 million decrease in income from operating activities excluding non-cash expenses, partially offset by a $3.7 million increase as a result of changes in net working capital.
Investing activities
Net cash used in investing activities for the
three
months ended
March 31, 2015
was
$4.6 million
compared to
$4.5 million
for the
three
months ended
March 31, 2014
, representing an increase of $0.1 million. The increase was primarily due to
an increase of $0.7 million in purchases of gaming equipment, vehicles and other equipment, partially offset primarily by a $0.4 million decrease in software development costs and a $0.1 million increase in collections under our notes receivable.
Financing activities
Net cash provided by financing activities for the
three
months ended
March 31, 2015
was
$0.6 million
compared to net cash used in financing activities of
$0.5 million
for the
three
months ended
March 31, 2014
, representing a $1.1 million increase in net cash provided by financing activities. The increase was primarily due to $1.0 million in borrowings on the Company’s Revolving Facility during the
three
months ended
March 31, 2015
and $0.2 million in proceeds from employees on early exercise of stock options, partially offset by a $0.2 million increase in payments on debt.
Off-Balance Sheet Arrangements
We do not maintain any off-balance sheet transactions, arrangements, obligations or other relationships with unconsolidated entities or others that are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Critical Accounting Policies
A description of our critical accounting policies can be found in “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended
December 31, 2014
. Except as noted below, there were no material changes to those policies during the
three
months ended
March 31, 2015
.
Recently Issued Accounting Standards
In July 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-11,
Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists,
which provides that an unrecognized tax benefit, or a portion thereof, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except to the extent that a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date to settle any additional income taxes that would result from disallowance of a tax position, or the tax law does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, then the unrecognized tax benefit should be presented as a liability. These amendments in this ASU are effective for fiscal years, and interim reporting periods within those years, beginning after December 15, 2013. The adoption of this standard by the Company on January 1, 2014 had no material impact on the Company’s condensed consolidated financial statements.
In May 2014, the FASB issued 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. The amendment is effective for annual periods, and interim reporting periods within those annual periods, beginning after December 15, 2016 and may be adopted using either a full retrospective transition method or a modified retrospective transition method. Early adoption is not permitted. The Company is currently evaluating the provisions of the amendment and the impact on its future consolidated financial statements.
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 amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. The Company is currently evaluating the provisions of ASU 2014-12 and has not yet determined the impact on its financial position, results of operations or cash flows.
In August 2014, the Financial Accounting Standards Board ("FASB") issued an accounting standards update that 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 will adopt this standard effective January 1, 2017. The Company is currently assessing the impact the adoption of this standard will have on its consolidated financial statements.