Condensed Notes to Consolidated Financial Statements (Unaudited)
Note 1 — Nature of Business and Basis of Presentation
Overview
Golden Entertainment, Inc. and its wholly-owned subsidiaries own and operate a diversified entertainment platform, consisting of a portfolio of gaming assets that focus on casino and distributed gaming operations (including gaming in the Company’s branded taverns). The Company’s portfolio includes ten casino properties located in Nevada and Maryland. The Company’s distributed gaming operations involve the installation, maintenance and operation of slot machines and amusement devices in non-casino locations such as restaurants, bars, taverns, convenience stores, liquor stores and grocery stores in Nevada and Montana, as well as the operation of branded taverns targeting local patrons located primarily in the greater Las Vegas, Nevada metropolitan area. Unless otherwise indicated, the terms “Golden” and the “Company,” refer to Golden Entertainment, Inc. together with its subsidiaries.
The Company conducts its business through four reportable segments: Nevada Casino Resorts, Nevada Locals Casinos, Maryland Casino Resort, and Distributed Gaming. Each reportable segment is comprised of the following properties and operations: | | | | | | | | |
Reportable Segment | | Location |
Nevada Casino Resorts | | |
The STRAT Hotel, Casino & SkyPod (“The STRAT”) | | Las Vegas, Nevada |
Aquarius Casino Resort (“Aquarius”) | | Laughlin, Nevada |
Edgewater Hotel & Casino Resort (“Edgewater”) | | Laughlin, Nevada |
Colorado Belle Hotel & Casino Resort (“Colorado Belle”) (1) | | Laughlin, Nevada |
| | |
Nevada Locals Casinos | | |
Arizona Charlie’s Boulder | | Las Vegas, Nevada |
Arizona Charlie’s Decatur | | Las Vegas, Nevada |
Gold Town Casino | | Pahrump, Nevada |
Lakeside Casino & RV Park | | Pahrump, Nevada |
Pahrump Nugget Hotel Casino (“Pahrump Nugget”) | | Pahrump, Nevada |
| | |
Maryland Casino Resort | | |
Rocky Gap Casino Resort (“Rocky Gap”) | | Flintstone, Maryland |
| | |
Distributed Gaming | | |
Nevada distributed gaming | | Nevada |
Nevada taverns | | Nevada |
Montana distributed gaming | | Montana |
(1)As a result of the impact of the 2019 novel coronavirus (“COVID-19”) pandemic, the operations of the Colorado Belle remain suspended.
On August 24, 2022, the Company entered into definitive agreements to sell Rocky Gap to Century Casinos, Inc. (“Century”) and VICI Properties, L.P. (“VICI”), an affiliate of VICI Properties Inc., for aggregate consideration of $260.0 million (the “Rocky Gap Transactions”). Specifically, Century agreed to acquire the operations of Rocky Gap from Golden for $56.1 million in cash (subject to adjustment based on Rocky Gap’s working capital and cage cash at closing), subject to the conditions and terms set forth therein, and VICI agreed to acquire the real estate assets relating to Rocky Gap from Golden for $203.9 million in cash, subject to the conditions and terms set forth therein. The Rocky Gap Transactions are required by their terms to close concurrently and the Company expects the Rocky Gap Transactions to close during the second quarter of 2023, subject to the satisfaction or waiver of customary regulatory approvals and closing conditions. Refer to discussion in “Note 2 — Assets Held for Sale” for further information. Impact of COVID-19
As of September 30, 2022, all of the Company’s properties were open other than the Colorado Belle (whose operations remain suspended as a result of the pandemic), and none of the Company’s casino properties or distributed gaming locations were subject
to COVID-19 operating restrictions. Despite the resurgence of Omicron variants during 2022, the Company’s casino properties and distributed gaming operations experienced positive trends during the first half of 2022, including an increase in occupancy of hotel rooms and guest visitation following the removal of COVID-19 mitigation measures. The Company’s results of operations in the second half of 2021 also benefited from pent-up demand following the easing of COVID-19 mitigation measures and the effect of government stimulus on discretionary consumer spending. Future COVID-19 variants, mandates, restrictions or mitigation measures imposed by governmental authorities or regulatory bodies are uncertain and could have a significant impact on the Company’s future operations.
Temporary closures of the Company’s operations due to the COVID-19 pandemic resulted in lease concessions for certain of the Company’s taverns and route locations in 2020, some of which continued in 2021. Such concessions provided for deferral and, in some instances, forgiveness of rent payments with no substantive amendments to the consideration due per the terms of the original contract and did not result in substantial changes in the Company’s obligations under such leases. The Company elected to account for the deferred rent as variable lease payments, which resulted in a reduction of the rent expense of $2.3 million for the nine months ended September 30, 2021. Rent expense that was not forgiven was recorded in future periods as those deferred payments were paid to the Company’s lessors.
Basis of Presentation
The unaudited consolidated financial statements of the Company have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) applicable to interim financial information. Accordingly, certain information normally included in the annual financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) has been condensed and/or omitted. For further information, refer to the audited consolidated financial statements of the Company for the year ended December 31, 2021 and the notes thereto included in the Company’s Annual Report on Form 10-K (the “Annual Report”) previously filed with the SEC. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments, which included only normal recurring adjustments, necessary to present fairly the Company’s results for the periods presented. Results for interim periods should not be considered indicative of the results to be expected for the full year and should be read in conjunction with the consolidated financial statements and notes thereto included in the Annual Report. The accompanying unaudited consolidated financial statements include the accounts of the Company and its subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation. Reclassifications were made to the Company’s prior period consolidated financial statements to conform to the current period presentation, where applicable. These reclassifications had no effect on previously reported net income.
Significant Accounting Policies
There have been no changes to the significant accounting policies disclosed in the Company’s Annual Report.
Cash and Cash Equivalents
Cash and cash equivalents includes cash on hand and in banks and highly liquid investments with original maturities of three months or less. As of September 30, 2022, the Company had $177.7 million in cash and cash equivalents, which included $7.2 million of cash and cash equivalents related to assets held for sale. Although cash and cash equivalents balances may at times exceed the federal insured deposit limit, the Company believes such risk is mitigated by the quality of the institutions holding such deposits.
Net Income Per Share
Basic net income per share is calculated by dividing net income by the weighted-average common shares outstanding. Diluted net income per share in profitable periods reflects the effect of all potentially dilutive common shares outstanding by dividing net income by the weighted-average of all common and potentially dilutive shares outstanding. In the event of a net loss, diluted shares are not considered because of their anti-dilutive effect. For the three and nine months ended September 30, 2022, diluted net income per share excluded the weighted average effect of 205,699 and 141,350 shares of common stock, respectively, related to time-based and performance-based restricted stock units due to such shares being anti-dilutive. No shares of common stock related to time-based and performance-based restricted stock units were anti-dilutive for the three and nine months ended September 30, 2021.
Recent Accounting Pronouncements
Changes to GAAP are established by the Financial Accounting Standards Board (“FASB”) in the form of accounting standards updates (“ASUs”) to the FASB’s Accounting Standards Codification. The Company considers the applicability and impact of all ASUs. While management continues to assess the possible impact of the adoption of new accounting standards and the future
adoption of the new accounting standards that are not yet effective on the Company’s financial statements, management currently believes that the following new standards have or may have an impact on the Company’s consolidated financial statements and disclosures:
Accounting Standards Issued and Adopted
In July 2021, the FASB issued ASU No. 2021-05, Leases (Topic 842): Lessors — Certain Leases with Variable Lease Payments. The ASU addresses an issue related to a lessor’s accounting for lease contracts that have variable lease payments that do not depend on a reference index or a rate and would have resulted in the recognition of a selling loss at lease commencement if classified as sales-type or direct financing. The amendment allows the lessor to classify and account for such lease contracts as operating. The Company adopted the standard effective January 1, 2022, and the adoption did not have a material impact on the Company’s financial statements or disclosures.
Accounting Standards Issued but Not Yet Adopted
In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805) - Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. The ASU improves the accounting for revenue contracts with customers acquired in a business combination by addressing diversity in practice and inconsistency related to recognition of contract assets and liabilities acquired in a business combination. The provisions of this ASU require that an acquiring entity account for the related revenue contracts in accordance with ASC 606 as if it had originated the contracts. The standard is effective for fiscal years beginning after December 15, 2022 and interim periods within those fiscal years with early adoption permitted. The Company does not expect the impact of the adoption of this ASU to be material to its financial statements or disclosures.
Management does not believe that any other recently issued accounting standards that are not yet effective are likely to have a material impact on the Company’s financial statements.
Note 2 — Assets Held for Sale
The Company classifies assets as held for sale when a sale is probable, is expected to be completed within one year, and the asset group meets all of the accounting criteria to be classified as held for sale. As discussed in “Note 1 — Nature of Business and Basis of Presentation,” on August 24, 2022, the Company entered into definitive agreements to sell Rocky Gap. The Rocky Gap Transactions are expected to close in the second quarter of 2023, subject to satisfaction or waiver of customary regulatory approvals and closing conditions. As a result, the assets related to the Rocky Gap property were classified as held for sale as of September 30, 2022 and the Company ceased recording depreciation and amortization of the long-lived assets included in the sale from the date of execution of the definitive agreements. Operations of Rocky Gap have historically been represented in the Company’s Maryland Casino Resort reportable segment.
The carrying amounts of the assets and liabilities held for sale in the Rocky Gap Transactions consisted of the following:
| | | | | |
(In thousands) | September 30, 2022 |
ASSETS | |
Current assets | |
Cash and cash equivalents | $ | 7,172 | |
Accounts receivables, net | 1,923 | |
Prepaid expenses | 768 | |
Inventories | 531 | |
Other | 44 | |
Total current assets held for sale | 10,438 | |
Property and equipment, net | 23,717 | |
Operating lease right-of-use assets, net | 5,980 | |
Intangible assets, net | 1,064 | |
Other assets | 11 | |
Total assets held for sale | $ | 41,210 | |
LIABILITIES | |
Current liabilities | |
Current portion of finance leases | $ | 103 | |
Current portion of operating leases | 436 | |
Accounts payable | 1,182 | |
Accrued payroll and related | 1,416 | |
Other accrued liabilities | 1,772 | |
Total current liabilities related to assets held for sale | 4,909 | |
Non-current finance leases | 228 | |
Non-current operating leases | 5,206 | |
Total liabilities related to assets held for sale | $ | 10,343 | |
For the three and nine months ended September 30, 2022, Rocky Gap generated revenues of $21.6 million and $60.1 million, respectively, and pretax income of $7.3 million and $17.8 million, respectively. For the three and nine months ended September 30, 2021, Rocky Gap generated revenues of $21.6 million and $59.0 million, respectively, and pretax income of $7.0 million and $18.0 million, respectively.
Note 3 — Property and Equipment
Property and equipment, net, consisted of the following:
| | | | | | | | | | | |
(In thousands) | September 30, 2022 | | December 31, 2021 |
Land | $ | 125,240 | | | $ | 125,240 | |
Building and improvements | 915,178 | | | 937,759 | |
Furniture and equipment | 233,989 | | | 246,323 | |
Construction in process | 20,699 | | | 16,347 | |
Property and equipment | 1,295,106 | | | 1,325,669 | |
Accumulated depreciation | (453,236) | | | (421,449) | |
Property and equipment, net | $ | 841,870 | | | $ | 904,220 | |
Depreciation expense for property and equipment, including finance leases, was $22.4 million and $70.3 million for the three and nine months ended September 30, 2022, respectively, and $24.6 million and $74.2 million for the three and nine months ended September 30, 2021, respectively.
The Company reviews the carrying amounts of its long-lived assets, other than goodwill and indefinite-lived intangible assets, for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Due to the significant impact of the COVID-19 pandemic on the Company’s operations, the Company decided to keep operations of its Colorado Belle property suspended. Based on the results of its interim impairment assessments conducted during the three and
nine months ended September 30, 2022 and 2021, the Company concluded that there was no impairment of the Company’s long-lived assets.
To the extent the Company becomes aware of new facts and circumstances that would result in a triggering event, the Company will revise its cash flow projections accordingly, as its estimates of future cash flows are highly dependent upon certain assumptions, including, but not limited to, the nature, timing, and extent of elimination or change of the restrictions on the Company’s operations and the extent and timing of the economic recovery globally, nationally, and specifically within the gaming industry. If such assumptions are not accurate, the Company may be required to record impairment charges in future periods, whether in connection with its regular review procedures, or earlier, if an indicator of an impairment is present prior to such evaluation.
Note 4 — Goodwill and Intangible Assets
The Company tests goodwill and indefinite-lived intangible assets for impairment annually during the fourth quarter of each year, and whenever events or circumstances indicate that it is more likely than not that the carrying value of a reporting unit exceeds its fair value. Finite-lived intangible assets are evaluated for potential impairment whenever there is an indicator that the carrying value of an asset group may not be recoverable. Based on the results of its interim impairment assessments conducted during the three and nine months ended September 30, 2022 and 2021, the Company concluded that there was no impairment of the Company’s goodwill and intangible assets.
The following table summarizes goodwill activity by reportable segment:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | Nevada Casino Resorts | | Nevada Locals Casinos | | Maryland Casino Resort | | Distributed Gaming | | Total Goodwill |
Balance, December 31, 2021 and September 30, 2022 | $ | 22,105 | | | $ | 38,187 | | | $ | — | | | $ | 98,104 | | | $ | 158,396 | |
Intangible assets, net, consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2022 |
(In thousands) | Useful Life (Years) | | Gross Carrying Value | | Cumulative Amortization | | Cumulative Impairment | | Intangible Assets, Net |
Indefinite-lived intangible assets | | | | | | | | | |
Trade names | Indefinite | | $ | 53,690 | | | $ | — | | | $ | (6,890) | | | $ | 46,800 | |
| | | 53,690 | | | — | | | (6,890) | | | 46,800 | |
Amortizing intangible assets | | | | | | | | | |
Customer relationships | 4-16 | | 81,105 | | | (40,277) | | | — | | | 40,828 | |
Player relationships | 2-14 | | 42,990 | | | (40,294) | | | — | | | 2,696 | |
Non-compete agreements | 2-5 | | 9,840 | | | (8,933) | | | — | | | 907 | |
In-place lease value | 4 | | 1,170 | | | (1,170) | | | — | | | — | |
Leasehold interest | 4 | | 570 | | | (570) | | | — | | | — | |
Other | 4-25 | | 1,366 | | | (1,225) | | | — | | | 141 | |
| | | 137,041 | | | (92,469) | | | — | | | 44,572 | |
Balance, September 30, 2022 | | | $ | 190,731 | | | $ | (92,469) | | | $ | (6,890) | | | $ | 91,372 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
(In thousands) | Useful Life (Years) | | Gross Carrying Value | | Cumulative Amortization | | Cumulative Impairment | | Intangible Assets, Net |
Indefinite-lived intangible assets | | | | | | | | | |
Trade names | Indefinite | | $ | 53,690 | | | $ | — | | | $ | (6,890) | | | $ | 46,800 | |
| | | 53,690 | | | — | | | (6,890) | | | 46,800 | |
Amortizing intangible assets | | | | | | | | | |
Customer relationships | 4-16 | | 81,105 | | | (35,879) | | | — | | | 45,226 | |
Player relationships | 2-14 | | 42,990 | | | (39,812) | | | — | | | 3,178 | |
Non-compete agreements | 2-5 | | 9,840 | | | (8,349) | | | — | | | 1,491 | |
Gaming license (1) | 15 | | 2,100 | | | (1,210) | | | — | | | 890 | |
In-place lease value | 4 | | 1,170 | | | (1,155) | | | — | | | 15 | |
Leasehold interest | 4 | | 570 | | | (570) | | | — | | | — | |
Other | 4-25 | | 1,814 | | | (1,356) | | | — | | | 458 | |
| | | 139,589 | | | (88,331) | | | — | | | 51,258 | |
Balance, December 31, 2021 | | | $ | 193,279 | | | $ | (88,331) | | | $ | (6,890) | | | $ | 98,058 | |
(1)Relates to Rocky Gap.
Total amortization expense related to intangible assets was $1.9 million and $5.6 million for the three and nine months ended September 30, 2022, respectively, and $1.9 million and $6.1 million for the three and nine months ended September 30, 2021, respectively.
To the extent the Company becomes aware of new facts and circumstances that would result in a triggering event, the Company will revise its cash flow projections accordingly, as its estimates of future cash flows are highly dependent upon certain assumptions, including, but not limited to, the nature, timing, and extent of elimination or change of the restrictions on the Company’s operations and the extent and timing of the economic recovery globally, nationally, and specifically within the gaming industry. If such assumptions are not accurate, the Company may be required to record impairment charges in future periods, whether in connection with its regular review procedures, or earlier, if an indicator of an impairment is present prior to such evaluation.
Note 5 — Accrued Liabilities
Accrued liabilities consisted of the following:
| | | | | | | | | | | |
(In thousands) | September 30, 2022 | | December 31, 2021 |
Interest | $ | 12,252 | | | $ | 6,168 | |
Gaming liabilities | 10,491 | | | 12,311 | |
Accrued taxes, other than income taxes | 8,818 | | | 9,035 | |
Other accrued liabilities | 6,353 | | | 5,549 | |
Deposits | 2,968 | | | 2,284 | |
Total current accrued liabilities | $ | 40,882 | | | $ | 35,347 | |
Note 6 — Long-Term Debt
Long-term debt, net, consisted of the following:
| | | | | | | | | | | |
(In thousands) | September 30, 2022 | | December 31, 2021 |
Term Loan | $ | 600,000 | | | $ | 650,000 | |
2026 Unsecured Notes | 337,461 | | | 375,000 | |
Finance lease liabilities | 2,270 | | | 3,005 | |
Notes payable | 114 | | | 602 | |
Total long-term debt and finance leases | 939,845 | | | 1,028,607 | |
Unamortized discount | (8,657) | | | (11,689) | |
Unamortized debt issuance costs | (4,090) | | | (5,392) | |
Total long-term debt and finance leases after debt issuance costs and discount | 927,098 | | | 1,011,526 | |
Current portion of long-term debt and finance leases | (558) | | | (1,057) | |
Long-term debt, net and finance leases | $ | 926,540 | | | $ | 1,010,469 | |
Senior Secured Credit Facility
In October 2017, the Company entered into a senior secured credit facility consisting of a $900 million senior secured first lien credit facility (consisting of an $800 million term loan (the “Term Loan”) maturing on October 20, 2024 and a $100 million revolving credit facility (the “Revolving Credit Facility”)) with JPMorgan Chase Bank, N.A. (as administrative agent and collateral agent), the lenders party thereto and the other entities party thereto (the “Credit Facility”). The Revolving Credit Facility was subsequently increased from $100 million to $200 million in 2018, increasing the total Credit Facility capacity to $1 billion. On October 12, 2021, the Company further modified the terms of the Revolving Credit Facility by increasing its size to $240 million and extending the maturity date from October 20, 2022 to April 20, 2024. The Company incurred $0.7 million in debt modification costs and fees related to this modification of the Revolving Credit Facility that have been deferred and are being amortized over the term of the Revolving Credit Facility using the straight-line method.
As of September 30, 2022, the Company had $600 million in principal amount of outstanding Term Loan borrowings under its Credit Facility, no outstanding letters of credit and no borrowings under the Revolving Credit Facility, such that the full borrowing availability of $240 million under the Revolving Credit Facility was available to the Company. The weighted-average effective interest rate on the Company’s outstanding borrowings under the Credit Facility was 5.17% and 4.26% for the three and nine months ended September 30, 2022, respectively.
The Company made multiple prepayments of the principal under the Term Loan during 2021, thereby eliminating the requirement to make any further quarterly installment payments prior to maturity. The Company prepaid $25 million and $50 million of principal under the Term Loan during the three and nine months ended September 30, 2022, respectively, which reduced the final installment payment due at the maturity date of October 20, 2024 to $600 million. The Company recorded non-cash charges in the amount of $0.2 million and $0.3 million during the three and nine months ended September 30, 2022, respectively, for the accelerated amortization of the debt issuance costs and discount related to the prepayment of the Term Loan.
The Company was in compliance with its financial and other covenants under the Credit Facility as of September 30, 2022.
Senior Unsecured Notes
On April 15, 2019, the Company issued $375 million in principal amount of 7.625% Senior Notes due 2026 (“2026 Unsecured
Notes”) in a private placement to institutional buyers at face value. The 2026 Unsecured Notes bear interest at 7.625%, payable semi-annually on April 15th and October 15th of each year.
During June 2022, the Company repurchased $37.5 million in principal amount of 2026 Unsecured Notes in open market transactions, thereby reducing the final principal payment due at maturity to $337.5 million. The Company recorded a non-cash charge in the amount of $1.1 million for the accelerated amortization of the debt issuance costs and discount related to the repurchase of 2026 Unsecured Notes.
Note 7 — Shareholders’ Equity and Stock Incentive Plans
Share Repurchase Program
On August 3, 2021, the Company’s Board of Directors authorized a share repurchase program of $50 million. In December 2021, the Company repurchased 226,485 shares of its common stock pursuant to its share repurchase program in open market transactions at an average price of $46.87 per share, resulting in a charge to accumulated deficit of $10.6 million. In March 2022, the Company repurchased 268,791 shares of its common stock pursuant to its share repurchase program in open market transactions at an average price of $56.54 per share, resulting in a charge to accumulated deficit of $15.2 million. On May 3, 2022, the Company’s Board of Directors re-authorized its $50 million share repurchase program. During three months ended June 30, 2022, the Company repurchased 515,000 shares of its common stock pursuant to its share repurchase program at an average price of $43.63 per share, resulting in a charge to accumulated deficit of $22.5 million. There were no share repurchases during the three months ended September 30, 2022 and as of September 30, 2022, the Company had $27.5 million of remaining share repurchase availability under its May 3, 2022 share repurchase authorization. On November 1, 2022, the Company’s Board of Directors increased its share repurchase program to $75 million.
Share repurchases may be made from time to time in open market transactions, block trades or in private transactions in accordance with applicable securities laws and regulations and other legal requirements, including compliance with the Company’s finance agreements. There is no minimum number of shares that the Company is required to repurchase and the repurchase program may be suspended or discontinued at any time without prior notice.
Stock Options
The following table summarizes the Company’s stock option activity:
| | | | | | | | | | | |
| Stock Options |
| Shares | | Weighted-Average Exercise Price |
Outstanding at January 1, 2022 | 2,141,494 | | | $ | 11.31 | |
Granted | — | | | $ | — | |
Exercised | (67,000) | | | $ | 9.85 | |
Cancelled | — | | | $ | — | |
Expired | — | | | $ | — | |
Outstanding at September 30, 2022 | 2,074,494 | | | $ | 11.36 | |
Exercisable at September 30, 2022 | 2,074,494 | | | $ | 11.36 | |
There was no share-based compensation expense related to stock options for the three and nine months ended September 30, 2022 or for the three months ended September 30, 2021, and the Company recorded share-based compensation expense of $0.2 million for the nine months ended September 30, 2021. The Company did not have any remaining unrecognized share-based compensation expense related to stock options as of September 30, 2022 and 2021.
Restricted Stock Units
The following table summarizes the Company’s activity related to time-based restricted stock units (“RSUs”) and performance-based restricted stock units (“PSUs”):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | RSUs | | PSUs |
| | Shares | | Weighted-Average Grant Date Fair Value | | Shares (1) | | Weighted-Average Grant Date Fair Value |
Outstanding at January 1, 2022 | | 815,420 | | | $ | 18.17 | | | 705,577 | | (2) | $ | 13.84 | |
Granted | | 122,577 | | | $ | 52.05 | | | 83,579 | | | $ | 53.51 | |
Performance certification | | — | | | $ | — | | | 534,383 | | (3) | $ | — | |
Vested | | (363,450) | | | $ | 17.78 | | | (247,380) | | (4) | $ | 12.51 | |
Cancelled | | (28,269) | | | $ | 17.63 | | | — | | | $ | — | |
Outstanding at September 30, 2022 | | 546,278 | | | $ | 26.06 | | | 1,076,159 | | | $ | 17.17 | |
(1) The number of shares for the PSUs listed as granted represents the “target” number of PSUs granted to each recipient eligible to vest if the Company meets its “target” performance goals for the applicable period. The actual number of PSUs eligible to vest for those PSUs will vary depending on whether or not the Company meets or exceeds the applicable threshold, target, or maximum performance goals for the PSUs, with 200% of the “target” number of PSUs eligible to vest at “maximum” performance levels.
(2) Includes 171,194 shares of PSUs granted in March 2019 that were certified below target during the three months ended March 31, 2021 and vested in March 2022. Also includes PSUs granted in March 2020 and March 2021 at “target.”
(3) The Company’s financial results for the applicable performance goals were certified during the three months ended March 31, 2022 and 200% of the target PSUs granted in March 2020 and March 2021 were deemed “earned.” Includes 38,093 incremental shares issued in March 2022 in connection with vesting of PSUs granted in March 2020 due to such award “earned” at 200% of the “target.” The remaining PSUs granted in March 2020 and March 2021 will be eligible to vest on March 14, 2023 and 2024, respectively.
(4) Comprises 171,194 shares of PSUs granted in March 2019 and 76,186 shares of PSUs granted in March 2020 that vested in March 2022.
Share-based compensation expense related to RSUs was $1.8 million and $5.1 million for the three and nine months ended September 30, 2022, respectively, and $2.2 million and $5.3 million for the three and nine months ended September 30, 2021, respectively. Share-based compensation expense related to PSUs was $1.5 million and $4.6 million for the three and nine months ended September 30, 2022, respectively, and $0.8 million and $2.7 million for the three and nine months ended September 30, 2021, respectively.
As of September 30, 2022, there was $10.0 million and $8.3 million of unamortized share-based compensation expense related to RSUs and PSUs, respectively, which is expected to be recognized over a weighted-average period of 1.4 years and 0.9 years for RSUs and PSUs, respectively. As of September 30, 2021, there was $10.9 million and $5.0 million of unamortized share-based compensation expense related to RSUs and PSUs, respectively, which is expected to be recognized over a weighted-average period of 2.0 years for both RSUs and PSUs.
As of September 30, 2022, a total of 3,136,862 shares of the Company’s common stock remained available for grants of awards under the Golden Entertainment, Inc. 2015 Incentive Award Plan, which includes the annual increase in the number of shares available for grant on January 1, 2022 of 1,153,210 shares.
Note 8 — Income Tax
The Company’s effective income tax rates were 27.0% and (8.8)% for the three and nine months ended September 30, 2022, respectively, and (0.4)% and 0.3% for the three and nine months ended September 30, 2021, respectively.
The Company recorded income tax expense of $5.2 million for the three months ended September 30, 2022 and income tax benefit of $5.7 million for the nine months ended September 30, 2022. The Company recorded income tax benefit of $0.1 million and income tax expense of $0.4 million for the three and nine months ended September 30, 2021, respectively.
A valuation allowance on the Company’s deferred tax assets resulted in an annual effective tax rate of less than 1% and lower income tax expense amounts in 2021. During the first quarter of 2022, the Company concluded that it was more likely than not that the Company will generate sufficient taxable income within the applicable net operating loss carry-forward periods to realize a portion of its deferred tax assets, which resulted in a partial reversal of the deferred tax asset valuation allowance. The partial reversal of the deferred tax asset valuation allowance during the first quarter of 2022 resulted in the negative effective income tax rate and income tax benefit for the nine months ended September 30, 2022. The effective income tax rate and the income tax expense for the three months ended September 30, 2022 differed from the federal tax rate of 21% due to the limitation of tax deductions on executive compensation under the Internal Revenue Code Section 162(m).
As of September 30, 2022, the Company’s 2017 and 2018 federal tax returns were under audit by the IRS.
As of September 30, 2022 and December 31, 2021, the Company had no material uncertain tax positions.
Note 9 — Financial Instruments and Fair Value Measurements
Estimates of fair value for financial assets and liabilities are based on the framework established in the accounting guidance for fair value measurements. The framework defines fair value, provides guidance for measuring fair value and requires certain disclosures. The framework discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow) and the cost approach (cost to replace the service capacity of an asset or replacement cost). The framework utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:
•Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
•Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
•Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions.
Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. Thus, assets and liabilities categorized as Level 3 may be measured at fair value using inputs that are observable (Levels 1 and 2) and unobservable (Level 3). Management’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of assets and liabilities and their placement within the fair value hierarchy levels.
Financial Instruments
The carrying values of the Company’s cash and cash equivalents, accounts receivable, other current assets and accounts payable approximate fair value because of the short duration of these financial instruments.
The following table summarizes the fair value measurement of the Company’s long-term debt:
| | | | | | | | | | | | | | | | | |
| September 30, 2022 |
(In thousands) | Carrying Amount | | Fair Value | | Fair Value Hierarchy |
Term Loan | $ | 600,000 | | | $ | 593,250 | | | Level 2 |
2026 Unsecured Notes | 337,461 | | | 331,893 | | | Level 2 |
Finance lease liabilities | 2,270 | | | 2,270 | | | Level 3 |
Notes payable | 114 | | | 114 | | | Level 3 |
Total debt | $ | 939,845 | | | $ | 927,527 | | | |
| | | | | | | | | | | | | | | | | |
| December 31, 2021 |
(In thousands) | Carrying Amount | | Fair Value | | Fair Value Hierarchy |
Term Loan | $ | 650,000 | | | $ | 650,813 | | | Level 2 |
2026 Unsecured Notes | 375,000 | | | 390,938 | | | Level 2 |
Finance lease liabilities | 3,005 | | | 3,005 | | | Level 3 |
Notes payable | 602 | | | 602 | | | Level 3 |
Total debt | $ | 1,028,607 | | | $ | 1,045,358 | | | |
The estimated fair value of the Company’s Term Loan and 2026 Unsecured Notes is based on a relative value analysis performed as of September 30, 2022 and December 31, 2021. The finance lease liabilities and notes payable are fixed-rate debt, are not traded and do not have observable market inputs, and therefore, their fair value is estimated to be equal to the carrying value.
Note 10 — Commitments and Contingencies
Participation Agreements
The Company enters into certain slot placement contracts in the form of participation agreements. Under participation agreements, the Company and the business location each hold a state issued gaming license in order to be able to receive a percentage of gaming revenue earned on the Company’s slot machines. The business location retains a percentage of the gaming
revenue generated from the Company’s slot machines. The Company is considered to be the principal in these arrangements and therefore, records its share of revenue generated under participation agreements on a gross basis with the business location’s share of revenue recorded as gaming expenses.
The aggregate contingent payments recognized by the Company as gaming expenses under participation agreements were $54.2 million and $162.1 million for the three and nine months ended September 30, 2022, respectively, and $57.6 million and $171.2 million for the three and nine months ended September 30, 2021, respectively.
Legal Matters and Other
From time to time, the Company is involved in a variety of lawsuits, claims, investigations and other legal proceedings arising in the ordinary course of business, including proceedings concerning labor and employment matters, personal injury claims, breach of contract claims, commercial disputes, business practices, intellectual property, tax and other matters for which the Company records reserves. Although lawsuits, claims, investigations and other legal proceedings are inherently uncertain and their results cannot be predicted with certainty, the Company believes that the resolution of its currently pending matters should not have a material adverse effect on its business, financial condition, results of operations or liquidity. Regardless of the outcome, legal proceedings can have an adverse impact on the Company because of defense costs, diversion of management resources and other factors. In addition, it is possible that an unfavorable resolution of one or more such proceedings could in the future materially and adversely affect the Company’s business, financial condition, results of operations or liquidity in a particular period.
In January 2021, the Company was affected by a ransomware cyber-attack that temporarily disrupted the Company’s access to certain information located on the Company’s network and incurred expenses relating thereto. The Company’s financial information and business operations were not materially affected. The Company implemented a variety of measures to further enhance its cybersecurity protections and minimize the impact of any future cyber incidents. The Company has insurance related to this event and has recovered a portion of the costs it incurred to remediate this matter, which amounts were received and recorded during 2021 and the three months ended March 31, 2022.
In September 2018, the Company entered into an agreement with American Wagering, Inc. and William Hill U.S. HoldCo, Inc. (collectively, “William Hill”), which contemplated that William Hill would be obligated to make a one-time payment to the Company in the event of a change of control transaction with respect to William Hill. Under this agreement, as amended, the April 22, 2021 acquisition of William Hill PLC by Caesars Entertainment, Inc. (“Caesars”) constituted the change of control event triggering this payment. On May 26, 2021, the Company, William Hill and Caesars executed an amendment to the agreement requiring William Hill and Caesars, as the acquiring party, to make a payment in the amount of $60 million by July 15, 2021. The Company received this payment in July 2021 and recognized $60 million in non-operating income for the year ended December 31, 2021.
Note 11 — Segment Information
The Company conducts its business through four reportable segments: Nevada Casino Resorts, Nevada Locals Casinos, Maryland Casino Resort and Distributed Gaming.
The Nevada Casino Resorts segment is comprised of destination casino resort properties offering a variety of food and beverage outlets, entertainment venues and other amenities. The casino resort properties in this segment cater primarily to a regional drive-in customer base seeking a value-oriented vacation experience, with guests typically traveling from Southern California or Arizona. The Company’s casino resort properties in Nevada have a significantly larger number of hotel rooms compared to the other casino properties in its portfolio. While hotel stays at these casino resorts are typically longer, the overall frequency of visitation from guests is lower when compared to the Nevada Locals Casinos.
The Nevada Locals Casinos segment is comprised of casino properties that cater to local customers who generally live within a five-mile radius. The Company’s locals casino properties typically experience a higher frequency of customer visits compared to its casino resort properties in Nevada and Maryland, with many of the customers visiting the Company’s Nevada Locals Casinos on a weekly basis. The casino properties within this reportable segment have no or a limited number of hotel rooms and offer fewer food and beverage outlets or other amenities, with revenues primarily generated from slot machine play.
The Maryland Casino Resort segment is comprised of the Rocky Gap casino resort, which is geographically disparate from the Company’s Nevada properties, operates in a separate regulatory jurisdiction and has only a limited number of hotel rooms compared to the Nevada Casino Resorts. Rocky Gap caters to a regional drive-in customer base traveling from mid-Atlantic areas (Maryland, Virginia, Washington DC, Pennsylvania, West Virginia) and offers a full range of amenities, including various food and beverage outlets, signature golf course, spa and pool. As discussed in “Note 1 — Nature of Business and Basis of Presentation” and “Note 2 — Assets Held for Sale,” during the three months ended September 30, 2022, the Company entered into definitive agreements to sell Rocky Gap and classified the assets related to Rocky Gap as held for sale as of September 30,
2022.
The Distributed Gaming segment is comprised of the operation of slot machines and amusement devices in approximately 1,100 non-casino locations, such as restaurants, bars, taverns, convenience stores, liquor stores and grocery stores, across Nevada and Montana with a limited number of slot machines in each location. Distributed Gaming operations cater to local residents with high frequency visitation to these locations. The Company places its slot machines and amusement devices in locations where it believes they will receive maximum customer traffic. As part of the Distributed Gaming segment, the Company owns and operates a limited number of branded tavern locations, where it controls the food and beverage operations as well as the slot machines located within the tavern. The Company’s branded taverns offer a casual, upscale environment catering to local patrons offering superior food, craft beer and other alcoholic beverages, and are typically limited to 15 slot machines.
The Corporate and Other segment includes the Company’s cash and cash equivalents, miscellaneous receivables and corporate overhead. Costs recorded in the Corporate and Other segment have not been allocated to the Company’s reportable segments because these costs are not easily allocable and to do so would not be practical.
The Company presents Adjusted EBITDA in its segment disclosures because it is the primary metric used by the Company’s chief operating decision makers in measuring both the Company’s past and future expectations of performance. Further, the Company’s annual performance plan used to determine compensation of its executive officers and employees is tied to the Adjusted EBITDA metric. Adjusted EBITDA represents each segment’s earnings before interest and other non-operating income (expense), income taxes, depreciation and amortization, impairment of goodwill and intangible assets, preopening and related expenses, gain or loss on disposal of assets, share-based compensation expenses, and other non-cash charges, that are deemed to be not indicative of the Company’s core operating results, calculated before corporate overhead (which is not allocated to each reportable segment).
Due to the Company’s use of Adjusted EBITDA as its measure of profit for its reportable segments, the Company includes a reconciliation of the total of the Company’s consolidated Adjusted EBITDA to the Company’s consolidated net income determined in accordance with GAAP. The Company also discloses Adjusted EBITDA at the reportable segment level, as set forth in the table below:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(In thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
Revenues | | | | | | | | |
Nevada Casino Resorts | | | | | | | | |
Gaming | | $ | 42,812 | | | $ | 46,216 | | | $ | 133,156 | | | $ | 135,060 | |
Food and beverage | | 21,537 | | | 22,449 | | | 66,044 | | | 60,129 | |
Rooms | | 26,068 | | | 27,643 | | | 76,670 | | | 69,436 | |
Other | | 8,439 | | | 8,072 | | | 26,919 | | | 20,567 | |
Nevada Casino Resorts revenues | | $ | 98,856 | | | $ | 104,380 | | | $ | 302,789 | | | $ | 285,192 | |
Nevada Locals Casinos | | | | | | | | |
Gaming | | $ | 27,457 | | | $ | 28,437 | | | $ | 85,886 | | | $ | 91,226 | |
Food and beverage | | 6,208 | | | 6,081 | | | 18,688 | | | 17,918 | |
Rooms | | 2,325 | | | 1,858 | | | 7,098 | | | 5,419 | |
Other | | 1,745 | | | 1,729 | | | 5,737 | | | 5,614 | |
Nevada Locals Casinos revenues | | $ | 37,735 | | | $ | 38,105 | | | $ | 117,409 | | | $ | 120,177 | |
Maryland Casino Resort | | | | | | | | |
Gaming | | $ | 16,027 | | | $ | 16,502 | | | $ | 45,940 | | | $ | 45,985 | |
Food and beverage | | 2,463 | | | 2,314 | | | 6,333 | | | 5,867 | |
Rooms | | 2,372 | | | 2,065 | | | 5,917 | | | 5,358 | |
Other | | 762 | | | 759 | | | 1,872 | | | 1,770 | |
Maryland Casino Resort revenues | | $ | 21,624 | | | $ | 21,640 | | | $ | 60,062 | | | $ | 58,980 | |
Distributed Gaming | | | | | | | | |
Gaming | | $ | 102,124 | | | $ | 102,012 | | | $ | 310,904 | | | $ | 302,853 | |
Food and beverage | | 12,827 | | | 13,427 | | | 38,877 | | | 39,099 | |
Other | | 2,695 | | | 2,496 | | | 8,456 | | | 7,295 | |
Distributed gaming revenues | | $ | 117,646 | | | $ | 117,935 | | | $ | 358,237 | | | $ | 349,247 | |
Corporate and other | | 3,132 | | | 362 | | | 3,512 | | | 989 | |
Total revenues | | $ | 278,993 | | | $ | 282,422 | | | $ | 842,009 | | | $ | 814,585 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
(In thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
Adjusted EBITDA | | | | | | | | |
Nevada Casino Resorts | | $ | 30,122 | | | $ | 39,196 | | | $ | 102,589 | | | $ | 112,486 | |
Nevada Locals Casinos | | 16,818 | | | 18,103 | | | 56,651 | | | 61,230 | |
Maryland Casino Resort | | 7,446 | | | 7,669 | | | 20,260 | | | 20,831 | |
Distributed Gaming | | 18,845 | | | 21,158 | | | 63,092 | | | 66,952 | |
Corporate and other | | (12,176) | | | (12,698) | | | (39,196) | | | (37,561) | |
Total Adjusted EBITDA | | 61,055 | | | 73,428 | | | 203,396 | | | 223,938 | |
Adjustments | | | | | | | | |
Other non-operating income | | — | | | — | | | — | | | 60,000 | |
Depreciation and amortization | | (24,286) | | | (26,474) | | | (75,894) | | | (80,342) | |
Change in non-cash lease expense | | 298 | | | 143 | | | (113) | | | (517) | |
Share-based compensation | | (3,286) | | | (3,089) | | | (10,269) | | | (8,762) | |
(Loss) gain on disposal of assets | | (266) | | | 72 | | | (935) | | | (747) | |
Loss on debt extinguishment | | (158) | | | (759) | | | (1,412) | | | (759) | |
Preopening and related expenses (1) | | (2) | | | (3) | | | (61) | | | (232) | |
Other, net | | 1,539 | | | 1,145 | | | (3,595) | | | (1,784) | |
Interest expense, net | | (15,709) | | | (15,535) | | | (45,565) | | | (47,752) | |
Income tax (provision) benefit | | (5,182) | | | 123 | | | 5,737 | | | (366) | |
Net Income | | $ | 14,003 | | | $ | 29,051 | | | $ | 71,289 | | | $ | 142,677 | |
(1) Preopening and related expenses consist of labor, food, utilities, training, initial licensing, rent and organizational costs
incurred in connection with the opening of tavern and casino locations.
Assets
The Company’s assets by reportable segment consisted of the following amounts: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | Nevada Casino Resorts | | Nevada Locals Casinos | | Maryland Casino Resort | | Distributed Gaming | | Corporate and Other | | Consolidated |
Balance at September 30, 2022 | $ | 783,693 | | | $ | 163,863 | | | $ | 41,210 | | | $ | 408,156 | | | $ | 150,751 | | | $ | 1,547,673 | |
| | | | | | | | | | | |
Balance at December 31, 2021 | $ | 811,016 | | | $ | 165,362 | | | $ | 41,403 | | | $ | 411,342 | | | $ | 186,441 | | | $ | 1,615,564 | |
Note 12 — Related Party Transactions
The Company historically leased its office headquarters building from a company 33% beneficially owned by Blake L. Sartini, 5% owned by a trust for the benefit of Mr. Sartini’s immediate family members (including Blake L. Sartini II) for which Mr. Sartini serves as trustee, and 3% beneficially owned by Stephen A. Arcana. On May 24, 2021 the building was sold to an independent third party, and therefore this lease is no longer with a related party. The rent expense for the office headquarters building prior to the sale of the building to an independent third party was $0.5 million for the nine months ended September 30, 2021. Additionally, a portion of the office headquarters building was sublet to Sartini Enterprises, Inc., a company controlled by Mr. Sartini. Rental income for each of the three and nine months ended September 30, 2022 and 2021 for the sublet portion of the office headquarters building was insignificant. No amount was owed to the Company under such sublease as of September 30, 2022 and December 31, 2021. In addition, Golden and Sartini Enterprises, Inc. participate in certain cost-sharing arrangements. The amount due and payable by the Company under such arrangements was insignificant as of September 30, 2022 and December 31, 2021. Mr. Sartini serves as the Chairman of the Board and Chief Executive Officer of the Company and is co-trustee of The Blake L. Sartini and Delise F. Sartini Family Trust, which is a significant shareholder of the Company. Mr. Arcana serves as the Executive Vice President and Chief Operating Officer of the Company.
In November 2018, the Company entered into a lease agreement for additional office space in a building owned by a company 33% beneficially owned by Mr. Sartini, 5% owned by a trust for the benefit of Mr. Sartini’s immediate family members (including Blake L. Sartini II) for which Mr. Sartini serves as trustee, and 3% beneficially owned by Mr. Arcana. The lease commenced in August 2020 and expires on December 31, 2030. The rent expense for the space was $0.1 million for each of the three months ended September 30, 2022 and 2021, and $0.2 million for each of the nine months ended September 30, 2022 and 2021. Additionally, the lease agreement includes a right of first refusal for additional space on the second floor of the building.
From time to time, the Company’s executive officers and employees use a private aircraft leased to Sartini Enterprises, Inc. for Company business purposes pursuant to aircraft time-sharing, co-user and cost-sharing agreements between the Company and Sartini Enterprises, Inc., all of which have been approved by the Audit Committee of the Board of Directors. The aircraft time-sharing, co-user and cost-sharing agreements specify the maximum expense reimbursement that Sartini Enterprises, Inc. can charge the Company under the applicable regulations of the Federal Aviation Administration for the use of the aircraft and the flight crew. Such costs include fuel, landing fees, hangar and tie-down costs away from the aircraft’s operating base, flight planning and weather contract services, crew costs and other related expenses. The Company’s compliance department regularly reviews these reimbursements. The Company incurred $0.1 million under the aircraft time-sharing, co-user and cost-sharing agreements with Sartini Enterprises, Inc. for each of the three months ended September 30, 2022 and 2021, and $0.5 million under such agreements for each of the nine months ended September 30, 2022 and 2021. The Company owed $0.1 million and $0.2 million under such agreements as of September 30, 2022 and December 31, 2021, respectively.
On May 18, 2022, the Company repurchased 210,000 shares of its common stock from Anthony A. Marnell III, an independent non-employee member of the Company’s Board of Directors, pursuant to its share repurchase program at a price of $42.61 per share, resulting in a charge to accumulated deficit of $8.9 million. This transaction was approved by the Audit Committee of the Board of Directors prior to being executed.
Note 13 — Subsequent Events
The Company’s management evaluates subsequent events through the date of issuance of the consolidated financial statements. Other than the re-authorization of the Company’s share repurchase program discussed in “Note 7 — Shareholders’ Equity and Stock Incentive Plans,” there have been no subsequent events that occurred during such period that would require adjustment to or disclosure in the consolidated financial statements as of and for the three and nine months ended September 30, 2022.