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Acquisition and Equity Investment | 6 Months Ended
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Jun. 30, 2023
Acquisition and Equity Investment [Abstract] |
Acquisition and Equity Investment | 3. ACQUISITION AND EQUITY INVESTMENT Acquisition – Nugget On April 3, 2023, the Company completed its previously announced Nugget Acquisition of 100% of the membership interests in Nugget Sparks, LLC from Marnell. Nugget Sparks, LLC operates the Nugget Casino Resort, located in Sparks, Nevada. The Nugget Acquisition was financed with funds previously borrowed from the Company’s Goldman Credit Agreement. In connection with the Nugget Acquisition, the Company made an initial payment to Marnell of $104.7 million on April 3, 2023. This amount included a base price of $100.0 million plus an adjustment based on the estimated working capital of Nugget at closing. As of April 3, 2023, the Company began consolidating Nugget as a wholly-owned subsidiary. Nugget contributed $27.0 million in net operating revenue and $2.8 million in net earnings attributable to Century Casinos, Inc. shareholders for the three and six months ended June 30, 2023. The Company accounted for the transaction as a business combination, and accordingly, the acquired assets of $260.7 million (including $6.8 million in cash) and liabilities of $194.6 million were included in the Company’s consolidated balance sheet at April 3, 2023. The Nugget Acquisition generated $36.5 million of tax deductible goodwill for the Company’s United States segment. The goodwill from the Nugget Acquisition is attributable to the business expansion opportunity for the Company. ‎ The fair value of the assets acquired and liabilities assumed (excluding cash received) was determined to be $59.3 million as of the acquisition date. The fair values of the acquired tangible and intangible assets were determined using variations of the income, market and cost approaches, including the following methods which the Company considered appropriate: •multi-period excess earnings method; •cost method; •capitalized cash flow method; •relief from royalty method; •discounted cash flow method; and •direct market value approach. Both the income and market approach valuation methodologies used for the identifiable net assets acquired in the Nugget Acquisition make use of Level 3 inputs and are provisional pending development of a final valuation. Trade receivables and payables, inventory and other current and noncurrent assets and liabilities were valued at the existing carrying values as they represented a reasonable approximation of the fair value of those items at the Nugget Acquisition date, based on management’s judgment and estimates. The personal property components of the fixed assets were primarily valued utilizing the market and cost approaches. Certain personal property with an active and identifiable secondary market value were valued using the market approach. This property included, but was not limited to, certain gaming/slot equipment, information and technology equipment and vehicles. The cost approach was utilized to value all other personal property. The cost approach estimates fair value as the current cost of replacing or reproducing the utility of an asset, or group of assets and adjusting it for any depreciation resulting from one or more of the following: physical deterioration, functional obsolescence, and/or economic obsolescence. The real estate assets that are owned by Smooth Bourbon were adjusted to fair value concurrently with the Nugget Acquisition. The fair value was determined utilizing the direct capitalization method of the income approach. The fair value of the acquired real estate assets was determined to be $184.7 million. The income approach incorporates all tangible and intangible property and served as a ceiling for the fair values of the acquired assets of the ongoing business enterprise, while still taking into account the premise of highest and best use. The fair value of the customer relationships from the player’s club list was valued using the incremental cash flow method under the income approach. The incremental cash flow method is used to estimate the fair value of an intangible asset based on a residual cash flow notion. This method measures the benefits (e.g., cash flows) derived from ownership of an acquired intangible asset as if it were in place, as compared to the acquirer’s expected cash flows as if the intangible asset were not in place (i.e., with-and-without). The present value difference in the two cash flow streams is ascribable to the intangible asset. The Company has assigned a 10 year useful life to the player loyalty program based on estimated revenue attrition among the player’s club members, based historical operations as estimated by management. The fair value of the Nugget trademark was valued using the relief from royalty method. The relief from royalty method presumes that, without ownership of the asset, the Company would have to make a stream of payments to a brand or franchise owner in return for the right to use their name. By virtue of this asset, the Company avoids any such payments and records the related intangible value of the trademark. The primary assumptions in the valuation included projected revenue, a pre-tax royalty rate, the trademark’s useful life, and tax expense. The Company has assigned the Nugget trademark a 10 year useful life after considering, among other things, the expected use of the asset, the expected useful life of other related assets or asset groups, any legal, regulatory, or contractual provisions that may limit the useful life, the effects of obsolescence, demand and other economic factors, and the maintenance expenditures required to promote and support the trademark. ‎ Details of the Nugget Acquisition in the table below are based on estimated fair values of assets and liabilities as of April 3, 2023. The Nugget Acquisition was accounted for using the acquisition method of accounting. Assets acquired and liabilities assumed in connection with the Nugget Acquisition have been recorded at their preliminary fair values. Certain estimated values for the Nugget Acquisition for accrued liabilities, property and equipment, intangible assets, and deferred income taxes are not yet finalized pending the final purchase price allocations and the receipt of additional information from the Nugget. As a result, the Company’s estimates and assumptions are subject to change within the measurement period as valuations are finalized. The Company expects to finalize the allocation of the purchase price within one year of the Nugget Acquisition.
Amounts in thousands |  |
Cash |  | $ | 6,764
Receivables |  |  | 1,689
Prepaid expenses |  |  | 3,711
Inventories |  |  | 2,681
Property and equipment |  |  | 217,367
Intangible assets |  |  | 30,250
Deposits and other |  |  | 353
Accounts payable |  |  | (2,615)
Accrued liabilities |  |  | (3,976)
Accrued payroll |  |  | (2,348)
Taxes payable |  |  | (998)
Finance lease liabilities |  |  | (184,700)
Net identifiable assets acquired |  |  | 68,178
Add: Goodwill |  |  | 36,540
Net assets acquired |  | $ | 104,718
The following table details the purchase consideration net cash outflow.
Amounts in thousands |  |  |
Outflow of cash to acquire subsidiaries, net of cash acquired |  |  |
Cash consideration |  | $ | 100,000
Preliminary working capital adjustment |  |  | 4,718
Less: cash and restricted cash balances acquired |  |  | (6,764)
Net cash used in investing activities |  | $ | 97,954
Acquisition-related costs The Company incurred acquisition costs of approximately $0.3 million for the three and six months ended June 30, 2023, respectively, and $0.7 million and $1.8 million for the three and six months ended June 30, 2022, respectively, in connection with the Nugget Acquisition. These costs include investment banking, legal and accounting fees and have been recorded as general and administrative expenses in the Corporate Other segment. Ancillary Agreements In connection with the Nugget Acquisition, the Company and the sellers entered into a consulting agreement dated December 19, 2022, whereby the sellers agreed to provide the Company with certain consulting services following the Nugget Acquisition. The agreement compensates the sellers for services following the Nugget Acquisition as performed by employees at a monthly rate. Fees incurred under the agreement were $0.2 million for the three and six months ended June 30, 2023 and were recorded as general and administrative expenses in the United States segment. Acquisition-Related Contingencies Nugget is party to various legal and administrative proceedings, which have arisen in the normal course of business and relate to underlying events that occurred on or before April 3, 2023. Estimated losses have been accrued as of the Nugget Acquisition date for these proceedings in accordance with ASC Topic 450, which requires that an amount be accrued if the loss is probable and can be estimated. The current liability for the estimated losses associated with these proceedings is not material to the Company’s consolidated financial condition and those estimated losses are not expected to have a material impact on its results of operations. The Company estimated the range of these contingencies to be between $0.1 million and $0.2 million as of June 30, 2023. Pro forma results (Unaudited) The following table provides unaudited pro forma information of the Company as if the Nugget Acquisition had occurred at the beginning of the earliest comparable period presented. The unaudited pro forma financial results include adjustments for transaction-related costs that are directly attributable to the Nugget Acquisition for the six months ended June 30, 2023 and 2022 including (i) pro forma adjustments to record the removal of interest expense related to the Macquarie Credit Agreement (as defined below), (ii) pro forma adjustments to record interest expense related to the Goldman Credit Agreement, (iii) pro forma adjustments to record depreciation and amortization for assets acquired in the Nugget Acquisition, (iv) an estimated tax impact, and (v) pro forma adjustments to record Smooth Bourbon as a consolidated subsidiary as of January 1, 2022. This pro forma information is not necessarily indicative either of the combined results of operations that actually would have been realized had the acquisition been consummated during the periods for which the pro forma information is presented, or of future results. For the purposes of this table, financial information has been provided through June 30, 2023 for the Nugget and the Company.
|  | For the six months ended |  | For the six months ended
Amounts in thousands, except for per share information |  | June 30, 2023 |  | June 30, 2022
Net operating revenue |  | $ | 265,392 |  | $ | 259,107
Net (loss) earnings attributable to Century Casinos, Inc. shareholders |  | $ | (5,271) |  | $ | 12,640
Equity Investment – Smooth Bourbon Following is summarized financial information regarding Smooth Bourbon for the three and six months ended June 30, 2023:
|  | For the three months ended |  | For the six months ended
Amounts in thousands |  | June 30, 2023 |  | June 30, 2022 |  | June 30, 2023 |  | June 30, 2022
Operating Results |  |  |  |  |  |  |  |  |  |  |  |
Net operating revenue |  | $ | 207 |  | $ | 3,770 |  | $ | 4,059 |  | $ | 3,770
Earnings from continuing operations |  | $ | 104 |  | $ | 3,749 |  | $ | 3,833 |  | $ | 3,749
Net earnings |  | $ | 60 |  | $ | 2,126 |  | $ | 2,241 |  | $ | 2,126
Net earnings attributable to Century Casinos, Inc. |  | $ | 30 |  | $ | 1,063 |  | $ | 1,121 |  | $ | 1,063
The Company began consolidating Smooth Bourbon on April 3, 2023 after the Nugget Acquisition. Changes in the carrying amount of the investment in Smooth Bourbon for the six months ended June 30, 2023 are presented in the table below.
Amounts in thousands |  |  | Balance at ‎January 1, 2023 |  |  | Equity Earnings |  |  | Dividend |  |  | Conversion to Consolidated Subsidiary |  |  | Balance at ‎June 30, 2023
Smooth Bourbon |  | $ | 93,260 |  | $ | 1,121 |  | $ | (2,256) |  | $ | (92,125) |  | $ | —

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