UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-Q



 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934



For the quarterly period ended September 30, 2016



OR



   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934



For the transition period from ____________ to ___________



Commission file number          0-22900



CENTURY CASINOS, INC.

(Exact name of registrant as specified in its charter) 





 

DELAWARE

84-1271317

(State or other jurisdiction of

(I.R.S. Employer Identification No.)

incorporation or organization)

 



455 E. Pikes Peak Ave., Suite 210, Colorado Springs, Colorado 80903

(Address of principal executive offices, including zip code)



(719) 527-8300

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  No    

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.



 

 

 

 

 

 

 

 

 

 

 

 

 

Large accelerated filer

 

Accelerated filer

 

Non-accelerated filer  

 

Smaller reporting company

   

 

 

 

(Do not check if a smaller reporting company)

 

 



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  No  

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

24,444,571 shares of common stock, $0.01 par value per share, were outstanding as of October 24, 2016.



 

1


 

 

INDEX



 

 

Part I

FINANCIAL INFORMATION

Page

Item 1.

Condensed Consolidated Financial Statements (Unaudited)



Condensed Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015



Condensed Consolidated Statements of Earnings for the Three and Nine Months Ended September 30, 2016 and 2015



Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2016 and 2015



Condensed Consolidated Statements of Equity as of September 30, 2016 and 2015



Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2016 and 2015 



Notes to Condensed Consolidated Financial Statements

10 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

30 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

53 

Item 4.

Controls and Procedures

53 

Part II

OTHER INFORMATION

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

53 

Item 6.

Exhibits

54 

Signatures

55 







 

2


 

 

PART I – FINANCIAL INFORMATION

Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)



CENTURY CASINOS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)



 

 

 

 

 

 



 

September 30,

 

 

December 31,

Amounts in thousands, except for share and per share information

 

2016

 

 

2015

ASSETS

 

 

(unaudited)

 

 

 

Current Assets:

 

 

 

 

 

 

 Cash and cash equivalents

 

$

32,966 

 

$

29,366 

 Receivables, net

 

 

3,642 

 

 

3,279 

 Prepaid expenses

 

 

1,600 

 

 

997 

 Inventories

 

 

562 

 

 

529 

 Deferred income taxes

 

 

462 

 

 

309 

 Other current assets

 

 

80 

 

 

60 

Total Current Assets

 

 

39,312 

 

 

34,540 



 

 

 

 

 

 

Property and equipment, net

 

 

134,132 

 

 

131,582 

Restricted cash

 

 

23,164 

 

 

Goodwill

 

 

10,570 

 

 

10,173 

Deferred income taxes

 

 

5,035 

 

 

4,834 

Casino licenses

 

 

3,271 

 

 

3,028 

Trademarks

 

 

1,700 

 

 

1,654 

Cost investment

 

 

1,000 

 

 

1,000 

Deposits and other

 

 

1,300 

 

 

272 

Total Assets

 

$

219,484 

 

$

187,083 



 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 Current portion of long-term debt

 

$

5,510 

 

$

4,123 

 Accounts payable

 

 

1,567 

 

 

2,692 

 Accrued liabilities

 

 

6,360 

 

 

5,619 

 Accrued payroll

 

 

4,586 

 

 

4,162 

 Taxes payable

 

 

4,424 

 

 

4,371 

 Contingent liability (note 8)

 

 

2,245 

 

 

2,180 

 Deferred income taxes

 

 

153 

 

 

153 

Total Current Liabilities

 

 

24,845 

 

 

23,300 



 

 

 

 

 

 

Long-term debt, net of current portion and deferred financing costs (note 7)

 

 

52,846 

 

 

32,397 

Taxes payable and other

 

 

667 

 

 

630 

Deferred income taxes

 

 

3,273 

 

 

3,481 

Total Liabilities

 

 

81,631 

 

 

59,808 

Commitments and Contingencies

 

 

 

 

 

 



See notes to condensed consolidated financial statements.





-  Continued -

 

3


 

 

CENTURY CASINOS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (continued)







 

 

 

 

 

 



 

 

 

 

 

 



 

September 30,

 

 

December 31,

Amounts in thousands, except for share and per share information

 

2016

 

 

2015

Equity:

 

 

(unaudited)

 

 

 

Preferred stock; $0.01 par value; 20,000,000 shares authorized; no shares issued or outstanding

 

 

 

 

Common stock; $0.01 par value; 50,000,000 shares authorized; 24,444,571 and 24,414,083 shares issued and outstanding

 

 

244 

 

 

244 

Additional paid-in capital

 

 

77,988 

 

 

77,318 

Retained earnings

 

 

63,588 

 

 

57,558 

Accumulated other comprehensive earnings

 

 

(10,103)

 

 

(12,704)

Total Century Casinos, Inc. shareholders' equity

 

 

131,717 

 

 

122,416 

Non-controlling interest

 

 

6,136 

 

 

4,859 

Total Equity

 

 

137,853 

 

 

127,275 

Total Liabilities and Equity

 

$

219,484 

 

$

187,083 



See notes to condensed consolidated financial statements.

 

4


 

 

CENTURY CASINOS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited)









 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

   

 

For the three months

 

For the nine months

   

 

ended September 30,

 

ended September 30,

Amounts in thousands, except for per share information

 

2016

 

2015

 

2016

 

2015

Operating revenue:

 

 

 

 

 

 

 

 

 

 

 

 

Gaming

 

$

30,554 

 

$

29,636 

 

$

89,615 

 

$

88,285 

Hotel

 

 

534 

 

 

476 

 

 

1,469 

 

 

1,263 

Food and beverage

 

 

3,030 

 

 

3,164 

 

 

8,950 

 

 

8,949 

Termination of concession agreements

 

 

 

 

 

 

 

 

3,365 

Other

 

 

2,811 

 

 

2,551 

 

 

8,839 

 

 

6,318 

Gross revenue

 

 

36,929 

 

 

35,827 

 

 

108,873 

 

 

108,180 

Less: Promotional allowances

 

 

(2,403)

 

 

(2,301)

 

 

(6,616)

 

 

(6,377)

Net operating revenue

 

 

34,526 

 

 

33,526 

 

 

102,257 

 

 

101,803 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Gaming

 

 

14,601 

 

 

13,284 

 

 

42,228 

 

 

42,179 

Hotel

 

 

143 

 

 

149 

 

 

416 

 

 

416 

Food and beverage

 

 

2,673 

 

 

2,698 

 

 

7,884 

 

 

7,679 

General and administrative

 

 

11,141 

 

 

11,235 

 

 

33,708 

 

 

31,728 

Depreciation and amortization

 

 

2,133 

 

 

2,078 

 

 

6,260 

 

 

5,780 

Total operating costs and expenses

 

 

30,691 

 

 

29,444 

 

 

90,496 

 

 

87,782 

Earnings from operations

 

 

3,835 

 

 

4,082 

 

 

11,761 

 

 

14,021 

Non-operating income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

18 

 

 

 

 

49 

 

 

21 

Interest expense

 

 

(667)

 

 

(816)

 

 

(2,247)

 

 

(2,527)

Gain on foreign currency transactions and other

 

 

20 

 

 

240 

 

 

1,778 

 

 

1,142 

Non-operating income (expense), net

 

 

(629)

 

 

(570)

 

 

(420)

 

 

(1,364)

Earnings before income taxes

 

 

3,206 

 

 

3,512 

 

 

11,341 

 

 

12,657 

Income tax expense

 

 

(793)

 

 

(373)

 

 

(2,378)

 

 

(402)

Net earnings

 

 

2,413 

 

 

3,139 

 

 

8,963 

 

 

12,255 

Net earnings attributable to non-controlling interests

 

 

(526)

 

 

(411)

 

 

(2,933)

 

 

(1,085)

Net earnings attributable to Century Casinos, Inc. shareholders

 

$

1,887 

 

$

2,728 

 

$

6,030 

 

$

11,170 



 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share attributable to Century Casinos, Inc. shareholders:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.08 

 

$

0.11 

 

$

0.25 

 

$

0.46 

Diluted

 

$

0.08 

 

$

0.11 

 

$

0.25 

 

$

0.46 

Weighted average shares outstanding - basic

 

 

24,440 

 

 

24,399 

 

 

24,452 

 

 

24,389 

Weighted average shares outstanding - diluted

 

 

24,675 

 

 

24,440 

 

 

24,644 

 

 

24,430 



 

 

 

 

 

 

 

 

 

 

 

 

See notes to condensed consolidated financial statements.

 

5


 

 

CENTURY CASINOS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)









 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

   

 

For the three months

 

For the nine months



 

ended September 30,

 

ended September 30,

   

 

 

 

 

 

 

 

 

 

 

 

 

Amounts in thousands

 

2016

 

2015

 

2016

 

2015

   

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

2,413 

 

$

3,139 

 

$

8,963 

 

$

12,255 



 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

394 

 

 

(3,631)

 

 

2,841 

 

 

(7,770)

Other comprehensive income (loss)

 

 

394 

 

 

(3,631)

 

 

2,841 

 

 

(7,770)

Comprehensive income (loss)

 

$

2,807 

 

$

(492)

 

$

11,804 

 

$

4,485 



 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss) attributable to non-controlling interests

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings attributable to non-controlling interests

 

 

(526)

 

 

(411)

 

 

(2,933)

 

 

(1,085)

Foreign currency translation adjustments

 

 

(235)

 

 

270 

 

 

(240)

 

 

668 

Comprehensive income (loss) attributable to Century Casinos, Inc. shareholders

 

$

2,046 

 

$

(633)

 

$

8,631 

 

$

4,068 



 

 

 

 

 

 

 

 

 

 

 

 

See notes to condensed consolidated financial statements.











 

 

6


 

 

CENTURY CASINOS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (Unaudited)











 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts in thousands, except share information

Common Shares

 

 

Common
Stock

 

 

Additional
Paid-in
Capital

 

 

Accumulated

Other

Comprehensive

Income

 

 

Retained

Earnings

 

 

Total Century Casinos Shareholders' Equity

 

 

Noncontrolling Interest

 

 

Total Equity

BALANCE AT January 1, 2015

24,381,057 

 

$

244 

 

$

76,169 

 

$

(3,636)

 

$

45,651 

 

$

118,428 

 

$

3,998 

 

$

122,426 

Net earnings

 

 

 

 

 

 

 

 

11,170 

 

 

11,170 

 

 

1,085 

 

 

12,255 

Foreign currency translation adjustment

 

 

 

 

 

 

(7,102)

 

 

 

 

(7,102)

 

 

(668)

 

 

(7,770)

Amortization of stock-based compensation

 

 

 

 

1,230 

 

 

 

 

 

 

1,230 

 

 

 

 

1,230 

Distribution to non-controlling interest

 

 

 

 

 

 

 

 

 

 

 

 

(507)

 

 

(507)

Exercise of stock options

23,206 

 

 

 

 

89 

 

 

 

 

 

 

89 

 

 

 

 

89 

Conversion of CDR equity (note 1)

 

 

 

 

(581)

 

 

(135)

 

 

 

 

(716)

 

 

716 

 

 

BALANCE AT September 30, 2015

24,404,263 

 

$

244 

 

$

76,907 

 

$

(10,873)

 

$

56,821 

 

$

123,099 

 

$

4,624 

 

$

127,723 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE AT January 1, 2016

24,414,083 

 

$

244 

 

$

77,318 

 

$

(12,704)

 

$

57,558 

 

$

122,416 

 

$

4,859 

 

$

127,275 

Net earnings

 

 

 

 

 

 

 

 

6,030 

 

 

6,030 

 

 

2,933 

 

 

8,963 

Foreign currency translation adjustment

 

 

 

 

 

 

2,601 

 

 

 

 

2,601 

 

 

240 

 

 

2,841 

Amortization of stock-based compensation

 

 

 

 

573 

 

 

 

 

 

 

573 

 

 

 

 

573 

Distribution to non-controlling interest

 

 

 

 

 

 

 

 

 

 

 

 

(1,896)

 

 

(1,896)

Exercise of stock options

30,488 

 

 

 

 

97 

 

 

 

 

 

 

97 

 

 

 

 

97 

BALANCE AT September 30, 2016

24,444,571 

 

$

244 

 

$

77,988 

 

$

(10,103)

 

$

63,588 

 

$

131,717 

 

$

6,136 

 

$

137,853 

See notes to condensed consolidated financial statements.

 

 

7


 

 

CENTURY CASINOS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)



 

 

 

 

 

 

   

 

For the nine months



 

ended September 30,

Amounts in thousands

 

2016

 

2015



 

 

 

 

 

 

Cash Flows from Operating Activities:

 

 

 

Net earnings

 

$

8,963 

 

$

12,255 

Adjustments to reconcile net earnings to net cash provided by operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

6,260 

 

 

5,780 

Loss on disposition of fixed assets

 

 

42 

 

 

281 

Unrealized loss on interest rate swaps

 

 

(25)

 

 

237 

Amortization of stock-based compensation expense

 

 

573 

 

 

1,230 

Amortization of deferred financing costs

 

 

86 

 

 

77 

Deferred taxes

 

 

(561)

 

 

(1,885)

Changes in Operating Assets and Liabilities:

 

 

 

 

 

 

Receivables, net

 

 

64 

 

 

(2,469)

Prepaid expenses and other assets

 

 

(1,938)

 

 

1,644 

Accounts payable

 

 

(273)

 

 

(849)

Accrued liabilities

 

 

1,972 

 

 

(890)

Inventories

 

 

(8)

 

 

11 

Other operating assets

 

 

(20)

 

 

Other operating liabilities

 

 

 

 

Accrued payroll

 

 

356 

 

 

27 

Taxes payable

 

 

63 

 

 

(1,026)

Contingent liability payment

 

 

 

 

(159)

Net cash provided by operating activities

 

 

15,558 

 

 

14,271 



 

 

 

 

 

 

Cash Flows used in Investing Activities:

 

 

 

 

 

 

Purchases of property and equipment

 

 

(5,020)

 

 

(15,332)

Restricted cash held for purchase of Apex acquisition (note 3)

 

 

(23,175)

 

 

Proceeds from disposition of assets

 

 

10 

 

 

696 

Net cash used in investing activities

 

 

(28,185)

 

 

(14,636)

 Continued –

See notes to condensed consolidated financial statements.





 

8


 

 

CENTURY CASINOS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (continued)



 

 

 

 

 

 

   

 

For the nine months



 

ended September 30,

Amounts in thousands

 

2016

 

2015



 

 

 

 

 

 

Cash Flows provided by Financing Activities:

 

 

 

 

 

 

Proceeds from borrowings

 

 

22,788 

 

 

11,243 

Principal repayments

 

 

(3,668)

 

 

(4,484)

Payment of deferred financing costs

 

 

(209)

 

 

Distribution to non-controlling interest

 

 

(1,896)

 

 

(507)

Proceeds from exercise of stock options

 

 

97 

 

 

89 

Net cash provided by financing activities

 

 

17,112 

 

 

6,341 



Effect of Exchange Rate Changes on Cash

 

$

(885)

 

$

(918)



 

 

 

 

 

 

Increase in Cash and Cash Equivalents

 

$

3,600 

 

$

5,058 



 

 

 

 

 

 

Cash and Cash Equivalents at Beginning of Period

 

$

29,366 

 

$

24,741 

Cash and Cash Equivalents at End of Period

 

$

32,966 

 

$

29,799 

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

 

 

Interest paid

 

$

2,124 

 

$

947 

Income taxes paid

 

$

2,639 

 

$

2,155 

Non-Cash Investing Activities:

 

 

 

 

 

 

Purchase of property, plant and equipment on account

 

$

324 

 

$

1,053 

Assets acquired under capital lease obligation

 

$

502 

 

$

Conversion of CDR equity (note 1)

 

$

 

$

716 



See notes to condensed consolidated financial statements.







 

9


 

 

CENTURY CASINOS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)



1.DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION



Century Casinos, Inc. (“CCI” or the “Company”) is an international casino entertainment company. As of September 30, 2016, the Company owned casino operations in North America; held a majority ownership interest in eight casinos throughout Poland, a racetrack and entertainment center (“REC”) in Canada and the pari-mutuel off-track betting network in southern Alberta, Canada; managed cruise ship-based casinos on international waters; managed a casino in Aruba and provided gaming services in Argentina.



The Company currently owns, operates and manages the following casinos through wholly-owned subsidiaries in North America:



·

The Century Casino & Hotel in Edmonton, Alberta, Canada (“Century Resorts Alberta” or “CRA”)

·

The Century Casino Calgary, Alberta, Canada (“CAL”)

·

The Century Casino St. Albert in Edmonton, Alberta, Canada – See note 3 for information related to the Company’s recent acquisition of Apex Casino, which now operates as Century Casino St. Albert (“CSA”).

·

The Century Casino & Hotel in Central City, Colorado (“CTL”); and

·

The Century Casino & Hotel in Cripple Creek (“CRC”), Colorado



The Company currently has a controlling financial interest through its subsidiary Century Casinos Europe GmbH (“CCE”) in the following majority-owned subsidiaries:



·

The Company owns 66.6% of Casinos Poland Ltd (“CPL” or “Casinos Poland”). CPL is the owner and operator of eight casinos throughout Poland. CPL is consolidated as a majority-owned subsidiary for which the Company has a controlling financial interest. Polish Airports Company (“Polish Airports”) owns the remaining 33.3% of CPL, which is reported as a non-controlling financial interest.



·

The Company owns 75% of United Horsemen of Alberta Inc. dba Century Downs Racetrack and Casino (“CDR” or “Century Downs”). CDR operates Century Downs Racetrack and Casino, a REC in Balzac, a north metropolitan area of Calgary, Alberta, Canada. CDR is consolidated as a majority-owned subsidiary for which the Company has a controlling financial interest. The remaining 25% of CDR is owned by unaffiliated shareholders and is reported as a non-controlling financial interest. The casino at CDR opened in April 2015. The 2016 horse racing season is from February to November.



On March 20, 2015, CCE converted CAD 11.0 million that it had loaned to CDR into an additional 60% ownership interest in CDR. As a result of the conversion, the Company recognized $0.6 million in additional paid-in capital and $0.1 million in accumulated other comprehensive income that was previously attributed to non-controlling interest.

 

·

The Company owns 75% of Century Bets! Inc. (“CBS” or “Century Bets”). CBS is consolidated as a majority-owned subsidiary for which the Company has a controlling financial interest. Rocky Mountain Turf Club (“RMTC”) owns the remaining 25% of CBS, which is reported as a non-controlling financial interest. CBS began operating the pari-mutuel off-track horse betting network in southern Alberta in May 2015.



The Company has the following concession, management and consulting service agreements:



·

The Company operates 13 ship-based casinos through concession agreements with four cruise ship owners. The Company began operating the ship-based casinos onboard the Mein Schiff 5, a new 2,500 passenger cruise ship, and TUI Discovery, a 2,067 passenger cruise ship, during the second quarter of 2016, and began operating the ship-based casino onboard Glory Sea, a 1,200 passenger cruise ship that operates in the China market, in July 2016. Under an amended concession agreement with TUI Cruises, the Company also plans to operate the ship-based casino onboard Mein Schiff 6, a new 2,500 passenger cruise ship that is expected to begin operating in the third quarter of 2017.



In connection with entering into a concession agreement with Diamond Cruise International Co., Ltd. (“Diamond”) for the operation of the ship-based casino onboard Glory Sea, the Company also entered into a Cooperation Agreement with Dynamic Partners International, Ltd. (“Dynamic”). Under this agreement, Dynamic markets and promotes the casino to VIP players along with facilitating the concession agreement between Diamond and the Company, for which the Company pays Dynamic a portion of the net profit from the casino onboard Glory Sea.

 

10


 

 

In March 2015, the Company mutually agreed with Norwegian Cruise Line Holdings (“Norwegian”) to terminate its concession agreements with Oceania Cruises (“Oceania”) and Regent Seven Seas Cruises (“Regent”), indirect subsidiaries of Norwegian, effective June 1, 2015 (the “Termination Agreement”). The Company transitioned operations of the eight ship-based casinos that it operated onboard Oceania and Regent vessels to Norwegian in the second quarter of 2015. As consideration for the early termination of the concession agreements, the Company received $4.0 million in June 2015 and recorded this on its condensed consolidated statement of earnings (loss) under operating revenue net of $0.6 million related to assets that were sold to Norwegian as part of the Termination Agreement.



The Company also entered into a two-year consulting agreement, which became effective on June 1, 2015, under which the Company is providing limited consulting services for the ship-based casinos of Oceania and Regent in exchange for receiving a consulting fee of $2.0 million, which is payable $250,000 per quarter.



·

The Company has a management agreement to direct the operation of the casino at the Hilton Aruba Caribbean Resort & Casino from which the Company receives a monthly management fee. The management agreement expires in 2017 and the Company does not anticipate signing a new agreement.



·

The Company, through its subsidiary CCE, has a 7.5% ownership interest in Mendoza Central Entretenimientos S.A., an Argentina company (“MCE”). The shares are reported on the condensed consolidated balance sheet using the cost method of accounting. MCE has an exclusive concession agreement with Instituto Provincial de Juegos y Casinos to lease slot machines and provide related services to Casino de Mendoza, a casino located in Mendoza, Argentina and owned by the Province of Mendoza. In addition, CCE and MCE have entered into a consulting services agreement pursuant to which CCE provides advice on casino matters and receives a service fee consisting of a fixed fee plus a percentage of MCE’s earnings before interest, taxes, depreciation and amortization (“EBITDA”). See Note 4 for additional information related to MCE.



Additional Project Under Development



In September 2016, the Company was selected by Horse Racing Alberta (“HRA”) as the successful applicant to own, build and operate a horse racing facility in the Edmonton market area, which will operate as Century Mile. Century Mile will be a one-mile horse racetrack and a multi-level REC. The proposed location is on Edmonton International Airport land and close to the city of Leduc, south of Edmonton.  The Company estimates this project will cost approximately CAD 50.0 million and be completed by the end of 2018. The Century Mile project is subject to, among other things, the Company’s obtaining financing and the receipt of necessary regulatory and governmental approvals.



Preparation of Financial Statements



The accompanying condensed consolidated financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial reporting, the rules and regulations of the Securities and Exchange Commission which apply to interim financial statements and the instructions to Form 10-Q. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with US GAAP have been condensed or omitted. The accompanying condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany transactions and balances have been eliminated.



In the opinion of management, all adjustments considered necessary for the fair presentation of financial position, results of operations and cash flows of the Company have been included. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. The results of operations for the period ended September 30, 2016 are not necessarily indicative of the operating results for the full year.



 

11


 

 

Presentation of Foreign Currency Amounts



The Company’s functional currency is the U.S. dollar (“USD” or “$”).  Foreign subsidiaries with a functional currency other than the U.S. dollar translate assets and liabilities at current exchange rates at the end of the reporting periods, while income and expense accounts are translated at average exchange rates for the respective periods.  The Company and its subsidiaries enter into various transactions made in currencies different from their functional currencies.  These transactions are typically denominated in the Canadian dollar (“CAD”), Euro (“EUR”) and Polish zloty (“PLN”).  Gains and losses resulting from changes in foreign currency exchange rates related to these transactions are included in income from operations as they occur. 



The exchange rates to the U.S. dollar used to translate balances at the end of the reported periods are as follows:







 

 

 

 

 

 



 

September 30,

 

December 31,

 

September 30,

Ending Rates

 

2016

 

2015

 

2015

Canadian dollar (CAD)

 

1.3117 

 

1.3840 

 

1.3394 

Euros (EUR)

 

0.8898 

 

0.9209 

 

0.8959 

Polish zloty (PLN)

 

3.8320 

 

3.9464 

 

3.8040 



The average exchange rates to the U.S. dollar used to translate balances during each reported period are as follows:





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

For the three months

 

 

 

For the nine months

 

 



 

ended September 30,

 

 

 

ended September 30,

 

 

Average Rates

 

2016

 

2015

 

% Change

 

2016

 

2015

 

% Change

Canadian dollar (CAD)

 

1.3049 

 

1.3083 

 

0.3% 

 

1.3224 

 

1.2597 

 

(5.0%)

Euros (EUR)

 

0.8965 

 

0.8991 

 

0.3% 

 

0.8962 

 

0.8973 

 

0.1% 

Polish zloty (PLN)

 

3.8890 

 

3.7665 

 

(3.3%)

 

3.9057 

 

3.7291 

 

(4.7%)

Source: Pacific Exchange Rate Service

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 





Correction of Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2015

The Company identified errors within its statements of cash flows for the nine months ended September 30, 2015. The Company inadvertently failed to remove the effects of a portion of unpaid purchases of property and equipment from the change in accounts payable and purchases of property and equipment in the preparation of the statements of cash flows. This error resulted in the understatement of net cash provided by operating activities of $1.0 million and a corresponding understatement of net cash used in investing activities of $1.0 million, for the nine months ended September 30, 2015. The prior period amounts within the condensed consolidated statements of cash flows for the nine months ended September 30, 2015 have been revised to reflect the correct balances.



















2. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS



In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). The objective of ASU 2014-09 is to clarify the principles for recognizing revenue and to develop a common revenue standard under US GAAP and International Financial Reporting Standards. ASU 2014-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016; provided, however, that in August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date (“ASU 2015-14”), which deferred the effective date of ASU 2014-09 for one year. ASU 2015-14 is effective for fiscal years and interim periods beginning after December 15, 2017. The standards permit retrospective application using either of the following methodologies: (i) restatement of each prior reporting period presented or (ii) recognition of a cumulative-effect adjustment as of the date of initial application. In addition, the FASB has issued four related ASUs on principal versus agent guidance (ASU 2016-08), identifying performance obligations and the licensing implementation guidance (ASU 2016-10),  a revision of certain SEC Staff Observer comments (ASU 2016-11) and implementation guidance (ASU 2016-12).  The Company is currently evaluating the impact of adopting these ASUs, including the transition method to be applied; however, the standards are not expected to have a material impact on its consolidated financial statements.

 

12


 

 



In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements – Going Concern (“ASU 2014-15”). The objective of ASU 2014-15 is to provide guidance on management’s responsibility to evaluate whether there is substantial doubt about a company’s ability to continue as a going concern and to provide related footnote disclosures. ASU 2014-15 is effective for fiscal years ending after December 15, 2016, and annual and interim periods thereafter. The Company is currently evaluating the impact of adopting ASU 2014-15; however, the standard is not expected to have a material impact on its consolidated financial statements.



In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory (“ASU 2015-11”). The objective of ASU 2015-11 is to simplify the current guidance under which an entity must measure inventory at the lower of cost or market by requiring entities to measure most inventory at the lower of cost or net realizable value. ASU 2015-11 is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption of ASU 2015-11 is permitted.  The Company is currently evaluating the impact of adopting ASU 2015-11; however, the standard is not expected to have a material impact on its consolidated financial statements.



In September 2015, the FASB issued ASU No. 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments (“ASU 2015-16”). The objective of ASU 2015-16 is to simplify the accounting for measurement-period adjustments for acquisitions by eliminating the requirement to retrospectively adjust provisional amounts recognized in a business combination during the measurement period.  ASU 2015-16 requires adjustments to the provisional amounts that are identified during the measurement period to be recognized when they are identified. ASU 2015-16 is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The Company has adopted ASU 2015-16 and it could have a material impact on the Company’s consolidated financial statements in relation to the Apex Acquisition (see Note 3).



In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes (“ASU 2015-17”). The objective of ASU 2015-17 is to simplify the presentation of deferred taxes in a classified statement of financial position. ASU 2015-17 is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption of ASU 2015-17 is permitted. The Company is currently evaluating the impact of adopting ASU 2015-17; however, the standard is not expected to have a material impact on its consolidated financial statements.



In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). The objective of ASU 2016-02 is to recognize lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. ASU 2016-02 requires lessees to account for leases as finance leases or operating leases.  Both finance and operating leases will result in the lessee recognizing a right-of-use asset and corresponding lease liability. For finance leases the lessee would recognize interest expense and amortization of the right-of use asset and for operating leases the lessee would recognize a straight-line lease expense. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption of ASU 2016-02 is permitted. The Company is currently evaluating the impact of adopting ASU 2016-02. Adoption of this standard may have a material impact on the Company’s consolidated financial statements.



In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). The objective of ASU 2016-09 is to simplify the accounting for share-based payment transactions, including recording all excess tax benefits and tax deficiencies through income tax on the statement of earnings and eliminating the requirement that excess tax benefits be realized before they can be recognized. ASU 2016-09 also simplifies several other aspects of the accounting for employee share-based payments, including forfeitures, statutory tax withholdings requirements and classification on the statement of cash flows. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption of ASU 2016-09 is permitted. The Company is currently evaluating the impact of adopting ASU 2016-09.



 

13


 

 

In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). The objective of ASU 2016-15 is to reduce diversity in the classification of cash receipts and payments for specific cash flow issues, including debt prepayment or debt extinguishment costs, contingent consideration payments made after a business combination and proceeds from the settlement of insurance claims. ASU 2016-15 is effective for fiscal years beginning after December 31, 2017, and interim periods within those fiscal years. Early adoption of ASU 2016-15 is permitted. The Company is currently evaluating the impact of adopting ASU 2016-15; however, the standard is not expected to have a material impact on its consolidated financial statements.



3.APEX ACQUISITION



On October 1, 2016, the Company’s subsidiary, Century Casino St. Albert Inc.,  acquired 100% of the issued and outstanding shares of Casino St. Albert Inc. (“CSAI”), Action ATM Inc. (“AAI”) and MVP Sports Bar Ltd. (“MVP”), collectively operating the Apex Casino in St. Albert, Edmonton, Canada as well as acquiring the related land and real property held by Game Plan Developments Ltd. (the “Apex Acquisition”). The Company merged CSAI, AAI and MVP with Century Casino St. Albert Inc., the surviving company, and renamed the casino Century Casino St. Albert. CSA is a 34,500 square foot casino facility located on approximately seven acres of land that includes 382 slot machines, 11 live table games, a restaurant, a bar, a lounge and a banquet facility that can accommodate up to 175 guests.



The Company paid for the acquisition using additional financing from the second amended and restated credit agreement with the Bank of Montreal (the “BMO Credit Agreement”) (see Note 7). The funds from the BMO Credit Agreement were advanced on September 30, 2016 and the Apex Acquisition was completed on October 1, 2016. The total consideration of CAD 29.9 million  ($22.8 million based on the exchange rate in effect on September 30, 2016) (the “Purchase Price”) for the Apex Acquisition was  reported as restricted cash on the Company’s condensed consolidated balance sheet as of September 30, 2016 and consisted of the following:



A)

A CAD 0.6 million deposit, which was paid in two equal parts on April 25, 2016 and June 29, 2016.

B)

CAD 26.5 million, which was paid at closing on October 1, 2016.

C)

The remaining CAD 2.8 million of the Purchase Price remains subject to certain holdbacks in respect of the closing date working capital and other indemnities that are set forth in the purchase agreement. The holdbacks will be held in an escrow account until the completion of the closing working capital statement and the expiration of the agreed upon timelines.



CSA did not contribute any net operating revenue or net earnings attributable to Century Casinos, Inc. shareholders for the three and nine months ended September 30, 2016. The Company is currently completing the fair value assessment of the acquired operations and, as such, the fair value of assets and liabilities that will be recognized have not been disclosed in the financial statements.



Acquisition-related costs

The Company has incurred acquisition costs of approximately $0.1 million for the three and nine months ended September 30, 2016. These costs include legal and accounting fees and have been recorded as general and administrative expenses on the Company’s condensed consolidated statement of earnings.



 

14


 

 

Pro-forma results

The following table provides unaudited pro forma information of the Company as if the Apex Acquisition had occurred at the beginning of the earliest comparable period presented. This proforma 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 nine months



 

ended September 30,

Amounts in thousands, except for per share information

 

2016

 

2015

Net operating revenue

 

$

108,209 

 

$

108,551 

Net earnings attributable to Century Casinos, Inc. shareholders

 

$

7,012 

 

$

12,089 

Basic and diluted earnings per share

 

$

0.29 

 

$

0.49 





4.COST INVESTMENT



Mendoza Central Entretenimientos S.A.

On October 31, 2014, CCE entered into an agreement (the MCE Agreement”) with Gambling and Entertainment LLC and its affiliates, pursuant to which CCE purchased 7.5% of the shares of MCE, a company formed in Argentina, for $1.0 million. Pursuant to the MCE Agreement, CCE is working with MCE to utilize MCE’s exclusive concession agreement with Instituto Provincial de Juegos y Casinos to lease slot machines and provide related services to Casino de Mendoza, a casino located in Mendoza, Argentina, and owned by the Province of Mendoza. MCE may also pursue other gaming opportunities. Under the MCE Agreement, CCE has appointed one director to MCE’s board of directors and has the right to appoint additional directors to MCE’s board of directors based on its ownership percentage of MCE. In addition, CCE has a three-year option through October 2017 to purchase up to 50% of the shares of MCE.   The option can be exercised by CCE in tranches of shares, with each tranche representing not less than ten percent of the total outstanding shares of MCE. The exercise price of the shares is based upon the value of MCE at the time the option is exercised, which value is determined by a multiple of MCE’s EBITDA less certain debt. There are no conditions that limit CCE’s ability to exercise this option. The Company accounts for the $1.0 million investment in MCE using the cost method.





5.GOODWILL AND INTANGIBLE ASSETS



Goodwill

The Company tests goodwill for impairment as of October 1 each year, or more frequently as circumstances indicate it is necessary. Testing compares the estimated fair values of our reporting units to the reporting units’ carrying values. The reporting units with goodwill balances as of September 30, 2016 include the operations at CRA, CDR and CPL. The Company considers a variety of factors when estimating the fair value of its reporting units, including estimates about the future operating results of each reporting unit, multiples of earnings, various market analyses, and recent sales of comparable businesses, if such information is available. The Company makes a variety of estimates and judgments about the relevance and comparability of these factors to the reporting units in estimating their fair values. If the carrying value of a reporting unit exceeds its estimated fair value, the fair value of each reporting unit is allocated to the reporting unit’s assets and liabilities to determine the implied fair value of the reporting unit’s goodwill and whether impairment is necessary. There have been no indications of impairment at CRA, CDR or CPL since the Company’s last annual analysis that would necessitate additional impairment testing by the Company.

 

15


 

 

Changes in the carrying amount of goodwill related to CRA, CDR and CPL are as follows:





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Canada

 

Poland

 

 

 

Amounts in thousands

 

Century Resorts Alberta

 

Century Downs

 

Casinos Poland

 

Total

Balance – December 31, 2015

 

$

3,551 

 

$

137 

 

$

6,485 

 

$

10,173 

Effect of foreign currency translation

 

 

196 

 

 

 

 

194 

 

 

397 

Balance -- September 30, 2016

 

$

3,747 

 

$

144 

 

$

6,679 

 

$

10,570 



 

 

 

 

 

 

 

 

 

 

 

 



Intangible Assets

Trademarks

The Company currently owns two trademarks, the Century Casinos trademark and the Casinos Poland trademark, which are reported as intangible assets on the Company’s condensed consolidated balance sheets. Changes in the carrying amount of the trademarks are as follows:



 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

Amounts in thousands

 

Century Casinos

 

Casinos Poland

 

Total

Balance -- December 31, 2015

 

$

108 

 

$

1,546 

 

$

1,654 

Effect of foreign currency translation

 

 

 

 

46 

 

 

46 

Balance -- September 30, 2016

 

$

108 

 

$

1,592 

 

$

1,700 



 

 

 

 

 

 

 

 

 



The Company has determined both trademarks have indefinite useful lives and therefore the Company does not amortize the trademarks. Rather, the Company tests its trademarks for impairment as of October 1 each year, or more frequently as circumstances indicate it is necessary. The Company tests trademarks for impairment using the relief-from-royalty method. If the fair value of an indefinite-lived intangible asset is less than its carrying amount, the Company would recognize an impairment charge equal to the difference. No impairment charges related to the Century Casinos and Casinos Poland trademarks have been recorded.

Casino Licenses

Casino licenses consist of the following:





 

 

 

 

 

 

 



 

 

 

 

 

 

 



 

September 30,

 

December 31,

 

Amounts in thousands

 

2016

 

2015

 

Casino licenses

 

$

4,652 

 

$

4,131 

 

Less: accumulated amortization

 

 

(1,381)

 

 

(1,103)

 

Casino licenses, net

 

$

3,271 

 

$

3,028 

 



 

 

 

 

 

 

 



Casinos Poland

As of September 30, 2016,  Casinos Poland had eight casino licenses, each with an original term of six years, which are finite-lived intangible assets and are amortized over their respective useful lives. Changes in the carrying amount of the Casinos Poland licenses are as follows:





 

 

 



 

 

 

Amounts in thousands

 

 

Casinos Poland

Balance – December 31, 2015

 

$

730 

License renewal

 

 

339 

Amortization

 

 

(294)

Effect of foreign currency translation

 

 

71 

Balance -- September 30, 2016

 

$

846 



 

 

 



 

16


 

 

As of September 30, 2016, estimated amortization expense for the CPL casino licenses over the next five years was as follows:







 

 

 



 

 

 

Amounts in thousands

 

 

 

2016

 

$

128 

2017

 

 

346 

2018

 

 

147 

2019

 

 

70 

2020

 

 

155 



 

$

846 



 

 

 



Such estimates do not reflect the impact of future foreign exchange rate changes or the extension of the current licenses. The weighted average period before the current casino licenses expire is 1.7 years.  In Poland, gaming licenses are not renewable. Once a gaming license has expired, any gaming company can apply for the license. In July 2016, the casino license at the Katowice casino expired. In  October 2016, the Company was informed that it will not be granted the available license in Katowice. The casino operations at the Katowice casino have been moved to the Sosnowiec casino,  and the casino license for Katowice was fully amortized as of September 30, 2016. The Company is working to obtain a new license for the Katowice casino as well as evaluating other potential business uses for the Katowice casino. There can be no guarantees that a new license will be granted. If the Company does not receive a new license or identify another business use, an impairment charge related to the Katowice leasehold improvements may be necessary. Such an impairment charge, if any, is not expected to have a material impact to the Company’s financial position or results of operations. In September 2016, the casino license at the Lim Center casino in Warsaw expired and the Company was granted a new license for the Lim Center casino. 



Century Downs Racetrack and Casino

CDR currently has two licenses, one from the Alberta Gaming and Liquor Commission and one from HRA. The licenses are indefinite-lived intangible assets and therefore are not amortized.  No impairment charges related to the CDR licenses have been recorded. Changes in the carrying amount of the CDR licenses are as follows:







 

 

 



 

 

 

Amounts in thousands

 

Century Downs

Balance – December 31, 2015

 

$

2,298 

Effect of foreign currency translation

 

 

127 

Balance -- September 30, 2016

 

$

2,425 



 

 

 















6.PROMOTIONAL ALLOWANCES



Hotel accommodations, and food and beverage furnished without charge to customers are included in gross revenue at retail value and are deducted as promotional allowances to arrive at net operating revenue. The Company issues coupons and downloadable promotional credits to customers for the purpose of generating future revenue. The value of coupons and downloadable promotional credits redeemed is applied against the revenue generated on the day of the redemption. The estimated cost of provided promotional allowances is included in casino expenses. The costs of providing promotional allowances were as follows: