Ballys Corp

12. FAIR VALUE MEASUREMENTS

Except for the assets and liabilities held for sale and the corresponding impairment described in Note 7, there were no assets and liabilities measured at fair value on a nonrecurring basis. The following tables summarize the Company’s assets and liabilities measured at fair value on a recurring basis. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement:

There were no transfers made among the three levels in the fair value hierarchy for the years ended December 31, 2023 and 2022.

The following table summarizes the changes in fair value of the Company’s Level 3 assets and liabilities:

The gains (losses) recognized in the consolidated statements of operations for derivatives not designated as hedging instruments during the years ended December 31, 2023, 2022 and 2021 are as follows:

Interest Rate Contracts and Cross Currency Swaps

The fair values of interest rate and cross currency swap contract assets and liabilities are classified within Level 2 of the fair value hierarchy as the valuation inputs are based on estimates using currency spot and forward rates and standard pricing models that consider the value of future cash flows as of the balance sheet date, discounted to a present value using discount factors that match both the time to maturity and currency of the underlying instruments. These standard pricing models utilize inputs that are derived from or corroborated by observable market data such as interest rate yield curves as well as currency spot and forward rates. Changes in the fair value of these contracts are reported as a component of other comprehensive income (loss).

Foreign Exchange Forward Contracts

The foreign exchange forward contracts are accounted for as derivative assets and liabilities and are classified within Level 2 of the fair value hierarchy as the valuation inputs are based on quoted prices and market observable data of similar instruments in active markets, such as currency spot and forward rates. Gains (losses) recognized in earnings resulting from the change in fair value are reported within “Other non-operating income, net” on the consolidated statements of operations.

Sinclair Performance Warrants

Sinclair Performance Warrants are accounted for as a derivative instrument classified as a liability within Level 3 of the hierarchy as the warrants are not traded in active markets and are subject to certain assumptions and estimates made by management related to the probability of meeting performance milestones. These assumptions and the probability of meeting performance targets may have a significant impact on the value of the warrant. The Performance Warrants are valued using an option pricing model, considering the Company’s estimated probabilities of achieving the performance milestones for each tranche. Inputs to this valuation approach include volatility between 40% and 67%, risk free rates between 3.84% and 4.79%, the Company’s common stock price for each period and expected terms between 1.5 and 6.3 years. The fair value is recorded within “Commercial rights liabilities” of the consolidated balance sheets.

Sinclair Options

Sinclair Options are accounted for as an equity classified instrument under ASC 815. The fair value of the options are based on a Black-Scholes model using Level 2 inputs, including volatility rates, risk free rates, the Company’s common stock price and expected term. The fair value of the Options was $59.7 million as of December 31, 2023 and 2022, and is recorded within “Additional paid-in-capital” in the consolidated balance sheets.

Contingent consideration

Contingent consideration related to acquisitions is recorded at fair value as a liability on the acquisition date and subsequently remeasured at each reporting date, based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy. The remeasurements are based primarily on the expected probability of achievement of the contingency targets which are subject to management’s estimates. These changes in fair value are recognized within “Other, non-operating expenses, net” of the consolidated statements of operations.

In connection with the acquisitions of SportCaller and Monkey Knife Fight (“MKF”) in the first quarter of 2021, the Company recorded contingent consideration of $58.7 million. During the first quarter of 2022, the Company settled contingent consideration of $15.9 million, comprised of 393,778 immediately exercisable penny warrants,107,832 shares of Bally’s Corporation common stock and $0.1 million in cash. During the second quarter of 2023, the Company settled the remaining contingent consideration of $9.3 million, comprised of 386,926 immediately exercisable penny warrants,103,656 shares of Bally’s Corporation common stock and a de minimis payment in cash, all in satisfaction of contingencies related to the respective acquisition agreements.

In connection with the acquisition of Bally’s Golf Links on September 12, 2023, the Company recorded contingent consideration at fair value of $58.6 million. Refer to Note 6 “Business Combinations” for further information.

Convertible loans

The Company has certain agreements with vendors to provide a portfolio of games to its customers. Pursuant to these agreements, the Company has issued loans to its vendors and has an option to convert the loans to shares of the vendors’ equity, exercisable within a specified time period. The Company recorded the short-term portion of the instruments within “Prepaid expenses and other current assets” and the long-term portion of the instruments within “Other assets” at their fair value. The fair value of the loans to vendors with share prices quoted on active markets are classified within Level 1 of the hierarchy and the fair value of the loans to vendors with share values based on unobservable inputs are classified within Level 3 of the hierarchy, both with changes to fair value included within “Other non-operating expenses, net” of the consolidated statements of operations.

Investment in equity securities

The Company has a long term investment in an unconsolidated entity which it accounts for under the equity method of accounting. The Company has elected the fair value option allowed by ASC 825, Financial Instruments, with respect to this investment. Under the fair value option, the investment is remeasured at fair value at each reporting period through earnings. The Company measures fair value using quoted prices in active markets that are classified within Level 1 of the hierarchy, with changes to fair value included within “Other non-operating expenses, net” of the consolidated statements of operations.

Investment in GLPI Partnership

The Company holds a limited partnership interest in GLP Capital, L.P., the operating partnership of GLPI. The investment is reported at fair value based on Level 2 inputs, with changes to fair value included within “Other non-operating expenses, net” of the consolidated statements of operations.

Long-term debt

The fair value of the Company’s Term Loan Facility and senior notes are estimated based on quoted prices in active markets and are classified as Level 1 measurements. The fair value of the Revolving Credit Facility approximates its carrying amount as it is revolving, variable rate debt, and is also classified as a Level 1 measurement. In the table below, the carrying amounts of the Company’s long-term debt is net of debt issuance costs and debt discounts. Refer to Note 16 “Long-Term Debt” for further information.

13. ACCRUED LIABILITIES

As of December 31, 2023 and 2022, accrued liabilities consisted of the following:

(1) Refer to Note 22 “Commitments and Contingencies” for further information

(2) Refer to Note 17 “Leases” for further information

14. STRATEGIC PARTNERSHIP - SINCLAIR BROADCAST GROUP

In 2020, the Company and Sinclair entered into a Framework Agreement (the “Framework Agreement”) providing for a long-term strategic relationship between Sinclair and the Company. Under the Framework Agreement, the Company paid annual fees in cash, issued warrants and options and agreed to share tax benefits and received naming, integration and other rights, including access to Sinclair’s Tennis Channel, Stadium Sports Network and STIRR streaming service. Under a Commercial Agreement (the “Commercial Agreement”) contemplated by the Framework Agreement, the Company was required to pay annual fees to Diamond Sports Group (“Diamond”), a Sinclair subsidiary, for naming rights over Diamond’s regional sports networks (“RSNs”) and other consideration which escalated annually and total $88.0 million over a 10-year term.

In March 2023, Diamond commenced reorganization proceedings under Chapter 11 of the Bankruptcy Code, and in July 2023, Diamond commenced litigation against Sinclair, Bally’s and others as part of its bankruptcy proceedings. Subsequent to December 31, 2023, Diamond agreed to settle its claims against all defendants, including Bally’s. Pursuant to the settlement terms, Diamond would receive payments from Sinclair and would reject the Commercial Agreement. Bally’s would continue to have naming rights on Diamond’s RSNs through the 2024 major league baseball season at no cost to either party (unless Diamond agrees with a new counterparty that will pay for such naming rights). Bally’s, in turn, would receive a release of all claims Diamond may have against it. Separately, Bally’s and Sinclair agreed that their relative rights and obligations under the Framework Agreement and all agreements contemplated thereby would terminate, except for rights and obligations in respect of certain local broadcast television station integrations under the Commercial Agreement, and except for their respective rights and obligations under the Option Agreement (regarding the Options referenced below), the Warrant Agreement (regarding the Penny Warrants referenced below), the Performance Warrant Agreement (regarding the Performance Warrants referenced below), the Registration Rights Agreement, the Investor Rights Agreement and the Tax Receivable Agreement. Bally’s obligation to pay Diamond for the naming rights terminated upon the bankruptcy court’s approval of the settlement terms, which the court approved on March 1, 2024. Refer to Note 22 “Commitments and Contingencies” for further information.

The Company accounted for this relationship as an asset acquisition in accordance with the “Acquisition of Assets Rather Than a Business” subsections of ASC 805-50, Business Combinations—Related Issues, using a cost accumulation model. The total intangible asset (“Commercial rights intangible asset”) represents the present value of the naming rights fees and other consideration, including the fair value of the warrants and options, and an estimate of the tax-sharing payments, each explained below. The Commercial rights intangible asset, net of accumulated amortization, was $225.9 million and $255.6 million as of December 31, 2023 and 2022, respectively. Amortization was $30.9 million, $33.3 million and $25.7 million for the years ended December 31, 2023, 2022 and 2021, respectively. Refer to Note 10 “Goodwill and Intangible Assets” for further information.

The present value of the naming rights fees was recorded as part of intangible assets, with a corresponding liability, which accreted through interest expense through the termination date of the Commercial Agreement. The total value of the liability as of December 31, 2023 and 2022 was $57.7 million and $59.3 million, respectively. The short-term portion of the liability, which was $8.0 million and $6.0 million as of December 31, 2023 and 2022, respectively, is recorded within “Accrued liabilities” and the long-term portion of the liability, which was $49.7 million and $53.3 million as of December 31 2023 and 2022, respectively, is reflected as “Commercial rights liability” in our consolidated balance sheets. Accretion expense reported in “Interest expense, net” in our consolidated statements of operations was $4.4 million, $4.4 million and $4.3 million for years ended December 31, 2023, 2022 and 2021.

Under the Framework Agreement, the Company issued to Sinclair (i) an immediately exercisable warrant to purchase up to 4,915,726 shares of the Company at an exercise price of $0.01 per share (“the Penny Warrants”), (ii) a warrant to purchase up to a maximum of 3,279,337 additional shares of the Company at a price of $0.01 per share subject to the achievement of various performance metrics (the “Performance Warrants”), and (iii) an option to purchase up to 1,639,669 additional shares in four tranches with purchase prices ranging from $30.00 to $45.00 per share, exercisable over aseven-year period beginning on the fourth anniversary of the November 18, 2020 closing (the “Options”). The exercise and purchase prices and the number of shares issuable upon exercise of the warrants and options are subject to customary anti-dilution adjustments.

The Penny Warrants and Options are equity classified instruments under ASC 815. The fair value of the Penny Warrants approximates the fair value of the underlying shares and was $150.4 million on November 18, 2020 at issuance, and was recorded to “Additional paid-in-capital” in the consolidated balance sheets, with an offset to the Commercial rights intangible asset. The Company recorded $59.7 million, related to the Options, as of December 31, 2023 and 2022, and is included within “Additional paid-in capital” in the consolidated balance sheets.

The Performance Warrants are accounted for as a derivative liability because the underlying performance metrics represent an adjustment to the settlement amount that is not indexed to the Company’s own stock and thus equity classification is precluded under ASC 815. Refer to Note 12 “Fair Value Measurements” for further information.

Under the Framework Agreement, the Company is required to share 60% of the tax benefit it realizes from the Penny Warrants, Options, Performance Warrants and other related payments. Changes in the estimate of the tax benefit to be realized and tax rates in effect at the time, among other changes, was treated as an adjustment to the intangible asset. The liability for these obligations was $19.1 million and $19.4 million as of December 31, 2023 and 2022, respectively, and is reflected in our consolidated balance sheets. The change in value of the liability is included in “Other non-operating expenses, net” in our consolidated statements of operations.