Document


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
þ
Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the fiscal year ended: December 31, 2018
o
Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 Commission File No. 001-32583 
 
FULL HOUSE RESORTS, INC.
(Exact Name of Registrant as specified in Its Charter) 
 
 
Delaware
13-3391527
(State or Other Jurisdiction
(I.R.S. Employer
of Incorporation or Organization)
Identification No.)
 One Summerlin, 1980 Festival Plaza Drive, Suite 680, Las Vegas, Nevada 89135
(Address and zip code of principal executive offices)
(702) 221-7800
(Registrant’s Telephone Number, Including Area Code)
 Securities registered pursuant to Section 12(b) of the Act:
 
Common Stock, $0.0001 per Share
The NASDAQ Stock Market LLC
(Title of Each Class)
(Name of Each Exchange on Which Registered)
 Securities registered pursuant to Section 12(g) of the Act:
None
(Title of class)
  
 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.  Yes o No þ

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 þ No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).  Yes þ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
Accelerated filer þ
Emerging growth company o
Non-accelerated filer o
Smaller reporting company þ
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o No þ
 
The aggregate market value of Registrant’s voting $0.0001 par value common stock held by non-affiliates of the Registrant, as of June 30, 2018, was: $79.5 million.  As of March 11, 2019, there were 26,958,836 shares of common stock, $0.0001 par value per share, outstanding.

 Documents Incorporated By Reference
The information required by Part III of this Form 10-K is incorporated by reference from the Registrant’s definitive proxy statement relating to the annual meeting of stockholders to be held in 2019, which definitive proxy statement is anticipated to be filed with the Securities and Exchange Commission within 120 days after the end of the Registrant’s fiscal year.





FULL HOUSE RESORTS, INC.
TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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PART I
 
Forward-Looking Statements
 
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) for which the Private Securities Litigation Reform Act of 1995 provides a safe harbor. These forward-looking statements include, but are not limited to, statements about our plans, objectives, representations and intentions and are not historical facts and typically are identified by use of terms such as “believes,” “expects,” “anticipates,” “estimates,” “plans,” “intends,” “objectives,” “goals,” “aims,” “projects,” “forecasts,” “possible,” “seeks,” “may,” “could,” “should,” “might,” “likely,” “enable,” or similar words or expressions, as well as statements containing phrases such as “in our view,” “we cannot assure you,” “although no assurance can be given,” or “there is no way to anticipate with certainty.” Specifically, this Annual Report on Form 10-K contains forward-looking statements relating to our growth strategies; our development and expansion plans, including a planned expansion of Bronco Billy’s, our budget and ability to obtain financing for such expansion and the timing for commencement or completion of each phase of such expansion; our investments in capital improvements and other projects, including the amounts of such investments, the timing of commencement or completion of such capital improvements and projects and the resulting impact on our financial results; timing for required approvals; management’s expectation to exercise its buyout option on the Silver Slipper Casino and Hotel; adequacy of our financial resources to fund operating requirements and planned capital expenditures and to meet our debt and contractual obligations; expected sources of revenue; cash interest expense in 2019; anticipated sources of funds; anticipated legislative pursuits; expectations regarding the operation of our new ferry boat service at Rising Star Casino Resort; beliefs in connection with our marketing efforts; factors that affect the financial performance of our properties; adequacy of our insurance; competitive outlook; outcome of legal matters; impact of recently issued accounting standards; and estimates regarding certain accounting and tax matters, among others.

Various factors may affect the operation, performance, development and results of our business and could cause future outcomes to change significantly from those set forth in our forward-looking statements, including risks and uncertainties about the following:
repayment of our substantial indebtedness;
substantial dilution related to our outstanding stock warrants and options;
our ability to successfully implement our growth strategies, including the Bronco Billy’s expansion, capital investments and potential acquisitions;
commercial success and financial performance of our Bronco Billy’s expansion, including the Christmas Casino & Inn, and our other capital projects;
risks related to entering into sports betting operations, including our ability to establish and maintain relationships with key partners or vendors and generate sufficient returns on investment;
commerciality of our new ferry boat service and risks associated with ferry boat operations;
the successful integration of acquisitions, if any;
our ability to continue to comply with the covenants and terms of our debt instruments;
risks associated with our development and construction activities;
some of our casinos being on leased property;
changes to anticipated trends in the gaming industries;
changes in patron demographics;
general market and economic conditions, including, but not limited to, the effects of housing and energy conditions on the economy in general and on the gaming and lodging industries in particular;
access to capital and credit upon reasonable terms, including our ability to finance future business requirements and to repay or refinance debt as it matures;
dependence on key personnel;
our ability and the cost to hire, motivate and retain employees, given low unemployment rates and, in some jurisdictions, increases in minimum wages;
availability of adequate levels of insurance;

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changes to federal, state, and local taxation and tax rates, and gaming and environmental laws, regulations and legislation;
any violations of the anti-money laundering laws;
cyber-security risks, including misappropriation of customer information or other breaches of information security;
our ability to obtain and maintain gaming and other licenses, and obtain entitlements and other regulatory approvals for projects;
impact of severe weather;
lack of alternative routes to certain of our properties;
the competitive environment, including increased competition in our target market areas;
impact of the outcome of litigation matters;
our ability to successfully estimate the impact of certain accounting and tax matters, including the effect on our company of adopting certain accounting pronouncements; and
other factors described from time to time in this and our other Securities and Exchange Commission (“SEC”) filings and reports.
 
For a more detailed description of certain Risk Factors affecting our business, see Item 1A, “Risk Factors.”
We undertake no obligation to publicly update or revise any forward-looking statements as a result of future developments, events or conditions, except as required by law. New risks emerge from time to time and it is not possible for us to predict all such risk factors, nor can we assess the impact of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ significantly from those forecast in any forward-looking statements. 

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Item 1. Business.
 
Introduction
 
Formed as a Delaware corporation in 1987, Full House Resorts, Inc. owns, leases, operates, develops, manages, and/or invests in casinos and related hospitality and entertainment facilities. References in this document to “Full House,” the “Company,” “we,” “our,” or “us” refer to Full House Resorts, Inc. and its subsidiaries, except where stated or the context otherwise indicates.
 
The following table presents selected information concerning our casino resort properties as of December 31, 2018:
 
Property
 
Acquisition
Date
 
 
Location
 
Slot
Machines
 
Table
Games
 
Hotel
Rooms
Silver Slipper Casino and Hotel
 
2012
 
Hancock County, MS
(near New Orleans)
 
920
 
26
 
129
Bronco Billy’s Casino and Hotel
 
2016
 
Cripple Creek, CO
(near Colorado Springs)
 
885
 
10
 
36
Rising Star Casino Resort
 
2011
 
Rising Sun, IN
(near Cincinnati)
 
917
 
25
 
294
Stockman’s Casino
 
2007
 
Fallon, NV
(one hour east of Reno)
 
225
 
4
 
Grand Lodge Casino (leased and part of the Hyatt Regency Lake Tahoe Resort, Spa and Casino)
 
2011
 
Incline Village, NV
(North Shore of Lake Tahoe)
 
270
 
17
 
*
*
We have agreements with Hyatt that allow us to provide rooms, as well as other amenities and services, to our guests at mutually agreeable rates to support our operations.

We manage our casinos based on geographic regions within the United States.  Accordingly, Stockman’s Casino and Grand Lodge Casino comprise our Northern Nevada business segment, while Silver Slipper Casino and Hotel, Bronco Billy’s Casino and Hotel, and Rising Star Casino Resort are currently distinct segments. Our corporate headquarters are in Las Vegas, Nevada.

Our revenues are primarily derived from gaming sources, which include revenues from slot machines, table games, keno, and sports betting. Play at our slot machines accounts for most of our revenues, but we also offer a wide range of table games. We set minimum and maximum betting limits for our slot machines and table games based on market conditions, customer demand and other factors. Our gaming revenues are derived from a broad base of guests that includes both high- and low-stakes players. Our sports book operations at Silver Slipper Casino and Hotel is in partnership with a company specializing in race and sports betting. In addition, we derive a significant amount of revenues from our food and beverage outlets and our hotel rooms. We also derive revenues from our golf course at Rising Star Casino Resort, recreational vehicle parks (“RV parks”) at both Rising Star Casino Resort and Silver Slipper Casino and Hotel, retail outlets and entertainment, and expect to derive additional revenues from our newly-constructed projects and ferry boat service as further described herein. Our financial results are dependent upon the number of patrons that we attract to our properties and the amounts those guests spend per visit. Additionally, our operating results may be affected by, among other things, overall economic conditions affecting the disposable income of our guests, weather conditions affecting access to our properties, achieving and maintaining cost efficiencies, taxation and other regulatory changes, and competitive factors, including but not limited to, additions and improvements to the competitive supply of gaming facilities. We may experience significant fluctuations in our quarterly operating results due to seasonality, variations in gaming hold percentages, and other factors.

Our mission is to maximize shareholder value. We seek to increase revenues by providing our customers with their favorite games and amenities, high-quality customer service, and appropriate customer loyalty programs. Our customers include nearby residents who represent a high potential for repeat visits, along with drive-in tourist patrons. We continuously focus on improving the operating margins of our existing properties through a combination of revenue growth and expense management efforts. The casino resort industry is capital-intensive, and we rely on the ability of our properties to generate operating cash flow to pay interest, repay debt, and fund maintenance and certain growth-related capital expenditures. We also assess the potential impact of growth and development opportunities, including capital investments at our existing properties, the development of new properties, and the acquisition of existing properties.


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All of our casino properties are operated by us 24 hours each day, nearly every day of the year with the exception of Christmas morning for four to six hours at Rising Star Casino Resort. We also operate the hotel and food and beverage operations at Silver Slipper Casino and Hotel, Bronco Billy’s Casino and Hotel, Rising Star Casino Resort and Stockman’s Casino. At Grand Lodge Casino, the hotel and the food and beverage outlets are managed by Hyatt Regency Lake Tahoe Resort, Spa and Casino (“Hyatt Lake Tahoe”).  

Operating Properties
 
Silver Slipper Casino and Hotel
 
The Silver Slipper Casino and Hotel (“Silver Slipper”) is situated on the west end of the Mississippi Gulf Coast, near Bay St. Louis, Mississippi, and in addition to gaming space, includes 129 hotel rooms, a fine-dining restaurant, a buffet, a quick-service restaurant, an oyster bar, a casino bar and a beachfront bar. The property sits at the western end of an approximately eight-mile-long white sand beach, the closest such beach to the New Orleans and Baton Rouge metropolitan areas. Its customers are primarily from communities in southern Louisiana, including the North Shore of Lake Pontchartrain and the New Orleans and Baton Rouge metropolitan areas, and southwestern Mississippi. The Silver Slipper currently generates the most revenue and operating income of any of our properties. In August 2018, we added a sports book operation to the casino in partnership with a company specializing in race and sports betting.

The primary lease for the Silver Slipper includes approximately 38 acres, consisting of the seven-acre parcel on which the casino and hotel is situated and approximately 31 acres of marshlands. The lease term ends in April 2058. Between February 2019 and October 2027, we have the option to purchase the land site. Management believes that it will be economically favorable to exercise the buyout option and intends to do so, subject to our financial resources and future capital market conditions.

We also manage a nearby 37-space beachfront RV park under a management contract, which expires on March 31, 2020, unless canceled by either party.

Bronco Billy’s Casino and Hotel

Bronco Billy’s Casino and Hotel (“Bronco Billy’s”) occupies a significant portion of the key city block of Cripple Creek’s “casino strip” and in addition to gaming space, contains 36 hotel rooms, a steakhouse and four casual dining outlets. Bronco Billy’s also leases certain parking lots and buildings, including a portion of the hotel and casino, under a long-term lease. The lease has six renewal options in three-year increments to 2035, and we have the right to buy out the lease at any time during its term. We also commenced a three-year lease in August 2018 for the new Christmas Casino, which also includes an option to extend or buy out the lease. Bronco Billy’s customers are primarily from the Colorado Springs/Pueblo/Cañon City metropolitan area, the second-largest metropolitan area in Colorado, with a population of approximately 900,000 residents. Cripple Creek is approximately a one-hour drive from Colorado Springs, as well as a two-hour drive from the Denver metropolitan area, which has a population of approximately four million people.

In 2018, we began our expansion of Bronco Billy’s, which we anticipate completing in two phases. Phase One of the Bronco Billy’s expansion project includes the construction of a 319-space parking garage and connector building, the purchase of the Imperial Hotel in June 2018 and certain other nearby parcels of land, and the grand reopening in November 2018 of both the Imperial Casino and Imperial Hotel together as the Christmas Casino & Inn. Phase Two of the Bronco Billy’s expansion project, which is expected to include a new luxury hotel tower, spa, convention and entertainment space, two new restaurants, and a substantial remodeling of the casino. Construction of Phase Two is contingent upon receipt of financing on acceptable terms, among other contingencies.

Rising Star Casino Resort
 
Rising Star Casino Resort (“Rising Star”) is located on the banks of the Ohio River in Rising Sun, Indiana, approximately one hour from Cincinnati, Ohio, within two hours of Indianapolis, Indiana, and also within two hours of Louisville and Lexington, Kentucky. Rising Star offers, in addition to casino space, a contiguous 190-room hotel, an adjacent leased 104-room hotel, a 56-space RV park, five dining outlets, and an 18-hole golf course. The 104-room hotel is leased pursuant to a capital lease agreement that expires in 2027 and contains a bargain purchase option, whereby we have the right to purchase the hotel and the landlord has the right to put the hotel to us, in both cases for $1 if exercised upon maturity of the lease. We also own 1.3 acres of vacant land located in Burlington, Kentucky that is used as part of our ferry boat operations, as further described below.

In the second half of the year, we completed several capital projects. In July 2018, we renovated the entry pavilion and the adjoining hotel’s lobby and hallways. We also commenced operations for a 10-vehicle ferry boat service in September 2018

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that connects the more populous Boone County, Kentucky to our Rising Star property in Indiana. During recent years, Rising Star was adversely affected by the legalization of gaming in Ohio, where several new competitors are now located. All of such potential casinos in Ohio are now open.

     Northern Nevada
 
Stockman’s Casino
 
Stockman’s Casino (“Stockman’s”) is located approximately one hour from Reno, Nevada. In addition to gaming space, the facility has a bar, a fine-dining restaurant and a coffee shop. In the first quarter of 2018, we completed numerous external improvements to the property, including a new porte cochère. Stockman’s primarily serves the local market of Fallon and surrounding areas, including the nearby Naval Air Station Fallon, the United States Navy’s premier air-to-air and air-to-ground training facility, informally referred to as the “Top Gun” school.

Grand Lodge Casino
 
We operate the Grand Lodge Casino at the Hyatt Lake Tahoe under a lease with Hyatt Equities, L.L.C. (“Hyatt”). Grand Lodge Casino is located within the Hyatt Lake Tahoe in Incline Village, Nevada on the north shore of Lake Tahoe and includes approximately 20,990 square feet of leased space.  The Hyatt Lake Tahoe is one of three AAA Four Diamond hotels in the Lake Tahoe area. Its customers consist of both locals and tourists visiting the Lake Tahoe area.

In 2015, the lease was subsequently amended to extend our relationship and refurbish and improve the casino facility. The amendment included: (i) an agreement for Hyatt to renovate the casino and for us to purchase new gaming equipment, which was completed during the second quarter of 2017, (ii) an extension of the initial lease term through August 31, 2023 with an additional five-year renewal option, (iii) an increase in monthly rent from $125,000 to $145,833 commencing on July 1, 2017, and to $166,667 commencing on January 1, 2018, and (iv) the deferral of Hyatt’s option to purchase our leasehold interest and related operating assets to January 1, 2019.


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Government Regulation
 
The gaming industry is highly regulated, and we must maintain our licenses and pay gaming taxes to continue our operations. Each of our casinos is subject to extensive regulation under the laws, rules, and regulations of the jurisdiction in which it is located. These laws, rules, and regulations generally concern the responsibility, financial stability, and character of the owners, managers, and persons with financial interests in the gaming operations and include, without limitation, the following conditions and restrictions:
Periodic license fees and taxes must be paid to state and local gaming authorities;
Certain officers, directors, key employees, and gaming employees are required to be licensed or otherwise approved by the gaming authorities;
Individuals who must be approved by a gaming authority must submit comprehensive personal disclosure forms and undergo an extensive background investigation, the costs for which must be borne by the applicant;
Changes in any licensed or approved individuals must be reported to and/or approved by the relevant gaming authority;
Failure to timely file the required application forms by any individual required to be approved by the relevant gaming authority may result in that individual’s denial and the gaming licensee may be required by the gaming authority to disassociate with that individual; and
If any individual is found unsuitable by a gaming authority, the gaming licensee is required to disassociate with that individual.

Violations of gaming laws in one jurisdiction could result in disciplinary action in other jurisdictions. A summary of the governmental gaming regulations to which we are subject is filed as Exhibit 99.1 and is herein incorporated by reference.
Our businesses are subject to various federal, state, and local laws and regulations, in addition to gaming regulations. These laws and regulations include, but are not limited to, restrictions and conditions concerning alcoholic beverages, smoking, environmental matters, employees, currency transactions, taxation, zoning and building codes, construction, land use, and marketing and advertising. We also deal with significant amounts of cash in our operations and are subject to various reporting and anti-money laundering regulations. Such laws and regulations could change or could be interpreted differently in the future, or new laws and regulations could be enacted. Material changes, new laws or regulations, or material differences in interpretations by courts or governmental authorities could adversely affect our operating results. See “Item 1A – Risk Factors” for additional discussion.
Costs and Effects of Compliance with Environmental Laws
 
We are subject to various federal, state and local environmental laws and regulations that govern our operations, including emissions and discharges into the environment, and the handling and disposal of hazardous and non-hazardous substances and wastes. For example, our Indiana property is subject to the Indiana Department of Environmental Management for its riverboat, ferry boat and golf club operations, and our Mississippi property is located near environmental wetlands. Failure to comply with applicable laws and regulations could result in costs for corrective action, penalties or the imposition of other liabilities or restrictions. We also are subject to laws and regulations that impose liability and clean-up responsibility for releases of hazardous substances into the environment. Under certain of these laws and regulations, a current or previous owner or operator of the property may be liable for the costs of remediating contaminated soil or groundwater on or from its property, without regard to whether the owner or operator knew of, or caused, the contamination, and may also incur liability to third parties impacted by such contamination. The presence of contamination, or failure to remediate it properly, may adversely affect our ability to use, sell or rent the property. To date, none of these matters or other matters arising under environmental laws has had a material adverse effect on our business, financial condition, or results of operations; however, there can be no assurance that such matters will not have such an effect in the future.
 
Competition
 
The gaming industry is highly competitive. Gaming activities with which we compete include traditional commercial casinos and casino resorts in various states including on tribal lands and at racetracks, riverboat and dockside gaming, state-sponsored lotteries, video poker in restaurants, bars and hotels, pari-mutuel betting on horse and dog racing and jai alai, sports betting and card rooms. Furthermore, competition from Internet lotteries, sweepstakes, and other Internet wagering gaming services, which allow their customers to wager on a wide variety of sporting events and play Las Vegas-style casino games from home or in non-casino settings, could divert customers from our properties, and thus, adversely affect our business. All of our casinos, as well as other casinos that we may develop or acquire, compete with all these forms of gaming. We also will compete with any new forms or jurisdictions of gaming that may be legalized, as well as with other types of entertainment. Some of our competitors have more personnel and greater financial or other resources than we do. The principal methods of competition are:

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location, with casinos located closer to their feeder markets at an advantage; casino, lodging, entertainment and other hospitality product quality in terms of facilities, customer service and ease of access; breadth of offerings, including the types of casino games and other non-gaming amenities; and marketing, including the amount and frequency of promotions offered to guests.
     
Silver Slipper Casino and Hotel
 
Silver Slipper Casino and Hotel is the western-most casino on the Mississippi Gulf Coast and competes with two larger casinos located nearby, one of which completed a significant expansion in mid-2018. It also competes with casinos in Biloxi, Mississippi and New Orleans and Baton Rouge, Louisiana. Biloxi is one hour east of the Silver Slipper along Interstate 10. New Orleans and Baton Rouge are one and two hours, respectively, west of Silver Slipper.

Silver Slipper is the closest casino to most of St. Tammany Parish, one of the most affluent and fastest-growing parishes in Louisiana. Louisiana law permits 15 riverboat casinos, one land-based casino, four casinos at racetracks, and in certain areas, a limited number of slot machines at qualifying truck stops. The legislation permitting riverboat and truck stop casinos requires a local referendum and, at the time such legalization occurred, it was rejected by St. Tammany Parish voters. At this time, all licenses for riverboat casinos in Louisiana have been granted and are in operation, though it is possible for an existing licensee to relocate its casino (subject to state laws and approval in a local referendum). Mississippi, which has lower gaming tax rates than Louisiana, does not have a limitation on the number of casino licenses, but requires casinos in certain southern counties to be within approximately 800 feet of the shoreline, as defined by state law. There are occasionally proposals to relocate casinos within Louisiana or to develop new casinos in Mississippi, but there are considerable political and economic constraints on such potential competition, and management does not believe such efforts will be successful in the foreseeable future.

Bronco Billy’s Casino and Hotel

Bronco Billy’s is located in Cripple Creek, Colorado, which is a historic gold mining town located approximately one hour southwest of Colorado Springs, on the west side of Pikes Peak. Cripple Creek receives an estimated 1.5 million visitors per year and is one of only three cities in Colorado where commercial gaming is permitted. The other two cities are near Denver. Additionally, two Native American gaming operations exist in southwestern Colorado and there are tribal casinos in Oklahoma, but these are much further from Colorado Springs than Cripple Creek. As of December 31, 2018, we believe that Bronco Billy’s was the second largest of the seven gaming facilities operating in Cripple Creek. Several of those competitors have announced their intent to expand, principally through the addition of new hotel rooms, though none of those projects have broken ground. Gaming in Colorado is “limited stakes,” which restricts any single wager to a current maximum of $100.
 
Rising Star Casino Resort
 
The Rising Star Casino Resort in Rising Sun, Indiana is one of three riverboat casinos located on the Ohio River in southeastern Indiana, approximately one hour from Cincinnati, Ohio, within two hours of Indianapolis, Indiana, and also within two hours of Louisville and Lexington, Kentucky. Its closest competitors are each approximately 15 miles away, near bridges crossing the Ohio River. There is no bridge at Rising Star, but in September 2018, we commenced a ferry boat service connecting Rising Sun, Indiana, to the more populous Northern Kentucky region. Rising Star also competes with casinos in Ohio; casinos elsewhere in Indiana; and two racetrack casinos near Indianapolis, Indiana.

A Kentucky Supreme Court decision in 2014 permits horse racing tracks in Northern Kentucky to install slot machine-like devices, although it has not yet done so. We also compete with racetracks in Louisville and Lexington, Kentucky, that recently installed such machines. Additionally, the Indiana legislature passed legislation in 2015 to allow table games at racetracks (which are currently limited to slot machines) beginning in March 2021. Recently-proposed legislation, if passed, could allow them to have table games sooner.
 
Northern Nevada

Stockman’s Casino
 
Stockman’s Casino is the largest of several casinos in Churchill County, which has a population of approximately 25,000 residents. Churchill County is also the home of Naval Air Station Fallon, the United States Navy’s premier air-to-air and air-to-ground training facility, informally referred to as the “Top Gun” school. While we are not aware of any significant planned expansion to gaming capacity in the Churchill County area, additional competition may adversely affect our financial condition or results of operations. Furthermore, while the Navy appears to be currently expanding its base in Fallon, a reduction of its activities at the base would likely have an adverse effect on Stockman’s results of operations. Fallon is approximately 30 minutes east of the new large Tesla battery factory and other developments in the Tahoe-Reno Industrial Center.

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Grand Lodge Casino
 
Grand Lodge Casino is one of four casinos located within a five-mile radius in the North Lake Tahoe area.  A fifth casino, which has been closed for several years, was sold out of bankruptcy during 2017 and may re-open in the near future.
 
Grand Lodge Casino also competes with casinos in South Lake Tahoe and Reno.  There are also numerous Native American casinos in California serving the Northern California market.

Marketing
 
Our marketing efforts are conducted through various means, including our customer loyalty programs and specialized marketing campaigns, such as our seasonal “Christmas Casino” event at Rising Star Casino Resort. We advertise through various channels, including radio, television, Internet, billboards, newspapers and magazines, direct mail, email and social media. We also maintain websites to inform customers about our properties and utilize social media sites to promote our brands, unique events, and special deals. Our customer loyalty programs include the Silver Slipper Casino Players Club, Bronco Billy’s MVP “Most Valuable Players” Club, the Rising Star Rewards Club™, the Grand Lodge Players Advantage Club® and the Stockman’s Winner’s Club. Under these programs, customers earn points based on their volume of wagering that may be redeemed for various benefits, such as “free play,” cash back, complimentary dining, and hotel stays.

Our properties do not have coordinated loyalty programs. We do not currently believe that it would be economically advantageous given the disparate locations of our properties. Instead, our loyalty programs focus on providing each casino’s customers the amenities they most prefer.

Employees

As of March 1, 2019, we had 15 full-time corporate employees, three of whom are executive officers and two additional senior management employees. Our casino properties had 1,284 full-time and 313 part-time employees as follows:
 
 
 
Full-time
 
Part-time
Silver Slipper Casino and Hotel
 
469

 
82

Bronco Billy’s Casino and Hotel
 
257

 
67

Rising Star Casino Resort
 
387

 
123

Grand Lodge Casino
 
90

 
34

Stockman’s Casino
 
81

 
7

Corporate
 
15

 

Total Employees
 
1,299

 
313

 
We believe that our relationship with our employees is excellent. None of our employees are currently represented by labor unions.

Available Information

Our principal executive offices are located at Full House Resorts, Inc., One Summerlin, 1980 Festival Plaza Drive, Suite 680, Las Vegas, Nevada 89135, and our telephone number is (702) 221-7800. Our website address is www.fullhouseresorts.com. We make available, free of charge, on or through our Internet website, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Our Internet website and information contained on our Internet website are not part of this annual report on Form 10-K and are not incorporated by reference herein.

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Item 1A. Risk Factors.
 
An investment in our securities is subject to risks inherent to our business. We have described below what we currently believe to be the material risks and uncertainties in our business. Before making an investment decision, you should carefully consider the risks and uncertainties described below, together with all of the other information included or incorporated by reference in this Annual Report on Form 10-K.
 
We also face other risks and uncertainties beyond what is described below. This Annual Report on Form 10-K is qualified in its entirety by these risk factors. If any of the following risks actually occur, our business, financial condition and results of operations could be materially and adversely affected. If this were to happen, the value of securities, including our common stock, could decline significantly. You could lose all or part of your investment.

The indenture governing our senior secured notes imposes restrictive covenants and limitations that could significantly affect our ability to operate our business and lead to events of default if we do not comply with our covenants.

         Our indenture governing the senior secured notes due 2024 (the “Notes”) impose restrictive covenants on us and our subsidiaries that may limit our current and future operations. The restrictions that are imposed under the indenture include, among other obligations, limitations on our and our subsidiaries’ ability to:

incur additional debt and guarantee indebtedness;
make payments on subordinated obligations;
make dividends or distributions and repurchase stock;
make investments;
enter into transactions with affiliates;
grant liens on our property to secure debt;
sell assets or enter into mergers or consolidations;
sell equity interest in our subsidiaries;
make capital expenditures; or
amend or modify our subordinate indebtedness without obtaining consent from the holders of our senior indebtedness.

These restrictions could adversely affect our ability to:

obtain additional financing for our operations;
make needed capital expenditures;
make strategic acquisitions or investments or enter into alliances;
withstand a continued and sustained downturn in our business or the economy in general;
engage in business activities, including future opportunities, that may be in our interest; and
plan for or react to market conditions or otherwise execute our business strategies.

In addition, our indenture governing the Notes requires us, among other obligations, to maintain a total leverage ratio. Our ability to comply with the covenants in the indenture may be affected by general economic conditions, industry conditions, and other events beyond our control, including delay in the completion of new projects under construction. As a result, there can be no assurance that we will be able to comply with these covenants. Our failure to comply with the covenants contained in the indenture, or in any instrument governing future indebtedness, including failure to comply as a result of events beyond our control, could result in an event of default. If there were an event of default and it is not waived by the requisite holders (at their option), the trustee or holders could cause all outstanding Notes to be due and payable, subject to applicable grace periods, which could materially and adversely affect our operating results and our financial condition. Additionally, this could trigger cross-defaults under our other debt obligations. We cannot assure you that our assets or cash flow would be sufficient to repay our obligations under the Notes, or any future outstanding debt obligations, if accelerated upon an event of default, or that we would be able to borrow sufficient funds to refinance the Notes or any future debt instruments.

To service our indebtedness, we will require a significant amount of cash. Our ability to generate cash depends on many factors beyond our control.
 
Our ability to make payments on and to refinance our indebtedness, and to fund planned capital expenditures and expansion efforts, will depend upon our ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.
 

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We cannot assure you that our business will generate sufficient cash flows from operations or asset sales, our anticipated growth in operations, including through our expansion efforts, will be realized, or that future borrowings will be available to us in amounts sufficient to enable us to repay the Notes and to fund our other liquidity needs. In addition, as we undertake substantial new developments or facility renovations or if we consummate significant acquisitions in the future, our cash requirements may increase significantly and we may need to obtain additional equity or debt financing or joint venture partners. Any increase in our level of indebtedness could impose additional cash requirements on us in order to support interest payments. If we incur additional debt, the related risks that we now face could intensify.

Under the terms of our former Second Lien Credit Agreement, the holders of certain warrants have registration rights and redemption rights which require us to repurchase approximately 1.0 million shares of our common stock. If the holders exercise their redemption rights for all or a portion of their warrants, we have the option to pay them in cash or with a four-year note, or to register and sell the shares related to the warrants through a public offering.

If we are not able to generate sufficient cash flows from operations to repay the Notes and satisfy our obligations under the former Second Lien Credit Agreement, as needed, or to obtain adequate additional financing, we may have to adopt one or more alternatives, such as reducing or delaying planned expenses and capital expenditures or selling assets.

Our ability to obtain additional financing on commercially reasonable terms may be limited.
 
Although we believe that our cash, cash equivalents and working capital, as well as future cash from operations will provide adequate resources to fund ongoing operating requirements over the next twelve months, we may need to refinance or seek additional financing to compete effectively or grow our business. These financing strategies may not be completed on satisfactory terms, if at all. In addition, certain states’ laws to undertake certain financing transactions require approval of gaming regulatory authorities. Some requirements may prevent or delay us from obtaining necessary capital. We cannot assure you that we will be able to obtain any additional financing, refinance our existing debt, or fund our growth efforts. If we are unable to obtain financing on commercially reasonable terms, it could:

reduce funds available to us for purposes such as working capital, capital expenditures, strategic acquisitions and other general corporate purposes;
restrict our ability to capitalize on business opportunities;
increase our vulnerability to economic downturns and competitive pressures in the markets in which we operate; and
place us at a competitive disadvantage.

Our obligations to the holders of the Notes are collateralized by a security interest in substantially all of our assets, so if we default on those obligations, the holders of the Notes could foreclose on our assets. In addition, the existence of these security interests may adversely affect our financial flexibility.

Our obligations under the Notes and the transaction documents relating to the Notes are secured by a security interest in substantially all of our assets. As a result, if we default under our obligations under the Notes or the transaction documents, the holders of the Notes, acting through their appointed agent, could foreclose on their security interests and liquidate some or all of these assets, which would harm our business, financial condition and results of operations and could require us to reduce or cease operations. In addition, the pledge of these assets and other restrictions may limit our flexibility in raising capital for other purposes. Because substantially all of our assets are pledged under these financing arrangements, our ability to incur additional secured indebtedness or to sell or dispose of assets to raise capital may be impaired, which could have an adverse effect on our financial flexibility.

Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase.

An increase in market interest rates would increase our interest expense arising on our existing and future floating rate indebtedness. Pursuant to the terms of our indenture governing the Notes, the Notes bear interest at the greater of the three-month London Interbank Offered Rate (“LIBOR”) or 1.0%, plus a margin rate of 7.0%. As a result, we are exposed to interest rate risk. Interest rates, including LIBOR, have recently increased and are expected to continue to increase in future periods. If interest rates continue to increase, our debt service obligations on our variable rate indebtedness will increase even though the amount borrowed remains the same, and our net income and cash flows, including cash available for servicing our indebtedness, will correspondingly decrease. Furthermore, in an environment of increasing interest rates, it is likely that any future refinancing of our indebtedness will be either at fixed interest rates higher than our current fixed interest rates or at variable rates. We have purchased an interest rate cap that expires on March 31, 2021 to minimize the effect of interest rate increases on approximately

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half of our outstanding borrowings with a notional amount of $50 million and strike rate of 3.00%, which resets every three months at the end of March, June, September, and December. However, we do not maintain interest rate caps with respect to all of our variable rate indebtedness, and our interest rate cap may not fully mitigate our interest rate risk. In addition, on July 27, 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, announced its intention to phase out LIBOR by the end of 2021. It is unclear if LIBOR will cease to exist at that time or if new methods of calculating LIBOR will be established such that it continues to exist after 2021. If LIBOR ceases to exist, we may need to renegotiate our debt agreements. This could have an adverse effect on our financing costs.

We and our subsidiaries may still be able to incur substantially more debt, which could further exacerbate the risks described above.

We and our subsidiaries may be able to incur substantial additional indebtedness in the future. The terms of the indenture governing the Notes do not fully prohibit us or our subsidiaries from doing so. If new debt is added to our, or our subsidiaries’, current debt levels, the related risks that we or they now face could intensify.

We face significant competition from other gaming and entertainment operations.
 
The gaming industry is characterized by an increasingly high degree of competition among a large number of participants, including riverboat casinos, dockside casinos, land-based casinos, racetrack casinos, video lottery, poker machines not located in casinos, Native American gaming, social gaming and other forms of gaming. Furthermore, competition from Internet lotteries, sweepstakes, and other Internet wagering gaming services, which allow their customers to wager on a wide variety of sporting events and play Las Vegas-style casino games from home or in non-casino settings, could divert customers from our properties and thus adversely affect our business. Such Internet wagering services are often illegal under federal law, but operate from overseas locations and are, nevertheless, sometimes accessible to domestic gamblers. Additionally, there are often proposals to legalize Internet poker and other varieties of Internet gaming in a number of states and at the federal level. Several states, including Nevada, New Jersey, and Delaware, have enacted legislation authorizing intrastate Internet gaming and Internet gaming operations have begun in these states. Expansion of Internet gaming in other jurisdictions (both legal and illegal) could further compete with our traditional operations, which could have an adverse impact on our business and results of operations.
 
In a broader sense, our gaming operations face competition from all manner of leisure and entertainment activities, including other non-gaming resorts and vacation destinations, shopping, athletic events, television and movies, concerts, and travel. Legalized gaming is currently permitted in various forms throughout the U.S., in several Canadian provinces and on various lands taken into trust for the benefit of certain Native Americans in the U.S. and Canada. Other jurisdictions that border our operational locations, such as Ohio, have recently legalized and implemented gaming. In addition, established gaming jurisdictions could award additional gaming licenses or permit the expansion or relocation of existing gaming operations. New, relocated or expanded operations by other persons could increase competition for our gaming operations and could have a material adverse impact on us. Gaming competition is intense in most of the markets where we operate. In most markets, we compete directly with other casino facilities operating in the immediate and surrounding market areas. In some markets, we face competition from nearby markets in addition to direct competition within our market areas. As competing properties and new markets are opened, our operating results may be negatively impacted. In addition, some of our direct competitors in certain markets may have superior facilities and/or operating conditions. We expect each existing or future market in which we participate to be highly competitive.  The competitive position of each of our casino properties is discussed in “Item 1. Business – Competition”.

We face extensive regulation from gaming and other regulatory authorities and the cost of compliance or failure to comply with such regulations may adversely affect our business and results of operations.
 
Licensing. The gaming industry is highly regulated and we must maintain our licenses and pay gaming taxes to continue our operations. The ownership, management and operation of gaming facilities are subject to extensive state and local regulation in the jurisdiction in which it is located. These laws, rules and regulations generally concern the responsibility, financial stability and character of the owners, managers, and persons with financial interest in the gaming operations. The regulatory authorities in jurisdictions where we operate have broad discretion, and may, for any reason set forth in the applicable legislation, rules and regulations, limit, condition, suspend, fail to renew or revoke a license or registration to conduct gaming operations. Furthermore, because we are subject to regulation in each jurisdiction in which we operate, and because regulatory agencies within each jurisdiction review our compliance with gaming laws in other jurisdictions, it is possible that gaming compliance issues in one jurisdiction may lead to reviews and compliance issues in other jurisdictions.
 
Taxation and fees. We believe that the prospect of significant tax revenue is one of the primary reasons that jurisdictions permit legalized gaming. As a result, gaming companies are typically subject to significant revenue-based taxes and fees in addition to normal federal, state, local and provincial income and employment taxes, and such taxes and fees are subject to increase at any

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time. We pay substantial taxes and fees with respect to our operations. From time to time, federal, state, local and provincial legislators and officials have proposed changes in tax laws, or in the administration of such laws, affecting the gaming industry. In addition, any downturn in economic conditions could intensify the efforts of state and local governments to raise revenues through increases in gaming taxes and/or property taxes. It is not possible to determine with certainty the likelihood of changes in tax laws or in the administration of such laws. Any material increase, or the adoption of additional taxes or fees, could have a material adverse effect on our business, financial condition and results of operations.
 
Compliance with other laws. In addition to gaming regulations, we are also subject to various federal, state, and local laws and regulations affecting businesses in general. These laws and regulations include, but are not limited to, environmental matters, employment, currency transactions, taxation, construction, zoning, construction and land-use laws, marketing and advertising, smoking, and regulations governing the serving of alcoholic beverages.

The Bank Secrecy Act, enforced by the Financial Crimes Enforcement Network (“FinCEN”) of the U.S. Treasury Department, requires us to report currency transactions in excess of $10,000 occurring within a gaming day, including identification of the guest by name and social security number, to the Internal Revenue Service (“IRS”). This regulation also requires us to report certain suspicious activity, including any transaction that exceeds $5,000 that we know, suspect or have reason to believe involves funds from illegal activity or is designed to evade federal regulations or reporting requirements. Periodic audits by the IRS and our internal audit function assess compliance with the Bank Secrecy Act, and substantial penalties can be imposed against us if we fail to comply with this regulation. In recent years, the U.S. Treasury Department has increased its focus on Bank Secrecy Act compliance throughout the gaming industry. Recent public comments by FinCEN suggest that casinos should make efforts to obtain information on each customer’s sources of income. This could impact our ability to attract and retain casino guests.

We also deal with significant amounts of cash in our operations and are subject to various reporting and anti-money laundering regulations. Any violations of anti-money laundering laws or regulations by any of our properties could have an adverse effect on our financial condition, results of operations or cash flows. Such laws and regulations could change or could be interpreted differently in the future, or new laws and regulations could be enacted.
 
Our riverboat, as well as our ferry boat operations, at Rising Star must comply with certain federal and state laws and regulations with respect to boat design, on-board facilities, equipment, personnel and safety. In addition, we are required to have third parties periodically inspect and certify our casino riverboat for safety, stability and single compartment flooding integrity. All of our casinos also must meet local fire safety standards. We would incur additional costs, if any, if our gaming facilities were not in compliance with one or more of these regulations.

We may face revenue declines should discretionary consumer spending drop from an economic downturn.

Our net revenues are highly dependent upon the volume and spending levels of customers at our properties and, as such, our business has been in the past, and could be in the future, adversely impacted by economic downturns. Decreases in discretionary consumer spending brought about by weakened general economic conditions such as, but not limited to, lackluster recoveries from recessions, high unemployment levels, higher income taxes, low levels of consumer confidence, weakness in the housing market, cultural and demographic changes, and increased stock market volatility may negatively impact our revenues and operating cash flow. Furthermore, during periods of economic contraction, our revenues may decrease while many of our costs remain fixed and some costs may increase, resulting in decreased earnings.

Our business may be adversely affected by legislation prohibiting tobacco smoking.

Legislation in various forms to ban indoor tobacco smoking has been enacted or introduced in jurisdictions in which we operate. Except for those in Colorado, the gaming areas of our properties are not currently subject to tobacco restrictions. While gaming areas have generally been exempted from these restrictions, if additional restrictions on smoking are enacted in jurisdictions in which we operate, we could experience a decrease in gaming revenue. This is particularly the case if such restrictions are not applicable to all competitive facilities in that gaming market.

The exercise of outstanding stock warrants and options may result in substantial dilution and may depress the trading price of our common stock.  

In connection with the former Second Lien Credit Facility, we have warrants outstanding, representing rights to purchase approximately 1.0 million shares of our common stock at the option of the lenders. If our outstanding warrants and other options to purchase shares of our common stock are exercised and the underlying shares of common stock are issued upon such exercise are sold, our stockholders may experience substantial dilution and the market price of our shares of common stock could decline. Further, the perception that such securities might be exercised could adversely affect the trading price of our shares of common

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stock. During the time that such securities are outstanding, they may adversely affect the terms on which we could obtain additional capital.

The warrants also provide the holders with registration rights and redemption rights which allow them, at their option, to require us to repurchase all or a portion of the warrants upon the occurrence of certain triggering events. The refinancing of the Second Lien Credit Facility qualified as a triggering event. If the holders exercise their redemption rights, we have the option of paying them in cash or with a four-year note on terms stipulated in the warrant agreement, or by registering and selling the shares related to the warrants through a public offering, which could result in substantial dilution and may adversely affect the market price of our shares.
 
We depend on our key personnel.
 
We are highly dependent on the services of our executive management team and other members of our senior management team. Our ability to attract and retain key personnel is affected by the competitiveness of our compensation packages and the other terms and conditions of employment, our continued ability to compete effectively against other gaming companies, and our growth prospects. The loss of the services of any members of our senior management team could have a material adverse effect on our business, financial condition and results of operations.

We may face disruption and other difficulties in integrating and managing facilities we have recently developed or acquired, or may develop or acquire in the future.

We may face certain challenges as we integrate the operational and administrative systems of recently developed or acquired facilities into our business. As a result, the realization of anticipated benefits may be delayed or substantially reduced. Events outside of our control, including changes in state and federal regulations and laws as well as economic trends, also could adversely affect our ability to realize the anticipated benefits from the acquisition or future development.

We expect to continue pursuing expansion opportunities. For example, we plan to build an approximately 180-guest room hotel in Cripple Creek, Colorado, adjoining and integral with our existing Bronco Billy’s. The expansion is expected to include a spa, parking garage, convention and entertainment space, and two new restaurants. As part of the expansion, we refurbished and reopened the Imperial Casino as the Christmas Casino and rebranded the Imperial Hotel as the Christmas Inn. We also regularly evaluate opportunities for acquisition and development of new properties. We could face significant challenges in managing and integrating our expanded or combined operations and any other properties we may develop or acquire, particularly in new competitive markets. The integration of properties we may develop or acquire will require the dedication of management resources that may temporarily divert attention from our day-to-day business. The process of integrating properties that we may acquire also could interrupt the activities of those businesses, which could have a material adverse effect on our business, financial condition and results of operations. In addition, the development of new properties may involve construction, local opposition, regulatory, legal and competitive risks, as well as the risks attendant to partnership deals on these development opportunities. In particular, in projects where we team up with a joint venture partner, if we cannot reach agreement with such partners, or our relationships otherwise deteriorate, we could face significant increased costs and delays. Local opposition can delay or increase the anticipated cost of a project. Finally, given the competitive nature of these types of limited license opportunities, litigation is possible.
 
Management of new properties, especially in new geographic areas, may require that we increase our management resources. We cannot assure you that we will be able to manage the combined operations effectively or realize any of the anticipated benefits of our acquisitions. We also cannot assure you that if acquisitions are completed, that the acquired businesses will generate returns consistent with our expectations.
 
Our ability to achieve our objectives in connection with any acquisition we may consummate may be highly dependent on, among other things, our ability to retain the senior-level property management teams of such acquisition candidates. If, for any reason, we are unable to retain these management teams following such acquisitions or if we fail to attract new capable executives, our operations after consummation of such acquisitions could be materially adversely affected.
 
If we make new acquisitions or new investments, we may face additional risks related to our business, results of operations, financial condition, liquidity, ability to satisfy financial covenants and comply with other restrictive covenants under our indenture, and ability to pay or refinance our indebtedness.
 
The occurrence of some or all of the above described events could have a material adverse effect on our business, financial condition and results of operations.


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Our ferry boat service is highly regulated, which can adversely affect our operations. 

Our ferry boat service at the Rising Star Casino Resort is subject to stringent local, state and federal laws and regulations governing, among other things, the health and safety of our passengers and personnel, and the operation and insurance of our vessel. Many aspects of our ferry boat service are subject to regulation by a wide array of agencies, including the U.S. Coast Guard and other federal authorities, the State of Indiana and Commonwealth of Kentucky authorities, as well as local authorities in Ohio County, Indiana and Boone County, Kentucky. In addition, we are required by various governmental and quasi-governmental agencies to obtain, maintain and periodically renew certain permits, licenses and certificates with respect to our ferry boat service. Compliance with or the enforcement of applicable laws and regulations can be costly. In addition, failure to comply with applicable laws and regulations may result in administrative and civil penalties, criminal sanctions or, in certain cases, the suspension or termination of our ferry boat service.  

Marine transportation is inherently risky, and insurance may be insufficient to cover losses that may occur to our assets or result from our ferry boat operations.  

The operation of our vessel is subject to various inherent risks, including:

catastrophic marine disasters and accidents;
adverse weather conditions or natural disasters;
mechanical failure or equipment damage;
hazardous substance spills; and
navigation and human errors.

The occurrence of any of these events may result in, among other things, damage to or loss of our vessel, damage to other vessels and the environment, loss of revenues, short-term or long-term interruption of ferry boat service; termination of our vessel charter or other contracts, fines, penalties or other restrictions on conducting business, damage to our reputation and customer relationships, and death or injury to personnel and passengers. Such occurrences may also result in a significant increase in our operating costs or liability to third parties.

We derive our revenues and operating income from our casino resort properties located in Mississippi, Colorado, Indiana and Nevada, and are especially subject to certain risks, including economic and competitive risks, associated with the conditions in those areas and in the states from which we draw patrons.

Because we derive our revenues and operating income from properties concentrated in four states, we are subject to greater risks from regional conditions than a gaming company with operating properties in a greater number of different geographic regions. A decrease in revenues from or increase in costs for one of these locations is likely to have a proportionally greater impact on our business and operations than it would for a gaming company with more geographically diverse operating properties. Risks from regional conditions include the following:

regional economic conditions;
regional competitive conditions, including legalization or expansion of gaming in Mississippi, Colorado, Indiana, Nevada, or in neighboring states;
allowance of new types of gaming, such as the introduction of live table games at Indiana racinos;
reduced land and air travel due to increasing fuel costs or transportation disruptions; and,
increase in our vulnerability to economic downturns and competitive pressures in the markets in which we operate.

Some of our casino resort operations are located on leased property. If the lessors exercise their buyout rights or if we default on one or more leases, the applicable lessors could terminate the affected leases and we could lose possession of the affected casino.

We lease certain parcels of land at our Silver Slipper Casino and Hotel in Mississippi, both land and buildings at Bronco Billy’s Hotel and Casino in Colorado and one of the two hotels at our Rising Star Casino Resort in Indiana. We also lease casino space at our Grand Lodge Casino in Nevada. As a lessee, we have the right to use the leased land, hotel or space as applicable; however, we do not hold fee ownership. Accordingly, unless we have a purchase option and exercise such option, we will have no interest in the improvements thereon at the expiration of the leases. We have such purchase options on the leased property at the Silver Slipper, Bronco Billy’s and for the leased hotel at Rising Star, but it is either currently more advantageous for us to continue to lease rather than exercise the buyout option, or we have certain restrictions which only allow us to exercise the purchase option during certain future time periods. Under certain circumstances and at the expirations of the underlying leases, we might be forced to exercise our buyout options in order to continue to operate those properties. There is no certainty that the funds could

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be raised at that time at a reasonable cost, or at all, to exercise some or all of the buyout options. The operating lease at the Grand Lodge Casino includes certain lessor buyout rights based upon a multiple of EBITDA that, if exercised, could result in the lessor purchasing our leasehold interest and the operating assets on terms that may be less than fair market value or financially unfavorable to us. Since we do not completely control the land, buildings, hotel and space underlying our leased properties, a lessor could take certain actions to disrupt our rights under the long-term leases which are beyond our control. If the entity owning any leased land, buildings, hotel or space chose to disrupt our use either permanently or for a significant period of time, then the value of our assets could be impaired and our business and operations could be adversely affected. If we were to default on the lease, the lessor could terminate the affected lease and we could lose possession of the affected land, buildings, hotel or space and any improvements thereon. The loss of the lease through exercise of buyout rights or through termination upon default would have a significant adverse effect on our business, financial condition and results of operations as we would then be unable to operate all or portions of the affected facilities, which, in turn, may result in a default under our debt agreements.

We are engaged from time to time in one or more construction and development projects, and many factors could prevent us from completing them as planned.
 
Construction of major buildings has certain inherent risks, including the risks of fire, structural collapse, human error and electrical, mechanical and plumbing malfunction. In addition, projects entail additional risks related to structural heights and the required use of cranes. Our development and expansion projects also entail significant risks, including:
 
shortage of materials;
shortage of skilled labor or work stoppages;
unforeseen construction scheduling, engineering, excavation, environmental or geological problems;
increases in the cost of steel and other raw materials for construction, driven by U.S. tariffs on imports, demand, higher labor and construction costs and other factors, may cause price increases beyond those anticipated in the budgets for our development projects;
natural disasters, hurricanes, weather interference, changes in river levels, floods, fires, earthquakes or other casualty losses or delays;
unanticipated cost increase or delays in completing the project;
delays in obtaining or inability to obtain or maintain necessary license or permits;
lack of sufficient, or delays in the availability of, financing;
changes to plans or specifications;
performance by contractors and subcontractors;
disputes with contractors;
personal injuries to workers and other persons;
disruption of our operations caused by diversion of management’s attention to new development projects and construction at our existing properties;
remediation of environmental contamination at some of our proposed construction sites, which may prove more difficult or expensive than anticipated in our construction budgets;
failure to obtain and maintain necessary gaming regulatory approvals and licenses, or failure to obtain such approvals and licenses on a timely basis;
requirements or government-established “goals” concerning union labor or requiring that a portion of the project expenditures be through companies controlled by specific ethnic or gender groups, goals that may not be obtainable, or may only be obtainable at additional project cost; and
other unanticipated circumstances or cost increases.

The occurrence of any of the foregoing could increase the total costs, delay or prevent the construction, development, expansion or opening of a project. Escalating construction costs may cause us to modify the design and scope of projects from those initially contemplated or cause the budgets for those projects to be increased. We generally carry insurance to cover certain liabilities related to construction, but not all risks are covered, and it is uncertain whether such insurance will provide sufficient payment in a timely fashion even for those risks that are insured and material to us.
 
Construction of our development projects exposes us to risks of cost overruns due to typical construction uncertainties associated with any project or changes in the designs, plans or concepts of such projects. For these and other reasons, construction costs may exceed the estimated cost of completion, notwithstanding the existence of any guaranteed maximum price construction contracts.


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We face a number of challenges prior to opening new or upgraded facilities.
 
We have several development and improvement projects planned in the near future. No assurance can be given that, when we endeavor to open new or upgraded facilities, the expected timetables for opening such facilities will be met in light of the uncertainties inherent in the development of the regulatory framework, construction, the licensing process, legislative action and litigation. Delays in opening new or upgraded facilities could lead to increased costs and delays in receiving anticipated revenues with respect to such facilities and could have a material adverse effect on our business, financial condition and results of operations.

Subsequent phases to certain of our existing projects and potential enhancements at our properties may require us to raise additional capital.
 
We may need to access financial institution sources, capital markets, private sources or otherwise obtain additional funds to complete subsequent phases of our existing projects and to fund potential enhancements we may undertake at our facilities, such as our potential hotel development at Bronco Billy’s. We do not know when or if financial institution sources, capital markets or private sources will permit us to raise additional funds for such phases and enhancements in a timely manner, on acceptable terms, or at all. Inability to access financial institution sources, capital markets or private sources, or the availability of capital only on less-than-favorable terms, may force us to delay, reduce or cancel our subsequent phases and enhancement projects.
 
Our ability to obtain financial institution sources, capital markets or private source financing for future offerings may also be limited by our financial condition, results of operations or other factors, such as our credit rating or outlook at the time of any such financing or offering and the covenants in our existing debt agreements, as well as by general economic conditions and contingencies and uncertainties that are beyond our control. As we seek additional financing, we will be subject to the risks of rising interest rates and other factors affecting the financial markets.
 
The casino, hotel and resort industry is capital intensive and we may not be able to finance expansion and renovation projects, which could put us at a competitive disadvantage.
 
Our properties have an ongoing need for renovations and other capital improvements to remain competitive, including replacement, from time to time, of furniture, fixtures and equipment. We may also need to make capital expenditures at our casino properties to comply with our debt covenants, lease agreements and applicable laws and regulations.
 
Renovations and other capital improvements at our properties require significant capital expenditures. In addition, renovations and capital improvements usually generate little or no cash flow until the projects are completed. We may not be able to fund such projects solely from existing resources and cash provided from operating activities. Consequently, we may have to rely upon the availability of debt or equity capital to fund renovations and capital improvements, and our ability to carry them out will be limited if we cannot obtain satisfactory debt or equity financing, which will depend on, among other things, market conditions. We cannot assure you that we will be able to obtain additional equity or debt financing or that we will be able to obtain such financing on favorable terms. Our failure to renovate our properties may put us at a competitive disadvantage.

Adverse weather conditions, road construction, gasoline shortages and other factors affecting our facilities and the areas in which we operate could make it more difficult for potential customers to travel to our properties and deter customers from visiting our properties.

Our continued success depends upon our ability to draw customers from each of the geographic markets in which we operate. Adverse weather conditions or road construction can deter our customers from traveling to our facilities or make it difficult for them to frequent our properties. In recent years, there were severe cold temperatures that we believe adversely affected our Indiana and Mississippi properties’ financial performance and historically low snow levels in the Lake Tahoe region adversely affected visitation and financial performance at the Grand Lodge Casino. Bronco Billy’s in recent years was adversely affected by nearby forest fires, as well as the subsequent flooding of its access roads due to lack of vegetation (from the forest fires) on hills above such roads. Moreover, gasoline shortages or fuel price increases in regions that constitute a significant source of customers for our properties could make it more difficult for potential customers to travel to our properties and deter customers from visiting. Our dockside gaming facility in Indiana, as well as any additional riverboat or dockside casino properties that might be developed or acquired, are also subject to risks, in addition to those associated with land-based casinos, which could disrupt our operations. Although our Indiana casino vessel does not leave its moorings in normal operations, there are risks associated with the movement or mooring of vessels on waterways, including risks of casualty due to river turbulence, flooding, collisions with other vessels and severe weather conditions. Our new ferry boat that we operate at Rising Star has similar risks as our Indiana casino vessel, as well as additional risks related to ferry boat operations discussed above.


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Our results of operations and financial condition could be materially adversely affected by the occurrence of natural disasters, such as hurricanes, or other catastrophic events, including war, terrorism and gun violence.
 
Natural disasters, such as major hurricanes, tornadoes, typhoons, floods, fires and earthquakes, could adversely affect our business and operating results. Hurricanes are common in the area in which our Mississippi property is located and the severity of such natural disasters is unpredictable. In 2017, Hurricane Nate resulted in the temporary closure of the Silver Slipper Casino and Hotel. In 2005, Hurricanes Katrina and Rita caused significant damage in the Gulf Coast region and damaged a casino that previously existed at our Mississippi site. Additionally, our Indiana property is at risk of flooding due to its proximity to the Ohio River.
 
Catastrophic events, such as terrorist and war activities in the United States and elsewhere, when they occur, have had a negative effect on travel and leisure expenditures, including lodging, gaming and tourism. Gun violence has also occurred at casinos, including a mass shooting at a casino in Las Vegas in 2017. We cannot accurately predict the extent to which such events may affect us, directly or indirectly, in the future. There also can be no assurance that we will be able to obtain or choose to purchase any insurance coverage with respect to occurrences of terrorist and violent acts and any losses that could result from these acts. If there is a prolonged disruption at our properties due to natural disasters, terrorist attacks or other catastrophic events, our results of operations and financial condition would be materially adversely affected.

Several of our properties, including Silver Slipper, Bronco Billy’s and, to a lesser extent, Rising Star, are accessed by our customers via routes that have few alternatives.

The Silver Slipper is located at the end of a dead-end road, with no other access. Bronco Billy’s is accessed by most guests via a mountain pass; if that pass is closed for any reason, the alternative is longer. Rising Star’s primary access from Cincinnati is via a road alongside the Ohio River; if this road were to close, the alternative routes involve more winding roads through the rolling hills inland from the river. If access to any of these roads is blocked for any significant period, our results of operations and financial condition would be materially affected.

We may incur property and other losses that are not adequately covered by insurance, including adequate levels of Weather Catastrophe Occurrence/Named Windstorm, Flood and Earthquake insurance coverage for our properties.
 
Although we maintain insurance that our management believes is customary and appropriate for our business, there can be no assurance that insurance will be available at reasonable costs in any given year or adequate to cover all losses and damage to which our business or our assets might be subjected. The lack of adequate insurance for certain types or levels of risk could expose us to significant losses in the event that a catastrophe occurred for which we are uninsured or under-insured. Any losses we incur that are not adequately covered by insurance may decrease our future operating income, require us to find replacements or repairs for destroyed property, and reduce the funds available for payments of our obligations. In addition, certain casualty events, such as labor strikes, nuclear events, acts of war, declines in visitation and loss of income due to fear of terrorism or other acts of violence, loss of electrical power due to catastrophic events, rolling blackouts or otherwise, deterioration or corrosion, insect or animal damage, and pollution, may not be covered at all under our policies. The occurrence of any of the foregoing could, therefore, expose us to substantial uninsured losses.
 
Because of significant loss experience caused by hurricanes and other natural disasters, a number of insurance companies may stop writing insurance in Class 1 hurricane areas, including Mississippi. Others may significantly limit the amount of coverage they will write in these markets and increase the premiums charged for this coverage. Additionally, uncertainty can occur as to the viability of certain insurance companies. While we believe that the insurance companies from which we have purchased insurance policies will remain solvent, there is no certainty that this will be the case.

We may face risks related to our ability to receive regulatory approvals required to complete certain acquisitions, mergers, joint ventures, and other developments, as well as other potential delays in completing certain transactions.
 
Our growth may be fueled, in part, by the acquisition of existing gaming and development properties. In addition to standard closing conditions, our material transactions, including but not limited to acquisitions, are often conditioned on the receipt of regulatory approvals and other hurdles that create uncertainty and could increase costs. Such delays could significantly reduce the benefits to us of such transactions and could have a material adverse effect on our business, financial condition and results of operations.


19



If we fail to obtain necessary government approvals in a timely manner, or at all, it can adversely impact our various expansion, development, investment and renovation projects.

The scope of the approvals required for expansion, development, investment or renovation projects can be extensive and may include gaming approvals, state and local land-use permits and building and zoning permits. Unexpected changes or concessions required by local, state or federal regulatory authorities could involve significant additional costs and delay the scheduled openings of the facilities. We may not obtain the necessary permits, licenses, entitlements and approvals within the anticipated time frames, or at all.

Insufficient or lower-than-expected results generated from our new developments and acquired properties may negatively affect our operating results and financial condition.
 
We cannot assure you that the revenues generated from our new developments and acquired properties will be sufficient to pay related expenses if and when these developments are completed; or, even if revenues are sufficient to pay expenses, that the new developments and acquired properties will yield an adequate return or any return on our significant investments. As previously discussed, the development of new properties may involve construction, regulatory, legal and competitive risks or local opposition, any of which can significantly increase the anticipated cost of a project. Our projects, if completed, may not achieve the level of guest acceptance and patronage we anticipate and, for this or other reasons, may take significantly longer than we expect to generate returns, if any. If our new developments or acquired properties do not achieve the financial results anticipated, it could adversely affect our revenues and results of operations. Moreover, lower-than-expected results from the opening of a new facility may make it more difficult to raise capital.

Higher wage and benefit costs could adversely affect our business.

While the vast majority of our employees earn more than the minimum wage in the relative jurisdictions and receive medical plan benefits from us, changes in federal and state minimum wage laws and other laws relating to employee benefits, including the Patient Protection and Affordable Care Act, have in the past, and could in the future cause us to incur additional wage and benefits costs. Increased labor costs brought about by changes in minimum wage laws, other regulations or prevailing market conditions have recently, and could in the future, further increase our expenses, which could have an adverse impact on our profitability, or decrease the number of employees we are able to employ, which could decrease customer service levels at our gaming facilities and therefore adversely impact revenues.
 
Rising operating costs at our gaming properties could have a negative impact on our business.
 
The operating expenses associated with our gaming properties could increase due to, among other reasons, the following factors:
 
changes in federal, state or local tax or regulations, including state gaming regulations or gaming taxes, could impose additional restrictions or increase our operating costs;
aggressive marketing and promotional campaigns by our competitors for an extended period of time could force us to increase our expenditures for marketing and promotional campaigns in order to maintain our existing customer base or attract new customers;
as our properties age, we may need to increase our expenditures for repairs, maintenance, and to replace equipment necessary to operate our business in amounts greater than what we have spent historically;
our reliance on slot play revenues and any additional costs imposed on us from vendors;
availability and cost of the many products and services we provide our customers, including food, beverages, retail items, entertainment, hotel rooms, spa and golf;
availability and costs associated with insurance;
increases in costs of labor;
our properties use significant amounts of electricity, natural gas and other forms of energy, and energy price increases may adversely affect our cost structure;
our properties use significant amounts of water, and a water shortage may adversely affect our operations; and
at Grand Lodge Casino, we rely on Hyatt Lake Tahoe to provide certain items at reasonable costs, including food, beverages, parking and rooms. Any change in their pricing or the availability of such items may affect our ability to compete.
 
If our operating expenses increase without any offsetting increase in our revenues, our results of operations would suffer.


20



We extend credit to certain customers and we may not be able to collect gaming receivables from our credit players.

Most of our casino play involves slot machines or lower limit table games. Nevertheless, we do conduct a portion of our gaming activities on a credit basis through the issuance of markers which are unsecured instruments. Table games players typically are extended more credit than slot players, and high-stakes players typically are extended more credit than players who tend to wager lower amounts. High-end gaming is more volatile than other forms of gaming and variances in win-loss results attributable to high-end gaming may have a significant positive or negative impact on cash flow and earnings in a particular quarter. We extend credit to those customers whose level of play and financial resources warrant, in the opinion of management, an extension of credit. These large receivables could have a significant impact on our results of operations if deemed uncollectible.

We face the risk of fraud and cheating.

Our gaming customers may attempt or commit fraud or cheat in order to increase winnings. Acts of fraud or cheating could involve the use of counterfeit chips or other tactics, possibly in collusion with our employees. Internal acts of cheating could also be conducted by employees directly or through collusion with dealers, surveillance staff, floor managers or other casino or gaming area staff. Failure to discover such acts or schemes in a timely manner could result in losses in our gaming operations. In addition, negative publicity related to such schemes could have an adverse effect on our reputation, potentially causing a material adverse effect on our business, financial condition, results of operations and cash flows.

Win rates for our gaming operations depend on a variety of factors, some beyond our control.

The gaming industry is characterized by an element of chance. In addition to the element of chance, win rates are also affected by other factors, including players’ skill and experience, the mix of games played, the financial resources of players, the spread of table limits, the volume of bets played and the amount of time played. Our gaming profits are mainly derived from the difference between our casino winnings and the casino winnings of our gaming customers. Since there is an inherent element of chance in the gaming industry, we do not have full control over our winnings or the winnings of our gaming customers. If our winnings do not exceed the winnings of our gaming customers by enough to cover our operating costs, we may record a loss from our gaming operations, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Our gaming operations rely heavily on technology services and an uninterrupted supply of electrical power and if we experience damage or service interruptions, we may have to cease some or all of our operations, which will result in a decrease in revenue.
 
Our gaming operations rely heavily on technology services and an uninterrupted supply of electrical power. Our security system and all of our slot machines are controlled by computers and reliant on electrical power to operate. A loss of electrical power or a failure of the technology services needed to run the computers would make us unable to run all or parts of our gaming operations. Any unscheduled interruption in our technology services or interruption in the supply of electrical power is likely to result in an immediate, and possibly substantial, loss of revenue due to a shutdown of our gaming operations. Although we have designed our systems around industry-standard designs to reduce downtime in the event of outages or catastrophic occurrences, they remain vulnerable to damage or interruption from floods, fires, power loss, telecommunication failures, terrorist attacks, computer viruses, computer denial-of-service attacks and similar events. Additionally, substantial increases in the cost of electricity and natural gas could negatively affect our results of operations.
 
Our information technology and other systems are subject to cyber-security risk, misappropriation of customer information and other breaches of information security.
 
We rely extensively on our computer systems to process customer transactions, manage customer data, manage employee data and communicate with third-party vendors and other third parties, and we may also access the Internet to use our computer systems. Our operations require that we collect and store customer data, including credit card numbers and other personal information, for various business purposes, including marketing and promotional purposes. We also collect and store personal information about our employees. Breaches of our security measures or information technology systems or the accidental loss, inadvertent disclosure or unapproved dissemination of proprietary information or sensitive personal information or confidential data about us, or our customers, or our employees including the potential loss or disclosure of such information as a result of hacking or other cyber-attack, computer virus, fraudulent use by customers, employees or employees of third party vendors, trickery or other forms of deception or unauthorized use, or due to system failure, could expose us, our customers, our employees or other individuals affected to a risk of loss or misuse of this information, result in litigation and potential liability for us, damage our reputation or brand names or otherwise harm our business. We rely on proprietary and commercially available systems, software, tools and monitoring to provide security for processing, transmission and storage of customer information, such as

21



payment card, employee information and other confidential or proprietary information. Our data security measures are reviewed and evaluated regularly, however they might not protect us against increasingly sophisticated and aggressive threats. The cost and operational consequences of implementing further data security measures could be significant and there is no certainty that such measures, if purchased, could thwart all threats.

Additionally, the collection of customer and employee personal information imposes various privacy compliance related obligations on our business and increases the risks associated with a breach or failure of the integrity of our information technology systems.  The collection and use of personal information is governed by privacy laws and regulations enacted in the United States and other jurisdictions around the world. Privacy regulations continue to evolve and on occasion may be inconsistent from one jurisdiction to another. Compliance with applicable privacy laws and regulations may increase our operating costs and/or adversely impact our ability to market our products, properties and services to our customers. In addition, non-compliance with applicable privacy laws and regulations by us (or in some circumstances non-compliance by third party service providers engaged by us) may also result in damage of reputation, result in vulnerabilities that could be exploited to breach our systems and/or subject us to fines, payment of damages, lawsuits or restrictions on our use or transfer of personal information.

We are subject to environmental laws and potential exposure to environmental liabilities.
 
We are subject to various federal, state and local environmental laws and regulations that govern our operations, including emissions and discharges into the environment, and the handling and disposal of hazardous and non-hazardous substances and wastes. Failure to comply with such laws and regulations could result in costs for corrective action, penalties or the imposition of other liabilities or restrictions. We also are subject to laws and regulations that impose liability and clean-up responsibility for releases of hazardous substances into the environment. Under certain of these laws and regulations, a current or previous owner or operator of property may be liable for the costs of remediating contaminated soil or groundwater on or from its property, without regard to whether the owner or operator knew of, or caused, the contamination, as well as incur liability to third parties impacted by such contamination. The presence of contamination, or failure to remediate it properly, may adversely affect our ability to use, sell or rent property. To date, none of these matters or other matters arising under environmental laws has had a material adverse effect on our business, financial condition, or results of operations; however, there can be no assurance that such matters will not have such an effect in the future. 

The concentration and evolution of the slot machine manufacturing industry could impose additional costs on us.
 
A majority of our revenues are attributable to slot machines and related systems operated by us at our gaming facilities. It is important, for competitive reasons, that we offer popular and up-to-date slot machine games to our customers.
 
A substantial majority of the slot machines sold in the U.S. in recent years were manufactured by only a few companies, and there has been recent consolidation activity within the gaming equipment sector.
 
In recent years, slot machine manufacturers have frequently refused to sell slot machines featuring the most popular games, instead requiring participation lease arrangements. Participation slot machine leasing arrangements typically often require the payment of a fixed daily rental or a percentage payment of coin-in or net win. Generally, a participation lease is substantially more expensive over the long term than the cost to purchase a new machine.
 
For competitive reasons, we may be forced to purchase new slot machines or enter into participation lease arrangements that are more expensive than our current costs associated with the continued operation of our existing slot machines. If the newer slot machines do not result in sufficient incremental revenues to offset the increased investment and participation lease costs, it could hurt our profitability.
 
We are subject to litigation which, if adversely determined, could cause us to incur substantial losses.
 
From time to time during the normal course of operating our businesses, we are subject to various litigation claims and legal disputes. Some of the litigation claims may not be covered under our insurance policies, or our insurance carriers may seek to deny coverage. As a result, we might also be required to incur significant legal fees, which may have a material adverse effect on our financial position. In addition, because we cannot accurately predict the outcome of any action, it is possible that, as a result of current and/or future litigation, we will be subject to adverse judgments or settlements that could significantly reduce our earnings or result in losses.
 

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The market price for our common stock may be volatile, and investors may not be able to sell our stock at a favorable price or at all.
 
Many factors could cause the market price of our common stock to rise and fall, including:

actual or anticipated variations in our quarterly results of operations;
change in market valuations of companies in our industry;
change in expectations of future financial performance;
regulatory changes;
fluctuations in stock market prices and volumes;
issuance of common stock market prices and volumes;
the addition or departure of key personnel; and
announcements by us or our competitors of acquisitions, investments, dispositions, joint ventures or other significant business decisions. 

In addition, the stock market in general has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to companies’ operating performance. Broad market and industry factors may materially harm the market price of our common stock, regardless of our operating performance. In the past, following periods of volatility in the market price of a company’s securities, shareholder derivative lawsuits and/or securities class-action litigation has sometimes been instituted against that company. Such litigation, if instituted against us, could result in substantial costs and a diversion of management’s attention and resources.    

Stockholders may be required to dispose of their shares of our common stock if they are found unsuitable by gaming authorities.

While gaming authorities generally focus on shareholders with more than 5% and often 10% of a company’s shares, such authorities generally can require that any beneficial owner of our common stock and other securities file an application for a finding of suitability. If a gaming authority requires a record or beneficial owner of our securities to file a suitability application, the owner must apply for a finding of suitability within 30 days or at an earlier time prescribed by the gaming authority. The gaming authority has the power to investigate an owner’s suitability and the owner must pay all costs of the investigation. If the owner is found unsuitable, then the owner may be required by law to dispose of our securities. Our certificate of incorporation also provides us with the right to repurchase shares of our common stock from certain beneficial owners declared by gaming regulators to be unsuitable holders of our equity securities. The price we may pay to any such beneficial owner may be below the price such beneficial owner would otherwise accept for his or her shares of our common stock.    
    
Item 1B. Unresolved Staff Comments.
Not applicable.

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Item 2. Properties.
 Substantially all of our assets collateralize our indebtedness, as discussed in Note 6 to the consolidated financial statements set forth in “Item 8. Financial Statements and Supplementary Data.”
 
Silver Slipper Casino and Hotel
We own the facilities and related improvements at the Silver Slipper Casino and Hotel in Hancock County, Mississippi. The property at year-end offered 920 slot machines and 26 table games, a surface parking lot, an estimated 800-space parking garage and a 129-room hotel. The casino and hotel are located on 38 acres of leased land, including 31 acres of protected marshlands. The lease expires on April 30, 2058 and contains a purchase option that can be exercised from February 2019 through October 2027. Rent under the lease was $1.5 million in 2018 (see Note 9 to the consolidated financial statements set forth in “Item 8. Financial Statements and Supplementary Data”). As of 2019, we are able to exercise our buyout option for $15.5 million plus a retained interest in the property’s operations of 3% of net income (as defined in the lease), for 10 years from the purchase date. We also lease approximately 5.7 acres of land occupied by offices and warehouse space that are approximately four miles from our casino, as well as small parcels of land with a building and sign. We also manage a 37-space beachfront RV park under a management agreement, which expires on March 31, 2020, unless canceled by either party.

Bronco Billy’s Casino and Hotel

Bronco Billy’s Casino and Hotel is located on or near approximately 3.6 acres of owned land and 2.4 acres of leased land that we control in Cripple Creek, Colorado. The property includes 36 hotel rooms and several acres of surface parking. A portion of the casino and parking lots are subject to a long-term lease that includes renewal options in three-year increments to 2035 and a purchase option that can be exercised at any time during the lease term. The purchase price under such option remains at $7.6 million throughout the lease. Base rent paid in 2018 was $300,000, and such rent escalates through the term of the lease according to a defined schedule. During 2018, we purchased the operating historic Imperial Hotel and other nearby parcels of land. In August 2018, we commenced a lease of the freestanding Imperial Casino. As part of our planned expansion of Bronco Billy’s, we refurbished and rebranded both the Imperial Hotel and Imperial Casino together as the Christmas Casino & Inn in November 2018. In terms of gaming devices located throughout our property, the Christmas Casino accounted for 16% of our slot machines at year-end, with the remaining 84% of slot machines at Bronco Billy’s Casino. Combined, our Cripple Creek operations currently offer 885 slot machines and 10 table games as of year-end.

Rising Star Casino Resort
We own the Rising Star Casino Resort in Rising Sun, Indiana. At year-end, the property consisted of a dockside riverboat on the Ohio River offering 917 slot machines and 25 table games, a land-based pavilion with approximately 30,000 square feet of meeting and convention space, a 190-room hotel, a 56-space RV park, surface parking and an 18-hole golf course on approximately 311 acres. Additionally, we lease a 104-room hotel pursuant to a capital lease that expires in October 2027 and contains a bargain purchase option for $1 if exercised upon maturity of the lease. We also own 1.3 acres in Burlington, Kentucky, from where we commenced ferry boat operations in September 2018; the ferry service connects our Rising Star property in Indiana to the more populous Boone County, Kentucky.
Stockman’s Casino
Included as part of our Northern Nevada segment, we own Stockman’s Casino, located on approximately five acres in Fallon, Nevada. The facility offers 225 slot machines and four table games as of year-end, a bar, a fine-dining restaurant and a coffee shop, and approximately 300 surface parking spaces.
 
Grand Lodge Casino

Included as part of our Northern Nevada segment, the Grand Lodge Casino at year-end offered 270 slot machines and 17 table games, and is integrated into the Hyatt Regency Lake Tahoe Resort, Spa and Casino in Incline Village, Nevada on the north shore of Lake Tahoe.  We operate Grand Lodge Casino pursuant to a lease with Hyatt expiring on August 31, 2023 and own the personal property, including slot machines. The lease is secured by our interests under such lease, consisting of certain collateral (as defined and described in a security agreement), and is subordinate to our Notes due 2024.  Beginning on January 1, 2019, Hyatt has an option to purchase our leasehold interest and operating assets of the Grand Lodge Casino at a defined price based partially on earnings.
    
Additionally, we have agreements with Hyatt that allow us to provide rooms, as well as other amenities and services, to our guests at mutually agreeable rates to support our operations.

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Corporate
We lease 4,479 square feet of corporate office space in Las Vegas, Nevada pursuant to a lease that expires in January 2025.

Item 3. Legal Proceedings.
We are subject to various legal and administrative proceedings relating to personal injuries, employment matters, commercial transactions and other matters arising in the normal course of business. We do not believe that the outcome of these matters will have a material adverse effect on our financial position, results of operations or cash flows. We maintain what we believe is adequate insurance coverage to further mitigate the risks of such potential negative effects.

Item 4. Mine Safety Disclosures.
Not applicable.

25



PART II
 
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
 
Our common stock is traded on the Nasdaq Capital Market under the symbol “FLL.”  
 
On March 11, 2019, we had 83 “registered holders” of record of our common stock. We believe that a substantial number of shareholders hold their common stock in “street name” or are otherwise beneficial holders whose shares of record are held by banks, brokers, and other financial institutions. Such holders are not included in the number of “registered holders” above.
 
Dividend Policy
 
We have not paid any dividends on our common stock to date. The payment of dividends in the future will be contingent upon our revenues and earnings, if any; the terms of our indebtedness; our capital requirements; growth opportunities; and general financial condition. Our debt covenants restrict the payment of dividends and it is the present intention of our board of directors to retain all earnings, if any, for use in our business operations, debt reduction and growth initiatives, reinvesting such earnings on behalf of shareholders. Accordingly, we do not anticipate paying any dividends in the foreseeable future.
 
Item 6.  Selected Financial Data.
 
As a smaller reporting company, as defined by Rule 12b-2 of the Exchange Act, we are not required to provide the information required by this Item.
 
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion of our results of operations and financial condition should be read together with the other financial information and consolidated financial statements included in this Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from the results anticipated in the forward-looking statements as a result of a variety of factors, including those discussed in Item 1A. “Risk Factors” and elsewhere in this report. The results of operations for the periods reflected herein are not necessarily indicative of results that may be expected for future periods. Full House Resorts, Inc., together with its subsidiaries, may be referred to as “Full House,” the “Company,” “we,” “our” or “us”.
 
Executive Overview
 
Our primary business is the ownership and/or operation of casino and related hospitality and entertainment facilities, which includes offering casino gambling, hotel accommodations, dining, golfing, RV camping, sports betting, entertainment and retail outlets, among other amenities. We own or operate five casino properties in four states – Mississippi, Colorado, Indiana and Nevada. We view our Mississippi, Colorado and Indiana properties as distinct operating segments and both of our Nevada properties as one operating segment.
 
Our portfolio consists of the following:
Property
 
Acquisition
Date
 
Location
Silver Slipper Casino and Hotel
 
2012
 
Hancock County, MS
(near New Orleans)
Bronco Billy’s Casino and Hotel
 
2016
 
Cripple Creek, CO
(near Colorado Springs)
Rising Star Casino Resort
 
2011
 
Rising Sun, IN
(near Cincinnati)
Stockman’s Casino
 
2007
 
Fallon, NV
(one hour east of Reno)
Grand Lodge Casino (leased and part of the Hyatt Regency Lake Tahoe Resort, Spa and Casino)
 
2011
 
Incline Village, NV
(North Shore of Lake Tahoe)


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Our financial results are dependent upon the number of patrons that we attract to our properties and the amounts those guests spend per visit. While we provide credit at some of our casinos where we are permitted to by gaming regulations, most of our revenues are cash-based, through customers wagering with cash or paying for non-gaming services with cash or credit cards. Our revenues are primarily derived from slot machines, but also include other gaming activities, along with table games, keno and sports betting. In addition, we derive a significant amount of revenue from our hotels and our food and beverage outlets. We also derive revenues from our golf course and ferry boat service at Rising Star, our RV parks as owned at Rising Star and managed at Silver Slipper, and retail outlets and entertainment.

We often provide hotel rooms and food and beverages to customers on a complimentary basis. Prior to 2018, the retail value of such services was included in the respective revenue classifications and then deducted as promotional allowances to calculate net revenues. With the adoption of the new revenue recognition standard discussed below, amounts historically included in the promotional allowances line have been eliminated as they are now included as a contra-revenue, primarily reducing our casino revenues. Hence, beginning in 2018, our hotel, food and beverage revenues reflect the retail value of such services, including such services provided on a complimentary basis, while our casino revenues are net of the retail value of services provided to casino customers on a complimentary basis.

We may experience significant fluctuations in our quarterly operating results due to seasonality, variations in gaming hold percentages and other factors. Consequently, our operating results for any quarter or year are not necessarily comparable and may not be indicative of results in future periods. 

Our market environment is highly competitive and capital-intensive. We rely on the ability of our properties to generate operating cash flow to pay interest, repay debt, and fund maintenance and certain growth-related capital expenditures. We continuously focus on improving the operating margins of our existing properties through a combination of revenue growth and expense management. We also assess growth and development opportunities, which include capital investments at our existing properties, the development of new properties, and the acquisition of existing properties.

Recent Developments

Bronco Billy’s Expansion. In 2018, we began our expansion of Bronco Billy’s, which we anticipate completing in two phases. Phase One of the Bronco Billy’s expansion project includes the construction of a 319-space parking garage and connector building, the purchase of the Imperial Hotel (which we acquired in June 2018) and certain other nearby parcels of land, and the reopening and rebranding of the Imperial Casino and Hotel as the Christmas Casino & Inn (which occurred in November 2018). Phase Two of the Bronco Billy’s expansion project, which is expected to include a new luxury hotel tower, spa, convention and entertainment space, and two new restaurants, is contingent upon receipt of financing on acceptable terms, among other contingencies.

Debt Refinancing. In February 2018, we issued $100 million of new senior secured notes due 2024 (the “Notes”). The proceeds were used to fund the repayment of our outstanding First Lien and Second Lien Credit Facilities, the associated refinancing costs, and to provide for working capital needs, capital expenditures, and general corporate purposes.

Racetrack Proposal. The New Mexico Racing Commission (the “Commission”) recently announced a competitive process regarding the issuance of the state’s sixth racing license. In accordance with that process, we formally presented our racetrack casino proposal (“La Posada del Llano”) to the Commission in October 2018 and answered additional questions regarding our project in November 2018. If selected by the Commission, La Posada del Llano is expected to include a racetrack featuring a unique “Moving Grandstand,” an 18-hole championship golf course, a casino with up to 750 slot machines, and a 300-guestroom hotel, among other amenities. Due to litigation filed against the Commission by one of the other applicants, it is uncertain when the Commission will make a decision regarding the issuance of the racetrack license.

Key Performance Indicators

We use several key performance indicators to evaluate the operations of our properties. These key performance indicators include the following:

Gaming revenue indicators:

Slot coin-in is the gross dollar amount wagered in slot machines and table game drop is the total amount of cash or credit exchanged into chips at table games for use by our customers. Slot coin-in and table game drop are indicators of volume.


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Slot win is the difference between customer wagers and customer winnings on slot machines. Table game hold is the difference between the amount of money or markers exchanged into chips at the tables and customer winnings paid. Slot win and table game hold percentages represent the relationship between slot win and coin-in and table game win and drop.

Room revenue indicators:

Hotel occupancy rate is an indicator of the utilization of our available rooms. Complimentary room sales, or the retail value of accommodations furnished to customers free of charge, are included in the calculation of the hotel occupancy rate.
    
Adjusted EBITDA, Adjusted Property EBITDA and Adjusted Property EBITDA Margin:

Management uses Adjusted EBITDA as a measure of our performance. For a description of Adjusted EBITDA see “Non-GAAP Measure.” We utilize Adjusted Property EBITDA as the measure of segment profit in assessing performance and allocating resources at the reportable segment level. For information regarding our operating segments, see Note 13 to the consolidated financial statements set forth in “Item 8. Financial Statements and Supplementary Data.” Additionally, we use Adjusted Property EBITDA Margin, which is calculated by dividing Adjusted Property EBITDA by the property’s net revenues.

Results of Operations – 2018 Compared to 2017

Consolidated operating results

The following summarizes our consolidated operating results for the years ended December 31, 2018 and 2017. We adopted Accounting Standards Codification 606 for Revenue from Contracts with Customers (“ASC 606”) on January 1, 2018. See Note 2 to the consolidated financial statements set forth in “Item 8. Financial Statements and Supplementary Data,” or “Note 2,” for more information regarding this new revenue recognition standard, as well as a summary of its effects on our revenues and expenses. We do not expect that this new revenue recognition standard will have an aggregate material impact on operating income, net income, or cash flows on an ongoing basis. However, due to the adoption of the new revenue recognition standard, departmental revenues and expenses varied significantly between years due to reclassifications between the various departments, in addition to other changes discussed in Note 2.

(In thousands)
For the Years Ended December 31,
 
Difference
 
2018
 
2017
 
Percent
 
Total
 
ASC 606
 
Other
Net revenues
$
163,876

 
$
161,267

 
1.6
 %
 
$
2,609

 
$
(892
)
 
$
3,501

Operating expenses
156,450

 
154,210

 
1.5
 %
 
2,240

 
(871
)
 
3,111

Operating income
7,426

 
7,057

 
5.2
 %
 
369

 
(21
)
 
390

Interest and other non-operating expenses, net
11,321

 
12,235

 
(7.5
)%
 
(914
)
 

 
(914
)
Income tax expense (benefit)
476

 
(150
)
 
(417.3
)%
 
626

 

 
626

Net loss
$
(4,371
)
 
$
(5,028
)
 
(13.1
)%
 
$
657

 
$
(21
)
 
$
678



The following table details our net revenues for the twelve months ended December 31, 2018 and 2017, which are comprised of casino and non-casino operations. Non-casino revenues for the year ended December 31, 2017 are shown below as net of promotional allowances. Revenues for the year ended December 31, 2018 reflect the new accounting standard, where the retail value of complimentary services is a reduction to casino revenues, while non-casino revenues reflect the retail value of both complimentary and non-complimentary services. The table shows that most of the differences between the periods in each of these categories is related to the implementation of ASC 606. See Note 2 for more information.


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(In thousands)
For the Years Ended December 31,
 
Difference
 
2018
 
2017
 
Percent
 
Total
 
ASC 606
 
Other
Casino revenues
 
 
 
 
 
 
 
 
 
 
 
Slots
$
94,978

 
$
125,329

 
(24.2
)%
 
$
(30,351
)
 
$
(33,053
)
 
$
2,702

Table games
18,202

 
18,702

 
(2.7
)%
 
(500
)
 

 
(500
)
Other
1,133

 
464

 
144.2
 %
 
669

 

 
669

 
114,313


144,495

 
(20.9
)%
 
(30,182
)
 
(33,053
)
 
2,871

 
 
 
 
 
 
 
 
 
 
 
 
Non-casino revenues, net
 
 
 
 
 
 
 
 
 
 
 
Food and beverage
35,058

 
11,869

 
195.4
 %
 
23,189

 
22,704

 
485

Hotel
9,864

 
1,686

 
485.1
 %
 
8,178

 
8,172

 
6

Other
4,641

 
3,217

 
44.3
 %
 
1,424

 
1,285

 
139

 
49,563

 
16,772

 
195.5
 %
 
32,791

 
32,161

 
630

Total net revenues
$
163,876

 
$
161,267

 
1.6
 %
 
$
2,609

 
$
(892
)
 
$
3,501



The following discussion is based on our consolidated financial statements for the years ended December 31, 2018 and 2017, unless otherwise described. For further discussions, refer to “Operating results – reportable segments” below.

Revenues. As indicated in the above table, net revenues increased 1.6%, despite the $0.9 million impact of the adoption of the new revenue recognition standard in 2018. The accounting change had the greatest impact on net revenues for Grand Lodge Casino, a part of our Northern Nevada segment, as third-party payments for hotel guestrooms, food, and beverages are now classified as offsets to casino revenue; whereas in 2017, they were charged to operating expenses under legacy revenue recognition standards. Rising Star was the least affected by ASC 606 during the year, but had declines in net revenues due to significant weather issues particularly in the first quarter, which reduced gaming volumes for the local casino market in southeastern Indiana as a whole.

Our other properties achieved gains from improved marketing and a full year’s worth of new amenities and other improvements, as well as significantly improved weather in the fourth quarter of 2018. Net revenues at Bronco Billy’s increased due to the acquisition of the Imperial Hotel in June 2018 and Imperial Casino in August 2018 (collectively rebranded in November 2018 as the Christmas Casino & Inn), a full year of the Crippled Cow restaurant (which opened in mid-2017), and increased covers at other venues. At Silver Slipper, new marketing initiatives helped increase net revenues in both gaming and non-gaming operations, as did a full year of operations at the property’s new Beach Club and Oyster Bar.

Operating expenses. Expenses for individual departments varied significantly due to the new revenue recognition standard, which no longer requires us to reclassify the estimated cost of providing complimentaries to a gaming customer from other expense categories to casino expenses. See Note 2 for more details regarding the new revenue recognition standard, which impacted reporting for casino expenses by $(30.2) million, food and beverage expenses by $26.3 million, hotel expenses by $9.0 million, and other operations by $1.4 million. Additionally, operating expenses increased primarily due to increased volumes, through both additional guests and a full-year of additional amenities, as described in further detail in the segment section below. Marketing expenses also increased, primarily at Bronco Billy’s due to improvements in the loyalty program.
    
Apart from the new revenue recognition standard, project development and acquisition costs increased by $0.6 million during 2018, reflecting our participation in the competitive process to develop a racetrack casino in New Mexico, our development efforts in Terre Haute, and elsewhere. Preopening costs increased by $0.3 million and were related to our new ferry boat operations at Rising Star and the Christmas Casino & Inn launch at Bronco Billy’s.


29



Interest and other non-operating expense, net.

Interest Expense

(In thousands)
For the Years Ended December 31,
 
2018
 
2017
Interest cost (excluding loan fee amortization)
$
9,716

 
$
10,104

Amortization of debt issuance costs and discount
790

 
882

Change in fair value of interest rate cap agreement
146

 

Capitalized interest
(346
)
 
(130
)
 
$
10,306

 
$
10,856


Interest expense decreased primarily due to the refinancing of our debt in February 2018, which resulted in a lower effective interest rate than our prior credit facilities, and increased capitalization of interest expense during 2018 from our growth projects.

Other non-operating expense, net    

During 2018, we incurred $1.0 million of other non-operating expense due primarily to the February 2018 refinancing of our prior credit facilities, which resulted in a $2.7 million loss on extinguishment of debt. This expense was partly offset by a $1.7 million gain from the non-cash fair value adjustment of our common stock warrant liability. The common stock warrant liability is adjusted to fair value each quarter. During 2017, other non-operating expense was $1.4 million, due to the fair value adjustments to our warrants. The decrease in fair value during 2018 primarily related to the decrease in our share price during that period.

Income taxes. Our effective income tax rate for the years ended December 31, 2018 and 2017 was (12.2)% and 2.9%, respectively. Our tax rate differs from the statutory rate of 21.0% primarily due to the effects of changes in tax law, changes in valuation allowance, and items that are permanently treated differently for generally accepted accounting principles in the United States of America (“GAAP”) and tax purposes. During 2018, we continued to provide a valuation allowance against our deferred tax assets, net of any available deferred tax liabilities. In future years, if it is determined that we meet the “more likely than not” threshold of utilizing our deferred tax assets, we may reverse some or all of our valuation allowance against our deferred tax assets.

On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted which, beginning in 2018, reduced the maximum corporate statutory rate from 35% to 21%. As of the date of enactment, we reduced our federal deferred tax assets and related valuation allowance for the new statutory rate, resulting in an income tax benefit of $0.9 million in 2017.
Additionally, Staff Accounting Bulletin No. 118 (“SAB 118”) was issued to address the application of GAAP in situations when a company does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. December 22, 2018 marked the end of the measurement period for purposes of SAB 118. As such, we have completed our analysis based on legislative updates relating to the Tax Act currently available. This resulted in no additional SAB 118 tax benefit or cost for the year ended December 31, 2018.

We do not expect to pay any federal income taxes or receive any federal tax refunds related to our 2018 results of operations. Tax losses incurred in 2018 may shelter taxable income in future years, but because of the level of uncertainty regarding sufficient prospective taxable income, we maintain a valuation allowance against our deferred tax assets, as mentioned above.

See Note 8 to the consolidated financial statements set forth in “Item 8. Financial Statements and Supplementary Data”, for a more detailed discussion. 

Operating results – reportable segments

We manage our casinos based on geographic regions within the United States. Accordingly, Stockman’s and Grand Lodge Casino comprise our Northern Nevada business segment, while Silver Slipper, Bronco Billy’s and Rising Star are currently distinct segments. With the addition of ferry boat operations in September 2018, our Rising Star segment now includes ferry boat operations between Indiana and Kentucky. In November 2018, we opened the Christmas Casino & Inn in Cripple Creek, Colorado, which is included in the Bronco Billy’s segment.
 

30



The following table presents detail by segment of our consolidated net revenue and Adjusted EBITDA. Management uses Adjusted Property EBITDA as its measure of segment profit. The comparability of the information for the periods presented was not materially affected by the implementation of the new revenue recognition standard.
 
(In Thousands)
For the Years Ended December 31,
 
 
 
2018
 
2017
 
Percent Change
Net Revenues
 
 
 
 
 
Silver Slipper Casino and Hotel
$
69,350

 
$
64,046

 
8.3
 %
Rising Star Casino Resort
47,966

 
49,751

 
(3.6
)%
Bronco Billy's Casino and Hotel
26,931

 
26,222

 
2.7
 %
Northern Nevada Casinos
19,629

 
21,248

 
(7.6
)%
 
$
163,876

 
$
161,267

 
1.6
 %
Adjusted Property EBITDA and Adjusted EBITDA
 
 
 

 
 

Silver Slipper Casino and Hotel
$
12,126

 
$
10,733

 
13.0
 %
Rising Star Casino Resort
2,806

 
2,678

 
4.8
 %
Bronco Billy's Casino and Hotel
3,919

 
4,758

 
(17.6
)%
Northern Nevada Casinos
3,375

 
2,789

 
21.0
 %
Adjusted Property EBITDA
22,226

 
20,958

 
6.1
 %
Corporate
(4,575
)
 
(4,491
)
 
(1.9
)%
Adjusted EBITDA
$
17,651

 
$
16,467

 
7.2
 %
 

Silver Slipper Casino and Hotel
    
Net revenues increased during 2018 due to successful marketing initiatives, the addition of sports book operations in August 2018, the ramp-up of new amenities that opened in mid-2017, and improved weather versus the prior year, particularly in the fourth quarter.

Under the new revenue recognition standard, departmental revenues and expenses varied significantly due to reclassifications between the various departments, as well as other changes discussed in Note 2. Apart from this accounting change, slot revenues, which accounted for approximately 88% of our casino revenue, increased by 6.3%. Meanwhile, table games revenue increased by 5.8%.

Apart from the accounting change, food and beverage revenues grew 7.4% during the year. Hotel occupancy was 91.7% compared to 88.3% in the prior year. In addition to the sports book operations mentioned above, 2018 also reflects a full year of new amenities at the property, including the Beach Club and the Oyster Bar, which both opened in mid-2017.

Adjusted Property EBITDA increased by 13.0% to $12.1 million in 2018, primarily from the growth in net revenue described above. Of note, Adjusted Property EBITDA in September 2017 included settlement proceeds of $675,000 related to the conclusion of litigation for construction defects at our parking garage, of which there was no comparable non-recurring credit or charge in 2018. Adjusted Property EBITDA margin was 17.5% in 2018 compared to 16.8% in 2017.

Rising Star Casino Resort

Net revenues decreased during 2018 due to adverse weather conditions, most notably during the first quarter from approximately 21 days of heavy snowfall, as well as two days when the casino was closed due to the flooding of nearby access roads. This affected guest volumes, as reflected in a 3.6% decrease of slot coin-in during the year.

Absent the accounting change, slot revenues decreased by 2.7% and table games revenues decreased by 10.3% due to lower volumes, while promotional allowances decreased by 7.9%. Non-gaming net revenues decreased by 2.0% during 2018, in part reflecting a temporary reduction in the number of available room-nights due to hotel improvements during the year. Average daily room rate remained flat.


31



Though our net revenues decreased compared to prior year, Adjusted Property EBITDA increased to $2.8 million from $2.7 million due to improved efficiencies driven by new management, a focus on cost controls, and savings from streamlining labor.

During the second half of 2018, we completed certain maintenance and growth-related capital expenditure projects, which were designed to improve the guest experience and to drive visitation, revenue and income growth. In July 2018, we completed improvements made to the entry pavilion and the adjoining hotel’s lobby and hallways. In September 2018, we completed the new access roads to the ferry landing sites and commenced implementation of a 10-vehicle ferry boat service to Kentucky as mentioned above, which significantly shortened the distance for customers traveling from the more populous Boone County, Kentucky to Rising Star. We invested a total of approximately $4.9 million with respect to the foregoing improvements at Rising Star in 2018.

Bronco Billy’s Casino and Hotel

Higher gaming volumes, new restaurant outlets, and the opening of the rebranded Christmas Casino & Inn resulted in increases to both our casino revenues and non-gaming revenues in 2018, as discussed in more detail below.

Absent the accounting change noted above, slot revenues increased slightly by 0.3% due to higher volumes brought on by the opening of our Christmas Casino in November 2018. However, table games revenue decreased by 1.6% due to lower volumes.

Apart from the accounting change, food and beverage revenues increased by 5.7% during 2018, reflecting a full year of revenue generated from the Crippled Cow outlet, which opened in mid-2017, as well as Rudy’s Diner and an additional bar at the Christmas Casino, which opened in November 2018. Hotel revenues increased by 18.4% resulting from our acquisition of the Imperial Hotel in June 2018, which increased the total number of hotel rooms at Bronco Billy’s from 24 to 36 guestrooms. In November 2018, we rebranded the Imperial Hotel and reopened the Imperial Casino, together as the Christmas Casino & Inn.

Adjusted Property EBITDA decreased by 17.6% due to rising operational costs. These costs included higher promotional expenses related to changes in the accruals for the property’s loyalty marketing program. Operational costs were also affected by an increase in the state’s minimum wage, as well as the additional labor needed for the Christmas Casino & Inn.

As discussed in the “Executive Overview” and “Liquidity & Capital Resources” sections, progress continues on our planned expansion of Bronco Billy’s Casino and Hotel.

Northern Nevada

Our Northern Nevada operations have historically been seasonal, with the summer months accounting for a disproportionate share of its annual revenues. Additionally, snowfall levels during the winter months also frequently have a positive or negative effect. Grand Lodge Casino is located near several ski resorts, including Alpine Meadows, Northstar and Squaw Valley. Normally, we benefit from a “good” snow year, resulting in extended periods of operation at the nearby ski areas.

Net revenues decreased in 2018 primarily due to the impact of the new revenue recognition standard. The impact is different here than at our other properties, as many of the complimentary services we provide to our customers are paid for by us, but are actually provided by our landlord, Hyatt. During 2018, promotional allowances provided by third-parties (principally Hyatt) were directly netted against casino revenues at Grand Lodge Casino, while in 2017, they were charged to operating expenses under the prior revenue recognition standards. A similar reclassification was related to the use of hotel rooms at the Hyatt Lake Tahoe, which we provided to gaming customers on a complimentary basis.

At Stockman’s Casino, construction at the nearby Navy base adversely affected business, as fewer air training groups were in town, which led to a decline in gaming volume.

Absent the accounting change, slot revenues in our Northern Nevada division increased, with both slot coin-in and win increasing and slot hold percentage remaining relatively flat. Though table games revenue decreased slightly, our overall casino revenue increased during the year by 1.6%.

Regarding non-gaming net revenues, which within the division are primarily at Stockman’s, food and beverage revenue increased by 9.7%, reflecting the completion of construction at the property and improved products.


32



Adjusted Property EBITDA in Northern Nevada increased by 21.0%, reflecting the completion of a significant renovation of Grand Lodge Casino in mid-2017, as well as exterior improvements, improved parking access at Stockman’s Casino, and a focus on controlling costs. Additionally, an improved ski season at Grand Lodge Casino in the fourth quarter of 2018 benefited results.

Corporate

Corporate expenses increased slightly by 1.9% in 2018 due primarily to increases in legal and professional fees, and salaries and benefits.

Non-GAAP Measure    

“Adjusted EBITDA” is earnings before interest and other non-operating income (expense), taxes, depreciation and amortization, preopening expenses, impairment charges, asset write-offs, recoveries, gain (loss) from asset disposals, project development and acquisition costs, and non-cash share-based compensation expense. Adjusted EBITDA information is presented solely as supplemental disclosure to measures reported in accordance with generally accepted accounting principles in the United States of America (“GAAP”) because management believes this measure is (i) a widely used measure of operating performance in the gaming and hospitality industries and (ii) a principal basis for valuation of gaming and hospitality companies. In addition, a version of Adjusted EBITDA (known as Consolidated EBITDA) is utilized in the covenants within our indenture, although not necessarily defined in the same way as above. Adjusted EBITDA is not, however, a measure of financial performance or liquidity under GAAP. Accordingly, this measure should be considered supplemental and not a substitute for net income (loss) or cash flows as an indicator of the Company’s operating performance or liquidity.
The following table presents a reconciliation of net loss to Adjusted EBITDA:

(In thousands)
For the Years Ended December 31,
 
2018
 
2017
Net loss
$
(4,371
)
 
$
(5,028
)
Income tax expense (benefit)
476

 
(150
)
Interest expense, net of amounts capitalized
10,306

 
10,856

Loss on extinguishment of debt
2,673

 

Adjustment to fair value of warrants
(1,671
)
 
1,379

Other
13

 

Preopening costs
274

 

Project development and acquisition costs
843

 
284

Depreciation and amortization
8,397

 
8,602

Loss (gain) on disposal of assets, net
79

 
(1
)
Stock-based compensation
632

 
525

Adjusted EBITDA
$
17,651

 
$
16,467




33



The following tables present reconciliations of operating income (loss) to Adjusted Property EBITDA and Adjusted EBITDA:
For the Year Ended December 31, 2018
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating
Income (Loss)
 
Depreciation
and
Amortization
 
Loss on Disposal of Assets
 
Preopening Costs
 
Project Development
and
Acquisition
Costs
 
Stock-Based Compensation
 
Adjusted Property EBITDA and Adjusted
EBITDA
Casino properties
 
 
 
 
 
 
 
 
 
 
 
 
 
Silver Slipper Casino and Hotel
$
8,784

 
$
3,341

 
$
1

 
$

 
$

 
$

 
$
12,126

Rising Star Casino Resort
150

 
2,511

 
9

 
136

 

 

 
2,806

Bronco Billy's Casino and Hotel
2,095

 
1,617

 
69

 
138

 

 

 
3,919

Northern Nevada Casinos
2,602

 
773

 

 

 

 

 
3,375

 
13,631

 
8,242

 
79

 
274

 

 

 
22,226

Other operations
 

 
 
 
 

 
 

 
 

 
 

 
 

Corporate
(6,205
)
 
155

 

 

 
843

 
632

 
(4,575
)
 
(6,205
)
 
155

 

 

 
843

 
632

 
(4,575
)
 
$
7,426

 
$
8,397

 
$
79

 
$
274

 
$
843

 
$
632

 
$
17,651

 
For the Year Ended December 31, 2017
(In thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating
Income (Loss)
 
Depreciation
and
Amortization
 
Loss (Gain) on Disposal of Assets
 
Preopening Costs
 
Project Development
and
Acquisition
Costs
 
Stock-Based Compensation
 
Adjusted Property EBITDA and Adjusted
EBITDA
Casino properties
 
 
 
 
 
 
 
 
 
 
 
 
 
Silver Slipper Casino and Hotel
$
7,355

 
$
3,370

 
$
8

 
$

 
$

 
$

 
$
10,733

Rising Star Casino Resort
181

 
2,497

 

 

 

 

 
2,678

Bronco Billy's Casino and Hotel
2,889

 
1,875

 
(6
)
 

 

 

 
4,758

Northern Nevada Casinos
2,029

 
766

 
(6
)
 

 

 

 
2,789

 
12,454

 
8,508

 
(4
)
 

 

 

 
20,958

Other operations
 

 
 

 
 
 
 

 
 

 
 
 
 

Corporate
(5,397
)
 
94

 
3

 

 
284

 
525

 
(4,491
)
 
(5,397
)
 
94

 
3

 

 
284

 
525

 
(4,491
)
 
$
7,057

 
$
8,602

 
$
(1
)
 
$

 
$
284

 
$
525

 
$
16,467


34



 
Operating expenses deducted to arrive at operating income (loss) in the above tables include facility rents related to: (i) Silver Slipper of $1.6 million in 2018 and $1.5 million in 2017, (ii) Northern Nevada segment of $1.9 million in both 2018 and 2017, and (iii) Bronco Billy’s of $0.4 million in 2018 and $0.3 million in 2017. Capital lease payments of $0.7 million during both 2018 and 2017 related to Rising Star’s smaller hotel are not deducted, as such payments are accounted for as interest expense and amortization of debt related to the capitalized lease.
    
Liquidity and Capital Resources
 
Cash Flows

As of December 31, 2018, we had $20.6 million of unrestricted cash and equivalents. Management currently estimates that approximately $10 million of cash and equivalents is currently required for our day-to-day operations.

Our casinos are our primary sources of income and operating cash flows. There can be no assurance that our business will generate sufficient cash flow from operations or that future borrowings will be available in amounts sufficient to enable us to pay our indebtedness or fund our other liquidity needs. Subject to the effects of the economic uncertainties discussed herein, we believe that adequate financial resources (including from operating cash flows and external debt and equity financing) will be available to fund ongoing operating requirements over the next 12 months; however, there can be no assurances of our ability to obtain additional financing to fund our growth efforts.

Cash flows – operating activities. On a consolidated basis, cash provided by operations during 2018 was $9.8 million compared to $7.1 million in 2017. Trends in our operating cash flows tend to follow trends in operating income, excluding non-cash charges, but are also affected by changes in working capital accounts such as receivables, prepaid expenses, and payables. The increase in our operating cash flows during 2018 compared to 2017 was primarily due to the increase in our operating income and working capital timing differences.

Cash flows – investing activities. On a consolidated basis, cash used in investing activities during 2018 was $17.4 million, which primarily related to several growth projects at our existing properties, including our new ferry boat service at Rising Star, the refurbishment and rebranding of the Christmas Casino & Inn, and development work for the Bronco Billy’s expansion, as well as the purchase of the Imperial Hotel and other land adjacent to Bronco Billy’s. Cash used in investing activities during 2017 was $11.2 million and primarily related to several growth projects at our existing properties, including the Silver Slipper Beach Club, the Oyster Bar at Silver Slipper, and the refurbishment of Grand Lodge Casino.

Cash flows – financing activities. On a consolidated basis, cash provided by financing activities during 2018 was $8.3 million, which primarily related to the proceeds from the registered direct equity offering that we completed in March 2018 and offset by payments related to the refinancing of our credit facilities, loan and lease principal payments, and purchase of an interest rate cap. Cash used in financing activities during 2017 was $3.1 million, primarily related to $2.2 million of First Lien Term Loan payments.

Other Factors Affecting Liquidity

We have significant outstanding debt and contractual obligations in addition to planned capital expenditures. We expect to continue to generate sufficient cash flow to meet our interest requirements and maintain our properties. Our debt matures in February 2024 and we anticipate needing to refinance our debt prior to its maturity, as we are unlikely to generate sufficient cash flow in the interim and be debt-free by such date. Our planned capital expenditures designed to grow the Company will require additional financing, including perhaps, the issuance of additional debt and potentially some form of equity financing. Our operations are subject to financial, economic, competitive, regulatory and other factors, many of which are beyond our control. If we are unable to generate sufficient operating cash flow and/or access the capital markets, we could be required to adopt one or more alternatives, such as reducing, delaying, or eliminating certain planned capital expenditures, selling assets, obtaining additional equity financing, or borrowing at higher costs of capital.

Long-Term Debt. At December 31, 2018, we had $99.0 million of principal indebtedness outstanding from the original $100 million of new senior secured notes due 2024 (the “Notes”). The proceeds from the Notes offering were used to pay off all of our outstanding First and Second Lien Credit Facilities, pay for costs associated with the refinancing, provide ongoing working capital, provide funds for capital expenditures, and for general corporate purposes. We currently estimate, based on current LIBOR rates, that our cash interest expense in 2019 will be approximately $10 million, including the interest component of our capital lease. This estimate is based on our total outstanding debt and applicable interest rates within the next twelve months.


35



Interest Rate Cap Agreement. In connection with the refinancing, we purchased an interest rate cap (“Interest Rate Cap”) for $238,000 on April 6, 2018. We entered into this interest rate derivative with Capital One, N.A. to minimize the effect of interest rate increases on approximately half of our outstanding borrowings with a notional amount of $50 million and strike rate of 3.00%, which resets every three months at the end of March, June, September, and December. The Interest Rate Cap expires on March 31, 2021 and is presented accordingly on our consolidated balance sheet under “Deposits and other” as a non-current asset. See Note 6 to the consolidated financial statements set forth in “Item 8. Financial Statements and Supplementary Data.”

Common Stock Warrants. In 2016, we granted the lenders under the former Second Lien Credit Facility (the “Second Lien Lenders”) warrants representing rights to purchase approximately 1.0 million shares of our common stock at $1.67 per share, the average trading price of our common stock during a 60-day period bracketing the date of issuance. The warrants include redemption rights which allow the warrant-holders, at their option, to require us to repurchase all or a portion of the warrants upon the occurrence of certain triggering events. The refinancing of the Second Lien Credit Facility in February 2018 qualified as a triggering event. As of the date of this filing, the Second Lien Lenders have not exercised these redemption rights, though they may do so on any six-month anniversary of the refinancing date prior to warrant expiration in May 2026. If they do exercise their redemption rights, we have the option of paying them in cash or with a four-year note on terms stipulated in the warrant agreement. Alternatively, the warrant-holders may choose to have us register and sell the shares related to the warrants through a public offering. See Note 6 to the consolidated financial statements set forth in “Item 8. Financial Statements and Supplementary Data” for further information associated with these warrants which could affect our liquidity and capital resources.

Hyatt Option to Purchase our Leasehold Interest and Related Assets. Our lease with Hyatt to operate the Grand Lodge Casino contains an option for Hyatt, as of January 1, 2019, to purchase our leasehold interest and related casino operating assets. See Note 9 to the consolidated financial statements set forth in “Item 8. Financial Statements and Supplementary Data” for further information about this option and related rental commitments that could affect our liquidity and capital resources.

Capital Investments. We have made significant investments through 2018 and expect to make additional capital investments during 2019 and beyond. These investments are designed to improve the guest experience and to drive visitation at our properties, revenue and income growth.

Bronco Billy’s - As discussed above in the “Executive Overview,” we began Phase One of the two-phase expansion of our Bronco Billy’s property with our purchase of the Imperial Hotel in June 2018, along with other nearby parcels of land, and our lease of the Imperial Casino in August 2018. In November 2018, we reopened the Imperial Hotel and Casino as the rebranded Christmas Casino & Inn. The remainder of Phase One includes the construction of a 319-space parking garage and connector building. We estimate that the total cost for Phase One of the expansion is approximately $20 million, which is expected to be funded from cash on hand and expected cash flow from operations. We have invested approximately $5 million in total for Phase One, and expect to invest the balance of $15 million in 2019. We expect to commence construction of the parking garage in the first half of 2019 and to complete such construction by the end of 2019. For Phase Two, we continue to discuss amenities, fixtures, and other related topics with our architects and general contractor in our efforts to execute a guaranteed maximum price contract and finalize an overall budget for the project. We currently expect to begin Phase Two upon the conclusion of Phase One, with completion of the entire expansion project expected in 2021.  However, construction of Phase Two is contingent upon receipt of financing on acceptable terms, among other contingencies.

Silver Slipper - We are planning to remodel the Silver Slipper casino in the second quarter of 2019, which will be the property’s first significant renovation since it opened in 2006. We do not expect renovations to disrupt operations, as our upgrades to the carpeting, wallpaper, and seating within the buffet will occur during periods of low guest traffic. The estimated cost of this renovation is less than $1 million.

Other Capital Expenditures - Additionally, we may fund various other capital expenditure projects, depending on our financial resources. Our capital expenditures may fluctuate due to decisions regarding strategic capital investments in new or existing facilities, and the timing of capital investments to maintain the quality of our properties. No assurance can be given that any of our planned capital expenditure projects will be completed or that any completed projects will be successful. Our annual capital expenditures typically include some number of new slot machines and related equipment; to some extent, we can coordinate such purchases to match our resources.

We evaluate projects based on a number of factors, including profitability forecasts, length of the development period, the regulatory and political environment, and the ability to secure the funding necessary to complete the development or acquisition, among other considerations. No assurance can be given that any additional projects will be pursued or completed or that any completed projects will be successful.     


36



Principal Debt Arrangements

Senior Secured Notes due 2024

On February 2, 2018, we refinanced amounts previously outstanding of $41 million under the First Lien Credit Facility and $55 million under the Second Lien Credit Facility with $100 million of Notes, which we sold to qualified institutional buyers. The Notes are collateralized by substantially all of our assets and are guaranteed by all of our material subsidiaries. 

The Notes bear interest at the greater of the three-month LIBOR or 1.0%, plus a margin rate of 7.0%. The indenture governing the Notes provides for a 50 basis point interest premium if Mr. Lee reduces his equity interests by 50% or more while serving as our CEO. Mr. Lee has no current intention to sell any shares. During the fourth quarter, he purchased 15,000 shares on the open market. Interest on the Notes is payable quarterly in arrears, on March 31, June 30, September 30 and December 31 of each year until the Notes mature in February 2024. On each interest payment date, we are required to make principal payments of $250,000 with a balloon payment for the remaining $94 million due upon maturity.

Mandatory prepayments of the Notes will be required upon the occurrence of certain events, including sales of certain assets. We may redeem the Notes, in whole or in part, at any time at the applicable redemption price plus accrued and unpaid interest. The redemption price may be prepaid at 102% of par through February 1, 2020; 101.5% through February 1, 2021; 100.5% through February 1, 2022; and 100% thereafter.

Covenants

The indenture governing the Notes contains customary representations and warranties, events of default, and positive and negative covenants, including financial covenants. As defined in the indenture, we are required to maintain a total leverage ratio, which measures “Consolidated EBITDA” against outstanding net debt. Additionally, we are allowed to deduct up to $15 million of our cash and equivalents (beyond estimated cash utilized in daily operations) in calculating the numerator of such ratio. For the upcoming year, the total leverage covenant ratio requirements are 5.00x through June 30, 2019 and 4.75x through December 31, 2019.

As of December 31, 2018, we were in compliance with our covenants; however, there can be no assurances that we will remain in compliance with all covenants in the future. See Note 6 to the consolidated financial statements set forth in “Item 8. Financial Statements and Supplementary Data” for more information about our Notes due 2024.

Off-balance Sheet Arrangements
 
We have no off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Securities and Exchange Commission Regulation S-K, that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

Critical Accounting Estimates and Policies
 
Our consolidated financial statements were prepared in conformity with accounting principles generally accepted in the United States of America. Certain of our accounting policies require that we apply significant judgment in defining the appropriate assumptions for calculating estimates that affect reported amounts and disclosures. By their nature, judgments are subject to an inherent degree of uncertainty, and therefore, actual results may differ from our estimates. We believe the following critical accounting policies affect the most significant judgments and estimates used in the preparation of our consolidated financial statements.

Impairment of Long-lived Assets, Goodwill and Indefinite-Lived Intangibles
 
Our long-lived assets include property and equipment, goodwill, and indefinite-lived intangibles, and are evaluated at least annually (and more frequently when circumstances warrant) to determine if events or changes in circumstances indicate that the carrying value may not be recoverable. Examples of such events or changes in circumstances that might indicate impairment testing is warranted might include, as applicable, an adverse change in the legal, regulatory or business climate relative to gaming nationally or in the jurisdictions in which we operate, or a significant long-term decline in historical or forecasted earnings or cash flows or the fair value of our property or business, possibly as a result of competitive or other economic or political factors. In evaluating whether a loss in value is other than temporary, we consider: (i) the length of time and the extent to which the fair value or market value has been less than cost; (ii) the financial condition and near-term prospects of the casino property, including any specific events which may influence the operations; (iii) our intent related to the asset and ability to retain it for a period of time

37



sufficient to allow for any anticipated recovery in fair value; (iv) the condition and trend of the economic cycle; (v) historical and forecasted financial performance; and (vi) trends in the general market.

We review the carrying value of our property and equipment used in our operations whenever events or circumstances indicate that the carrying value of an asset may not be recoverable from estimated future undiscounted cash flows expected to result from its use and eventual disposition. If the undiscounted cash flows exceed the carrying value, no impairment is indicated. If the undiscounted cash flows do not exceed the carrying value, then an impairment is recorded based on the fair value of the asset. Fair value is typically measured using a discounted cash flow model whereby future cash flows are discounted using a weighted-average cost of capital, developed using a standard capital-asset pricing model, based on guideline companies in our industry. 

We test our goodwill and indefinite-lived intangible assets for impairment annually during the fourth quarter or when a triggering event occurs. For our 2018 and 2017 annual impairment tests, we utilized the option to perform a qualitative analysis for our goodwill and indefinite-lived intangibles and concluded it was more likely than not that the fair values of such intangibles exceeded their carrying values. Any impairment charges incurred are not reversed if a subsequent evaluation concludes a higher valuation than the carrying value.
 
Fixed Asset Capitalization and Depreciation Policies
 
We define a fixed asset as a unit of property that (i) has an economic useful life that extends beyond 12 months and (ii) was acquired or produced for a cost greater than $2,500 for a single asset or greater than $5,000 for a group of assets. Property and equipment are stated at cost. For the majority of our property and equipment, cost was determined at the acquisition date based on estimated fair values. We acquired Bronco Billy’s in May 2016, Silver Slipper in October 2012, Rising Star in April 2011 and Stockman’s in January 2007. Project development costs, which are amounts expended on the pursuit of new business opportunities, and acquisition-related costs are expensed as incurred. Maintenance and repairs that neither materially add to the value of the property nor appreciably prolong its life are also expensed as incurred. Depreciation and amortization are provided on a straight-line basis over the estimated useful lives of the assets. When we construct assets, we capitalize direct costs of the project, including fees paid to architects and contractors and property taxes. Salaries are capitalized only for employees working directly on the project. In addition, interest cost associated with major development and construction projects is capitalized as part of the cost of the project. Interest is typically capitalized on amounts expended on the project using the weighted-average cost of our outstanding borrowings. Capitalization of interest starts when construction activities begin and ceases when construction is substantially complete or development activity is suspended for more than a brief period.

We must make estimates and assumptions when accounting for capital expenditures. Whether an expenditure is considered a maintenance expense or a capital asset is sometimes a matter of judgment. When constructing or purchasing assets, we must determine whether existing assets are being replaced or otherwise impaired, which also may be a matter of judgment. In addition, our depreciation expense is highly dependent on the assumptions we make about our assets’ estimated useful lives. We determine the estimated useful lives based on our experience with similar assets, engineering studies, and our estimate of the usage of the asset. Whenever events or circumstances occur, which would change the estimated useful life of an asset, we account for the change prospectively.
 
Goodwill and Business Combinations
 
Goodwill represents the excess of the purchase price over fair value of net tangible and other intangible assets acquired in connection with business combinations. We accounted for our acquisitions of casino properties for Bronco Billy’s, Silver Slipper and Rising Star as business combinations. In a business combination, we determine the fair value of acquired assets, including identifiable intangible assets, assumed liabilities, and non-controlling interests, if any. The fair value of the acquired business is allocated to the acquired assets, assumed liabilities, and non-controlling interests based on their fair value, with any remaining fair value allocated to goodwill. This allocation process requires use of estimates and assumptions, including estimates of future cash flows to be generated by the acquired assets.

Intangible Assets
 
Our indefinite-lived intangible assets primarily include the cost of gaming licenses and trade names. Gaming licenses represent the rights to conduct gaming in certain jurisdictions, and trade names represent the fair value of the casino name’s brand recognition. The value of our gaming licenses were primarily estimated using a derivation of the income approach to valuation. The value of the Bronco Billy’s trade names utilized the “relief from royalty” method, which primarily utilizes comparable royalty agreements to determine value. Indefinite-lived intangible assets are not amortized, unless it is determined that their useful life is no longer indefinite. We periodically review our indefinite-lived assets to determine whether events and circumstances continue

38



to support an indefinite useful life. If it is determined that an indefinite-lived intangible asset has a finite useful life, then the asset is tested for impairment and is subsequently accounted for as a finite-lived intangible asset.
 
Our finite-lived intangible assets include customer loyalty programs, land leases, payments for a lease option and water rights. Finite-lived intangible assets are amortized over the shorter of their contractual or economic useful lives.
 
Customer loyalty programs represent the value of repeat business associated with the casinos’ loyalty programs when we acquired the properties. Such values were determined using a derivation of the income approach to valuation. The valuation analyses for the active-rated players were based on estimated revenues and attrition rates. Silver Slipper Casino and Hotel and Rising Star Casino Resort maintain historical information for the proportion of revenues attributable to the rated play, which acquisition costs were allocated to such customer loyalty programs. The combined value of the customer loyalty programs have since been fully-amortized over their assumed economic useful life, but remains a component of gross intangible assets other than goodwill, and comprises a majority of the related accumulated amortization. See Note 4 to the consolidated financial statements set forth in “Item 8. Financial Statements and Supplementary Data” for more information.
 
Revenue Recognition
 
Our revenue recognition policies follow casino industry practices. Casino revenue is the aggregate net difference between gaming wins and losses, with certain liabilities recognized, including progressive jackpots, earned customer loyalty incentives, funds deposited by customers before gaming play occurs, and for certain chips and tokens in the customers’ possession. Key performance indicators related to gaming revenue are slot coin-in and table game drop (volume indicators) and “win” or “hold” percentage.

Revenue for food and beverage, hotel, and other revenue transactions is typically the net amount collected from the customer for such goods and services, plus the retail value of (i) discretionary comps and (ii) comps provided in return for redemption of loyalty points. We record such revenue as the good or service is transferred to the customer. Additionally, we may collect deposits in advance for future hotel reservations or entertainment, among other services, which represent obligations to the Company until the service is provided to the customer. Sales and similar revenue-linked taxes (except for gaming taxes) collected from customers on behalf of, and submitted to, taxing authorities are also excluded from revenue and recorded as a current liability.
 
Customer Loyalty Programs
 
We have separate customer loyalty programs at each of our properties – Silver Slipper Casino Players Club, Bronco Billy’s MVP “Most Valuable Players” Club, Rising Star Rewards Club™, Grand Lodge Players Advantage Club® and the Stockman’s Winner’s Club. Under these programs, customers earn points based on their volume of wagering that may be redeemed for various benefits, such as free play, cash back, complimentary dining, or hotel stays, among others, depending on each property’s specific offers. We also occasionally offer sweepstakes and other promotions for tracked customers that do not require redemption of points.

As points are accrued, we defer a portion of our gaming revenue based on the estimated standalone value of loyalty points being earned by the customer. The standalone value of loyalty points is derived from the retail value of food, beverages, hotel rooms, and other goods or services for which such points may be redeemed. A liability related to these customer loyalty points is recorded, net of estimated breakage and other factors, until the customer redeems these points, primarily for “free casino play/cash back,” complimentary dining, or hotel stays. Upon redemption, the related revenue is recognized at retail value within the department providing the goods or services. Unredeemed points are forfeited if the customer becomes and remains inactive for a specified period of time.

Loyalty programs are a part of the total marketing program. The amount of marketing reinvestment (complimentaries to players, promotional awards, entertainment, etc.) is based on the specific property and competitive assumptions. We track the percentage of promotional and marketing costs, compared to gaming revenue, for an efficient use and return on our marketing investment. Our properties operate in highly-competitive promotional environments due to the high amounts of incentives offered by our competition.

Accounts Receivable Allowance for Doubtful Accounts

Accounts receivable consist primarily of casino, hotel and other receivables, are typically non-interest bearing, and are carried net of an appropriate collection allowance to approximate fair value. The allowances for doubtful accounts are estimated based on specific review of customer accounts, as well as, historical collection experience and current economic and business

39



conditions. Accounts are written off when management deems the account to be uncollectible, and recoveries of accounts previously written off are recorded when received.

Income Taxes

We are subject to federal and state taxes in the United States. Significant judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities, and any valuation allowance recorded against our net deferred tax assets. We make these estimates and judgments about our future taxable income that are based on assumptions that are consistent with our future plans. Tax laws, regulations, and administrative practices may be subject to change due to economic or political conditions, including fundamental changes to the applicable tax laws.

Our income tax returns are subject to examination by the IRS and other tax authorities. Positions taken in tax returns are sometimes subject to uncertainty in the tax laws and may not ultimately be accepted by the IRS or other tax authorities. We assess our tax positions using a two-step process. A tax position is recognized if it meets a “more likely than not” threshold. It is then measured at the largest amount of benefit that is greater than fifty percent likely of being realized. Additionally, we recognize accrued interest and penalties, if any, related to unrecognized tax benefits in income tax expense.

Common Stock Warrant Liability

We measure the fair value of our common stock warrants at each reporting period based on Level 3 inputs as determined by GAAP. Due to the variable terms regarding the timing of the settlement of the warrants, the Company utilizes a “Monte Carlo” simulation approach, a mathematical technique used to model the probability of different outcomes, to measure the fair value of the warrants. The simulation included certain estimates by Company management regarding the estimated timing of the settlement of the warrants. Significant increases or decreases in those management estimates would result in a significantly higher or lower fair value measurement. Changes in the fair value measurement of our warrant liability are measured quarterly, including changes caused by increases or decreases in our stock price, and are expensed or credited to income during the measurement period.

Share-based Compensation 

We have granted shares of common stock and stock options to key members of management and the board of directors. Accounting standards require us to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award and recognize that cost over the service period. Share-based compensation expense from stock awards is included in general and administrative expense. Vesting is contingent upon certain conditions, including continuous service of the individual recipients. We use the Black-Scholes valuation model to determine the estimated fair value for each option grant issued. The Black-Scholes-determined fair value, net of actual forfeitures, is amortized as compensation cost on a straight-line basis over the service period.

Recently Issued Accounting Pronouncements Not Yet Adopted

See Note 2 for a discussion of recently issued accounting pronouncements not yet adopted.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

As a smaller reporting company, as defined by Rule 12b-2 of the Exchange Act, we are not required to provide the information required by this Item.


40



Item 8. Financial Statements and Supplementary Data.
 
 
Page
 

41



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON CONSOLIDATED FINANCIAL STATEMENTS


Board of Directors and Stockholders
Full House Resorts, Inc. and Subsidiaries
Las Vegas, Nevada


Opinion on the Consolidated Financial Statements. We have audited the accompanying consolidated balance sheets of Full House Resorts, Inc. and Subsidiaries (the “Company”) as of December 31, 2018 and 2017, and the related consolidated statements of operations, stockholders’ equity and cash flows, for each of the two years in the period ended December 31, 2018, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2018 and 2017, and the results of its consolidated operations and its cash flows for each of the two years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013 edition) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 14, 2019, expressed an unqualified opinion on the Company’s internal control over financial reporting.

Change in Accounting Principles. As discussed in Note 2 to the financial statements, the Company has changed its method of accounting for revenue from contracts with customers in 2018, due to the adoption of the Financial Accounting Standards Board’s Accounting Standards Codification Topic 606, “Revenue from Contracts with Customers” using a modified retrospective approach.

Basis for Opinion. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

We have served as the Company’s auditor since 2004.

/s/ Piercy Bowler Taylor & Kern
Certified Public Accountants

Las Vegas, Nevada
March 14, 2019

42



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Board of Directors and Stockholders
Full House Resorts, Inc. and Subsidiaries
Las Vegas, Nevada

Opinion on Internal Control over Financial Reporting. We have audited the internal control over financial reporting of Full House Resorts, Inc. and Subsidiaries (the “Company”) as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013 edition) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on the criteria established in Internal Control - Integrated Framework (2013 edition) issued by COSO.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB) the consolidated balance sheets of the Company as of December 31, 2018 and 2017, and the related consolidated statements of operations, shareholders’ equity and cash flows, for each of the two years in the period ended December 31, 2018, and the notes to the consolidated financial statements, and our report dated March 14, 2019, expressed an unqualified opinion and included an explanatory paragraph related to the Company’s change in method of accounting for revenue from contracts with customers due to the adoption of the Financial Accounting Standards Board’s Accounting Standards Codification Topic 606, “Revenue from Contracts with Customers.”

Basis for Opinion. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Report of Management on Internal Control Over Financial Reporting included in Item 9A. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the United States federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control over financial reporting based on the assessed risk, and performing procedures that respond to those risks and such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control over Financial Reporting. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States. The Company’s internal control over financial reporting includes those policies and procedures that 1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company, 2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company, and 3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the consolidated financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

We have served as the Company’s auditor since 2004.

/s/ Piercy Bowler Taylor & Kern
Certified Public Accountants

Las Vegas, Nevada
March 14, 2019

43



FULL HOUSE RESORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
 
 
Year Ended December 31,
 
2018
 
2017
Revenues
 
 
 
Casino (1)
$
114,313

 
$
144,495

Food and beverage (1)
35,058

 
32,471

Hotel (1)
9,864

 
8,863

Other operations
4,641

 
4,444

Gross revenues (1)
163,876

 
190,273

Less promotional allowances (1)

 
(29,006
)
Net revenues
163,876

 
161,267

Operating costs and expenses
 

 
 

Casino (1)
45,752

 
76,305

Food and beverage (1)
38,619

 
12,528

Hotel (1)
10,358

 
1,084

Other operations (1)
3,434

 
1,923

Selling, general and administrative (1)
48,694

 
53,485

Preopening costs
274

 

Project development and acquisition costs
843

 
284

Depreciation and amortization
8,397

 
8,602

Loss (gain) on disposal of assets, net
79

 
(1
)
 
156,450

 
154,210

Operating income
7,426

 
7,057

Other (expense) income
 

 
 

Interest expense, net of amounts capitalized of $346 and $130
(10,306
)
 
(10,856
)
Loss on extinguishment of debt
(2,673
)
 

Adjustment to fair value of warrants
1,671

 
(1,379
)
Other
(13
)
 

 
(11,321
)
 
(12,235
)
Loss before income taxes
(3,895
)
 
(5,178
)
Income tax expense (benefit)
476

 
(150
)
Net loss
$
(4,371
)
 
$
(5,028
)
 
 
 
 

Basic loss per share
$
(0.17
)
 
$
(0.22
)
Diluted loss per share
$
(0.23
)
 
$
(0.22
)
Basic weighted average number of common shares outstanding
26,012,381

 
22,882,960

Diluted weighted average number of common shares outstanding
26,460,902

 
22,882,960

 
(1)
On January 1, 2018, the Company adopted Accounting Standards Codification No. 606, Revenue from Contracts with Customers (“ASC 606”), using the modified retrospective method, which impacts the comparability of these line items.

See notes to consolidated financial statements.
 



44



FULL HOUSE RESORTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
 
December 31,
 
2018
 
2017
ASSETS
 
 
 
Current assets
 
 
 
Cash and equivalents
$
20,634

 
$
19,910

Accounts receivable, net of allowance of $98 and $103
2,035

 
1,760

Inventories
1,425

 
1,692

Prepaid expenses and other
2,899

 
2,849

 
26,993

 
26,211

 
 
 
 
Property and equipment, net
122,076

 
114,058

Goodwill
21,286

 
21,286

Other intangible assets, net
11,145

 
10,936

Deposits and other
772

 
994

 
$
182,272

 
$
173,485

LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Current liabilities
 

 
 

Accounts payable
$
5,917

 
$
5,182

Accrued payroll and related
3,668

 
3,115

Other accrued expenses
9,704

 
8,846

Common stock warrant liability
825

 

Current portion of long-term debt
1,000

 
1,000

Current portion of capital lease obligation
497

 
421

 
21,611

 
18,564

 
 
 
 
Other long-term obligations
166

 
2,689

Long-term debt, net of current portion, unamortized discount and issuance costs
94,194

 
93,566

Capital lease obligation, net of current portion
4,324

 
4,861

Deferred taxes, net
2,232

 
1,757

 
122,527

 
121,437

Commitments and contingencies (Notes 7 and 9)


 


Stockholders’ equity
 

 
 

Common stock, $0.0001 par value, 100,000,000 shares authorized; 28,288,764 and 24,294,084 shares issued and 26,932,169 and 22,937,489 shares outstanding
3

 
2

Additional paid-in capital
63,935

 
51,868

Treasury stock, 1,356,595 common shares
(1,654
)
 
(1,654
)
Retained earnings (deficit)
(2,539
)
 
1,832

 
59,745

 
52,048

 
$
182,272

 
$
173,485

 See notes to consolidated financial statements. 

45




FULL HOUSE RESORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
YEARS ENDED DECEMBER 31, 2018 and 2017
(In thousands)
 
 
Common Stock
 
Additional
Paid-in
Capital
 
Treasury Stock
 
Retained Earnings (Deficit)
 
Total
Stockholders’
Equity
December 31, 2018
 
Shares
 
Dollars
 
 
Shares
 
Dollars
 
 
Beginning balances
 
24,294

 
$
2

 
$
51,868

 
1,357

 
$
(1,654
)
 
$
1,832

 
$
52,048

Stock grants
 
34

 

 
104

 

 

 

 
104

Equity offering, net
 
3,943

 
1

 
11,435

 

 

 

 
11,436

Stock-based compensation
 
18

 

 
528

 

 

 

 
528

Net loss
 

 

 

 

 

 
(4,371
)
 
(4,371
)
Ending balances
 
28,289

 
$
3

 
$
63,935

 
1,357

 
$
(1,654
)
 
$
(2,539
)
 
$
59,745

 
 
 
Common Stock
 
Additional
Paid-in
Capital
 
Treasury Stock
 
Retained Earnings
 
Total
Stockholders’
Equity
December 31, 2017
 
Shares
 
Dollars
 
 
Shares
 
Dollars
 
 
Beginning balances
 
24,221

 
$
2

 
$
51,271

 
1,357

 
$
(1,654
)
 
$
6,860

 
$
56,479

Stock-based compensation and option exercises
 
73

 

 
597

 

 

 

 
597

Net loss
 

 

 

 

 

 
(5,028
)
 
(5,028
)
Ending balances
 
24,294

 
$
2

 
$
51,868

 
1,357

 
$
(1,654
)
 
$
1,832

 
$
52,048

 
See notes to consolidated financial statements.


    

46



FULL HOUSE RESORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 
Year Ended December 31,
 
2018
 
2017
Cash flows from operating activities:
 
 
 
Net loss
$
(4,371
)
 
$
(5,028
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
  

Depreciation and amortization
8,397

 
8,602

Amortization of debt issuance and warrant costs
790

 
882

Stock-based compensation
632

 
525

Change in value of stock warrants
(1,671
)
 
1,379

Debt extinguishment costs
2,673

 

Loss (gain) on disposal of assets and other
225

 
(1
)
Increases and decreases in operating assets and liabilities:
 
 
 
Accounts receivable
(275
)
 
149

Prepaid expenses, inventories and other
217

 
(403
)
Deferred taxes
476

 
(150
)
Accounts payable and accrued expenses
2,731

 
1,188

Net cash provided by operating activities
9,824

 
7,143

Cash flows from investing activities:
 

 
 

Purchase of property and equipment, net of construction contracts payable
(17,051
)
 
(11,070
)
Other
(379
)
 
(141
)
Net cash used in investing activities
(17,430
)
 
(11,211
)
Cash flows from financing activities:
 

 
 

Repayment of First and Second Lien Term Loans
(96,063
)
 
(2,249
)
Prepayment premium of Second Lien Term Loan
(1,100
)
 

Proceeds from Senior Secured Notes borrowings
100,000

 

Payment of debt discount and issuance costs
(4,105
)
 
(429
)
Payment of Interest Rate Cap premium
(238
)
 

Repayment of Senior Secured Notes
(1,000
)
 

Repayment of capital lease obligation
(460
)
 
(455
)
Proceeds from equity offering
11,435

 

Proceeds from exercise of stock options

 
73

Other
(139
)
 

Net cash provided by (used in) financing activities
8,330

 
(3,060
)
 
 
 
 
Net increase (decrease) in cash and equivalents
724

 
(7,128
)
Cash and equivalents, beginning of year
19,910

 
27,038

Cash and equivalents, end of year
$
20,634

 
$
19,910

 
 
 
 
SUPPLEMENTAL CASH FLOW INFORMATION:
 

 
 

Cash paid for interest, net of amounts capitalized
$
9,368

 
$
9,909

NON-CASH INVESTING ACTIVITIES:
  

 
  

Accounts payable related capital expenditures
$
328

 
$
1,435

 
See notes to consolidated financial statements.

47



FULL HOUSE RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  ORGANIZATION

Formed as a Delaware corporation in 1987, Full House Resorts, Inc. owns, leases, operates, develops, manages, and/or invests in casinos and related hospitality and entertainment facilities. References in this document to “Full House,” the “Company,” “we,” “our,” or “us” refer to Full House Resorts, Inc. and its subsidiaries, except where stated or the context otherwise indicates.

We currently operate five casinos; four are part of real estate that we own or lease and one is located within a hotel owned by a third party. The following table identifies the properties along with their dates of acquisition and locations:
Property
 
Acquisition
Date
 
Location
Silver Slipper Casino and Hotel
 
2012
 
Hancock County, MS
(near New Orleans)
Bronco Billy’s Casino and Hotel
 
2016
 
Cripple Creek, CO
(near Colorado Springs)
Rising Star Casino Resort
 
2011
 
Rising Sun, IN
(near Cincinnati)
Stockman’s Casino
 
2007
 
Fallon, NV
(one hour east of Reno)
Grand Lodge Casino (leased and part of the Hyatt Regency Lake Tahoe Resort, Spa and Casino)
 
2011
 
Incline Village, NV
(North Shore of Lake Tahoe)

We manage our casinos based on geographic regions within the United States. See Note 13 for further information.

2.  BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation and Accounting. The consolidated financial statements include the accounts of Full House and its wholly-owned subsidiaries. All material intercompany accounts and transactions have been eliminated.

Except when otherwise required by accounting principles generally accepted in the United States of America (“GAAP”) and disclosed herein, we measure all of our assets and liabilities on the historical cost basis of accounting.

Use of Estimates. The consolidated financial statements have been prepared in conformity with GAAP. These principles require the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Fair Value and the Fair Value Input Hierarchy. Fair value measurements affect our accounting for net assets acquired in acquisition transactions and certain financial assets and liabilities, such as our common stock warrant liability and interest rate cap. Fair value measurements are also used in our periodic assessments of long-lived tangible and intangible assets for possible impairment, including for property and equipment, goodwill, and other intangible assets. Fair value is defined as the expected price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date.

GAAP categorizes the inputs used for fair value into a three-level hierarchy:

Level 1: Observable inputs, such as quoted prices in active markets for identical assets or liabilities;
Level 2: Comparable inputs, other than quoted prices, that are observable for similar assets or liabilities in less active markets; and
Level 3: Unobservable inputs, which may include metrics that market participants would use to estimate values, such as revenue and earnings multiples and relative rates of return.

The Company utilizes Level 2 inputs when measuring the fair value of its interest rate cap. In order to estimate the fair value of this derivative instrument, the Company obtains valuation reports from the third-party broker that issued the interest rate cap. The

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report contemplates fair value by using inputs including market-observable data such as interest rate curves, volatilities, and information derived from or corroborated by that market-observable data (see Notes 6 and 12).

The Company utilizes Level 3 inputs when measuring the fair value of net assets acquired in business combination transactions, subsequent assessments for impairment, and most financial instruments, including but not limited to the estimated fair value of common stock warrants at issuance and for recurring changes in the related warrant liability (see Notes 6 and 12).

Cash Equivalents. Cash equivalents include cash involved in operations and cash in excess of daily requirements that is invested in highly liquid, short-term investments with initial maturities of three months or less when purchased.

Inventories. Inventories consist primarily of food, beverage and retail items, and are stated at the lower of cost or net realizable value. Costs are determined using the first-in, first-out and the weighted average methods.

Accounts Receivable. Accounts receivable consist primarily of casino, hotel and other receivables, are typically non-interest bearing, and are carried net of an appropriate collection allowance to approximate fair value. Allowances for doubtful accounts are estimated based on specific review of customer accounts including the customers’ willingness and ability to pay and nature of collateral, if any, as well as historical collection experience and current economic and business conditions. Accounts are written off when management deems the account to be uncollectible and recoveries of accounts previously written off are recorded when received.

Property and Equipment. Property and equipment are stated at cost and are capitalized and depreciated, while normal repairs and maintenance are expensed in the period incurred. A significant amount of the Company’s property and equipment was acquired through business combinations, and therefore, are recognized at fair value measured at the acquisition date. Gains or losses on dispositions of property and equipment are included in operating expenses, effectively as adjustments to depreciation estimates.

Certain events or changes in circumstances may indicate that the recoverability of the carrying amount of property, plant and equipment should be assessed, including, among others, a significant decrease in market value, a significant change in the business climate in a particular market, or a current period operating or cash flow loss combined with historical losses or projected future losses. When such events or changes in circumstances are present, we estimate the future cash flows expected to result from the use of the asset (or asset group) and its eventual disposition. These estimated future cash flows are consistent with those we use in our internal planning. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount, then we would recognize an impairment loss.

Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets or the term of the lease, whichever is appropriate under the circumstances. We determine the estimated useful lives based on our experience with similar assets, estimated usage of the asset, and industry practice. Whenever events or circumstances occur, which change the estimated useful life of an asset, we account for the change prospectively. Depreciation and amortization is provided over the following estimated useful lives:
 
Class of Assets
 
Estimated
Useful Lives
Land improvements
 
15 to 18 years
Buildings and improvements
 
3 to 44 years
Furniture, fixtures and equipment
 
2 to 10 years

Goodwill and Indefinite-lived Intangible Assets. Goodwill represents the excess of the purchase price of Bronco Billy’s Casino and Hotel, Silver Slipper Casino and Hotel, Rising Star Casino Resort and Stockman’s Casino over the estimated fair value of their net tangible and other intangible assets on the acquisition date, net of subsequent impairment charges. Our other indefinite-lived intangible assets primarily include certain license rights to conduct gaming in certain jurisdictions and trade names. Goodwill and other indefinite-lived intangible assets are not amortized, but are periodically tested for impairment. The impairment loss recognized is the amount by which the carrying amount exceeds the fair value.

These tests for impairment are performed annually during the fourth quarter or when a triggering event occurs.

Finite-lived Intangible Assets. Our finite-lived intangible assets include customer loyalty programs, land lease acquisition costs and water rights. Finite-lived intangible assets are amortized over the shorter of their contractual or economic lives. We periodically evaluate the remaining useful lives of these intangible assets to determine whether events and circumstances warrant a revision

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to the remaining period of amortization and the possible need for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount, then we would recognize an impairment loss.

Debt Issuance Costs and Debt Discounts.