10-Q


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
(Mark One)
 
 
 
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2015
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from         to
 Commission File No. 1-32583

 FULL HOUSE RESORTS, INC.
(Exact name of registrant as specified in its charter)  
Delaware
(State or other jurisdiction
of incorporation or organization)
 
13-3391527
(I.R.S. Employer
Identification No.)
 
 
 
4670 S. Fort Apache Road, Ste. 190
Las Vegas, Nevada
(Address of principal executive offices)
 
89147
(Zip Code)
(702) 221-7800
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ   No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ    No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “small reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer o
Accelerated Filer o
Non Accelerated Filer o (Do not check if a smaller reporting company)  
Smaller reporting company þ
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No þ

 
As of November 12, 2015, there were 18,969,396 shares of Common Stock, $0.0001 par value per share, outstanding.
 


1




 
FULL HOUSE RESORTS, INC.
FORM 10-Q
INDEX
 
 
 
 
Page
PART I. Financial Information
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
Item 3.
 
Item 4.
 
 
 
 
 
PART II. Other Information
 
 
Item 1.
 
Item 1A.
 
Item 6.
 
 
 
 
 
 

2



PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

FULL HOUSE RESORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands, except per share data)
 
 
 
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
2015
 
2014
 
2015
 
2014
Revenues
 
 
 
 
 
 
 
Casino
$
30,577

 
$
29,606

 
$
84,374

 
$
85,136

Food and beverage
6,891

 
5,298

 
19,053

 
15,607

Hotel
2,020

 
1,314

 
4,836

 
3,830

Management fees

 
273

 

 
1,066

Other operations
1,208

 
1,098

 
2,890

 
2,737

Gross revenues
40,696

 
37,589

 
111,153

 
108,376

Less promotional allowances
(6,430
)
 
(4,672
)
 
(17,077
)
 
(13,700
)
Net revenues
34,266

 
32,917

 
94,076

 
94,676

Operating costs and expenses
 

 
 

 
 

 
 

Casino
15,600

 
14,099

 
43,569

 
43,763

Food and beverage
2,282

 
2,170

 
6,632

 
6,492

Hotel
248

 
214

 
678

 
537

Other operations
372

 
370

 
1,023

 
996

Selling, general and administrative
9,570

 
10,937

 
30,763

 
32,824

Project development, acquisition costs and preopening
730


72


894


407

Depreciation and amortization
2,203

 
2,398

 
6,225

 
7,165

Impairment

 

 

 
11,547

 
31,005

 
30,260

 
89,784

 
103,731

Operating income (loss)
3,261

 
2,657

 
4,292

 
(9,055
)
Other (expense) income
 

 
 

 
 

 
 

Interest expense, net of $0 and $0.1 million capitalized for the three months ended September 30, 2015 and 2014, and $0.4 million and $0.2 million capitalized for the nine months ended September 30, 2015 and 2014
(1,829
)
 
(1,614
)
 
(4,876
)
 
(4,702
)
Settlement loss

 
(1,700
)
 

 
(1,700
)
Other

 
(61
)
 
12

 
(68
)
 
(1,829
)
 
(3,375
)
 
(4,864
)
 
(6,470
)
Income (loss) before income taxes
1,432

 
(718
)
 
(572
)
 
(15,525
)
Provision (benefit) for income taxes
(603
)
 
48

 
(425
)
 
(5,186
)
Net income (loss)
$
2,035

 
$
(766
)
 
$
(147
)
 
$
(10,339
)
Basic and diluted loss per share
$
0.11

 
$
(0.04
)
 
$
(0.01
)
 
$
(0.55
)
Basic and diluted weighted average number of common shares outstanding
18,969

 
18,877

 
18,927

 
18,874

 
See condensed notes to consolidated financial statements.

3



FULL HOUSE RESORTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
 
September 30,
2015
 
December 31,
2014
 
(Unaudited)
 
 
ASSETS
 
 
 
Current assets
 
 
 
Cash and equivalents
$
13,938

 
$
15,639

Restricted cash
569

 

Accounts receivable, net of allowance for doubtful accounts of $151 and $513
1,487

 
1,573

Income tax receivable
759

 
3,095

Other receivables
1,603

 

Prepaid expenses and other
4,366

 
2,833

Acquisition deposit
2,500



 
25,222

 
23,140

Property and equipment, net
100,134

 
95,040

Other long-term assets
 

 
 

Goodwill
16,480

 
16,480

Intangible assets, net of accumulated amortization of $7,693 and $6,195
1,997

 
3,382

Deposits
659

 
178

Loan fees, net of accumulated amortization of $5,045 and $3,827
1,757

 
2,650

Deferred tax asset
37

 
74

 
20,930

 
22,764

 
$
146,286

 
$
140,944

LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Current liabilities
 

 
 

Accounts payable
$
4,273

 
$
4,102

Construction contracts payable
1,418

 
1,638

Accrued player club points and progressive jackpots
1,736

 
1,709

Accrued payroll and related
2,461

 
3,743

Other accrued expenses
3,185

 
3,704

Deferred tax liability
999

 
901

Current portion of capital lease obligation
657

 
690

Current portion of long-term debt
6,000

 
1,337

 
20,729

 
17,824

Long-term debt, net of current portion
62,000

 
59,294

Deferred tax liability
232

 
99

Capital lease obligation, net of current portion
5,690

 
6,230

 
88,651

 
83,447

Commitments and contingencies (Note 11)


 


Stockholders’ equity
 

 
 

Common stock, $0.0001 par value, 100,000,000 shares authorized; 20,325,991 and 20,233,276 shares issued; 18,969,396 and 18,876,681 shares outstanding
2

 
2

Additional paid-in capital
46,163

 
45,878

Treasury stock, 1,356,595 common shares
(1,654
)
 
(1,654
)
Retained earnings
13,124

 
13,271

 
57,635

 
57,497

 
$
146,286

 
$
140,944

See condensed notes to consolidated financial statements.

4



FULL HOUSE RESORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited)
(In thousands)
 
 
Common stock
 
 
 
Treasury stock
 
 
 
 
 
 
Shares
 
Dollars
 
Additional Paid-in Capital
 
Shares
 
Dollars
 
Retained Earnings
 
Total Stockholders' Equity
Balance as of January 1, 2015
 
20,233

 
$
2

 
$
45,878

 
1,357

 
$
(1,654
)
 
$
13,271

 
$
57,497

Stock-based compensation
 
93

 

 
285

 

 

 

 
285

Net loss
 

 

 

 

 

 
(147
)
 
(147
)
Balance as of September 30, 2015
 
20,326

 
$
2

 
$
46,163

 
1,357

 
$
(1,654
)
 
$
13,124

 
$
57,635

 
See condensed notes to consolidated financial statements.

5



FULL HOUSE RESORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
 
 
 
 
Nine Months Ended 
 September 30,
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Net loss
$
(147
)
 
$
(10,339
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 

 
 

Development receivable collection allowance reduction
(250
)


Impairment

 
11,547

Depreciation
4,727

 
5,525

Amortization of loan fees
1,218

 
1,114

Amortization of player loyalty program, land lease and water rights
1,498

 
1,640

Loss on disposals

 
37

Stock-based compensation
285

 
219

Increases and decreases in operating assets and liabilities:
 

 
 

Accounts receivable, net
86

 
(291
)
Income tax receivable
2,336

 
1,970

Other receivables
(1,353
)
 

Prepaid expenses and other assets
(1,449
)
 
(331
)
Deferred taxes
268

 
(4,255
)
Accounts payable and accrued expenses
(1,624
)
 
(316
)
Net cash provided by operating activities
5,595

 
6,520

Cash flows from investing activities:
 

 
 

Purchase of property and equipment, net of construction contracts payable
(10,021
)
 
(6,222
)
Restricted cash
(569
)
 

Deposits and other
(3,177
)
 
(329
)
Net cash used in investing activities
(13,767
)
 
(6,551
)
Cash flows from financing activities:
 

 
 

First Term Loan borrowings
8,869

 

Revolving Loan borrowings (repayments), net
(1,500
)
 
2,000

Repayment of capital lease obligation
(573
)
 
(610
)
Loan fees and other
(325
)
 
(252
)
Net cash provided by financing activities
6,471

 
1,138

Net (decrease) increase in cash and equivalents
(1,701
)
 
1,107

Cash and equivalents, beginning of period
15,639

 
14,936

Cash and equivalents, end of period
$
13,938

 
$
16,043

SUPPLEMENTAL CASH FLOW INFORMATION:
 

 
 

Cash paid for interest, net of amounts capitalized
$
3,439

 
$
3,471

Cash received from income tax refunds, net
$
(3,154
)
 
$
(1,915
)
NON-CASH INVESTING ACTIVITIES:
 

 
 

Accrued capital expenditures
$
1,438

 
$
1,301

 
See condensed notes to consolidated financial statements.

6



FULL HOUSE RESORTS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. ORGANIZATION
 
Organization. Formed as a Delaware corporation in 1987, Full House Resorts, Inc., ("Full House") owns, operates, develops, manages, and/or invests in casinos and related hospitality and entertainment facilities. References in this document to 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 own three casino properties and operate a fourth casino subject to a lease, as follows:
Property
Acquisition
Date
Location
Silver Slipper Casino and Hotel (Owned)
2012
Bay St. Louis, MS (near New Orleans)
Rising Star Casino Resort (Owned)
2011
Rising Sun, IN (near Cincinnati)
Stockman’s Casino (Owned)
2007
Fallon, NV (one hour east of Reno)
Grand Lodge Casino (leased and part of the Hyatt Regency Lake Tahoe Resort)
2011
Incline Village, NV (North Shore of Lake Tahoe)
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
 
Basis of Presentation. As permitted by the rules and regulations of the Securities and Exchange Commission, certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted. These consolidated financial statements should be read in conjunction with the Company’s 2014 annual consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

The interim consolidated financial statements of the Company included herein reflect all adjustments (consisting of normal recurring adjustments) that are, in the opinion of management, necessary to present fairly the financial position and results of operations for the interim periods presented. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the entire year.

The consolidated financial statements include the accounts of Full House and its wholly-owned subsidiaries. All material intercompany accounts and transactions have been eliminated. Certain minor reclassifications have been made to prior-period amounts to conform to the current-period presentation. These reclassifications had no effect on the previously reported net loss.

Restricted cash. The Company is required to maintain a segregated construction trust account for proceeds drawn from its construction loan which have not yet been remitted to contractors for the hotel at Silver Slipper Casino.

Income taxes. For interim income tax reporting, the Company estimates its annual effective tax rate and applies it to its year-to-date pretax income or loss. During the second quarter of 2015, it was determined that the Company's annual effective tax rate could not be reasonably estimated. This remains true for the third quarter. As a result, the year-to-date effective tax rate was used to determine the tax expense (benefit) incurred during the three and nine months ended September 30, 2015.

Net income (loss) per share. Basic net income (loss) per share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflects the additional dilution for all potentially-dilutive securities, such as stock options.

During the three and nine months ended September 30, 2015 and 2014, the effect of all potential common share equivalents were anti-dilutive, and therefore all such shares were excluded from the computation of diluted weighted average shares outstanding for these periods.
 
Recently issued accounting standards. Management believes that there are no recently issued accounting standards not yet effective that are likely to have a material impact on our financial statements.

7



3. PENDING ACQUISITION

On September 27, 2015, the Company, through its newly formed subsidiary FHR-Colorado LLC, entered into an asset purchase agreement (the "Bronco Billy's Purchase Agreement") with Pioneer Group, Inc., a Nevada corporation (“Pioneer Group”), pursuant to which the Company would acquire the operating assets and assume certain liabilities of Bronco Billy’s Casino and Hotel (“Bronco Billy’s”) in Cripple Creek, Colorado for a purchase price of $30.0 million (Note 11).
4. OTHER RECEIVABLES

Property Tax Assessments and Settlement Agreement

In September 2015, the Company agreed to settle its real property tax assessment appeal for the tax years 2011 through 2014 with respect to the Rising Star Casino.

Under the terms of the settlement agreement, Ohio County will pay the Company a tax refund of $1,352,937 within 90 days of the agreement's effective date. Upon its receipt of the tax refund, the Company will dismiss its appeals pending before the Ohio County Property Tax Assessment Board of Appeals. In addition, the parties have agreed to a final determination of the Company's real property tax assessment for the tax year 2015 and to certain parameters affecting the calculation of the real property assessment for the tax years 2016 and 2017.

Nambe Pueblo Settlement Agreement

On July 24, 2015, the Company reached a settlement with the Nambe Pueblo tribe related to $662,000 previously advanced by the Company as part of a development agreement and a security and reimbursement agreement from 2005. The advance had been fully reserved since 2011.

In consideration for the release of any future claims and other items as defined within the settlement agreement, Nambe Pueblo will pay $500,000 to the Company in two installments of $250,000. The first installment was received on July 31, 2015, and the final installment is due upon the earlier of the opening of the Nambe Pueblo casino or December 31, 2015. The Company incurred a $50,000 collection fee payable upon the receipt of the proceeds. The net expected recovery was recognized as a change in estimate in the quarter ended June 30, 2015 and included in selling, general and administrative expense.
5. PROPERTY AND EQUIPMENT
 Property and equipment, including capital lease assets, consist of the following (in thousands):
 
September 30,
2015
 
December 31,
2014
 
(Unaudited)
 
 
Land and improvements
$
12,291

 
$
11,670

Buildings and improvements
91,593

 
73,997

Furniture and equipment
30,812

 
27,951

Construction in progress
8

 
11,264

 
134,704

 
124,882

Less accumulated depreciation
(34,570
)
 
(29,842
)
 
$
100,134

 
$
95,040


The Silver Slipper Hotel opened in phases, beginning in May 2015 and completed during the third quarter. The total cost incurred for the construction of the hotel was approximately $20.5 million.




8



6. ACCRUED LIABILITIES
 
Other accrued expenses consist of the following (in thousands):
 
September 30,
2015
 
December 31,
2014
 
(Unaudited)
 
 
Real estate and other taxes
$
1,658


$
1,961

Other
1,527


1,743

 
$
3,185

 
$
3,704

7. GOODWILL AND OTHER INTANGIBLES
 
At least annually during the fourth quarter, or more frequently when there is a material change in circumstances that could have a negative effect, the Company performs an assessment of its goodwill and other indefinite-lived intangible assets to determine if the carrying value of such assets exceeds the fair value. No change in circumstances that would trigger an evaluation was observed during the three and nine months ended September 30, 2015 or subsequently. During the second quarter of 2014, we recorded a non-cash impairment charge of $11.5 million on the goodwill and gaming license associated with Rising Star Casino Resort. We evaluate these assets using the market (comparable transactions) and income (discounted cash flow) approaches to value, both of which use Level 3 inputs as defined by GAAP.

We amortize our definite-lived intangible assets, including our player loyalty programs, loan fees, land leases and water rights, over their estimated useful lives.
8. CAPITAL LEASE
 
Our Indiana subsidiary, Gaming Entertainment (Indiana) LLC, leases a 104-room hotel at Rising Star Casino Resort pursuant to a capital lease agreement (the “Rising Star Lease Agreement”) with Rising Sun/Ohio County First, Inc., an Indiana non-profit corporation (the “Landlord”). Rent is fixed at $77,537 per month throughout the lease term and has an annual interest rate of 2.5% until September 30, 2015, 3.5% from October 1, 2015 until September 30, 2017, and 4.5% thereafter. The lease term expires on October 1, 2023. At any time during the lease term, we have the exclusive option to purchase the hotel at a price based upon the project’s actual cost of $7.7 million, reduced by the cumulative principal payments made by the Company during the lease term.  Upon expiration of the lease term, if we have not yet exercised our option to purchase the hotel tower, either (i) the Landlord has the right to sell the hotel to us, or (ii) we have the option to purchase the hotel.  In either case, the purchase price is $1 plus closing costs. The Rising Star Lease Agreement is not guaranteed by the parent company or any subsidiary other than Gaming Entertainment (Indiana) LLC and has customary provisions in the event of a default.
9. LONG-TERM DEBT
 
Long-term debt consists of the following (in thousands):
 
September 30,
2015
 
December 31,
2014
 
(Unaudited)
 
 
Long-term debt, net of current portion:
 
 
 
First Term Loan, maturing October 1, 2016 (as amended); quarterly payments of $1.5 million beginning October 1, 2015; interest payable monthly at a variable rate which averaged 4.75% for both periods presented
$
47,500

 
$
38,631

Revolving Loan, maturing October 1, 2016 (as amended), interest payable monthly at a variable rate which averaged 4.75% for both periods presented
500

 
2,000

Second Term Loan, maturing April 1, 2017, interest payable monthly at 14.25% per annum (13.25% prior to July 18, 2014)
20,000

 
20,000

Less current portion
(6,000
)
 
(1,337
)
 
$
62,000

 
$
59,294



9



First and Second Lien Credit Facilities. The First Lien Credit Facility, including the Revolving Loan, and Second Lien Credit Facility are secured by substantially all of our assets. Our principal wholly-owned subsidiaries, except for FHR-Colorado LLC which was recently formed to acquire Bronco Billy's, guarantee our obligations under the agreements. As of September 30, 2015, commensurate with the completion of the hotel at Silver Slipper Casino, we had drawn all of the proceeds of the $10 million construction term loan under the First Lien Credit Facility. The final costs related to the construction are still being resolved, hence approximately $569,000 of those proceeds remains in a trust account and will be used to fund a portion of the remaining construction costs.

Effective May 31, 2015, the Company entered into a Fourth Amendment to the First Lien Credit Facility which amended certain provisions of the First Lien Credit Agreement, including (i) extending the period for draws against the $10 million term loan associated with the hotel construction at Silver Slipper Casino and Hotel to August 31, 2015, and (ii) extending the date that the first quarterly payment of $0.25 million was due for this portion of the term loan to October 1, 2015.

On August 5, 2015 and effective as of June 30, 2015, we entered into the Fifth Amendment to the First Lien Credit Facility and Amendment No. 4 to the Second Lien Credit Facility which, amongst other items:

Revised certain financial covenant ratios as of June 30, 2015, and going forward through the term of the loans;
Extended the maturity date for the First Lien Credit Facility from June 29, 2016 to October 1, 2016;
Created a pricing grid to allow the interest rate on the Second Lien Credit Facility to vary with changes in our leverage; and
Amended the prepayment premium on the Second Lien Credit Facility.

The First and Second Lien Credit Facilities continue to contain customary restrictive covenants, including a maximum total leverage ratio, maximum first lien leverage ratio, and a fixed charge coverage ratio. These revised financial covenant ratios are as follows:

First Lien Credit Facility
 
 
Applicable Period
 
Maximum
Total Leverage
Ratio
 
Maximum
First Lien Leverage Ratio
 
Minimum
Fixed Charge Coverage Ratio
June 30, 2015 through and including September 29, 2015
 
6.85x
 
4.85x
 
1.10x
September 30, 2015 through and including December 30, 2015
 
6.75x
 
4.75x
 
1.10x
December 31, 2015 through and including March 30, 2016
 
6.35x
 
4.35x
 
1.10x
March 31, 2016 through and including June 29, 2016
 
6.15x
 
4.15x
 
1.10x
June 30, 2016 through and including September 29, 2016
 
5.85x
 
4.00x
 
1.10x
September 30, 2016 and thereafter
 
5.50x
 
3.75x
 
1.10x

Second Lien Credit Facility
 
 
Applicable Period
 
Maximum
Total Leverage
Ratio
 
Maximum
First Lien Leverage Ratio
 
Minimum
Fixed Charge Coverage Ratio
June 30, 2015 through and including September 29, 2015
 
7.10x
 
5.10x
 
1.00x
September 30, 2015 through and including December 30, 2015
 
7.00x
 
5.00x
 
1.00x
December 31, 2015 through and including March 30, 2016
 
6.60x
 
4.60x
 
1.00x
March 31, 2016 through and including June 29, 2016
 
6.40x
 
4.40x
 
1.00x
June 30, 2016 through and including September 29, 2016
 
6.10x
 
4.25x
 
1.00x
September 30, 2016 and thereafter
 
5.75x
 
4.00x
 
1.00x

We were in compliance with our covenants, as amended, as of September 30, 2015. There can be no assurances that we will remain in compliance with all covenants in all future periods or, if there is a breach, that lenders will waive such breach.

We have elected to pay interest on the First Lien Credit Facility based on the greater of the elected London Interbank Offered Rate (“LIBOR”) rate or 1.0%, plus a margin rate. As of September 30, 2015, the interest rate was 4.75% on the balance outstanding on

10



the First Lien Credit Facility, based on the 1.0% minimum plus a 3.75% margin. In accordance with the terms of the First Lien Credit Facility, we maintain a prepaid interest rate cap for a notional amount of $14.75 million at a LIBOR cap rate of 1.5%, which terminates on June 29, 2016.
10. INCOME TAXES
 
We filed our original 2014 federal tax return during the first quarter of 2015, which resulted in the Company receiving a $3.1 million income tax refund in March 2015. During the third quarter of 2015, we filed a superseding 2014 federal tax return and our state tax returns resulting in additional tax refunds due to the Company. At September 30, 2015, we have a refund receivable of $631,000 for our federal tax return and $128,000 for our state tax returns.

We had a benefit for income taxes for the three and nine months ended September 30, 2015. The Company's effective income tax rate for the three and nine months ended September 30, 2015 was (42.1)% and 74.3%, respectively, compared to an effective tax rate of (6.7)% and 33.4% during the corresponding prior-year periods. The differences were primarily due to the effects of changes to our valuation allowance against our deferred tax assets.
11. COMMITMENTS AND CONTINGENCIES
 
Operating Leases
 
The nature of our operating leases is as follows:
Leased Property
 
Expiration
Grand Lodge Casino facility
 
August 2018
Land lease of Silver Slipper Casino and Hotel site
 
April 2058
 
Additionally, we have less significant operating leases for certain office and warehouse facilities, office equipment, signage and land.

Grand Lodge Casino Lease. In 2011, we entered into a lease with Hyatt Equities, L.L.C. to operate the Grand Lodge Casino (“Grand Lodge Lease”). The Grand Lodge Lease is secured by the Company’s interests under the lease and property (as defined in the Grand Lodge Lease) and is subordinate to the liens in the First and Second Lien Credit Facilities. Hyatt Equities, L.L.C. has an option to purchase our leasehold interest and related operating assets of the Grand Lodge Casino subject to assumption of applicable liabilities. The option price is an amount equal to the Grand Lodge Casino’s positive working capital, plus Grand Lodge Casino’s earnings before interest, income taxes, depreciation and amortization (“EBITDA”) for the twelve-month period preceding the acquisition or for such period of time remaining on the lease term, whichever is less, plus the fair market value of the Grand Lodge Casino’s personal property. The Grand Lodge Lease was amended in 2013 to extend the initial term to August 31, 2018, among certain other conforming changes.
 
Options to Purchase Silver Slipper Casino and Hotel Leased Land. In 2004, our subsidiary, Silver Slipper Casino Venture, LLC, entered into a land lease with Cure Land Company, LLC for approximately 31 acres of marshlands and a seven-acre parcel on which the Silver Slipper Casino and Hotel is situated (the "Silver Slipper Land Lease"). The Silver Slipper Land Lease includes base monthly payments of $77,500 plus 3% of gross gaming revenue (as defined in the Silver Slipper Land Lease) in excess of $3.65 million. The Silver Slipper Land Lease includes an exclusive option to purchase the leased land (“Purchase Option”) after February 26, 2019 through October 1, 2027, for $15.5 million plus a retained interest in Silver Slipper Casino and Hotel’s operations of 3% of net income (as defined in the Silver Slipper Land Lease), for ten years from the purchase date. In the event that Full House sells or transfers (i) substantially all of the assets of Silver Slipper Casino Venture, LLC, or (ii) its membership interests in Silver Slipper Casino Venture, LLC in its entirety, then the purchase price will increase to $17.1 million plus the retained interest for ten years mentioned above. In either case, we also have an option to purchase only a four-acre portion of the leased land for $2.0 million, which may be exercised at any time in conjunction with the development of a hotel and which accordingly reduces the purchase price of the remaining land by $2.0 million. The current term of the land lease is through April 30, 2058.

Bronco Billy's Casino and Hotel Pending Acquisition

As discussed in Note 3, on September 27, 2015, the Company agreed to acquire the operating assets and assume certain liabilities of Bronco Billy's from the Pioneer Group.


11



Under the Bronco Billy's Purchase Agreement, Full House made a non-refundable (except under certain conditions) deposit of $2.5 million which will be credited against the purchase price upon closing. The $30 million purchase price is subject to reduction to $28.5 million if Bronco Billy’s Adjusted EBITDA (as defined in the Bronco Billy's Purchase Agreement) for the applicable period is less than $4.7 million, and is also subject to certain conditions and working capital and other customary adjustments. The Bronco Billy's Purchase Agreement may be terminated by Pioneer Group if the closing has not taken place by January 15, 2016 (the “Outside Date”). Full House may extend the Outside Date for up to four periods of 30 days each if the sole reason the closing fails to occur by the Outside Date is the failure of Full House to obtain required gaming approvals despite its good faith efforts and, for the fourth extension period, Full House increases the Deposit by $100,000. In addition, Full House has the option to terminate the Bronco Billy's Purchase Agreement without penalty if Bronco Billy’s Adjusted EBITDA for the most recent twelve-month period prior to closing, but not later than the twelve-months ending December 31, 2015, is less than $4.5 million.

Full House intends to finance the acquisition concurrent with the refinancing of its outstanding first and second lien debt. The Company expects to complete its refinancing and close on the Bronco Billy’s acquisition in late 2015 or early 2016, subject to obtaining regulatory approvals and other customary closing conditions, including, without limitation, approvals from the Colorado gaming authorities. The transaction is not subject to a financing or due diligence condition, though the Company performed substantial due diligence.

Silver Slipper Casino Hotel Construction
 
On August 26, 2013, the Silver Slipper Casino and Hotel entered into an agreement for the construction of a 129-room hotel adjoining the casino. The hotel was opened in phases beginning in May 2015 and completed in September. The final construction bills are still being resolved; the Company estimates that the total cost was approximately $20.5 million and there is approximately $1.4 million remaining to be paid as of September 30, 2015. These remaining costs are expected to be funded from the proceeds in the construction trust account of $569,000 and the remainder from our working capital.
 
Indiana Department of Revenue
 
During 2014, we received a proposed assessment of $1.6 million, including interest and penalties, from the Indiana Department of Revenue (“IDOR”) related to unpaid sales and use taxes for periods prior to 2013, which we protested. In April 2015, we withdrew our formal protest with the IDOR and accepted the IDOR’s revised audit findings and proposed assessment. The revised assessment totaled $237,000, including interest and penalties, which approximated our estimate and was remitted in April 2015.

Indianapolis Proposal

On August 10, 2015, the Company responded to a "request for proposal" (RFP) by the Indianapolis Airport Authority with a proposal for a $650 million lifestyle complex, anchored by a modest-sized casino. Under our proposal, the Company would act as the "master developer" (as such term is used in the RFP) of the project and plans to seek partners for many of its aspects. The project is contingent, amongst other things, on being selected by the Indianapolis Airport Authority, on changes in the state gaming laws and other regulatory approvals that would allow the relocation to Indianapolis of approximately half of the gaming devices that the Company is licensed to operate in Rising Sun, Indiana, and on obtaining financing for the proposed project. There is no certainty that the Company's proposal will be selected or that the proposed project will become a reality.

Litigation

In 2013 and 2014, the Company expended approximately $1.6 million repairing defects to its parking garage at the Silver Slipper Casino and Hotel. The parking garage was originally built in 2007, and the Company acquired the property in 2012. The Company hired outside legal counsel to pursue the reimbursement of such costs from the contractor and architect, who neglected to install certain structural elements required by the building codes. During the third quarter of 2015, the case was dismissed in favor of the defendants, as the statutes of repose had expired and, in the judge's opinion, the Company had failed to prove elements that would have extended its right to seek reimbursement of the remedial costs. We filed an appeal on November 2, 2015.
During the third quarter of 2014, the Company settled its lawsuit with Majestic Star Casino LLC ("Majestic Star") and Majestic Mississippi, LLC ("Majestic Mississippi") related to the Company's attempted purchase of the Fitz Tunica Casino & Hotel. Pursuant to the terms of the settlement, Majestic Star and Majestic Mississippi received $1.7 million of the funds held in escrow which was recorded by the Company as a settlement loss.





12



Legal Matters
 
We are party to a number of pending legal proceedings that occurred in the normal course of business. Management does not expect that the outcome of such proceedings, either individually or in the aggregate, will have a material effect on our financial position, cash flows or results of operations.
12. SHARE-BASED BENEFIT PLANS
 
2015 Equity Incentive Plan. On March 31, 2015, our board of directors adopted the Full House Resorts, Inc. 2015 Equity Incentive Plan (the “2015 Plan”). Our stockholders approved the 2015 Plan on May 5, 2015, terminating our 2006 Plan. The 2015 Plan includes shares reserved for issuance of up to 1,400,000 new shares to directors, employees and consultants. The 2015 Plan allows for a variety of forms of awards, including stock options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalents and performance-based compensation. Additionally, in November 2014, 943,834 nonqualified stock options were granted to Daniel R. Lee, our President and Chief Executive Officer, and, in January 2015, 300,000 nonqualified stock options were granted to Lewis Fanger, our Senior Vice President, Chief Financial Officer and Treasurer, each outside the 2015 Plan and in connection with their employment.

On May 5, 2015, the Company issued 92,715 shares of restricted common stock to members of our board of directors as partial payment for their service as directors and granted 320,000 stock options to various employees of the Company with an exercise price of $1.51, the closing price per share on the grant date. These stock options have a three year vesting period vesting ratably each year.

Stock Options. The following table summarizes information related to our common stock options, all of which remain unvested as of September 30, 2015.
 
Number
of Stock
Options
 
Weighted
Average
Exercise Price
Options outstanding at January 1, 2015
943,834

 
$
1.25

Granted
620,000

 
$
1.44

Exercised

 

Canceled/Forfeited

 

Options outstanding at September 30, 2015
1,563,834

 
$
1.33

Options exercisable at September 30, 2015

 
$
1.33


Compensation Costs. Stock-based compensation expense totaled $0.1 million for both the three months ended September 30, 2015 and 2014. During the first nine months of 2015 and 2014, stock-based compensation expense was $0.3 million and $0.2 million, respectively.

As of September 30, 2015, there was approximately $0.7 million of unrecognized compensation cost related to unvested stock options granted by the Company. This unrecognized compensation cost is expected to be recognized over a weighted-average period of 3.1 years.

The aggregate intrinsic value of options outstanding was $0.2 million at September 30, 2015, none of which were exercisable. The aggregate intrinsic value represents the total pre-tax intrinsic value that would have been realized by the option holders had all option holders exercised their options on the applicable date. The intrinsic value of a stock option is the excess of our closing stock price on that date over the exercise price, multiplied by the number of in-the-money options.
13. SEGMENT REPORTING
 
We manage our casinos based on geographical regions within the United States. The casino/resort segments include the Silver Slipper Casino and Hotel in Bay St. Louis, Mississippi; the Rising Star Casino Resort in Rising Sun, Indiana; and the Northern Nevada segment, which consists of the Grand Lodge Casino in Incline Village, Nevada and Stockman’s Casino in Fallon, Nevada. The Development/Management segment includes costs associated with casino-related development and management projects, including our management contract with the Pueblo of Pojoaque that expired in September 2014.


13



In 2015, the Company's management began utilizing Adjusted Property EBITDA as the primary profit measure for its segments. Adjusted Property EBITDA is a non-GAAP measure defined as Adjusted EBITDA before corporate-related costs and expenses that are not allocated to each property. Adjusted EBITDA is a non-GAAP measure defined as 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, board and executive transition costs, project development and acquisition costs, and non-cash share based compensation expense. Adjusted EBITDA or Adjusted Property EBITDA should not be construed as an alternative to operating income or net income for use as an indicator of our performance; or as an alternative to cash flows from operating activities for use as a measure of liquidity; or as any other measure determined in accordance with GAAP. We have significant uses of cash flows, including capital expenditures, interest payments, taxes and debt principal repayments, which are not reflected in Adjusted EBITDA or Adjusted Property EBITDA. Also, other companies in the gaming and hospitality industries that report Adjusted EBITDA or Adjusted Property EBITDA information may calculate Adjusted EBITDA or Adjusted Property EBITDA in a different manner.

The following tables reflect selected operating information for our reporting segments for the three and nine months ended September 30, 2015 and 2014 and include a reconciliation of Adjusted Property EBITDA to operating income (loss) and net income (loss):
For the three months ended September 30, 2015
(In thousands, unaudited)
 
Casino/Resort Operations
 
 
 
 
 
 
 
Northern
 Nevada
 
Rising Star
Casino Resort
 
Silver Slipper
Casino & Hotel
 
Development/
Management
 
Corporate
 
Consolidated
Revenues, net
$
6,809

 
$
12,563

 
$
14,894

 
$

 
$

 
$
34,266

 
 
 
 
 
 
 
 
 
 
 
 
Adjusted Property EBITDA
$
2,227

 
$
2,455

 
$
2,413

 
$

 
$

 
$
7,095

 
 
 
 
 
 
 
 
 
 
 
 
Other operating costs and expenses:
 
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization
199

 
678

 
1,322

 

 
4

 
2,203

Preopening costs

 

 
21

 

 

 
21

Corporate expenses

 

 

 

 
844

 
844

Project development and acquisition costs

 

 

 
709

 

 
709

Stock compensation

 

 

 

 
57

 
57

Operating income (loss)
2,028


1,777


1,070


(709
)

(905
)
 
3,261

Non-operating expense:
 
 
 
 
 
 
 
 
 
 


Interest expense, net of amounts capitalized

 
40

 
4

 

 
1,785

 
1,829

Non-operating expense


40


4




1,785


1,829

Income (loss) before income taxes
2,028


1,737


1,066


(709
)

(2,690
)

1,432

Provision (benefit) for income taxes

 
(61
)
 
3

 

 
(545
)
 
(603
)
Net income (loss)
$
2,028


$
1,798


$
1,063


$
(709
)

$
(2,145
)
 
$
2,035


14



For the three months ended September 30, 2014
(In thousands, unaudited)
 
Casino/Resort Operations
 
 
 
 
 
 
 
Northern
 Nevada
 
Rising Star
Casino Resort
 
Silver Slipper
Casino & Hotel
 
Development/
Management
 
Corporate
 
Consolidated
Revenues, net
$
7,134

 
$
13,399

 
$
12,111

 
$
273

 
$

 
$
32,917

 
 
 
 
 
 
 
 
 
 
 
 
Adjusted Property EBITDA
$
2,463

 
$
1,650

 
$
1,736

 
$
273

 
$

 
$
6,122

 
 
 
 
 
 
 
 
 
 
 
 
Other operating costs and expenses:
 
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization
209

 
766

 
1,419

 

 
4

 
2,398

Corporate expenses

 

 

 

 
936

 
936

Project development and acquisition costs

 

 

 
72

 

 
72

Stock compensation

 

 

 

 
59

 
59

Operating income (loss)
2,254

 
884

 
317

 
201

 
(999
)
 
2,657

Non-operating expense:
 
 
 
 
 
 
 
 
 
 
 
Interest expense, net of amounts capitalized

 
62

 
5

 

 
1,547

 
1,614

Settlement loss

 

 

 

 
1,700

 
1,700

Other
21

 
31

 
9

 

 

 
61

Non-operating expense
21

 
93

 
14

 

 
3,247

 
3,375

Income (loss) before income taxes
2,233


791


303


201


(4,246
)

(718
)
Provision (benefit) for income taxes
759

 
471

 
103

 
159

 
(1,444
)
 
48

Net income (loss)
$
1,474


$
320


$
200


$
42


$
(2,802
)

$
(766
)



15



For the nine months ended September 30, 2015
(In thousands, unaudited)
 
Casino/Resort Operations
 
 
 
 
 
 
 
Northern
 Nevada
 
Rising Star
Casino Resort
 
Silver Slipper
Casino & Hotel
 
Development/
Management
 
Corporate
 
Consolidated
Revenues, net
$
15,665

 
$
35,444

 
$
42,967

 
$

 
$

 
$
94,076

 
 
 
 
 
 
 
 
 
 
 
 
Adjusted Property EBITDA
$
3,269

 
$
3,251

 
$
7,774

 
$

 
$

 
$
14,294

 
 
 
 
 
 
 
 
 
 
 
 
Other operating costs and expenses:
 
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization
593

 
2,039

 
3,582

 

 
11

 
6,225

Write-offs, recoveries and asset disposals
80

 

 

 

 
(446
)
 
(366
)
Preopening costs

 

 
134

 

 

 
134

Corporate expenses

 

 

 

 
2,964

 
2,964

Project development and acquisition costs

 

 

 
760

 

 
760

Stock compensation

 

 

 

 
285

 
285

Operating income (loss)
2,596

 
1,212

 
4,058

 
(760
)
 
(2,814
)
 
4,292

Non-operating expense (income):
 
 
 
 
 
 
 
 
 
 
 
Interest expense, net of amounts capitalized

 
124

 
13

 

 
4,739

 
4,876

Other

 
(11
)
 

 

 
(1
)
 
(12
)
Non-operating expense

 
113

 
13

 

 
4,738

 
4,864

Income (loss) before income taxes
2,596

 
1,099

 
4,045

 
(760
)
 
(7,552
)
 
(572
)
Provision (benefit) for income taxes

 
(61
)
 
8

 

 
(372
)
 
(425
)
Net income (loss)
$
2,596


$
1,160


$
4,037


$
(760
)

$
(7,180
)

$
(147
)





16



For the nine months ended September 30, 2014
(In thousands, unaudited)
 
Casino/Resort Operations
 
 
 
 
 
 
 
Northern
 Nevada
 
Rising Star
Casino Resort
 
Silver Slipper
Casino & Hotel
 
Development/
Management
 
Corporate
 
Consolidated
Revenues, net
$
16,543

 
$
40,188

 
$
36,879

 
$
1,066

 
$

 
$
94,676

 
 
 
 
 
 
 
 
 
 
 
 
Adjusted Property EBITDA
$
3,847

 
$
2,503

 
$
6,009

 
$
1,066

 
$

 
$
13,425

 
 
 
 
 
 
 
 
 
 
 
 
Other operating costs and expenses:
 
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization
640

 
2,305

 
4,207

 

 
13

 
7,165

Impairment

 
11,547

 

 

 

 
11,547

Write-offs, recoveries and asset disposals

 
8

 
13

 

 
30

 
51

Corporate expenses

 

 

 

 
3,091

 
3,091

Project development and acquisition costs

 

 

 
407

 

 
407

Stock compensation

 

 

 

 
219

 
219

Operating income (loss)
3,207

 
(11,357
)
 
1,789

 
659

 
(3,353
)
 
(9,055
)
Non-operating expense:
 
 
 
 
 
 
 
 
 
 


Interest expense, net of amounts capitalized

 
157

 
7

 

 
4,538

 
4,702

Settlement loss

 

 

 

 
1,700

 
1,700

Other
20

 
31

 
17

 

 

 
68

Non-operating expense
20

 
188

 
24

 

 
6,238

 
6,470

Income (loss) before income taxes
3,187

 
(11,545
)
 
1,765

 
659

 
(9,591
)
 
(15,525
)
Provision (benefit) for income taxes
1,084

 
(3,821
)
 
600

 
212

 
(3,261
)
 
(5,186
)
Net income (loss)
$
2,103


$
(7,724
)

$
1,165


$
447


$
(6,330
)

$
(10,339
)

17



Selected balance sheet data as of September 30, 2015 and December 31, 2014 follows:

As of September 30, 2015
(In thousands, unaudited)
 
Casino/Resort Operations
 
 
 
Northern
Nevada
 
Rising Star
Casino Resort
 
Silver Slipper
Casino & Hotel
 
Development/
Management
 
Corporate
 
Consolidated
Total assets
$
12,110

 
$
37,231

 
$
83,035

 
$
2,742

 
$
11,168

 
$
146,286

Property, equipment and capital lease, net
6,220

 
31,792

 
61,856

 
242

 
24

 
100,134

Goodwill
1,809

 

 
14,671

 

 

 
16,480

Liabilities
1,649

 
10,856

 
4,048

 

 
72,098

 
88,651


As of December 31, 2014
(In thousands)
 
Casino/Resort Operations
 
 
 
Northern
Nevada
 
Rising Star
Casino Resort
 
Silver Slipper
Casino & Hotel
 
Development/
Management
 
Corporate
 
Consolidated
Total assets
$
12,471

 
$
39,101

 
$
76,898

 
$

 
$
12,474

 
$
140,944

Property, equipment and capital lease, net
6,656

 
33,801

 
54,548

 

 
35

 
95,040

Goodwill
1,809

 

 
14,671

 

 

 
16,480

Liabilities
1,970

 
11,543

 
4,182

 

 
65,752

 
83,447


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This management’s discussion and analysis of financial condition and results of operations (“MD&A”) contains forward-looking statements that involve risks and uncertainties. Please see “Forward-Looking Statements” for a discussion of the uncertainties, risks and assumptions that may cause our actual results to differ materially from those discussed in the forward-looking statements. This discussion should be read in conjunction with our historical financial statements and related notes thereto and the other disclosures contained elsewhere in this Quarterly Report on Form 10-Q, and the audited consolidated financial statements and notes for the fiscal year ended December 31, 2014, which were included in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 26, 2015. 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”, except where stated or the context otherwise indicates.
 















18



Overview

We own and operate casinos and related hotel, food and beverage and entertainment facilities. Our portfolio of casinos consists of:
Property
Acquisition
Date
Location
Silver Slipper Casino and Hotel (Owned)
2012
Bay St. Louis, MS (near New Orleans)
Rising Star Casino Resort (Owned)
2011
Rising Sun, IN (near Cincinnati)
Stockman’s Casino (Owned)
2007
Fallon, NV (one hour east of Reno)
Grand Lodge Casino (leased and part of the Hyatt Regency Lake Tahoe Resort)
2011
Incline Village, NV (North Shore of Lake Tahoe)
 
Until our three-year contract expired in September 2014, we also managed the Buffalo Thunder Casino near Santa Fe, New Mexico for the Pueblo of Pojoaque.

During the third quarter of 2015, we opened the final phase of our 129-guest room hotel at the Silver Slipper Casino.

On September 27, 2015, we entered into an asset purchase agreement (the "Bronco Billy's Purchase Agreement") with Pioneer Group, Inc. pursuant to which we would acquire the operating assets and assume certain liabilities of Bronco Billy’s Casino and Hotel in Cripple Creek, Colorado for a purchase price of $30.0 million. The purchase price is subject to reduction to $28.5 million if Bronco Billy’s Adjusted EBITDA (as defined in the Bronco Billy's Purchase Agreement) for the applicable period is less than $4.7 million. We intend to finance the acquisition concurrent with the refinancing of our outstanding first and second lien debt. We have the option to terminate the Bronco Billy's Purchase Agreement without penalty if Bronco Billy’s Adjusted EBITDA for the most recent twelve-month period prior to closing is less than $4.5 million. Based on the results to date, management expects that Bronco Billy's results will exceed the $4.7 million and $4.5 million parameters.

 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 our properties, achieving and maintaining cost efficiencies, competitive factors, gaming tax increases and other regulatory changes, the commencement of new gaming operations and construction at existing facilities. 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 future periods’ results.
 
Our revenues are primarily derived from gaming sources, which include revenues from slot machines, table games and live keno. Gaming revenues are generally defined as gaming wins less gaming losses. In addition, we derive a significant amount of revenue from our hotel rooms and food and beverage outlets. We also derive revenues from our golf course at the Rising Star Casino Resort, retail outlets and entertainment. Promotional allowances consist primarily of hotel rooms and food and beverages furnished to customers on a complimentary basis. The retail value of such services is included in the respective revenue classifications and is then deducted as promotional allowances to calculate net revenues. We calculate operating income (loss) as net revenues less total operating costs and expenses. Operating income (loss) represents only those amounts that relate to our operations and excludes interest income, interest expense, and other non-operating income and expenses.
 
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 promises to pay (“markers”) exchanged into chips for use at the Company’s table games. Slot coin-in and table game drop are indicators of volume.


19



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

 Room revenue indicators:

Hotel occupancy rate is an indicator of the utilization of our available rooms; average daily rate (“ADR”) is a price indicator; and hotel revenue per available room (“RevPAR”) is the product of the two and indicates the overall revenue generation of the hotel. Complimentary room sales, or the retail value of accommodations gratuitously furnished to customers, are included in the calculation of the hotel occupancy rate, ADR and RevPAR.

Adjusted EBITDA and Adjusted Property EBITDA:

Management also uses Adjusted EBITDA and Adjusted Property EBITDA as measures of performance as more fully explained and discussed later herein.

    
    


20



Results of Operations
 
Consolidated operating results
The following summarizes our consolidated operating results for the three and nine months ended September 30, 2015 and 2014 (in thousands):

 
Three Months Ended
September 30,
 
Percent Change
 
Nine Months Ended September 30,
 
Percent Change
 
2015
 
2014
 
 
2015
 
2014
 
Net revenues
$
34,266

 
$
32,917

 
4.1
%
 
$
94,076

 
$
94,676

 
(0.6
)%
Operating expenses
31,005

 
30,260

 
2.5
%
 
89,784

 
103,731

 
(13.4
)%
Operating income (loss)
3,261

 
2,657

 
22.7
%
 
4,292

 
(9,055
)
 
(147.4
)%
Interest expense
1,829


1,614


13.3
%
 
4,876


4,702

 
3.7
 %
Income taxes (benefit)
(603
)

48


NM

 
(425
)

(5,186
)
 
NM

Net income (loss)
2,035

 
(766
)
 
NM

 
(147
)
 
(10,339
)
 
NM


 
Three Months Ended
September 30,
 
Percent Change
 
Nine Months Ended September 30,
 
Percent Change
 
2015
 
2014
 
 
2015
 
2014
 
Casino revenues
 
 
 
 
 
 
 
 
 
 
 
Slots
$
26,358

 
$
25,264

 
4.3
 %
 
$
72,622

 
$
73,367

 
(1.0
)%
Table games
4,135

 
4,236

 
(2.4
)%
 
11,499

 
11,467

 
0.3
 %
Other
84

 
106

 
(20.8
)%
 
253

 
302

 
(16.2
)%
 
30,577

 
29,606

 
3.3
 %
 
84,374

 
85,136

 
(0.9
)%
Non-casino revenues, net
 
 

 


 
 

 
 

 


Food and beverage
2,515

 
2,089

 
20.4
 %
 
7,041

 
6,134

 
14.8
 %
Hotel
376

 
254

 
48.0
 %
 
776

 
624

 
24.4
 %
Other
798

 
695

 
14.8
 %
 
1,885

 
1,716

 
9.8
 %
 
3,689

 
3,038

 
21.4
 %
 
9,702

 
8,474

 
14.5
 %
Management fees

 
273

 
 %
 

 
1,066

 
 %
Total net revenues
$
34,266

 
$
32,917

 
4.1
 %
 
$
94,076

 
$
94,676

 
(0.6
)%

NM - not meaningful

The following discussion is based on our consolidated financial statements for the three and nine months ended September 30, 2015 and 2014.
 
Revenues. Consolidated net revenues for the three-month period increased primarily due to our Silver Slipper segment, where the opening of our new hotel and strategic marketing enhancements resulted in significant visitation increases. The Silver Slipper hotel opened in phases, with 96 of 129 rooms open at the beginning of the third quarter of 2015, an additional 24 rooms opening on July 3, 2015 and the remaining nine suites completed on September 27, 2015. Revenue growth at the Silver Slipper more than offset decreases at Rising Star, which were impacted by increased competition, and Northern Nevada, where lower hold percentages at Grand Lodge adversely affected revenues. Additionally, in September 2014, our management contract with the Pueblo of Pojoaque Tribe expired, as reflected in our Development/Management segment.

For the nine-month period, consolidated net revenues showed a modest decline. At Silver Slipper, both gaming and non-gaming revenue rose significantly, reflecting the opening of the property's hotel, strategic promotional activity, enhancements to our food offerings and more favorable weather. In our Rising Star segment, revenues decreased primarily due to increased competition, including the addition of two new regional competitors in May and August 2014. Revenues for our Northern Nevada segment declined primarily due to historically low snow levels at Lake Tahoe regional ski resorts, which resulted in less visitation

21



at the Grand Lodge. Revenues were also affected by the expiration of the aforementioned management contract within our Development/Management segment.

See further information within our reportable segments described below.

Operating expenses. Consolidated operating expenses for the three-month period increased primarily due to staffing and other additional expenses necessary to operate the new hotel at the Silver Slipper; significant increases in guest volumes at Silver Slipper that resulted in an increase in casino, food and beverage, and selling, general and administrative costs; and higher project development and acquisition costs within our Development/Management segment related to the pending acquisition of Bronco Billy's and our American Place proposal. These increases were partially offset by a decrease in costs at our Rising Star segment, primarily due to a property tax refund that is included in selling, general and administrative expenses.

Consolidated operating expenses decreased for the nine-month period primarily due to several items at our Rising Star segment, including last year's $11.5 million impairment charge in the second quarter of 2014; the property tax refund mentioned above; and lower revenues, which accordingly resulted in a reduction in gaming taxes and other casino expenses. These decreases were partially offset by increased casino and food and beverage costs at our Silver Slipper segment, the result of an increase in patronage; additional expenses necessary to operate the new hotel at Silver Slipper; and costs related to the Bronco Billy's pending acquisition and American Place proposal.

Interest expense. Interest expense consists of the following (in thousands):
 
Three Months Ended
 September 30,
 
Nine Months Ended
 September 30,
 
2015
 
2014
 
2015
 
2014
Interest cost (excluding loan fee amortization)
$
1,404

 
$
1,319

 
$
4,098

 
$
3,832

Amortization of loan fees
408

 
389

 
1,218

 
1,114

Capitalized interest
17

 
(94
)
 
(440
)
 
(244
)
 
$
1,829

 
$
1,614

 
$
4,876

 
$
4,702

 
The increase in interest cost above for the three and nine month periods compared to the corresponding periods in the prior year was due to the additional debt incurred to construct the hotel at Silver Slipper and an increase in interest rate for the Second Lien Credit Facility.

Other expense. During the third quarter of 2014, the Company settled its lawsuit with Majestic Star Casino LLC ("Majestic Star") and Majestic Mississippi, LLC ("Majestic Mississippi") related to the Company's attempted purchase of the Fitz Tunica Casino & Hotel. Pursuant to the terms of the settlement, Majestic Star and Majestic Mississippi received $1.7 million of the funds held in escrow which was recorded by the Company as a settlement loss.

 Income tax benefit. We filed our original 2014 federal tax return during the first quarter of 2015, which resulted in the Company receiving a $3.1 million income tax refund in March 2015. During the third quarter of 2015, we filed a superseding 2014 federal tax return and our state tax returns, resulting in additional tax refunds due to the Company. At September 30, 2015, we have a refund receivable of $631,000 for our federal tax return and a receivable of $128,000 for our state tax returns.

We had income tax benefits for the three and nine months ended September 30, 2015. This was primarily due to the effects of changes in our valuation allowance against our deferred tax assets. In the prior-year periods we accrued a provision for income taxes, but then recorded a valuation allowance during the fourth quarter of 2014 against our deferred tax assets due to the uncertainty that such benefits would be realized. We continued to record a valuation allowance against our deferred tax assets during 2015.

We do not expect to pay any federal income taxes or receive any federal tax refunds related to our 2015 results. Tax losses incurred in 2015 may shelter taxable income in future years, but because of the level of uncertainty regarding sufficient prospective income, we maintain a valuation allowance against our deferred tax assets.
 
Operating results – reportable segments

We manage our casinos based on geographical regions within the United States. Accordingly, Stockman’s Casino and Grand Lodge Casino comprise a Northern Nevada business segment, while Rising Star Casino Resort and the Silver Slipper Casino

22



and Hotel are currently distinct segments. We previously managed certain casinos owned by Native American tribes and we also consider our fee-based casino development and management services as a segment, although none of our current casino properties are managed for others.
 
The following table presents detail by segment of our consolidated net revenue and Adjusted EBITDA (in thousands, unaudited). Management uses Adjusted Property EBITDA as the primary profit measure for its reportable segments. See "Non-GAAP Measures" for additional information.
 
Three Months Ended
September 30,
 
Percent Change
 
Nine Months Ended
September 30,
 
Percent Change
 
2015
 
2014
 
 
2015
 
2014
 
Net revenues
 
 
 
 
 
 
 
 
 
 
 
Silver Slipper Casino and Hotel
$
14,894

 
$
12,111

 
23.0
 %
 
$
42,967

 
$
36,879

 
16.5
 %
Rising Star Casino Resort
12,563

 
13,399

 
(6.2
)%
 
35,444

 
40,188

 
(11.8
)%
Northern Nevada Casinos
6,809

 
7,134

 
(4.6
)%
 
15,665

 
16,543

 
(5.3
)%
Development/Management

 
273

 
 %
 

 
1,066

 
 %
Corporate

 

 
 %
 

 

 
 %
 
$
34,266

 
$
32,917

 
4.1
 %
 
$
94,076

 
$
94,676

 
(0.6
)%
Adjusted EBITDA
 

 
 

 
 
 
 

 
 

 
 
Silver Slipper Casino and Hotel
$
2,413

 
$
1,736

 
39.0
 %
 
$
7,774

 
$
6,009

 
29.4
 %
Rising Star Casino Resort
2,455

 
1,650

 
48.8
 %
 
3,251

 
2,503

 
29.9
 %
Northern Nevada Casinos
2,227

 
2,463

 
(9.6
)%
 
3,269

 
3,847

 
(15.0
)%
Development/Management

 
273

 
 %
 

 
1,066

 
 %
Corporate
(844
)
 
(936
)
 
(9.8
)%
 
(2,964
)
 
(3,091
)
 
(4.1
)%
 
$
6,251

 
$
5,186

 
20.5
 %
 
$
11,330

 
$
10,334

 
9.6
 %
 
Silver Slipper Casino and Hotel
 
Net revenues increased for the three and nine months ended September 30, 2015 compared to the prior-year periods due to higher customer counts and gaming volumes, reflecting the phased opening of our hotel, strategic promotional activity, enhancements to our food offerings, and better weather conditions during the first quarter. For the three-month period, slot revenue increased 20%, table games revenue rose 23.5% and non-gaming net revenues (principally food and beverage revenues) grew 50.4%. For the nine-month period, slot revenue increased 14.1%, table games revenue rose 20.6% and non-gaming net revenues grew 35%. As of September 27, 2015, our 129-room hotel is now completely open.

     Adjusted Property EBITDA increased significantly for the three and nine months ended September 30, 2015 compared to the prior-year periods, attributable to the gaming and non-gaming revenue increases described above. Casino expenses and selling, general and administrative expenses increased by less than the increase in gaming revenues. As a result, Adjusted Property EBITDA margin for the three-month period improved to 16.2% from 14.3% in the prior-year period. For the nine-month period, Adjusted Property EBITDA margin improved to 18.1% from 16.3% in the prior-year period.

Adjusted Property EBITDA increased 25.3% in the first quarter, 25.1% in the second quarter, 39.0% in the third quarter, and 29.4% for the nine months ended 2015, compared to the prior-year periods.

Rising Star Casino Resort
 
Net revenues decreased for the three and nine months ended September 30, 2015 compared to the prior-year periods, primarily a result of competitive pressure from both new and existing nearby casinos and the resulting decline in gaming volumes. For the three-month period, slot revenue decreased 6.6% and table games revenue decreased 12.6%, while non-gaming net revenues (including food and beverage, hotel, golf and retail) increased 4%. For the nine-month period, slot revenue decreased 13.7% and table games revenue decreased 9.5%, while non-gaming net revenues increased 1.2%.

Adjusted Property EBITDA increased for the three months ended September 30, 2015 compared to the prior-year period, attributable to a $1.4 million property tax refund, a reduction in current-year property taxes, and a careful focus on cost controls,

23



which more than offset the decrease in revenues. Adjusted Property EBITDA margin for the three-month period increased to 19.5% from 12.3% in the prior-year period.

Adjusted Property EBITDA increased for the nine months ended September 30, 2015 compared to the prior-year period. The increase was primarily due to the property tax refund and reduction in current-year property taxes described above, along with cost containment measures which helped offset the revenue decline. Adjusted Property EBITDA margin for the nine-month period increased to 9.2% from 6.2% in the prior-year period. All casinos as currently allowed by law in Indiana and southern Ohio have now opened. A Kentucky Supreme Court decision in 2014, however, may now permit a horse racing track in northern Kentucky to install slot machine-like devices, and the Indiana legislature passed legislation to allow table games at casinos and racetracks (which are now limited to slot machines) beginning in 2020.

Northern Nevada

Net revenues decreased for the three months ended September 30, 2015 compared to the prior-year periods, primarily a result of lower hold percentages at Grand Lodge Casino. Slot and table games volumes for the the three-month period showed growth over the 2014 period, with slot coin-in rising 5.6% and table games drop increasing 11.0% from the third quarter of 2014. The slot hold percentage of 4.9% in the third quarter of 2015 compares to 5.4% in the third quarter of 2014; the table games hold percentage of 12.3% compares to 14.6% in last year's third quarter.

During the nine-month period, revenues at the Grand Lodge were additionally affected by historically low snow levels, which adversely affected the winter sports season and visitation at the property. For the nine-month period, slot revenue decreased 5.2% and table games revenue decreased 7%. Over the same period, slot handle decreased 1% and table games drop increased 7.4%. In Fallon, Nevada, the Company has made certain management and operational changes and cosmetic improvements at Stockman's Casino. Net revenues decreased 11.8% and 4.8% for the first and second quarters, respectively, and increased 1.7% in the third quarter, compared to the prior year periods. For the nine month period, revenues decreased 5.1%.

     Adjusted Property EBITDA for the Northern Nevada division decreased for the three and nine months ended September 30, 2015 compared to the prior-year periods, primarily due to the swings in win percentage mentioned above. Adjusted Property EBITDA margin for the three months ended September 30, 2015 decreased to 32.7% from 34.5% in the prior-year quarter, and for the nine-month period decreased to 20.9% from 23.3% in the prior-year period.

The Company's Northern Nevada operations have historically been seasonal, with the summer months accounting for a disproportionate share of its annual profits.

Development/Management and Corporate
 
Development/Management net revenues and Adjusted EBITDA decreased for both the three and nine month periods ended September 30, 2015 compared to the prior-year periods due to the expiration of our management contract in September 2014 with the Pueblo of Pojoaque.
 
Corporate expenses decreased for both the three and nine months ended September 30, 2015 compared to the prior-year periods primarily due to decreased corporate salaries and benefits.
 
Non-GAAP Measures
 
“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, board and executive transition costs, project development and acquisition costs, and non-cash share based compensation expense. Adjusted EBITDA information is presented solely as a supplemental disclosure to reported U.S generally accepted accounting principles (“GAAP”) measures because management believes these measures are (1) widely used measures of operating performance in the gaming and hospitality industry, (2) a principal basis for valuation of gaming and hospitality companies, and (3) are utilized in the covenants within our debt agreements, although not necessarily defined in the same way as above. “Adjusted Property EBITDA” is Adjusted EBITDA before corporate related costs and expenses which are not allocated to each property. Adjusted EBITDA and Adjusted Property EBITDA are not, however, a measure of financial performance or liquidity under GAAP. Accordingly, these measures 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.
 

24



The following table presents a reconciliation of Adjusted EBITDA to net income (loss) (in thousands, unaudited):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
Adjusted EBITDA
$
6,251

 
$
5,186

 
$
11,330

 
$
10,334

Depreciation and amortization
(2,203
)
 
(2,398
)
 
(6,225
)
 
(7,165
)
Impairment

 

 

 
(11,547
)
Write-offs, recoveries and asset disposals

 

 
366

 
(51
)
Preopening
(21
)
 

 
(134
)
 

Project development & acquisition costs
(709
)
 
(72
)
 
(760
)
 
(407
)
Stock compensation
(57
)
 
(59
)
 
(285
)
 
(219
)
Operating income (loss)
3,261

 
2,657

 
4,292

 
(9,055
)
Non-operating expense (income)
 

 
 

 
 

 
 

Interest expense
(1,829
)
 
(1,614
)
 
(4,876
)
 
(4,702
)
Settlement loss

 
(1,700
)
 

 
(1,700
)
Other

 
(61
)
 
12

 
(68
)
 
(1,829
)
 
(3,375
)
</