Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

 

 

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2019

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from         to

 

Commission File 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.)

 

 

 

One Summerlin, 1980 Festival Plaza Drive, Suite 680

Las Vegas, Nevada

(Address of principal executive offices)

 

89135

(Zip Code)

 

(702) 221-7800

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

 

 

 

Title of each Class

  

Trading Symbol(s)

  

Name of each exchange on which registered

Common Stock, $0.0001 par value per share

 

FLL

 

The Nasdaq Stock Market LLC

 

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

Indicate by check mark whether the registrant has submitted electronically 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  No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company and/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

Accelerated filer

Emerging growth company

Non-accelerated filer

Smaller reporting company

 

 

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:  Yes  No 

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

As of  November 7, 2019, there  were 26,999,518 shares of Common Stock, $0.0001 par value per share, outstanding.

 

 

 

 

Table of Contents

FULL HOUSE RESORTS, INC. AND SUBSIDIARIES

FORM 10-Q

INDEX

 

 

 

 

 

 

 

 

 

 

Page

PART I
FINANCIAL INFORMATION
 

Item 1. 

Financial Statements (Unaudited)

 

3

 

Consolidated Statements of Operations

 

3

 

Consolidated Balance Sheets

 

4

 

Consolidated Statements of Changes in Stockholders’ Equity

 

5

 

Consolidated Statements of Cash Flows

 

6

 

Condensed Notes to Consolidated Financial Statements

 

7

Item 2. 

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

 

21

Item 3. 

Quantitative and Qualitative Disclosures about Market Risk

 

37

Item 4. 

Controls and Procedures

 

37

 

 

 

 

PART II
OTHER INFORMATION
 

Item 1. 

Legal Proceedings

 

39

Item 1A. 

Risk Factors

 

39

Item 6. 

Exhibits

 

39

 

 

 

 

 

 

 

 

Signatures 

 

 

40

 

 

2

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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

 

Nine Months Ended

 

 

September 30, 

 

September 30, 

 

    

2019

    

2018

    

2019

    

2018

Revenues

 

 

  

 

 

  

 

 

  

 

 

  

Casino

 

$

30,644

 

$

30,767

 

$

87,392

 

$

86,369

Food and beverage

 

 

9,262

 

 

9,371

 

 

26,783

 

 

26,093

Hotel

 

 

3,077

 

 

2,583

 

 

8,843

 

 

7,448

Other operations

 

 

1,276

 

 

1,307

 

 

3,398

 

 

3,276

Net revenues

 

 

44,259

 

 

44,028

 

 

126,416

 

 

123,186

Operating costs and expenses

 

 

  

 

 

  

 

 

  

 

 

  

Casino

 

 

12,188

 

 

11,934

 

 

35,565

 

 

34,300

Food and beverage

 

 

10,154

 

 

10,301

 

 

28,972

 

 

29,184

Hotel

 

 

2,522

 

 

2,708

 

 

7,321

 

 

7,847

Other operations

 

 

1,189

 

 

958

 

 

3,030

 

 

2,306

Selling, general and administrative

 

 

12,485

 

 

11,769

 

 

38,172

 

 

36,193

Preopening costs

 

 

 —

 

 

140

 

 

 —

 

 

140

Project development and acquisition costs

 

 

228

 

 

390

 

 

503

 

 

557

Depreciation and amortization

 

 

2,089

 

 

2,094

 

 

6,263

 

 

6,300

Loss on sale or disposal of assets, net

 

 

10

 

 

 —

 

 

 5

 

 

79

 

 

 

40,865

 

 

40,294

 

 

119,831

 

 

116,906

Operating income

 

 

3,394

 

 

3,734

 

 

6,585

 

 

6,280

Other (expense) income

 

 

  

 

 

  

 

 

  

 

 

  

Interest expense, net of $478 and $112 capitalized for the three-months ended September 30, 2019 and 2018, and $608 and $328 capitalized for the nine-months ended September 30, 2019 and 2018

 

 

(2,428)

 

 

(2,513)

 

 

(8,062)

 

 

(7,519)

Loss on extinguishment of debt

 

 

 —

 

 

 —

 

 

 —

 

 

(2,673)

Adjustment to fair value of warrants

 

 

(262)

 

 

463

 

 

(161)

 

 

886

 

 

 

(2,690)

 

 

(2,050)

 

 

(8,223)

 

 

(9,306)

Income (loss) before income taxes

 

 

704

 

 

1,684

 

 

(1,638)

 

 

(3,026)

(Benefit) provision for income taxes

 

 

(234)

 

 

119

 

 

51

 

 

356

Net income (loss)

 

$

938

 

$

1,565

 

$

(1,689)

 

$

(3,382)

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per share

 

$

0.03

 

$

0.06

 

$

(0.06)

 

$

(0.13)

Diluted earnings (loss) per share

 

$

0.03

 

$

0.04

 

$

(0.06)

 

$

(0.16)

 

See condensed notes to consolidated financial statements.

3

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FULL HOUSE RESORTS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (Unaudited)

(In thousands, except share data)

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

    

2019

    

2018

ASSETS

 

 

 

 

 

 

Current assets

 

 

  

 

 

  

Cash and equivalents

 

$

27,782

 

$

20,634

Accounts receivable, net of allowance of $153 and $98

 

 

1,804

 

 

2,035

Inventories

 

 

1,935

 

 

1,425

Prepaid expenses and other

 

 

4,496

 

 

2,899

 

 

 

36,017

 

 

26,993

 

 

 

 

 

 

 

Property and equipment, net

 

 

121,253

 

 

122,076

Operating lease right-of-use assets, net(1)

 

 

18,240

 

 

 —

Goodwill

 

 

21,286

 

 

21,286

Other intangible assets, net

 

 

11,079

 

 

11,145

Deposits and other

 

 

613

 

 

772

 

 

$

208,488

 

$

182,272

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

Accounts payable

 

$

4,503

 

$

5,917

Accrued payroll and related

 

 

3,681

 

 

3,668

Other accrued expenses and current operating lease obligations(1)

 

 

11,970

 

 

9,704

Current portion of finance lease obligation

 

 

471

 

 

497

Current portion of long-term debt

 

 

1,100

 

 

1,000

Common stock warrant liability

 

 

986

 

 

825

 

 

 

22,711

 

 

21,611

 

 

 

 

 

 

 

Operating lease obligations, net of current portion, and other(1)

 

 

18,225

 

 

166

Finance lease obligation, net of current portion

 

 

3,948

 

 

4,324

Long-term debt, net

 

 

102,957

 

 

94,194

Deferred income taxes, net

 

 

683

 

 

632

 

 

 

148,524

 

 

120,927

Commitments and contingencies (Note 8)

 

 

  

 

 

  

Stockholders’ equity

 

 

  

 

 

  

Common stock, $0.0001 par value, 100,000,000 shares authorized; 28,336,955 and 28,288,764 shares issued and 26,980,360 and 26,932,169 shares outstanding

 

 

 3

 

 

 3

Additional paid-in capital

 

 

64,243

 

 

63,935

Treasury stock, 1,356,595 common shares

 

 

(1,654)

 

 

(1,654)

Accumulated deficit

 

 

(2,628)

 

 

(939)

 

 

 

59,964

 

 

61,345

 

 

$

208,488

 

$

182,272

 

(1)

On January 1, 2019, the Company adopted Accounting Standards Codification 842 (“ASC 842”), using the modified retrospective transition method under the effective date approach, which impacts the comparability of these line items.

See condensed notes to consolidated financial statements.

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FULL HOUSE RESORTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

Total

 

 

Common Stock

 

Paid-in

 

Treasury Stock

 

Accumulated

 

Stockholders’

 

    

Shares

    

Dollars

    

Capital

    

Shares

    

Dollars  

    

Deficit

    

Equity

Balance, January 1, 2019

 

28,289

 

$

 3

 

$

63,935

 

1,357

 

$

(1,654)

 

$

(939)

 

$

61,345

Exercise of stock options

 

26

 

 

 —

 

 

45

 

 —

 

 

 —

 

 

 —

 

 

45

Stock-based compensation

 

 —

 

 

 —

 

 

86

 

 —

 

 

 —

 

 

 —

 

 

86

Net loss

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(1,617)

 

 

(1,617)

Balance, March 31, 2019

 

28,315

 

 

 3

 

 

64,066

 

1,357

 

 

(1,654)

 

 

(2,556)

 

 

59,859

Stock grants

 

22

 

 

 —

 

 

48

 

 —

 

 

 —

 

 

 —

 

 

48

Stock-based compensation

 

 —

 

 

 —

 

 

59

 

 —

 

 

 —

 

 

 —

 

 

59

Net loss

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(1,010)

 

 

(1,010)

Balance, June 30, 2019

 

28,337

 

 

 3

 

 

64,173

 

1,357

 

 

(1,654)

 

 

(3,566)

 

 

58,956

Stock-based compensation

 

 —

 

 

 —

 

 

70

 

 —

 

 

 —

 

 

 —

 

 

70

Net income

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

938

 

 

938

Balance, September 30, 2019

 

28,337

 

$

 3

 

$

64,243

 

1,357

 

$

(1,654)

 

$

(2,628)

 

$

59,964

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Retained

 

Total

 

 

Common Stock

 

Paid-in

 

Treasury Stock

 

Earnings

 

Stockholders’

 

    

Shares

    

Dollars

    

Capital

    

Shares

    

Dollars  

    

(Deficit)

    

Equity

Balance, January 1, 2018

 

24,294

 

$

 2

 

$

51,868

 

1,357

 

$

(1,654)

 

$

3,432

 

$

53,648

Stock grants

 

34

 

 

 —

 

 

104

 

 —

 

 

 —

 

 

 —

 

 

104

Equity offering, net

 

3,943

 

 

 1

 

 

11,425

 

 —

 

 

 —

 

 

 —

 

 

11,426

Stock-based compensation

 

 —

 

 

 —

 

 

128

 

 —

 

 

 —

 

 

 —

 

 

128

Net loss

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(4,286)

 

 

(4,286)

Balance, March 31, 2018

 

28,271

 

 

 3

 

 

63,525

 

1,357

 

 

(1,654)

 

 

(854)

 

 

61,020

Equity offering, net

 

 —

 

 

 —

 

 

10

 

 —

 

 

 —

 

 

 —

 

 

10

Stock-based compensation

 

18

 

 

 —

 

 

175

 

 —

 

 

 —

 

 

 —

 

 

175

Net loss

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(661)

 

 

(661)

Balance, June 30, 2018

 

28,289

 

 

 3

 

 

63,710

 

1,357

 

 

(1,654)

 

 

(1,515)

 

 

60,544

Stock-based compensation

 

 —

 

 

 —

 

 

114

 

 —

 

 

 —

 

 

 —

 

 

114

Net income

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

1,565

 

 

1,565

Balance, September 30, 2018

 

28,289

 

$

 3

 

$

63,824

 

1,357

 

$

(1,654)

 

$

50

 

$

62,223

 

See condensed notes to consolidated financial statements.

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FULL HOUSE RESORTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

September 30, 

 

    

2019

    

2018

Cash flows from operating activities:

 

 

  

 

 

  

Net loss

 

$

(1,689)

 

$

(3,382)

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

 

 

  

 

 

  

Depreciation and amortization

 

 

6,263

 

 

6,300

Amortization of debt issuance and warrant costs

 

 

845

 

 

595

Stock-based compensation

 

 

263

 

 

521

Change in fair value of stock warrants

 

 

161

 

 

(886)

Change in fair value of interest rate cap

 

 

90

 

 

(40)

Loss on extinguishment of debt

 

 

 —

 

 

2,673

Loss on sale or disposal of assets

 

 

 5

 

 

79

Increases and decreases in operating assets and liabilities:

 

 

  

 

 

  

Accounts receivable

 

 

249

 

 

(3)

Prepaid expenses, inventories and other

 

 

(1,477)

 

 

(545)

Deferred taxes

 

 

51

 

 

356

Deferred revenue

 

 

2,000

 

 

 —

Accounts payable and accrued expenses

 

 

(1,048)

 

 

749

Net cash provided by operating activities

 

 

5,713

 

 

6,417

Cash flows from investing activities:

 

 

  

 

 

  

Purchase of property and equipment

 

 

(5,662)

 

 

(13,854)

Other

 

 

(563)

 

 

(341)

Net cash used in investing activities

 

 

(6,225)

 

 

(14,195)

Cash flows from financing activities:

 

 

  

 

 

  

Repayment of First and Second Lien Term Loans

 

 

 —

 

 

(96,063)

Prepayment premium of Second Lien Term Loan

 

 

 —

 

 

(1,100)

Proceeds from Senior Secured Notes borrowings

 

 

10,000

 

 

100,000

Payment of debt discount and issuance costs

 

 

(1,182)

 

 

(4,092)

Payment of Interest Rate Cap premium

 

 

 —

 

 

(238)

Repayment of Senior Secured Notes

 

 

(800)

 

 

(750)

Repayment of finance lease obligation

 

 

(403)

 

 

(342)

Proceeds from equity offering

 

 

 —

 

 

11,435

Proceeds from exercise of stock options

 

 

45

 

 

 —

Other

 

 

 —

 

 

(141)

Net cash provided by financing activities

 

 

7,660

 

 

8,709

 

 

 

 

 

 

 

Net increase in cash and equivalents

 

 

7,148

 

 

931

Cash and equivalents, beginning of period

 

 

20,634

 

 

19,910

Cash and equivalents, end of period

 

$

27,782

 

$

20,841

 

 

 

 

 

 

 

SUPPLEMENTAL CASH FLOW INFORMATION:

 

 

  

 

 

  

Cash paid for interest, net of amounts capitalized

 

$

6,962

 

$

6,953

NON-CASH INVESTING ACTIVITIES:

 

 

  

 

 

  

Accounts payable related capital expenditures

 

$

651

 

$

700

 

See condensed notes to consolidated financial statements.

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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. 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 Company currently operates five casinos; four are part of real estate that it owns or leases, and one is located within a hotel owned by a third party. The following table identifies the properties along with their respective dates of acquisition and locations:

 

 

 

 

 

 

 

    

Acquisition

    

 

Property

 

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)

 

The Company manages its casinos based on geographic regions within the United States. See Note 11 for further information.

 

 

2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation. As permitted by the rules and regulations of the Securities and Exchange Commission (“SEC”), certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) have been condensed or omitted. These consolidated financial statements should be read in conjunction with the Company’s 2018 annual consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10‑K for the year ended December 31, 2018.

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 annualized results for an entire year.

The consolidated financial statements include the accounts of Full House and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

Fair Value and the Fair Value Input Hierarchy. Fair value measurements affect the Company’s accounting for net assets acquired in acquisition transactions and certain financial assets and liabilities, such as its interest rate cap (“Interest Rate Cap”) agreement and common stock warrant liability. Fair value measurements are also used in the Company’s 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.

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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 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 Note 5).

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 Note 6).

Revenue Recognition of Accrued Club Points and Deferred Revenues

Accrued Club Points: Operating Revenues and Related Costs and Expenses. The Company’s revenues consist primarily of casino gaming, food and beverage, hotel, and other revenues (such as entertainment). The majority of the Company’s revenues are derived from casino gaming, principally slot machines.

Gaming revenue is the difference between gaming wins and losses, not the total amount wagered. The Company accounts for its gaming transactions on a portfolio basis as such wagers have similar characteristics and it would not be practical to view each wager on an individual basis.

The Company sometimes provides discretionary complimentary goods and services (“discretionary comps”). For these types of transactions, the Company allocates revenue to the department providing the complimentary goods or services based upon its estimated standalone selling price, offset by a reduction in casino revenues.

Many of the Company’s customers choose to earn points under its customer loyalty programs. As points are accrued, the Company defers a portion of its 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. Such liabilities were approximately $1.5 million for September 30, 2019 and $1.4 million for December 31, 2018. Upon redemption, the related revenue is recognized at retail value within the department providing the goods or services.

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. The Company records such revenue as the good or service is transferred to the customer. Additionally, the Company 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.

Deferred Revenues: Market Access Fees from Sports Wagering Agreements. These liabilities were created in the third quarter of 2019 when the Company entered into several agreements with various unaffiliated companies allowing for online sports wagering within Indiana and Colorado, as well as on-site sports wagering at Rising Star Casino Resort and at Bronco Billy’s Casino and Hotel (the “Sports Agreements”). As part of these longer-term Sports Agreements, the Company has received one-time market access fees totaling $2 million in cash, which is recorded as a long-term liability in the same amount as of September 30, 2019 and will be recognized as revenue ratably over the initial term length of 10 years, beginning with the commencement of operations. The Company will receive an additional $4 million of one-time market access fees in the fourth quarter of 2019, $1 million of which was already received and an additional $3 million that will become payable to the

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Company once the results from the November 5, 2019 election that ratified sports wagering in Colorado are certified by the state.

Income Taxes. For interim income tax reporting for the three- and nine-months ended September 30, 2019, the Company estimates its annual effective tax rate and applies it to its year-to-date pretax income or loss.

Reclassifications. The Company made certain minor financial statement presentation reclassifications to prior-period amounts to conform to the current-period presentation. Such reclassifications in presentation had no effect on the previously reported net loss or stockholders’ equity.

Earnings (Loss) Per Share. Earnings (loss) per share is net income (loss) applicable to common stock divided by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflects additional dilutive effects for all potentially-dilutive securities, including common stock options and warrants, using the treasury stock method.

New Accounting Pronouncement Implemented

Leases. In February 2016, the Financial Accounting Standards Board (the “FASB”) issued ASC 842, which replaces the existing guidance for leases and requires expanded disclosures about leasing activities. The Company determines if a contract is or contains a lease at inception or modification of the agreement. A contract is or contains a lease if there are identified assets and the right to control the use of an identified asset is conveyed for a period of time in exchange for consideration. Control over the use of the identified asset means that the lessee has both the right to obtain substantially all of the economic benefits from the use of the asset and the right to direct the use of the asset. ASC 842 requires a dual approach for lessee accounting under which a lessee would classify and account for leases as either finance leases or operating leases, both of which result in the lessee recognizing a right-of-use (“ROU”) asset and a corresponding lease liability on the balance sheet, as measured on a discounted basis for leases with terms greater than a year. For finance leases, the lessee will recognize interest expense associated with the lease liability and depreciation expense associated with the ROU asset; for operating leases, the lessee will recognize straight-line rent expense. For publicly-traded companies, ASC 842 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018.

Under the previous guidance for leases through December 31, 2018, rental payments for certain property and equipment used in the Company’s operations under long-term operating leases were recognized as rent expense with scheduled rent increases recognized on a straight-line basis over the initial lease term, without recording a lease asset and obligation. Rental payments for other property and equipment held under capital leases were recognized as a reduction of a capital lease obligation and interest expense. The fixed assets acquired pursuant to capital leases were included in property and equipment and amortized over the term of the lease.

Under the modified retrospective transition method, the Company elected to use the effective date approach with the period of adoption on January 1, 2019 as the date of initial application, and therefore, has elected to not recast comparative period financial information. In addition, the Company has elected the package of practical expedients permitted under the transition guidance to allow it to carry forward historical lease classifications, which includes not needing to reassess: (1) whether any expired or existing contracts are or contain leases, (2) the lease classification for any expired or existing leases, and (3) measurement of initial direct costs for any existing leases. The Company has also elected the practical expedient for short-term lease measurement and recognition, under which the Company will not recognize ROU assets or lease liabilities for leases with a term of 12 months or less. However, costs related to short-term leases with terms greater than one month, which the Company deems material, will be disclosed as a component of lease expenses when applicable. Additionally, the Company has elected the practical expedient to account for new and existing leases containing both lease and non-lease components (“embedded leases”) together as a single lease component by asset class for gaming-related equipment; as a result, the Company will not allocate contract consideration to the separate lease and non-lease components based on their relative standalone prices.

Finance and operating lease ROU assets and liabilities are recognized based on the present value of future minimum lease payments over the expected lease term at commencement. As the implicit rate is not determinable in most of the Company’s leases, management uses the Company’s incremental borrowing rate as estimated by third-party valuation specialists in determining the present value of future payments. The expected lease terms include options to extend or terminate the lease

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when it is reasonably certain that the Company will exercise such options. Lease expense for minimum lease payments is recognized on a straight-line basis over the expected lease term.

 

 

3. LEASES

The Company has no material leases in which it is the lessor. As lessee, the Company has one finance lease for a hotel and various operating leases for land, casino and office space, equipment, buildings, and signage. The Company’s lease terms, including extensions, range from one month to approximately 39 years. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants, but the land lease at Silver Slipper does include contingent rent as further discussed below.

Operating Leases

Silver Slipper Casino Land Lease through April 2058 and Options to Purchase. In 2004, the Company’s 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 agreement includes fixed, base monthly payments of $77,500 plus contingent rents of 3% of monthly gross gaming revenue (as defined in the lease) in excess of $3.65 million with no scheduled base rent increases through the remaining lease term ending in 2058. The land lease currently includes a purchase option at any time through October 1, 2027, for $15.5 million plus a seller-retained interest in Silver Slipper Casino and Hotel’s operations of 3% of net income (as defined) for 10 years following the purchase date. In the event that the Company sells or transfers either (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, the purchase price will increase to $17.1 million, plus the retained interest mentioned above. In either case, the Company also has an option to purchase a four-acre portion from the total 38 acres of leased land for $2.0 million in connection with the development of an owned hotel, which may be exercised at any time and would accordingly reduce the purchase price of the remaining land by $2.0 million. Following a buy-out of the lease, the property would have to purchase or otherwise provide for its drinking water, which is currently provided by the landlord as part of the lease. The cost of doing so is not believed to be significant.

Bronco Billy’s Lease through January 2035 and Option to Purchase. Bronco Billy’s leases certain parking lots and buildings, including a portion of the hotel and casino, under a long-term lease. The lease term includes six renewal options in three-year increments to 2035. Bronco Billy’s exercised its first renewal option through January 2020, and currently pays $30,000 per month in rent. In May 2019, Bronco Billy’s also exercised its second renewal option to extend the lease term through January 31, 2023, which will increase the monthly rent to $32,500 beginning in February 2021. The lease also contains a $7.6 million purchase option exercisable at any time during the lease term, or as extended, and a right of first refusal on any sale of the property.

Christmas Casino at Bronco Billy’s through August 2021 and Option to Purchase. As part of the Bronco Billy’s expansion, the Company leased a closed casino in August 2018 and opened it as the rebranded Christmas Casino in November 2018. The lease includes a minimum three-year term with annual lease payments of $0.2 million, and can be extended an additional two years with annual lease payments of $0.3 million. The Company can also purchase the casino at any time during the lease term, or as extended. The purchase price is $2.6 million if bought by October 31, 2020, increasing by $0.1 million on each anniversary thereafter up to $2.8 million.

Grand Lodge Casino Lease through August 2023. The Company’s subsidiary, Gaming Entertainment (Nevada), LLC, has a lease with Hyatt Equities, L.L.C. (“Hyatt”) to operate the Grand Lodge Casino. The lease is collateralized by the Company’s interests under the lease and property (as defined in the lease) and is subordinate to the liens of the senior secured notes due 2024 (see Note 5). Hyatt has an option, which began on January 1, 2019, to purchase the Company’s 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 pro-rated if less than twelve months remain on the lease), plus the fair market value of the Grand Lodge Casino’s personal property. The current monthly rent of $166,667 is applicable through the remaining lease term ending in August 2023.

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Corporate Office Lease through January 2025. In June 2017, the Company leased 4,479 square feet of office space in Las Vegas, Nevada. Annual rent is approximately $0.2 million and the term of the office lease expires in January 2025.

As of September 30, 2019, the Company has entered into two additional operating leases for gaming-related equipment, each at Bronco Billy’s and Rising Star Casino Resort, which are expected to commence within the fourth quarter of 2019.

Finance Lease

Rising Star Casino Hotel Lease through October 2027 and Option to Purchase. The Company’s Indiana subsidiary, Gaming Entertainment (Indiana) LLC, leases a 104‑room hotel at Rising Star Casino Resort. At any time during the lease term, the Company has the option to purchase the hotel at a price based upon the project’s actual cost of $7.7 million (see Note 4), reduced by the cumulative principal payments made by the Company during the lease term. At September 30, 2019, such net amount was $4.4 million. Upon expiration of the lease term in October 2027, (i) the Landlord has the right to sell the hotel to the Company, and (ii) the Company has the option to purchase the hotel. In either case, the purchase price is $1 plus closing costs.

Leases recorded on the balance sheet consist of the following:

 

 

 

 

 

 

 

(In thousands, Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Leases

    

Balance Sheet Classification

    

September 30, 2019

Assets

 

  

 

 

  

Operating lease assets

 

Operating Lease Right-of-Use Assets, Net

 

$

18,240

Finance lease assets

 

Property and Equipment, Net(1)

 

 

5,076

Total lease assets

 

  

 

$

23,316

 

 

 

 

 

 

Liabilities

 

  

 

 

  

Current

 

  

 

 

  

Operating

 

Other Accrued Expenses and Current Operating Lease Obligations

 

$

2,266

Finance

 

Current Portion of Finance Lease Obligation

 

 

471

Noncurrent

 

  

 

 

 

Operating

 

Operating Lease Obligations, Net of Current Portion, and Other

 

 

16,225

Finance

 

Finance Lease Obligation, Net of Current Portion

 

 

3,948

Total lease liabilities

 

  

 

$

22,910

 

(1)Finance lease assets are recorded net of accumulated amortization of $2.6 million as of September 30, 2019.

 

 

The components of lease expense are as follows:

 

 

 

 

 

 

 

 

 

(In thousands, Unaudited)

 

 

 

 

 

 

 

 

 

    

 

    

Three Months Ended

    

Nine Months Ended

Lease Costs

 

Statement of Operations Classification

 

September 30, 2019

 

September 30, 2019

Operating leases:

 

  

 

 

  

 

 

  

Fixed/base rent

 

Selling, General and Administrative Expenses

 

$

959

 

$

2,877

Variable payments

 

Selling, General and Administrative Expenses

 

 

146

 

 

501

Finance lease:

 

  

 

 

  

 

 

  

Amortization of leased assets

 

Depreciation and Amortization

 

 

40

 

 

119

Interest on lease liabilities

 

Interest Expense, Net

 

 

51

 

 

157

Total lease costs

 

 

 

$

1,196

 

$

3,654

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Maturities of lease liabilities as of September 30, 2019 are summarized as follows:

 

 

 

 

 

 

 

(In thousands, Unaudited)

 

 

 

 

 

 

 

    

Operating

    

Financing

Year Ending December 31, 

 

Leases

 

Lease(1)

2019 (excluding the nine months ended September 30, 2019)

 

$

968

 

$

127

2020

 

 

3,850

 

 

680

2021

 

 

3,719

 

 

652

2022

 

 

3,503

 

 

652

2023

 

 

2,478

 

 

652

Thereafter

 

 

32,152

 

 

2,499

Total future minimum lease payments

 

 

46,670

 

 

5,262

Less: Amount representing interest

 

 

(28,179)

 

 

(843)

Present value of lease liabilities

 

 

18,491

 

 

4,419

Less: Current lease obligations

 

 

(2,266)

 

 

(471)

Long-term lease obligations

 

$

16,225

 

$

3,948

 

(1)The Company’s only material finance lease is at Rising Star Casino Resort for a 104‑room hotel.

 

 

Other information related to lease term and discount rate is as follows:

 

 

 

 

Lease Term and Discount Rate

    

September 30, 2019

 

 

(Unaudited)

Weighted-average remaining lease term

 

  

 

Operating leases

 

21.3

years

Finance lease

 

8.0

years

Weighted-average discount rate

 

  

 

Operating leases(1)

 

9.44

%

Finance lease

 

4.50

%

 

(1)Upon adoption of the new lease standard, discount rates used for existing operating leases were established on January 1, 2019.

 

Supplemental cash flow information related to leases is as follows:

 

 

 

 

(In thousands, Unaudited)

    

 

 

 

 

Nine Months Ended

Cash paid for amounts included in the measurement of lease liabilities:

 

September 30, 2019

Operating cash flows for operating leases

 

$

2,881

Operating cash flows for finance lease

 

$

157

Financing cash flows for finance lease

 

$

403

 

 

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4. PROPERTY AND EQUIPMENT

Property and equipment, including finance lease assets, consists of the following:

 

 

 

 

 

 

 

(In thousands, Unaudited)

 

September 30, 

 

December 31, 

 

 

2019

 

2018

Land and improvements

 

$

15,835

 

$

15,786

Buildings and improvements

 

 

108,726

 

 

108,214

Furniture and equipment

 

 

45,564

 

 

43,740

Finance lease assets (see Note 3)

 

 

7,726

 

 

7,726

Construction in progress

 

 

9,519

 

 

6,864

 

 

 

187,370

 

 

182,330

Less: Accumulated depreciation

 

 

(66,117)

 

 

(60,254)

 

 

$

121,253

 

$

122,076

 

 

 

5. LONG-TERM DEBT

Long-term debt, related discounts and issuance costs consist of the following:

 

 

 

 

 

 

 

(In thousands, Unaudited)

 

September 30, 

 

December 31, 

 

 

2019

 

2018

Senior Secured Notes

 

$

108,200

 

$

99,000

Less: Unamortized discounts and debt issuance costs

 

 

(4,143)

 

 

(3,806)

 

 

 

104,057

 

 

95,194

Less: Current portion of long-term debt

 

 

(1,100)

 

 

(1,000)

 

 

$

102,957

 

$

94,194

 

Senior Secured Notes. On May 10, 2019, the Company entered into a Notes Purchase Agreement under which it agreed to sell an additional $10 million in aggregate principal amount of its senior secured notes due 2024 (the “Incremental Notes”) to qualified institutional buyers. The Company has used or expects to use the proceeds from the Incremental Notes to (i) provide additional liquidity for the construction of the Phase One parking garage at Bronco Billy’s Casino and Hotel and other capital expenditures; (ii) pay fees and expenses incurred in connection with the Incremental Notes offering; and (iii) provide funds for general corporate purposes. The Incremental Notes were issued on the same day at a price of 99.01% of their face value (a 0.99% original issue discount) pursuant to the indenture (as amended and supplemented, the “Indenture”), dated as of February 2, 2018. The Indenture governs the $100 million of senior secured notes due 2024 (the “Original Notes”) previously issued by the Company on February 2, 2018. The Incremental Notes have the same maturity date and interest rate as the Original Notes, are part of the same series as the Original Notes, and are treated as a single class together with the Original Notes (collectively, the “Notes”) for all purposes under the Indenture.

Also, on May 10, 2019, the Company executed the Second Amendment to the Indenture dated as of May 10, 2019, which (i) increased the principal amount required to be redeemed each quarter from $250,000 to $275,000 in total aggregate of the Notes, beginning June 30, 2019; (ii) permitted liens incurred in connection with the Cripple Creek Expansion Project; and (iii) changed the total leverage ratio as described in the Indenture and below under “Covenants.”

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%. 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 on February 2, 2024. On each interest payment date, the Company is required to make principal payments of $275,000 with a balloon payment for the remaining $103.5 million due upon maturity.

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The Company may redeem all or a part of the Notes plus the premium as set forth below, plus accrued and applicable unpaid interest:

 

 

 

 

Redemption Periods

    

Percentage Premium

 

On February 2, 2019 to February 1, 2020

 

2.0

%

On February 2, 2020 to February 1, 2021

 

1.5

%

On February 2, 2021 to February 1, 2022

 

0.5

%

On or after February 2, 2022

 

 —

%

 

The Notes are collateralized by substantially all of the Company’s assets and are guaranteed by all of its material subsidiaries.

Interest Rate Cap Agreement. The Company maintains an Interest Rate Cap from Capital One, N.A. (“Capital One”) in order to manage expected interest rate increases on the Notes. The agreement is for a notional amount of $50 million and expires on March 31, 2021. The Interest Rate Cap has a strike rate of 3.00% and resets every three months at the end of March, June, September, and December. If the three-month LIBOR exceeds the strike rate at the end of any covered period, the Company will receive cash payments from Capital One. For details regarding fair value measurements, see Note 2.

Covenants. The Indenture governing the Notes contains customary representations and warranties, events of default, and positive and negative covenants, including financial covenants. The Company is required to maintain a total leverage ratio, which measures Consolidated EBITDA (as defined in the Indenture) against outstanding debt. The Company is allowed to deduct up to $15 million of its cash and equivalents (beyond estimated cash utilized in daily operations) in calculating the numerator of such ratio. For the remainder of this year, the total leverage ratio maximum was adjusted to 6.00x as a result of the issuance of the Incremental Notes.

The Company was in compliance with its covenants as of September 30, 2019. However, there can be no assurances that the Company will remain in compliance with all covenants in the future and/or that it would be successful in obtaining waivers or modifications in the event of noncompliance.

 

 

6. COMMON STOCK WARRANT LIABILITY

As part of the Company’s former Second Lien Credit Facility, on May 13, 2016, the Company granted the Second Lien Credit Facility lenders 1,006,568 warrants, which have an exercise price of $1.67 and expire on May 13, 2026. The warrants also provide for redemption rights, preemptive rights under certain circumstances to maintain their ownership interest in the Company, piggyback registration rights and mandatory registration rights. In addition to a refinancing, the redemption rights allow the warrant-holders, at their option, to require the Company to repurchase all or a portion of the warrants upon the occurrence of certain events, including: (i) a liquidity event, as defined in the warrant purchase agreement, or (ii) the Company’s insolvency. The repurchase value is the 21‑day average price of the Company’s common stock at the time of such liquidity event, net of the warrant exercise price. If the redemption rights are exercised, the repurchase amount is payable by the Company in cash or through the issuance of an unsecured note with a four-year term and a minimum interest rate of 13.25%, as further defined in the warrant purchase agreement, and would be guaranteed by the Company’s subsidiaries. Alternatively, the warrant-holders may choose to have the Company register and sell the shares related to the warrants through a public stock offering.

The Company’s debt refinancing of the Second Lien Credit Facility during 2018 was considered a “triggering event” for the possible redemption or registration of the warrants. The Company’s warrant-holders have not yet requested the redemption or registration of their outstanding warrants, though they may do so on any six-month anniversary of the refinancing date prior to warrant expiration. Accordingly, the obligation is reflected as a current liability.

The Company measures the fair value of the warrants at each reporting period (see Note 2). At September 30, 2019, the estimated fair value was determined using the following assumptions:  an expected contractual term of 6.62 years, an expected stock price volatility rate of 45.33%, an expected dividend yield of 0%, and an expected risk-free interest rate of 1.61%.

 

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7. INCOME TAXES

The Company’s effective income tax rate for the three- and nine-months ended September 30, 2019 was (33.2%) and (3.1%), respectively, compared to an effective income tax rate of 7.1% and (11.8%) in the corresponding prior-year periods.  The Company’s tax rate differs from the statutory rate of 21.0% primarily due to the effects of valuation allowances against net deferred tax assets, as well as certain permanent item differences between tax and financial reporting purposes.

 

Subsequent to the Company’s filing of its quarterly report on Form 10-Q for the period ended June 30, 2019, the Company corrected the impact of the 2017 Tax Act on deferred tax liabilities to reflect that indefinite-lived deferred tax liabilities of $1.6 million should be netted against certain deferred tax assets and net operating loss carryforwards for purposes of assessing the realizability of those assets.   As a result, the Company has reduced the previously reported valuation allowance as of December 31, 2018 by $1.6 million with a resulting decrease in deferred tax liabilities and accumulated deficit at December 31, 2018 of $1.6 million.  Management believes that the impact of this adjustment is immaterial to the previously issued Consolidated Financial Statements.

 

 

8. COMMITMENTS AND CONTINGENCIES

Litigation

The Company is party to a number of pending legal proceedings related to matters that occurred in the normal course of business. Management does not expect that the outcome of any such proceedings, either individually or in the aggregate, will have a material effect on the Company’s financial position, results of operations and cash flows.

Options to Purchase or Lease Land

La Posada del Llano Racetrack Proposal in New Mexico. During July 2018, the Company paid $125,000 for options to purchase approximately 520 acres of adjoining land in Clovis, New Mexico as part of its racetrack casino proposal to the New Mexico Racing Commission. The proposal was in response to the New Mexico Racing Commission’s request for proposals related to the potential issuance of the state’s sixth racing license. During July 2019, the Company paid an additional $125,000 in total to renew these two options, as detailed below. In August 2019, the New Mexico Racing Commission announced that it would not issue the sixth racing license at this time, but may do so in the future. The New Mexico options consisted of:

·

A  $75,000 option to purchase 200 acres of land, which ended on the earlier of either July 2019 or 60 days following the granting of the sixth license to conduct horseracing by the New Mexico Racing Commission and New Mexico Gaming Control Board (“License Award”) and all related approvals, permits, and other licenses. In July 2019, the Company extended the purchase option by one year for another $75,000 under the same terms. Prior to the end of this first option extension, the Company may extend the purchase option by one year for an additional $75,000 under the same terms. Additionally, prior to the end of this first extension period, or as further extended, the Company may purchase the land for $1.4 million, which can be reduced by the option payments.

·

A  $50,000 option to purchase 320 acres of land, which ended on the earlier of either July 2019 or 60 days following the granting of the License Award and all related approvals, permits, and other licenses. In July 2019, the Company extended the purchase option by one year for another $50,000 under the same terms. Prior to the end of this option extension, the Company may purchase the land for $1.6 million, which can be reduced by the option payments.

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9. EARNINGS (LOSS) PER SHARE AND STOCKHOLDERS’ EQUITY

The table below reconciles basic and diluted income (loss) per share of common stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands, Unaudited)

 

Three Months Ended September 30, 

 

Nine Months Ended September 30, 

 

    

2019