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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 June 30, 2022

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, 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:  

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 August 4, 2022, there were 34,384,085 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 for the Three and Six Months Ended June 30, 2022 and 2021

3

Consolidated Balance Sheets at June 30, 2022 and December 31, 2021

4

Consolidated Statements of Changes in Stockholders’ Equity for the Three and Six Months Ended June 30, 2022 and 2021

5

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2022 and 2021

6

Condensed Notes to Consolidated Financial Statements

7

Item 2.

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

24

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

37

Item 4.

Controls and Procedures

38

PART II
OTHER INFORMATION

Item 1.

Legal Proceedings

38

Item 1A.

Risk Factors

38

Item 6.

Exhibits

39

Signatures

40

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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

Six Months Ended

June 30, 

June 30, 

    

2022

    

2021

    

2022

    

2021

Revenues

 

  

 

  

 

  

 

  

Casino

$

29,488

$

34,647

$

58,572

$

66,711

Food and beverage

 

6,933

 

7,440

 

13,444

 

13,541

Hotel

 

2,407

 

2,510

 

4,586

 

4,721

Other operations, including contracted sports wagering

 

5,555

 

2,845

 

9,204

 

4,677

 

44,383

 

47,442

 

85,806

 

89,650

Operating costs and expenses

 

  

 

  

 

  

 

  

Casino

 

10,106

 

11,087

 

19,981

 

21,426

Food and beverage

 

6,752

 

5,928

 

13,320

 

11,288

Hotel

 

1,197

 

1,140

 

2,268

 

2,196

Other operations

 

545

 

551

 

1,007

 

946

Selling, general and administrative

 

14,184

 

14,007

 

29,577

 

28,420

Project development costs

 

17

 

126

 

182

 

173

Preopening costs

1,534

2,320

Depreciation and amortization

 

1,834

 

1,829

 

3,626

 

3,629

(Gain) loss on disposal of assets, net

 

(5)

 

568

3

 

672

 

36,164

 

35,236

 

72,284

 

68,750

Operating income

 

8,219

 

12,206

 

13,522

 

20,900

Other (expense) income

 

  

 

  

 

  

 

  

Interest expense, net of amounts capitalized

(6,988)

(6,670)

(13,387)

(11,126)

(Loss) gain on modification and extinguishment of debt, net

(19)

30

(4,425)

(6,104)

Adjustment to fair value of warrants

 

 

 

 

(1,347)

 

(7,007)

 

(6,640)

 

(17,812)

 

(18,577)

Income (loss) before income taxes

 

1,212

 

5,566

 

(4,290)

 

2,323

Income tax provision (benefit)

5,567

82

(45)

284

Net (loss) income

$

(4,355)

$

5,484

$

(4,245)

$

2,039

Basic (loss) earnings per share

$

(0.13)

$

0.16

$

(0.12)

$

0.07

Diluted (loss) earnings per share

$

(0.13)

$

0.15

$

(0.12)

$

0.06

See condensed notes to consolidated financial statements.

3

Table of Contents

FULL HOUSE RESORTS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (Unaudited)

(In thousands, except share data)

June 30, 

December 31, 

    

2022

    

2021

ASSETS

Current assets

 

  

 

  

Cash and equivalents

$

108,231

$

88,721

Restricted cash

190,160

176,572

Accounts receivable, net

 

8,889

 

4,693

Inventories

 

1,392

 

1,660

Prepaid expenses and other

 

5,303

 

3,726

 

313,975

 

275,372

Property and equipment, net

 

217,174

 

149,540

Operating lease right-of-use assets, net

14,430

15,814

Goodwill

 

21,286

 

21,286

Other intangible assets, net

 

10,884

 

10,896

Deposits and other

 

2,010

 

934

$

579,759

$

473,842

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities

Accounts payable

$

16,336

$

8,411

Accrued payroll and related

 

4,111

 

5,473

Accrued interest

12,684

9,861

Other accrued liabilities

 

9,117

 

10,252

Current portion of operating lease obligations

3,668

3,542

Current portion of finance lease obligation

526

514

 

46,442

 

38,053

Operating lease obligations, net of current portion

 

11,293

 

12,903

Finance lease obligation, net of current portion

2,518

2,783

Long-term debt, net

 

401,001

 

301,619

Deferred income taxes, net

 

1,010

 

1,055

Contract liabilities, net of current portion

8,056

4,714

 

470,320

 

361,127

Commitments and contingencies (Note 8)

 

  

 

  

Stockholders’ equity

 

  

 

  

Common stock, $0.0001 par value, 100,000,000 shares authorized; 35,302,549 and 35,302,549 shares issued and 34,384,085 and 34,242,581 shares outstanding

 

4

 

4

Additional paid-in capital

 

109,708

 

108,911

Treasury stock, 918,464 and 1,059,968 common shares

 

(1,120)

 

(1,292)

Retained earnings

 

847

 

5,092

 

109,439

 

112,715

$

579,759

$

473,842

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

Retained

Stockholders’

Shares

Dollars

Capital

Shares

Dollars  

Earnings

Equity

Balance, January 1, 2022

35,302

$

4

$

108,911

1,060

$

(1,292)

$

5,092

$

112,715

Options exercised and
restricted stocks vested

14

(103)

125

139

Stock-based compensation

 

 

343

 

 

343

Net income

 

 

 

110

 

110

Balance, March 31, 2022

35,302

4

109,268

957

(1,167)

5,202

113,307

Restricted stocks vested

(47)

(39)

47

Stock-based compensation

487

487

Net loss

(4,355)

(4,355)

Balance, June 30, 2022

35,302

$

4

$

109,708

918

$

(1,120)

$

847

$

109,439

Additional

Total

Common Stock

Paid-in

Treasury Stock

Accumulated

Stockholders’

Shares

Dollars

Capital

Shares

Dollars  

Deficit

Equity

Balance, January 1, 2021

28,385

$

3

$

64,826

1,261

$

(1,538)

$

(6,614)

$

56,677

Equity offering, net

6,917

 

1

 

42,973

 

 

42,974

Options exercised

36

(34)

42

78

Stock-based compensation

124

124

Net loss

 

 

 

(3,445)

 

(3,445)

Balance, March 31, 2021

35,302

4

107,959

1,227

(1,496)

(10,059)

96,408

Options exercised

104

(152)

185

289

Stock-based compensation

199

199

Net income

5,484

5,484

Balance, June 30, 2021

35,302

$

4

$

108,262

1,075

$

(1,311)

$

(4,575)

$

102,380

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)

Six Months Ended

June 30, 

    

2022

    

2021

Cash flows from operating activities:

 

  

 

  

Net (loss) income

$

(4,245)

$

2,039

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

 

  

 

  

Depreciation and amortization

 

3,626

 

3,629

Amortization of debt issuance costs and discounts (premium) on debt

 

797

 

634

Stock-based compensation

 

830

 

323

Change in fair value of stock warrants

 

 

1,347

Loss on disposal of assets, net

 

3

 

672

Proceeds from insurance related to property damage

1,334

Loss on modification and extinguishment of debt, net

4,425

6,104

Increases and decreases in operating assets and liabilities:

 

  

 

  

Accounts receivable

 

(4,196)

 

1,506

Prepaid expenses, inventories and other

 

(1,309)

 

(4,209)

Deferred taxes

 

(45)

 

284

Common stock warrant liability

(4,000)

Contract liabilities

3,238

25

Accounts payable and accrued expenses

 

1,064

 

9,094

Net cash provided by operating activities

 

4,188

 

18,782

Cash flows from investing activities:

 

  

 

  

Purchase of property and equipment

 

(64,061)

 

(10,539)

Other

 

(965)

 

(32)

Net cash used in investing activities

 

(65,026)

 

(10,571)

Cash flows from financing activities:

 

  

 

  

Proceeds from Senior Secured Notes due 2028 borrowings

 

100,000

 

310,000

Proceeds from premium on Senior Secured Notes due 2028 borrowings

2,000

Proceeds from equity offering, net of issuance costs

42,974

Payment of debt discount and issuance costs

 

(7,841)

 

(9,405)

Repayment of Senior Secured Notes due 2024

(106,825)

Prepayment premiums of Senior Secured Notes due 2024

 

 

(1,261)

Repayment of finance lease obligation

(254)

(242)

Proceeds from exercise of stock options

 

139

 

367

Other

(108)

24

Net cash provided by financing activities

 

93,936

 

235,632

Net increase in cash, cash equivalents and restricted cash

 

33,098

 

243,843

Cash, cash equivalents and restricted cash, beginning of period

 

265,293

 

37,698

Cash, cash equivalents and restricted cash, end of period

$

298,391

$

281,541

Supplemental Cash Flow Information:

 

  

 

  

Cash paid for interest, net of amounts capitalized

$

13,745

$

891

Non-Cash Investing Activities:

 

  

 

  

Accounts payable related capital expenditures

$

12,089

$

2,681

See condensed notes to consolidated financial statements.

6

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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 on real estate that we own or lease and one located within a hotel owned by a third party. We are currently constructing two additional properties: Chamonix Casino Hotel (“Chamonix”), adjacent to the Company’s existing Bronco Billy’s Casino and Hotel in Cripple Creek, Colorado; and The Temporary by American Place (“The Temporary”) in Waukegan, Illinois. We also benefit from seven permitted sports wagering “skins,” three in Colorado, three in Indiana, and one in Illinois that we expect to receive upon the opening of The Temporary. As of June 30, 2022, five of our seven online skins are contracted with other companies, and four are currently in operation. These contracts allow the counterparties to operate online sports wagering sites under their brands, paying us a percentage of revenues, as defined in each respective agreement, subject to annual minimum amounts.

In December 2021, Full House was selected by the Illinois Gaming Board (“IGB”) to develop its American Place project in Waukegan, Illinois, a northern suburb of Chicago. During the period that the permanent American Place facility is under construction, we intend to operate a temporary casino facility named The Temporary. In May 2022, we commenced construction of The Temporary, which is expected to open in the fourth quarter of 2022, subject to customary regulatory approvals.

The following table identifies our segments, along with properties and their locations:

Segments and Properties

 Locations

Colorado

Bronco Billy’s Casino and Hotel

 

Cripple Creek, CO (near Colorado Springs)

Chamonix Casino Hotel (under construction)

Cripple Creek, CO (near Colorado Springs)

Illinois

The Temporary and American Place (under construction)

Waukegan, IL (northern suburb of Chicago)

Indiana

Rising Star Casino Resort

 

Rising Sun, IN (near Cincinnati)

Mississippi

Silver Slipper Casino and Hotel

 

Hancock County, MS (near New Orleans)

Nevada

Grand Lodge Casino
(leased and part of the Hyatt Regency Lake Tahoe Resort, Spa and Casino)

 

Incline Village, NV
(North Shore of Lake Tahoe)

Stockman’s Casino

 

Fallon, NV (one hour east of Reno)

Contracted Sports Wagering

Three sports wagering websites (“skins”)

Colorado

Three sports wagering websites (“skins”)

Indiana

One sports wagering website (“skin”) upon opening of The Temporary

Illinois

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

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COVID-19 Pandemic Update. The COVID-19 pandemic continues to evolve. Governmental authorities continue to update their precautionary measures and promote vaccination programs to manage the spread of the virus as different variants of the virus surface and subside. The Company has generally benefited from the gradual relaxation of pandemic-related business restrictions since 2021.

However, the COVID-19 pandemic, and certain precautionary measures, have created economic uncertainty both in the United States and globally, as well as significant volatility in, and disruption to, financial markets, labor markets and supply chains. Global supply chain disruptions have resulted in shipping delays, increased shipping costs, supply shortages, and inflationary pressures, including increases in prices for fuel, food, building materials, and other items. These increased costs, labor shortages, and supply shortages continued to put additional constraints on our operating business and our construction projects for the six-months ended June 30, 2022. We do not know when these cost, labor and supply chain issues will materially alleviate and, accordingly, they may continue to impact our existing business and our construction projects in the near term.

We believe that as the COVID-19 pandemic evolves, the direct and indirect impacts on global macro-economic conditions, as well as conditions specific to us, are becoming more difficult to isolate or quantify. In addition, these direct and indirect factors can make it difficult to isolate and quantify the portion of our costs that are a direct result of the pandemic versus costs arising from factors that may have been influenced by the pandemic, including supply chain constraints, increased prices and inflationary pressures, labor shortages, and changes in the spending patterns of customers. These factors and their effects on our operations may persist for a longer period, even after the COVID-19 pandemic has subsided.

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 2021 annual consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

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. 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.

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.

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The Company utilizes Level 1 inputs when measuring the fair value of its 2028 Notes (see Note 6).

The Company utilizes Level 2 inputs when measuring the fair value of its asset purchases and acquisitions (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.

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

Restricted cash balances consist of funds placed into a construction reserve account for the completion of the Chamonix construction project.

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

Revenue Recognition:

Accrued Club Points and Customer Loyalty Programs: 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 sports wagering, golf, RV park operations, and 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 casino 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 under loyalty programs by property for various benefits, primarily for “free casino play,” complimentary dining, or hotel stays, among others, depending on each property’s specific offers. Upon redemption, the related revenue is recognized at retail value within the department providing the goods or services. Unredeemed points are forfeited if the customer becomes and remains inactive for a specified period of time. Such liabilities were approximately $0.8 million for each of June 30, 2022 and December 31, 2021, and these amounts are included in “other accrued liabilities” on the consolidated balance sheets.

Revenue for food and beverage, hotel, and other revenue transactions is typically the net amount collected from customers 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 of the Company until the service is provided to the customer.

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Deferred Revenues: Market Access Fees from Sports Wagering Agreements. The Company entered into several agreements with various unaffiliated companies allowing for online sports wagering within Indiana, Colorado and Illinois, as well as on-site sports wagering at Rising Star Casino Resort, Bronco Billy’s Casino and Hotel, and The Temporary/American Place (the “Sports Agreements”). As part of these long-term Sports Agreements, the Company received one-time market access fees totaling $6 million in prior years, which were recorded as long-term liabilities and are being recognized as revenue ratably over the initial contract terms (or as accelerated due to termination), beginning with the commencement of operations. The market access fees are not refundable under ordinary circumstances. In May 2022, the Company received an additional $5 million of non-refundable, one-time market access fees for its executed Illinois Sports Agreement. As with the prior Sports Agreements, such market access fee was capitalized and will be amortized over the initial term of the agreement, beginning with the commencement of operations.

Indiana. The Company’s three Sports Agreements commenced operations in December 2019, April 2021 and December 2021. As noted below, one of such Sports Agreements ceased operations in May 2022.

Colorado. The Company’s three Sports Agreements commenced operations in June 2020, December 2020 and April 2021. As noted below, one of such Sports Agreements ceased operations in May 2022.

Illinois. The Company signed a Sports Agreement in May 2022 for Illinois. Such operations are expected to commence upon the opening of The Temporary, pending the receipt of customary gaming approvals.

In addition to the market access fees, deferred revenue includes the annual prepayment of contracted revenue, as required in two of the Sports Agreements. As of June 30, 2022, $1.0 million of such deferred revenue has been recognized during the year.

Deferred revenues consisted of the following, as discussed above:

(In thousands)

June 30, 

December 31, 

    

Balance Sheet Location

2022

    

2021

Deferred revenue, current

Other accrued liabilities

$

1,718

$

1,822

Deferred revenue, net of current portion

Contract liabilities, net of current portion

8,056

4,714

$

9,774

$

6,536

In February 2022, one of the Company’s contracted parties for sports wagering gave notice of its intent to cease operations on May 15, 2022, which created one available skin in each of Colorado and Indiana. Accordingly, this accelerated the recognition of $1.6 million of deferred revenue, which was recognized through the May 2022 termination date, as opposed to the remaining eight years of the original 10-year term. The Company is currently negotiating with other companies to be the replacement operator for such skins, but there can be no assurance that the Company will be able to find replacement operators on similar terms or at all.

Other Revenues. The transaction price of rooms, food and beverage, and retail contracts is the net amount collected from the customer for such goods and services. The transaction price for such contracts is recorded as revenue when the good or service is transferred to the customer over their stay at the hotel or when the delivery is made for the food, beverage, retail and other contracts. Sales and usage-based taxes are excluded from revenues.

Revenue by Source. The Company presents earned revenue as disaggregated by the type or nature of the good or service (casino, food and beverage, hotel, and other operations comprised mainly of retail, golf, entertainment, and contracted sports wagering) and by relevant geographic region within Note 11.

Income Taxes. For interim income tax reporting, it was determined during the second quarter of 2022 that the Company’s annual effective tax rate could not be reasonably estimated. As a result, the Company used the actual year-to-date effective tax rate to determine the tax expense incurred during the three and six months ended June 30, 2022.

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Reclassifications. The Company made certain minor financial statement presentation reclassifications to prior-period amounts to conform to the current-period presentation. Such reclassifications had no effect on the previously reported results of operations or financial position.

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 share-based awards outstanding under the Company’s stock compensation plan and warrants, using the treasury stock method.

Leases. 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.

For material leases with terms greater than a year, the Company records right-of-use (“ROU”) assets and lease liabilities on the balance sheet, as measured on a discounted basis. For finance leases, the Company recognizes interest expense associated with the lease liability and depreciation expense associated with the ROU asset; for operating leases, the Company recognizes straight-line rent expense.

The Company does 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, are disclosed as a component of lease expenses when applicable. Additionally, the Company accounts 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; therefore, the Company does 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 based on the information available at the commencement date and/or modification date. The expected lease terms include options to extend the lease 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 for operating leases. For finance leases, the ROU asset depreciates on a straight-line basis over the shorter of the lease term or useful life of the ROU asset and the lease liability accretes interest based on the interest method using the discount rate determined at lease commencement.

Preopening costs. Preopening costs are related to the preopening phases of new ventures, in accordance with accounting standards regarding start-up activities, and are expensed as incurred. These costs consist of payroll, advertising, outside services, organizational costs and other expenses directly related to new or start-up operations.

Recently Issued Accounting Pronouncements Not Yet Adopted. The Company believes that there are no other recently-issued accounting standards not yet effective that are currently likely to have a material impact on its financial statements.

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3. ACCOUNTS RECEIVABLE

Accounts receivable, net, consists of the following:

(In thousands)

June 30, 

December 31, 

    

    

2022

    

2021

Casino

$

511

$

398

Hotel

24

70

Trade Accounts

473

821

Other Operations, excluding Contracted Sports Wagering(1)

2,315

190

Contracted Sports Wagering

4,530

2,261

Other

1,301

1,210

9,154

4,950

Less: Reserves

 

(265)

 

(257)

$

8,889

$

4,693

_________

(1)

Includes the sale of “free play” at Rising Star for $2.1 million in May 2022, with such amount expected to be received in the third quarter of 2022. Because Indiana has a progressive gaming tax system and Rising Star is one of the smaller casinos in the state, the property has consistently sold its ability to deduct “free play” in computing gaming taxes to operators in higher tax tiers (though not sold until the third quarter in 2021).

Management believes that, as of June 30, 2022, no significant concentrations of credit risk existed for which a reserve had not already been recorded.

4. LEASES

The Company has no 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 36 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 land lease 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.

From April 1, 2022 through October 1, 2027, the Company may buy out the lease 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.

Bronco Billy’s / Chamonix 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. The Company exercised its third renewal option to extend the lease term through January 2026, with current annual lease payments of $0.4 million. The lease 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.  

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Third Street Corner Building through August 2023 and Option to Purchase. The Company leased a closed casino in Colorado in August 2018 and reopened it in November 2018. The reopened casino did not produce enough incremental revenue to offset the incremental costs, and it was closed in September 2020. The Company has the right to purchase the casino at any time during the extended lease term for $2.8 million.

As part of the Chamonix development project, this building is currently used as office space for construction personnel, obviating the need for construction trailers. The lease had an initial three-year term with annual lease payments of $0.2 million, and was subsequently extended to August 13, 2023, with current annual lease payments of $0.3 million.

Grand Lodge Casino Lease through August 2023. The Company’s subsidiary, Gaming Entertainment (Nevada), LLC, has a lease with Incline Hotel, LLC, the owner of the Hyatt Regency Lake Tahoe Resort (“Hyatt Lake Tahoe”), to operate the Grand Lodge Casino. It 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 Notes (see Note 6). The lessor currently has an option to purchase the Company’s leasehold interest and related operating assets of the Grand Lodge Casino, subject to assumption of applicable liabilities, and such option has not been exercised by the lessor as of this report date. 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.

Corporate Office Lease through January 2025. The Company leases 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.

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, and approximately 3.01 acres of land on which it resides, at a price based upon the hotel’s original cost of $7.7 million, reduced by the cumulative principal payments made by the Company during the lease term. At June 30, 2022, such potential purchase price was $3.0 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.

The components of lease expense are as follows:

(In thousands)

    

    

Three Months Ended

    

Six Months Ended

Classification within

June 30, 

June 30, 

Lease Costs

Statement of Operations

2022

 

2021

2022

 

2021

Operating leases:

 

  

 

  

  

 

  

  

Fixed/base rent

 

Selling, General and Administrative Expenses

$

1,172

$

1,086

$

2,337

$

2,245

Short-term payments

Selling, General and Administrative Expenses

33

70

Variable payments

 

Selling, General and Administrative Expenses

 

352

 

418

 

738

 

820

Finance lease:

 

 

  

 

 

  

 

  

Amortization of leased assets

 

Depreciation and Amortization

 

39

 

39

 

78

 

78

Interest on lease liabilities

 

Interest Expense, Net

 

35

 

41

 

72

 

84

Total lease costs

$

1,631

$

1,584

$

3,295

$

3,227

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Leases recorded on the balance sheet consist of the following:

(In thousands)

June 30, 

December 31, 

Leases

    

Balance Sheet Classification

    

2022

2021

Assets

 

  

 

  

  

Operating lease assets

   

Operating Lease Right-of-Use Assets, Net

   

$

14,430

$

15,814

Finance lease assets

 

Property and Equipment, Net(1)

 

4,644

 

4,722

Total lease assets

 

  

$

19,074

$

20,536

Liabilities

 

  

 

  

 

  

Current

 

  

 

  

 

  

Operating

 

Current Portion of Operating Lease Obligations

$

3,668

$

3,542

Finance

 

Current Portion of Finance Lease Obligation

 

526

 

514

Noncurrent

 

  

 

 

Operating

 

Operating Lease Obligations, Net of Current Portion

 

11,293

 

12,903

Finance

 

Finance Lease Obligation, Net of Current Portion

 

2,518

 

2,783

Total lease liabilities

 

  

$

18,005

$

19,742

__________

(1)

Finance lease assets are recorded net of accumulated amortization of $3.1 million and $3.0 million as of June 30, 2022 and December 31, 2021, respectively.

Maturities of lease liabilities as of June 30, 2022 are summarized as follows:

(In thousands)

    

Operating

    

Financing

Years Ending December 31, 

Leases

Lease(1)

2022 (excluding the six months ended June 30, 2022)

$

2,450

$

272

2023

 

3,641

 

652

2024

 

1,768

 

652

2025

 

1,538

 

652

2026

 

965

 

652

Thereafter

 

29,140

 

543

Total future minimum lease payments

 

39,502

 

3,423

Less: Amount representing interest

 

(24,541)

 

(379)

Present value of lease liabilities

 

14,961

 

3,044

Less: Current lease obligations

 

(3,668)

 

(526)

Long-term lease obligations

$

11,293

$

2,518

__________

(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

June 30, 2022

December 31, 2021

Weighted-average remaining lease term

 

  

  

Operating leases

 

22.9

years

21.5

years

Finance lease

 

5.3

years

5.8

years

Weighted-average discount rate

 

  

  

Operating leases

 

9.39

%

9.32

%

Finance lease

 

4.50

%

4.50

%

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Supplemental cash flow information related to leases is as follows:

(In thousands)

    

Six Months Ended

June 30, 

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

2022

2021

Operating cash flows for operating leases

$

2,436

$

2,439

Operating cash flows for finance lease

$

72

$

84

Financing cash flows for finance lease

$

254

$

242

5. ACQUISITIONS

Fountain Square of Waukegan Land Purchase. In connection with the development of its American Place project in Waukegan, Illinois, the Company entered into an agreement in January 2022 to purchase approximately 10 acres of land adjoining the approximately 30-acre casino site to be leased from the City, providing space for additional parking and access to the casino site from a major road. The land was acquired on March 17, 2022 for total consideration of $7.5 million.

6. LONG-TERM DEBT

Long-term debt, related premium (discount) and issuance costs consist of the following:

(In thousands)

June 30, 

December 31, 

2022

2021

Revolving Credit Facility due 2026

$

$

Senior Secured Notes due 2028(1)

410,000

310,000

Less: Unamortized debt issuance costs and premium/(discount), net

 

(8,999)

 

(8,381)

$

401,001

$

301,619

__________

(1)The estimated fair value of these notes was approximately $325.8 million for June 30, 2022 and $327.5 million for December 31, 2021. The fair value was estimated using quoted market prices for these notes.

Senior Secured Notes due 2028. On February 12, 2021, the Company refinanced all $106.8 million of its outstanding Senior Secured Notes due 2024 (the “Prior Notes”) with the issuance of $310 million aggregate principal amount of 8.25% Senior Secured Notes due 2028 (the “2028 Notes”). The net proceeds from the sale of the 2028 Notes were used to redeem all of the Prior Notes (including a 0.90% prepayment premium) and to repurchase all outstanding warrants. Additionally, $180 million of bond proceeds were placed into a construction reserve account to fund construction of Chamonix.

On February 7, 2022, the Company closed a private offering of $100 million aggregate principal amount of additional 8.25% Senior Secured Notes due 2028 (the “Additional Notes”), which sold at a price of 102.0% of such principal amount. Proceeds from the sale of the Additional Notes are being used: (i) to develop, equip and open The Temporary, which the Company intends to operate while it constructs its permanent American Place facility, (ii) to pay the transaction fees and expenses of the offer and sale of the Additional Notes and (iii) for general corporate purposes. The Additional Notes were issued pursuant to the indenture, dated as of February 12, 2021 (the “Indenture”), to which the Company issued the $310 million of 2028 Notes noted above (collectively, the “Notes”). In connection with the issuance of the Additional Notes, the Company and the subsidiary guarantors party to the Indenture entered into two Supplemental Indentures with Wilmington Trust, National Association, as trustee, dated February 1, 2022 and February 7, 2022, respectively. On March 3, 2022, the Company entered into a third Supplemental Indenture to establish a special record date for the initial interest payment for the Additional Notes.

The Notes bear interest at a fixed rate of 8.25% per year and mature on February 15, 2028. There is no mandatory debt amortization prior to the maturity date. Interest on the Notes is payable on February 15 and August 15 of each year, with the next interest payment due on August 15, 2022.

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The Notes are guaranteed, jointly and severally (such guarantees, the “Guarantees”), by each of the Company’s restricted subsidiaries (collectively, the “Guarantors”). The Notes and the Guarantees are the Company’s and the Guarantors’ general senior secured obligations, subject to the terms of the Collateral Trust Agreement (as defined in the Indenture), ranking senior in right of payment to all of the Company’s and the Guarantors’ existing and future debt that is expressly subordinated in right of payment to the Notes and the Guarantees, if any. The Notes and the Guarantees will rank equally in right of payment with all of the Company’s and the Guarantors’ existing and future senior debt.

The Notes contain representations and warranties, financial covenants, and restrictions on dividends customary for notes of this type. Mandatory prepayments, in whole or in part, of the Notes will be required upon the occurrence of certain events, including sales of certain assets, upon certain changes of control, or should the Company have certain unused funds in the construction disbursement account following the completion of Chamonix.

On or prior to February 15, 2024, the Company may redeem up to 35% of the original principal amount of the Notes with proceeds of certain equity offerings at a redemption price of 108.25%, plus accrued and unpaid interest to the redemption date. In addition, the Company may redeem some or all of the Notes prior to February 15, 2024 at a redemption price of 100% of the principal amount of the Notes, plus accrued and unpaid interest to the redemption date and a “make-whole” premium.

At any time on or after February 15, 2024, the Company may redeem some or all of the Notes for cash at the following redemption prices:

Redemption Periods

    

Percentage Premium

February 15, 2024 to February 14, 2025

 

104.125

%

February 15, 2025 to February 14, 2026

 

102.063

%

February 15, 2026 and Thereafter

100.000

%

Revolving Credit Facility due 2026. On February 7, 2022, the Company entered into a First Amendment to Credit Agreement with Capital One, N.A., which, among other things, increased the borrowing capacity under the Company’s Credit Agreement, dated as of March 31, 2021, from $15.0 million to $40.0 million (the “Credit Facility”). The amended $40.0 million senior secured revolving credit facility matures on March 31, 2026 and includes a letter of credit sub-facility. The Credit Facility may be used for working capital and other ongoing general purposes.

Under the First Amendment to Credit Agreement, the interest rate per annum applicable to loans under the Credit Facility was amended to be, at the Company’s option, either (i) the Secured Overnight Financing Rate (“SOFR”) plus a margin equal to 3.50% and a Term SOFR adjustment of 0.15%, or (ii) a base rate plus a margin equal to 2.50%. Upon completion of Chamonix (as defined in the agreement), the interest rate per annum applicable to loans under the Credit Facility will be reduced to, at the Company’s option, either (i) SOFR plus a margin equal to 3.00% and a Term SOFR adjustment of 0.15%, or (ii) a base rate plus a margin equal to 2.00%. Terms regarding the annual commitment fee, customary letter of credit fees, and repayment date of March 31, 2026, remain unchanged from the original Credit Agreement, dated as of March 31, 2021. As of this report date, there were no drawn amounts under the Credit Facility and an outstanding standby letter of credit of $1 million related to the American Place project.

The Credit Facility is equally and ratably secured by the same assets and guarantees securing the Notes. The Company may make prepayments of any amounts outstanding under the Credit Facility (without any reduction of the revolving commitments) in whole or in part at any time without penalty.

The Credit Facility contains a number of negative covenants that, subject to certain exceptions, are substantially similar to the covenants contained in the Notes. The Credit Facility also requires compliance with a financial covenant as of the last day of each fiscal quarter, such that Adjusted EBITDA (as defined) for the trailing twelve-month period must equal or exceed the utilized portion of the Credit Facility, if drawn. The Company was in compliance with this financial covenant as of June 30, 2022.

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7. INCOME TAXES

The Company’s effective income tax rates for the three and six months ended June 30, 2022 and 2021 were 459.3% and 1.0%, respectively, compared to effective income tax rates of 1.5% and 12.2% for the corresponding prior-year periods. The Company’s income tax expense or benefit for interim periods has historically been determined using an estimate of its annual effective tax rate (“AETR”), adjusted for discrete items. During the second quarter of 2022, it was determined that minor changes to the Company’s forecast caused significant changes to the AETR, resulting in tax expense that was incomparable, period-over-period. Specifically, a slight movement in year-to-date pretax book income would exaggerate the impact of items that drive tax expense, resulting in large fluctuations in AETR and the resultant tax expense/(benefit). As a result, the Company calculated the actual tax expense based on the results of operations during the three and six months ended June 30, 2022. This differs from the methodology used in the first quarter of 2022 to provide a more useful income tax expense for the current period.

The Company continues to assess the realizability of deferred tax assets (“DTAs”) and concluded that it has not met the “more likely than not” threshold. As of June 30, 2022, the Company continues to provide a valuation allowance against its DTAs that cannot be offset by existing deferred tax liabilities. In accordance with Accounting Standards Codification 740 (“ASC 740”), this assessment has taken into consideration the jurisdictions in which these DTAs reside. The valuation allowance against DTAs has no effect on the actual taxes paid or owed by the Company.

In the future, if it is determined that we meet the “more likely than not” threshold of utilizing our deferred tax assets, as required under ASC 740, then we may reverse some or all of our valuation allowance. We will continue to evaluate the need for the valuation allowance during each interim period in 2022. Absent any unforeseen impact to our operations, we expect that a continuing trend of net income improvements could result in the reversal of the valuation allowance by the end of 2022. Such valuation allowance and its potential reversal has no impact on the actual income taxes paid or the Company’s financial situation.

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 Lease Land

Option Agreement for Public Trust Tidelands Lease in Mississippi.  The Company has been evaluating the potential construction of an additional hotel tower and related amenities at Silver Slipper, a portion of which would extend out over the adjoining Gulf of Mexico. In contemplation for such potential future expansion, the Company paid $5,000 for an option agreement – entered into by the Company on June 8, 2021 and approved by the Governor of Mississippi on July 13, 2021 – for a 30-year lease of approximately a half-acre of tidelands, with a term extension for another 30 years, if exercised. This initial six-month option can be renewed for three additional six-month periods, with the payment of $5,000 for each extension. In November 2021, the Company paid an additional $5,000 to exercise its first six-month option extension through the end of May 2022. This option was further extended through the end of November 2022, when the Company paid an additional $5,000 to exercise its second six-month option extension in the second quarter of 2022.

Upon commencement of the lease, and for the first 18 months or until the beginning of the next six-month period after the opening of commercial operations on the leased premises, whichever occurs sooner, rent would be $10,000 for each six-month period (“Construction Rent”). Construction Rent would terminate no later than 18 months after the commencement of the lease. Thereafter, annual rent would be $105,300, with adjustments, based on the consumer price index on each anniversary. Before construction can commence, additional entitlements are necessary, including certain environmental approvals. There can be no certainty that the ti