FULL HOUSE RESORTS INC - Annual Report: 2019 (Form 10-K)

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

 

Commission File No. 001-32583

FULL HOUSE RESORTS, INC.

(Exact Name of Registrant as specified in Its Charter)

 

 

One Summerlin, 1980 Festival Plaza Drive, Suite 680, Las Vegas, Nevada 89135

(Address and zip code of principal executive offices)

(702) 221‑7800

(Registrant’s Telephone Number, Including Area Code)

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

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

None

(Title of class)

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

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

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.

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 Act). Yes ☐ No ☑

The aggregate market value of Registrant’s voting and non-voting common stock held by non-affiliates of the Registrant, as of June 28, 2019 (the last business day of the Registrant’s most recently completed second fiscal quarter), was: $45.1 million. As of March 26, 2020, there were 27,075,962 shares of common stock, $0.0001 par value per share, outstanding.

Documents Incorporated By Reference

The information required by Part III of this Form 10‑K is incorporated by reference from the Registrant’s definitive proxy statement relating to the annual meeting of stockholders to be held in 2020, which definitive proxy statement is anticipated to be filed with the Securities and Exchange Commission within 120 days after the end of the Registrant’s fiscal year ended December 31, 2019.

 

 

FULL HOUSE RESORTS, INC.

TABLE OF CONTENTS

 

PART I

Item 1. Business.

Introduction

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

The following table presents selected information concerning our casino resort properties as of December 31, 2019:

*We have agreements with Hyatt that allow us to provide rooms, as well as other amenities and services, to our guests at mutually agreeable rates to support our operations.

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

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

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

Operating Properties

Silver Slipper Casino and Hotel

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

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

We also manage a nearby 37‑space beachfront RV park under a management contract, which expires on March 31, 2025, unless canceled by either party.

Bronco Billy’s Casino and Hotel

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

In 2018, we began our expansion of Bronco Billy’s, which was designed to be completed in two phases. Phase One of the Bronco Billy’s expansion project includes the construction of a 319-space parking garage and connector building, the purchase of the Imperial Hotel in June 2018 and certain other nearby parcels of land, and the reopening and rebranding in November 2018 of the Imperial Casino and Imperial Hotel as the Christmas Casino & Inn. In March 2020, in light of the global coronavirus pandemic, we paused construction of the parking garage, which was in the early stages of construction. We do not yet know when or if conditions will warrant the resumption of such construction. Phase Two of the Bronco Billy’s expansion project is expected to include a new luxury hotel tower, spa, convention and entertainment space, two new restaurants, and a substantial remodeling of the casino. However, we do not intend to commence significant construction of Phase Two until Phase One is completed. Additionally, construction of Phase Two is contingent upon receipt of financing on acceptable terms, among other contingencies.

Rising Star Casino Resort

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

In the second half of 2018, we completed several capital projects. In July 2018, we renovated the entry pavilion and the adjoining hotel’s lobby and hallways. We also commenced operations for a 10‑vehicle ferry boat service in September 2018 that connects the more populous Boone County, Kentucky to our Rising Star property in Indiana. In the second half of 2019, we renovated and rebranded the existing casual restaurant as the new Ben’s Bistro. During recent years, Rising Star was adversely affected by the legalization of gaming in Ohio, where several new competitors are now located. All of such potential casinos in Ohio are now open.

Northern Nevada

Stockman’s Casino

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

Grand Lodge Casino

We operate the Grand Lodge Casino at the Hyatt Lake Tahoe under a lease with Hyatt Equities, L.L.C. (“Hyatt”), which ends on August 31, 2023. Grand Lodge Casino is located within the Hyatt Lake Tahoe in Incline Village, Nevada on the north shore of Lake Tahoe and includes approximately 20,990 square feet of leased space. The Hyatt Lake Tahoe is one of three AAA Four Diamond hotels in the Lake Tahoe area. Its customers consist of both locals and tourists visiting the Lake Tahoe area.

Government Regulation

The gaming industry is highly regulated, and we must maintain our licenses and pay gaming taxes to continue our operations. Each of our casinos is subject to extensive regulation under the laws, rules, and regulations of the jurisdiction in which it is located. These laws, rules, and regulations generally concern the responsibility, financial stability, and character of the owners, managers, and persons with financial interests in the gaming operations and include, without limitation, the following conditions and restrictions:

Violations of gaming laws in one jurisdiction could result in disciplinary action in other jurisdictions. A summary of the governmental gaming regulations to which we are subject is filed as Exhibit 99.1 and is herein incorporated by reference.

Our businesses are subject to various federal, state, and local laws and regulations, in addition to gaming regulations. These laws and regulations include, but are not limited to, restrictions and conditions concerning alcoholic beverages, smoking, environmental matters, employees, currency transactions, taxation, zoning and building codes, construction, land use, and marketing and advertising. We also deal with significant amounts of cash in our operations and are subject to various reporting and anti-money laundering regulations. Such laws and regulations could change or could be interpreted differently in the future,

or new laws and regulations could be enacted. Material changes, new laws or regulations, or material differences in interpretations by courts or governmental authorities could adversely affect our operating results. See “Item 1A – Risk Factors” for additional discussion.

Costs and Effects of Compliance with Environmental Laws

We are subject to various federal, state and local environmental laws and regulations that govern our operations, including emissions and discharges into the environment, and the handling and disposal of hazardous and non-hazardous substances and wastes. For example, our Indiana property is subject to the Indiana Department of Environmental Management for its riverboat, ferry boat and golf club operations, and our Mississippi property is located near environmental wetlands. Failure to comply with applicable laws and regulations could result in costs for corrective action, penalties or the imposition of other liabilities or restrictions. We also are subject to laws and regulations that impose liability and clean-up responsibility for releases of hazardous substances into the environment. Under certain of these laws and regulations, a current or previous owner or operator of the property may be liable for the costs of remediating contaminated soil or groundwater on or from its property, without regard to whether the owner or operator knew of, or caused, the contamination, and may also incur liability to third parties impacted by such contamination. The presence of contamination, or failure to remediate it properly, may adversely affect our ability to use, sell or rent the property. To date, none of these matters or other matters arising under environmental laws has had a material adverse effect on our business, financial condition, or results of operations; however, we cannot assure you that such matters will not have such an effect in the future.

Competition

The gaming industry is highly competitive. Gaming activities with which we compete include traditional commercial casinos and casino resorts in various states including on tribal lands and at racetracks, riverboat and dockside gaming, state-sponsored lotteries, video poker in restaurants, bars and hotels, pari-mutuel betting on horse and dog racing and jai alai, sports betting and card rooms. Furthermore, competition from Internet lotteries, sweepstakes, and other Internet wagering gaming services, which allow their customers to wager on a wide variety of sporting events and play Las Vegas-style casino games from home or in non-casino settings, could divert customers from our properties, and thus, adversely affect our business. All of our casinos, as well as other casinos that we may develop or acquire, compete with all these forms of gaming. We also compete with any new forms or jurisdictions of gaming that may be legalized, as well as with other types of entertainment. Some of our competitors have more personnel and greater financial or other resources than we do. The principal methods of competition are: location, with casinos located closer to their feeder markets at an advantage; casino, lodging, entertainment and other hospitality product quality in terms of facilities, customer service and ease of access; breadth of offerings, including the types of casino games and other non-gaming amenities; and marketing, including the amount and frequency of promotions offered to guests.

Silver Slipper Casino and Hotel

Silver Slipper Casino and Hotel is the western-most casino on the Mississippi Gulf Coast and competes with two larger casinos located nearby, one of which completed a significant expansion in mid‑2018. It also competes with casinos in Biloxi, Mississippi and New Orleans and Baton Rouge, Louisiana. Biloxi is one hour east of the Silver Slipper along Interstate 10. New Orleans and Baton Rouge are one and two hours, respectively, west of Silver Slipper.

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

Bronco Billy’s Casino and Hotel

Bronco Billy’s is located in Cripple Creek, Colorado, which is a historic gold mining town located approximately one hour southwest of Colorado Springs, on the west side of Pikes Peak. Cripple Creek is one of only three cities in Colorado where commercial gaming is permitted. The other two cities are near Denver. Additionally, two Native American gaming operations exist in southwestern Colorado and there are tribal casinos in Oklahoma, but these are much further from Colorado Springs than Cripple Creek. As of December 31, 2019, we believe that Bronco Billy’s was amongst the largest of the seven gaming facilities operating in Cripple Creek. Several of those competitors have announced their intent to expand, principally through the addition of new hotel rooms, with one of those projects having broken ground. Gaming in Colorado is “limited stakes,” which restricts any single wager to a current maximum of $100.

Rising Star Casino Resort

The Rising Star Casino Resort in Rising Sun, Indiana is one of three riverboat casinos located on the Ohio River in southeastern Indiana, approximately one hour from Cincinnati, Ohio, within two hours of Indianapolis, Indiana, and also within two hours of Louisville and Lexington, Kentucky. Its closest competitors are each approximately 15 miles away, near bridges crossing the Ohio River. There is no bridge at Rising Star, but in September 2018, we commenced a ferry boat service connecting Rising Sun, Indiana, to the more populous Northern Kentucky region. Rising Star also competes with casinos in Ohio; casinos elsewhere in Indiana; and two racetrack casinos near Indianapolis, Indiana.

A Kentucky Supreme Court decision in 2014 permits horse racing tracks in Northern Kentucky to install slot machine-like devices, although it has not yet done so. We also compete with racetracks in Louisville and Lexington, Kentucky, that recently installed such machines. In December 2019, our competitor near Louisville completed a significant investment to transition from its dockside riverboat casino to a new land-based casino. Additionally, on January 1, 2020, the racetrack casinos near Indianapolis (which were previously limited to slot machines) began offering live table games.

Northern Nevada

Stockman’s Casino

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

Grand Lodge Casino

Grand Lodge Casino is one of four casinos located within a five-mile radius in the North Lake Tahoe area. A fifth casino, which has been closed for several years, was sold out of bankruptcy during 2017 and may re-open in the near future.

Grand Lodge Casino also competes with casinos in South Lake Tahoe and Reno. There are also numerous Native American casinos in California serving the Northern California market.

Marketing

Our marketing efforts are conducted through various means, including our customer loyalty programs and specialized marketing campaigns, such as our seasonal “Christmas Casino” event at Rising Star Casino Resort. We advertise through various channels, including radio, television, Internet, billboards, newspapers and magazines, direct mail, email and social media. We also maintain websites to inform customers about our properties and utilize social media sites to promote our brands, unique events, and special deals. Our customer loyalty programs include the Silver Slipper Casino Players Club, Bronco Billy’s Mile

High Rewards Club, the Rising Star Rewards Club™, the Grand Lodge Players Advantage Club® and the Stockman’s Winner’s Club. Under these programs, customers earn points based on their volume of wagering that may be redeemed for various benefits, such as “free play,” cash back, complimentary dining, and hotel stays.

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

Employees

As of March 1, 2020, we had 15 full-time corporate employees, three of whom are executive officers and one additional senior management employee. Our casino properties had 1,255 full-time and 315 part-time employees as follows:

 

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

Available Information

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

Forward-Looking Statements

This Annual Report on Form 10‑K contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) for which the Private Securities Litigation Reform Act of 1995 provides a safe harbor. These forward-looking statements include, but are not limited to, statements about our plans, objectives, representations and intentions and are not historical facts and typically are identified by use of terms such as “believes,” “expects,” “anticipates,” “estimates,” “plans,” “intends,” “objectives,” “goals,” “aims,” “projects,” “forecasts,” “possible,” “seeks,” “may,” “could,” “should,” “might,” “likely,” “enable,” or similar words or expressions, as well as statements containing phrases such as “in our view,” “we cannot assure you,” “although no assurance can be given,” or “there is no way to anticipate with certainty.” Specifically, this Annual Report on Form 10‑K contains forward-looking statements relating to our plans, beliefs or expectations regarding our growth strategies; the impact of the coronavirus (COVID-19) pandemic and our expectations regarding the reopening of casinos and the length of time that state government authorities will require casinos in the respective states to remain closed; our development and expansion plans, including a planned expansion of Bronco Billy’s, our budget and ability to obtain financing for such expansion and the timing for commencement (or recommencement in the case of Phase One) or completion of each phase of such expansion; our investments in capital improvements and other projects, including the amounts of such investments, the timing of commencement or completion of such capital improvements and projects and the resulting impact on our financial results; our sports wagering agreements, including expected revenues and expenses, duration of terms and expected timing for launch, in the case of the Colorado agreements; the racetrack proposal and Waukegan proposal; management’s expectation to exercise its buyout option on the Silver Slipper Casino and Hotel; adequacy of our financial resources to fund operating requirements and planned capital expenditures and to meet our debt and contractual obligations; expected sources of revenue; cash interest expense in 2020; anticipated sources of funds; anticipated legislative pursuits; the operation of our ferry boat service at Rising Star Casino Resort; belief that Bronco Billy’s is amongst the largest of the seven gaming facilities operating in Cripple Creek; beliefs in connection with our marketing efforts; factors that affect the financial performance of our properties; adequacy of our insurance; competitive outlook; outcome of legal matters; impact of recently issued accounting standards; and estimates regarding certain accounting and tax matters, among others.

Various factors may affect the operation, performance, development and results of our business and could cause future outcomes to change significantly from those set forth in our forward-looking statements, including risks and uncertainties about the following:

For a more detailed description of certain Risk Factors affecting our business, see Item 1A, “Risk Factors.”

We undertake no obligation to publicly update or revise any forward-looking statements as a result of future developments, events or conditions, except as required by law. New risks emerge from time to time and it is not possible for us to predict all such risk factors, nor can we assess the impact of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ significantly from those forecast in any forward-looking statements.

Item 1A. Risk Factors.

An investment in our securities is subject to risks inherent to our business. We have described below what we currently believe to be the material risks and uncertainties in our business. Before making an investment decision, you should carefully consider the risks and uncertainties described below, together with all of the other information included or incorporated by reference in this Annual Report on Form 10‑K.

We also face other risks and uncertainties beyond what is described below. This Annual Report on Form 10‑K is qualified in its entirety by these risk factors. If any of the following risks actually occur, our business, financial condition and results of operations could be materially and adversely affected. If this were to happen, the value of securities, including our common stock, could decline significantly. You could lose all or part of your investment.

The outbreak of COVID-19 (coronavirus) has significantly impacted the global economy, including the gaming industry, and could have a material adverse effect on our results of operations, cash flows and liquidity.

The coronavirus pandemic and the efforts to contain it have significantly impacted the global economy, including the gaming industry in the United States and abroad. The ongoing coronavirus outbreak has resulted in extended shutdowns of non-

essential businesses around the world. Furthermore, governments are discouraging all non-essential movement and/or ordering social distancing and sheltering-in-place in an effort to help control the transmission of the coronavirus.

The coronavirus can be detected in individuals. The testing kits and tools have not been widely available and it is uncertain as to when they will become widely available. It is also possible to test for antibodies to COVID-19, a sign that an individual may have had the disease and may be less susceptible to contracting it again. Such testing is not yet widely available and it is not clear when it might become widely available. Eventually, medical professionals expect that there will be a vaccine for COVID-19, but the availability of that vaccine may be months or even years away. There have been similar outbreaks in the recent past (SARS, Ebola, MERS, and H1N1, for example, as well as various other strains of the flu) and there could be other pandemics in the future that could be similar or worse than COVID-19.

As a precautionary measure against the ongoing spread of the coronavirus, various state governments ordered the temporary closure of all casinos in their respective states, including all the states in which we have casino operations. As previously disclosed, Rising Star Casino Resort temporarily suspended operations on March 16, 2020 until further notice, Silver Slipper Casino and Hotel temporarily suspended operations on March 17, 2020 until further notice, Bronco Billy's Casino and Hotel temporarily suspended operations on March 17, 2020 until April 30, 2020, and Grand Lodge Casino and Stockman's Casino temporarily suspended operations on March 18, 2020 for a period of 30 days. While these closures are expected to be temporary, the current circumstances are dynamic and the impacts of the coronavirus on our business operations, including the duration and impact on overall customer demand, cannot be reasonably estimated at this time. However, we anticipate this could have a material adverse impact on our business, results of operations, financial position and cash flows.

After our casinos are eventually allowed to reopen, some guests may choose for a period of time not to travel or visit our properties for health concerns, which could lead to lower occupancy and lower room rates at our hotels, potential hotel closures, or additional closures or disruptions in our casino business, any of which could have a negative impact on our business and operating results. If the coronavirus continues to spread in the United States, we may elect on a voluntary basis to again close (after their reopening) certain of our properties or portions thereof, or governmental officials may order additional closures or impose further restrictions on travel or on the number of people allowed in our casino or perhaps sitting at any specific table game or bank of slot machines. There may also be restrictions on concerts or special events that we have historically used to bring customers to our properties. Any of these events could result in significant disruptions to our operations and a drop in demand for our hotel-casino properties and could have a material adverse effect on us. Moreover, our operations could be negatively affected if employees elect to stay home or are quarantined as the result of exposure to the virus. In addition, our reliance on third-party suppliers for food and other services exposes us to volatility in the prices and availability of these and similar goods and services. Such operational disruptions could increase our costs, further decrease our operating efficiencies and have a material adverse effect on our business, results of operations, financial condition and cash flows. The extent to which the coronavirus impacts our results will depend on future developments, which are highly uncertain, including the duration and impact on overall customer demand, the timing of the reopening of our casinos, new information which may emerge concerning the severity of the coronavirus, and the actions to contain the coronavirus or treat its impact, among others.

A prolonged closure of our casinos would negatively impact our ability to remain in compliance with our debt covenants, which would raise substantial doubt about our ability to continue as a going concern.

Our casinos are our primary sources of income and operating cash flows which we rely upon to remain in compliance with debt covenants under our senior secured notes due 2024 (the “Notes”) and meet our obligations when due. As noted above, due to the coronavirus pandemic, our operations at our casinos and hotels have been temporarily suspended and there is uncertainty as to when we will be permitted to reopen them.  Because we operate in several different jurisdictions, we may be able to reopen some, but not all, of our casinos within a certain time frame.  Although we believe we have sufficient resources to fund our currently-reduced operations for a period of time that lasts substantially beyond the currently mandated closure periods, we have no control over and cannot predict the length of the closure of our casinos and hotels due to the pandemic.  If we are unable to generate revenues from our casinos due to a prolonged period of closure or experience significant declines in business volumes upon reopening, this would negatively impact our ability to remain in compliance with our debt covenants and meet our payment obligations.  In such an event, we would either seek covenant waivers or attempt to amend our covenants, though there is no certainty that we would be successful in such efforts.  Additionally, we could seek additional liquidity through the issuance of new debt or equity, or through the sale of certain assets.  Our ability to obtain additional financing would depend in part on factors outside of our control.  If there is a prolonged closure of our casinos and hotels, or we are unable to obtain

additional capital, we may not be able to meet our debt covenants or pay our obligations as they become due and could risk default under the Notes, upon which the amount outstanding could be accelerated, which would raise substantial doubt about our ability to continue as a going concern. Our financial statements do not include adjustments that might result from the outcome of this uncertainty.

If we fail to maintain compliance with the continued listing requirements of The Nasdaq Capital Market, we could be delisted and the price of our common stock and our ability to access the capital markets could be negatively impacted.

Our common stock is currently listed on The Nasdaq Capital Market. To maintain the listing of our common stock on The Nasdaq Capital Market, we are required to meet certain continued listing requirements, which include, among others, a minimum closing bid price requirement of $1.00 per share for 30 consecutive trading days and any of: (i) a minimum stockholders’ equity of $2.5 million; (ii) a market value of listed securities of at least $35.0 million; or (iii) net income from continuing operations of $500,000 in the most recently completed fiscal year or in the two of the last three fiscal years. As of March 27, 2020, our bid price was $1.09 as a result of the unprecedented market disruptions caused by the coronavirus (COVID-19) pandemic.  Such bid price was in compliance with the continued listing requirements. 

In the event that the closing bid price of our common stock were below $1.00 for 30 consecutive trading days, we could receive a notice from Nasdaq that we are not in compliance with its continued listing requirements.  In connection with the market disruptions following September 11, 2001, Nasdaq temporarily suspended its minimum bid price and market float requirements in an effort to help companies remain listed in view of the extraordinary market conditions.  There can be no assurance, however, that Nasdaq would provide similar temporary relief for companies failing to meet these requirements today.

 If we fail to satisfy the continued listing requirements of The Nasdaq Capital Market, Nasdaq may take steps to delist our common stock, which could have a materially adverse effect on our ability to raise additional funds as well as the price and liquidity of our common stock. Such a delisting could have a negative effect on the price of our common stock and could impair our stockholders’ ability to sell or purchase our common stock when they wish to do so.

In addition, the delisting of our common stock from a national exchange could have a material adverse effect on our access to capital markets, and any limitation on market liquidity or reduction in the price of our common stock as a result of that delisting could adversely affect our ability to raise capital on terms acceptable to us, or at all.

 

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

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

These restrictions could adversely affect our ability to:

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

To service our indebtedness, we will require a significant amount of cash. Our ability to generate cash depends on many factors beyond our control.

Our ability to make payments on and to refinance our indebtedness, and to fund planned capital expenditures and expansion efforts, will depend upon our ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors,  including the impact of the coronavirus pandemic.

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

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

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

Our ability to obtain additional financing on commercially reasonable terms may be limited.

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

we will be able to obtain any additional financing, refinance our existing debt, or fund our growth efforts. If we are unable to obtain financing on commercially reasonable terms, it could:

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

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

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

An increase in market interest rates would increase our interest expense arising on our existing and future floating rate indebtedness. Pursuant to the terms of our indenture governing the Notes, the Notes bear interest at the greater of the three-month London Interbank Offered Rate (“LIBOR”) or 1.0%, plus a margin rate of 7.0%. As a result, we are exposed to interest rate risk. Interest rates, including LIBOR, have recently increased and are expected to continue to increase in future periods. If interest rates continue to increase, our debt service obligations on our variable rate indebtedness will increase even though the amount borrowed remains the same, and our net income and cash flows, including cash available for servicing our indebtedness, will correspondingly decrease. Furthermore, in an environment of increasing interest rates, it is likely that any future refinancing of our indebtedness will be either at fixed interest rates higher than our current fixed interest rates or at variable rates. We have purchased an interest rate cap that expires on March 31, 2021 to minimize the effect of interest rate increases on approximately half of our outstanding borrowings with a notional amount of $50 million and strike rate of 3.00%, which resets every three months at the end of March, June, September, and December. However, we do not maintain interest rate caps with respect to all of our variable rate indebtedness, and our interest rate cap may not fully mitigate our interest rate risk.

Uncertainty relating to the likely phasing out of LIBOR by 2021 may result in us paying increased interest under our debt instruments, such as our senior secured notes.

On July 27, 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, announced its intention to phase out LIBOR by the end of 2021. As a result, the continuation of LIBOR on its current basis is not guaranteed after 2021, and currently, it appears likely that LIBOR will be discontinued or substantially modified by 2021. If LIBOR ceases to exist, we may need to renegotiate our debt agreements. The discontinuation or modification of LIBOR could result in significant increases in benchmark interest rates, substantially higher financing costs or a shortage of available debt financing, any of which could have an adverse effect on our operating results.

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

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

We face significant competition from other gaming and entertainment operations.

The gaming industry is characterized by an increasingly high degree of competition among a large number of participants, including riverboat casinos, dockside casinos, land-based casinos, racetrack casinos, sports betting, video lottery, poker machines not located in casinos, Native American gaming, social gaming and other forms of gaming. Furthermore, competition from Internet lotteries, sweepstakes, and other Internet wagering gaming services, which allow their customers to wager on a wide variety of sporting events and play Las Vegas-style casino games from home or in non-casino settings, could divert customers from our properties and thus materially and adversely affect our business. Such Internet wagering services are often illegal under federal law, but operate from overseas locations and are, nevertheless, sometimes accessible to domestic gamblers. Additionally, there are often proposals to legalize Internet poker and other varieties of Internet gaming in a number of states and at the federal level. Several states, including Nevada, New Jersey, and Delaware, have enacted legislation authorizing intrastate Internet gaming and Internet gaming operations have begun in these states. Expansion of Internet gaming in other jurisdictions (both legal and illegal) could further compete with our traditional operations, which could have an adverse impact on our business and results of operations.

In a broader sense, our gaming operations face competition from all manner of leisure and entertainment activities, including other non-gaming resorts and vacation destinations, shopping, athletic events, television and movies, concerts, and travel. Legalized gaming is currently permitted in various forms throughout the U.S., in several Canadian provinces and on various lands taken into trust for the benefit of certain Native Americans in the U.S. and Canada. Other jurisdictions that border our operational locations, such as Ohio, have recently legalized and implemented gaming. In addition, established gaming jurisdictions could award additional gaming licenses or permit the expansion or relocation of existing gaming operations. New, relocated or expanded operations by other persons could increase competition for our gaming operations and could have a material adverse impact on us. Gaming competition is intense in most of the markets where we operate. In most markets, we compete directly with other casino facilities operating in the immediate and surrounding market areas. In some markets, we face competition from nearby markets in addition to direct competition within our market areas. As competing properties and new markets are opened, our operating results may be negatively impacted. In addition, some of our direct competitors in certain markets may have superior facilities and/or operating conditions. We expect each existing or future market in which we participate to be highly competitive. The competitive position of each of our casino properties is discussed in “Item 1. Business – Competition”.

We face extensive regulation from gaming and other regulatory authorities and the cost of compliance or failure to comply with such regulations may adversely affect our business and results of operations.

Licensing. The gaming industry is highly regulated and we must maintain our licenses and pay gaming taxes to continue our operations. The ownership, management and operation of gaming facilities are subject to extensive state and local regulation in the jurisdiction in which it is located. These laws, rules and regulations generally concern the responsibility, financial stability and character of the owners, managers, and persons with financial interest in the gaming operations. The regulatory authorities in jurisdictions where we operate have broad discretion, and may, for any reason set forth in the applicable legislation, rules and regulations, limit, condition, suspend, fail to renew or revoke a license or registration to conduct gaming operations. Furthermore, because we are subject to regulation in each jurisdiction in which we operate, and because regulatory agencies within each jurisdiction review our compliance with gaming laws in other jurisdictions, it is possible that gaming compliance issues in one jurisdiction may lead to reviews and compliance issues in other jurisdictions.

Taxation and fees. We believe that the prospect of significant tax revenue is one of the primary reasons that jurisdictions permit legalized gaming. As a result, gaming companies are typically subject to significant revenue-based taxes and fees in addition to normal federal, state, local and provincial income and employment taxes, and such taxes and fees are subject to increase at any time. We pay substantial taxes and fees with respect to our operations. From time to time, federal, state, local and

provincial legislators and officials have proposed changes in tax laws, or in the administration of such laws, affecting the gaming industry. In addition, any downturn in economic conditions could intensify the efforts of state and local governments to raise revenues through increases in gaming taxes and/or property taxes. It is not possible to determine with certainty the likelihood of changes in tax laws or in the administration of such laws. Any material increase, or the adoption of additional taxes or fees, could have a material adverse effect on our business, financial condition and results of operations.

Compliance with other laws. In addition to gaming regulations, we are also subject to various federal, state, and local laws and regulations affecting businesses in general. These laws and regulations include, but are not limited to, environmental matters, employment, currency transactions, taxation, construction, zoning, construction and land-use laws, marketing and advertising, smoking, and regulations governing the serving of alcoholic beverages.

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

We also deal with significant amounts of cash in our operations and are subject to various reporting and anti-money laundering regulations. Any violations of anti-money laundering laws or regulations by any of our properties could have an adverse effect on our financial condition, results of operations or cash flows. Such laws and regulations could change or could be interpreted differently in the future, or new laws and regulations could be enacted.

Our riverboat, as well as our ferry boat operations, at Rising Star must comply with certain federal and state laws and regulations with respect to boat design, on-board facilities, equipment, personnel and safety. In addition, we are required to have third parties periodically inspect and certify our casino riverboat for safety, stability and single compartment flooding integrity. All of our casinos also must meet local fire safety standards. We would incur additional costs, if any, if our gaming facilities are not in compliance with one or more of these regulations.

Changes in legislation and regulation of our business could have an adverse effect on our financial condition, results of operations and cash flows.

Regulations governing the conduct of gaming activities and the obligations of gaming companies in any jurisdiction in which we have or in the future may have gaming operations are subject to change and could impose additional operating, financial, competitive or other burdens on the way we conduct our business.

In particular, certain areas of law governing new gaming activities, such as the federal and state law applicable to sports betting, are new or developing in light of emerging technologies. New and developing areas of law may be subject to the interpretation of the government agencies tasked with enforcing them. In some circumstances, a government agency may interpret a statute or regulation in one manner and then reconsider its interpretation at a later date. No assurance can be provided that government agencies will interpret or enforce new or developing areas of law consistently, predictably, or favorably. Moreover, legislation to prohibit, limit or add burdens to our business may be introduced in the future in states where gaming has been legalized. In addition, from time to time, legislators and special interest groups have proposed legislation that would expand, restrict or prevent gaming operations or which may otherwise adversely impact our operations in the jurisdictions in which we operate. Any expansion of gaming or restriction on or prohibition of our gaming operations or enactment of other adverse regulatory changes could have a material adverse effect on our operating results. For example, in January 2019, legal counsel for the U.S. Department of Justice (“DOJ”) issued a legal opinion on the Interstate Wire Act of 1961 (“Wire Act”), which stated that the Wire Act bans any form of online gambling if it crosses state lines and reversed a 2011 DOJ legal opinion that stated that the Wire Act only applied to interstate sports betting. The validity of the 2019 DOJ legal opinion and the conflicting interpretations of the Wire Act by DOJ is presently the subject of ongoing litigation.

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

Our net revenues are highly dependent upon the volume and spending levels of customers at our properties and, as such, our business has been in the past, and could be in the future, adversely impacted by economic downturns. Decreases in discretionary consumer spending brought about by weakened general economic conditions such as, but not limited to, lackluster recoveries from recessions, pandemics, epidemics, widespread health emergencies, or outbreaks of infectious diseases such as the coronavirus, high unemployment levels, higher income taxes, low levels of consumer confidence, weakness in the housing market, cultural and demographic changes, and increased stock market volatility may negatively impact our revenues and operating cash flow. For example, the coronavirus is expected to have indeterminable adverse effects on the global economy, including the United States, such as an economic slowdown and it is possible that it could cause a global recession. This could lead to a reduction in discretionary spending by our guests on entertainment and leisure activities, which could have a material adverse effect on our revenues, cash flow and results of operations. Furthermore, during periods of economic contraction, our revenues may decrease while many of our costs remain fixed and some costs may increase, resulting in decreased earnings.

We cannot assure you that any of our contracted sports betting parties, through the use of our permitted website “skins,”  will be able to compete effectively, that our contracted sports parties will have the ability and/or willingness to sustain sports betting operations should they experience an extended period of unprofitability, or that we will have the ability to replace existing partners or vendors on similar terms as our existing revenue guarantees.

Our contracted sports betting parties, through the use of our permitted website “skins,” will compete in a rapidly evolving and highly competitive market against an increasing number of competitors. The success of their sports betting operations is dependent on a number of factors that are beyond our and their control, including the ultimate tax rates and license fees charged by jurisdictions across the United States; their ability to gain market share in a newly developing market; the timeliness and the technological and popular viability of their products, their ability to compete with new entrants in the market; changes in consumer demographics and public tastes and preferences; and the availability and popularity of other forms of entertainment. While our current agreements with our contracted sports betting parties provide us with guaranteed annual revenue upon their launch of operations, we cannot assure you that any of our contracted sports parties will be able to compete effectively or that they will have the ability or willingness to sustain sports betting operations for an extended period of unprofitability.  Should any of our contracted sports betting parties cease operations, whether due to unprofitability or for other reasons, there can be no assurance that we will be able to replace them on similar terms as our existing revenue guarantees.

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

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

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

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

The warrants also provide the holders with registration rights and redemption rights which allow them, at their option, to require us to repurchase all or a portion of the warrants upon the occurrence of certain triggering events. The refinancing of the Second Lien Credit Facility qualified as a triggering event. If the holders exercise their redemption rights, we have the option of paying them in cash or with a four-year note on terms stipulated in the warrant agreement, or by registering and selling the

shares related to the warrants through a public offering, which could result in substantial dilution and may adversely affect the market price of our shares.

We depend on our key personnel.

We are highly dependent on the services of our executive management team and other members of our senior management team. Our ability to attract and retain key personnel is affected by the competitiveness of our compensation packages and the other terms and conditions of employment, our continued ability to compete effectively against other gaming companies, and our growth prospects. The loss of the services of any members of our senior management team could have a material adverse effect on our business, financial condition and results of operations.

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

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

We expect to continue pursuing expansion opportunities. For example, we plan to build an approximately 180‑guest room hotel in Cripple Creek, Colorado, adjoining and integral with our existing Bronco Billy’s. The expansion is expected to include a spa, parking garage, convention and entertainment space, and two new restaurants. As part of the expansion, we refurbished and reopened the Imperial Casino as the Christmas Casino and rebranded the Imperial Hotel as the Christmas Inn. We also regularly evaluate opportunities for acquisition and development of new properties. We could face significant challenges in managing and integrating our expanded or combined operations and any other properties we may develop or acquire, particularly in new competitive markets. The integration of properties we may develop or acquire will require the dedication of management resources that may temporarily divert attention from our day-to-day business. The process of integrating properties that we may acquire also could interrupt the activities of those businesses, which could have a material adverse effect on our business, financial condition and results of operations. In addition, the development of new properties may involve construction, local opposition, regulatory, legal and competitive risks, as well as the risks attendant to partnership deals on these development opportunities. In particular, in projects where we team up with a joint venture partner, if we cannot reach agreement with such partners, or our relationships otherwise deteriorate, we could face significant increased costs and delays. Local opposition can delay or increase the anticipated cost of a project. Finally, given the competitive nature of these types of limited license opportunities, litigation is possible.

Management of new properties, especially in new geographic areas, may require that we increase our management resources. We cannot assure you that we will be able to manage the combined operations effectively or realize any of the anticipated benefits of our acquisitions. We also cannot assure you that if acquisitions are completed, that the acquired businesses will generate returns consistent with our expectations.

Our ability to achieve our objectives in connection with any acquisition we may consummate may be highly dependent on, among other things, our ability to retain the senior-level property management teams of such acquisition candidates. If, for any reason, we are unable to retain these management teams following such acquisitions or if we fail to attract new capable executives, our operations after consummation of such acquisitions could be materially adversely affected.

If we make new acquisitions or new investments, we may face additional risks related to our business, results of operations, financial condition, liquidity, ability to satisfy financial covenants and comply with other restrictive covenants under our indenture, and ability to pay or refinance our indebtedness.

The occurrence of some or all of the above described events could have a material adverse effect on our business, financial condition and results of operations.

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

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

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

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

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

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

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

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

We lease certain parcels of land at our Silver Slipper Casino and Hotel in Mississippi, both land and buildings at Bronco Billy’s Hotel and Casino in Colorado and one of the two hotels at our Rising Star Casino Resort in Indiana. We also lease casino space at our Grand Lodge Casino in Nevada. As a lessee, we have the right to use the leased land, hotel or space as applicable;

however, we do not hold fee ownership. Accordingly, unless we have a purchase option and exercise such option, we will have no interest in the improvements thereon at the expiration of the leases. We have such purchase options on the leased property at the Silver Slipper, Bronco Billy’s and for the leased hotel at Rising Star, but it is either currently more advantageous for us to continue to lease rather than exercise the buyout option, or we have certain restrictions which only allow us to exercise the purchase option during certain future time periods. Under certain circumstances and at the expirations of the underlying leases, we might be forced to exercise our buyout options in order to continue to operate those properties. There is no certainty that the funds could be raised at that time at a reasonable cost, or at all, to exercise some or all of the buyout options. The operating lease at the Grand Lodge Casino includes certain lessor buyout rights based upon a multiple of EBITDA that, if exercised, could result in the lessor purchasing our leasehold interest and the operating assets on terms that may be less than fair market value or financially unfavorable to us. Since we do not completely control the land, buildings, hotel and space underlying our leased properties, a lessor could take certain actions to disrupt our rights under the long-term leases which are beyond our control. If the entity owning any leased land, buildings, hotel or space chose to disrupt our use either permanently or for a significant period of time, then the value of our assets could be impaired and our business and operations could be adversely affected. If we were to default on the lease, the lessor could terminate the affected lease and we could lose possession of the affected land, buildings, hotel or space and any improvements thereon. The loss of the lease through exercise of buyout rights or through termination upon default could have a significant adverse effect on our business, financial condition and results of operations as we would then be unable to operate all or portions of the affected facilities, which, in turn, may result in a default under our debt agreements.

We are engaged from time to time in one or more construction and development projects, and many factors could prevent us from completing them as planned.

Construction of major buildings has certain inherent risks, including the risks of fire, structural collapse, human error and electrical, mechanical and plumbing malfunction. In addition, projects entail additional risks related to structural heights and the required use of cranes. Our development and expansion projects are exposed to significant risks, including:

The occurrence of any of the foregoing could increase the total costs, delay or prevent the construction, development, expansion or opening of a project. Escalating construction costs may cause us to modify the design and scope of projects from

those initially contemplated or cause the budgets for those projects to be increased. We generally carry insurance to cover certain liabilities related to construction, but not all risks are covered, and it is uncertain whether such insurance will provide sufficient payment in a timely fashion even for those risks that are insured and material to us.

Construction of our development projects exposes us to risks of cost overruns due to typical construction uncertainties associated with any project or changes in the designs, plans or concepts of such projects. For these and other reasons, construction costs may exceed the estimated cost of completion, notwithstanding the existence of any guaranteed maximum price construction contracts.

We face a number of challenges prior to opening new or upgraded facilities.

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

Subsequent phases to certain of our existing projects and potential enhancements at our properties may require us to raise additional capital.

We may need to access financial institution sources, capital markets, private sources or otherwise obtain additional funds to complete subsequent phases of our existing projects and to fund potential enhancements we may undertake at our facilities, such as our potential hotel development at Bronco Billy’s. We do not know when or if financial institution sources, capital markets or private sources will permit us to raise additional funds for such phases and enhancements in a timely manner, on acceptable terms, or at all. Inability to access financial institution sources, capital markets or private sources, or the availability of capital only on less-than-favorable terms, may force us to delay, reduce or cancel our subsequent phases and enhancement projects.

Our ability to obtain financial institution sources, capital markets or private source financing for future offerings may also be limited by our financial condition, results of operations or other factors, such as our credit rating or outlook at the time of any such financing or offering and the covenants in our existing debt agreements, as well as by general economic conditions and contingencies and uncertainties that are beyond our control. As we seek additional financing, we will be subject to the risks of rising interest rates and other factors affecting the financial markets.

The casino, hotel and resort industry is capital intensive and we may not be able to finance expansion and renovation projects, which could put us at a competitive disadvantage.

Our properties have an ongoing need for renovations and other capital improvements to remain competitive, including replacement, from time to time, of furniture, fixtures and equipment. We may also need to make capital expenditures at our casino properties to comply with our debt covenants, lease agreements and applicable laws and regulations.

Renovations and other capital improvements at our properties require significant capital expenditures. In addition, renovations and capital improvements usually generate little or no cash flow until the projects are completed. We may not be able to fund such projects solely from existing resources and cash provided from operating activities. Consequently, we may have to rely upon the availability of debt or equity capital to fund renovations and capital improvements, and our ability to carry them out will be limited if we cannot obtain satisfactory debt or equity financing, which will depend on, among other things, market conditions. We cannot assure you that we will be able to obtain additional equity or debt financing or that we will be able to obtain such financing on favorable terms. Our failure to renovate our properties may put us at a competitive disadvantage.

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

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

Our results of operations and financial condition could be materially adversely affected by the occurrence of natural disasters, such as hurricanes, pandemics, epidemics, widespread health emergencies, or outbreaks of infectious diseases such as the coronavirus pandemic, or other catastrophic events, including war, terrorism and gun violence.

Natural disasters, such as major hurricanes, tornadoes, typhoons, floods, fires and earthquakes, could adversely affect our business and operating results. Hurricanes are common in the area in which our Mississippi property is located and the severity of such natural disasters is unpredictable. In 2017, Hurricane Nate resulted in the temporary closure of the Silver Slipper Casino and Hotel. In 2005, Hurricanes Katrina and Rita caused significant damage in the Gulf Coast region and damaged a casino that previously existed at our Mississippi site. Additionally, our Indiana property is at risk of flooding due to its proximity to the Ohio River.

If a pandemic, epidemic or outbreak of an infectious disease, such as the recent coronavirus pandemic, occurs in the United States or on a global scale, our business may be adversely affected. As described elsewhere in these Risk Factors, such events may result in closures of our properties, a period of business disruption, and in reduced operations, any of which could materially affect our business, financial condition and results of operations.

Catastrophic events, such as terrorist and war activities in the United States and elsewhere, when they occur, have had a negative effect on travel and leisure expenditures, including lodging, gaming and tourism. Gun violence has also occurred at casinos, including a mass shooting at a casino in Las Vegas in 2017. We cannot accurately predict the extent to which such events may affect us, directly or indirectly, in the future. There also can be no assurance that we will be able to obtain or choose to purchase any insurance coverage with respect to occurrences of terrorist and violent acts and any losses that could result from these acts. If there is a prolonged disruption at our properties due to natural disasters, terrorist attacks or other catastrophic events, our results of operations and financial condition could be materially adversely affected.

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

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

We may incur property and other losses that are not adequately covered by insurance, including adequate levels of Weather Catastrophe Occurrence/Named Windstorm, Flood and Earthquake insurance coverage for our properties.

Although we maintain insurance that our management believes is customary and appropriate for our business, there can be no assurance that insurance will be available at reasonable costs in any given year or adequate to cover all losses and damage to which our business or our assets might be subjected. The lack of adequate insurance for certain types or levels of risk could expose us to significant losses in the event that a catastrophe occurred for which we are uninsured or under-insured. Any losses we incur that are not adequately covered by insurance may decrease our future operating income, require us to find replacements or repairs for destroyed property, and reduce the funds available for payments of our obligations. In addition, certain casualty events, such as labor strikes, nuclear events, acts of war, declines in visitation and loss of income due to fear of terrorism or other acts of violence, loss of electrical power due to catastrophic events, rolling blackouts or otherwise, deterioration or corrosion, insect or animal damage, and pollution, may not be covered at all under our policies. The occurrence of any of the foregoing could, therefore, expose us to substantial uninsured losses.

Because of significant loss experience caused by hurricanes and other natural disasters, a number of insurance companies may stop writing insurance in Class 1 hurricane areas, including Mississippi. Others may significantly limit the amount of coverage they will write in these markets and increase the premiums charged for this coverage. Additionally, uncertainty can occur as to the viability of certain insurance companies. While we believe that the insurance companies from which we have purchased insurance policies will remain solvent, there is no certainty that this will be the case.

We may face risks related to our ability to receive regulatory approvals required to complete certain acquisitions, mergers, joint ventures, and other developments, as well as other potential delays in completing certain transactions.

Our growth may be fueled, in part, by the acquisition of existing gaming and development properties. In addition to standard closing conditions, our material transactions, including but not limited to acquisitions, are often conditioned on the receipt of regulatory approvals and other hurdles that create uncertainty and could increase costs. Such delays could significantly reduce the benefits to us of such transactions and could have a material adverse effect on our business, financial condition and results of operations.

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

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

Insufficient or lower-than-expected results generated from our new developments and acquired properties may negatively affect our operating results and financial condition.

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

Higher wage and benefit costs could adversely affect our business.

While the vast majority of our employees earn more than the minimum wage in the relative jurisdictions and receive medical plan benefits from us, changes in federal and state minimum wage laws and other laws relating to employee benefits, including the Patient Protection and Affordable Care Act, have in the past, and could in the future cause us to incur additional wage and benefits costs. Increased labor costs brought about by changes in minimum wage laws, other regulations or prevailing market conditions have recently, and could in the future, further increase our expenses, which could have an adverse impact on our profitability, or decrease the number of employees we are able to employ, which could decrease customer service levels at our gaming facilities and therefore adversely impact revenues. For example, the state of Colorado increased its minimum wage in January 2019, which adversely impacted Bronco Billy’s operating results during 2019.

Rising operating costs at our gaming properties could have a negative impact on our business.

The operating expenses associated with our gaming properties could increase due to, among other reasons, the following factors:

If our operating expenses increase without any offsetting increase in our revenues, our results of operations would suffer.

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

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

We face the risk of fraud and cheating.

Our gaming customers may attempt or commit fraud or cheat in order to increase winnings. Acts of fraud or cheating could involve the use of counterfeit chips or other tactics, possibly in collusion with our employees. Internal acts of cheating could also be conducted by employees directly or through collusion with dealers, surveillance staff, floor managers or other

casino or gaming area staff. Failure to discover such acts or schemes in a timely manner could result in losses in our gaming operations. In addition, negative publicity related to such schemes could have an adverse effect on our reputation, potentially causing a material adverse effect on our business, financial condition, results of operations and cash flows.

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

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

Our gaming operations rely heavily on technology services and an uninterrupted supply of electrical power and if we experience damage or service interruptions, we may have to cease some or all of our operations, which will result in a decrease in revenue.

Our gaming operations rely heavily on technology services and an uninterrupted supply of electrical power. Our security system and all of our slot machines are controlled by computers and reliant on electrical power to operate. A loss of electrical power or a failure of the technology services needed to run the computers could make us unable to run all or parts of our gaming operations. Any unscheduled interruption in our technology services or interruption in the supply of electrical power is likely to result in an immediate, and possibly substantial, loss of revenue due to a shutdown of our gaming operations. Although we have designed our systems around industry-standard designs to reduce downtime in the event of outages or catastrophic occurrences, they remain vulnerable to damage or interruption from floods, fires, power loss, telecommunication failures, terrorist attacks, computer viruses, computer denial-of-service attacks and similar events. Additionally, substantial increases in the cost of electricity and natural gas could negatively affect our results of operations.

Our information technology and other systems are subject to cyber-security risk, misappropriation of customer information and other breaches of information security.

We rely extensively on our computer systems to process customer transactions, manage customer data, manage employee data and communicate with third-party vendors and other third parties, and we may also access the Internet to use our computer systems. Our operations require that we collect and store customer data, including credit card numbers and other personal information, for various business purposes, including marketing and promotional purposes. We also collect and store personal information about our employees. Breaches of our security measures or information technology systems or the accidental loss, inadvertent disclosure or unapproved dissemination of proprietary information or sensitive personal information or confidential data about us, or our customers, or our employees including the potential loss or disclosure of such information as a result of hacking or other cyber-attack, computer virus, fraudulent use by customers, employees or employees of third party vendors, trickery or other forms of deception or unauthorized use, or due to system failure, could expose us, our customers, our employees or other individuals affected to a risk of loss or misuse of this information, result in litigation and potential liability for us, damage our reputation or brand names or otherwise harm our business. We rely on proprietary and commercially available systems, software, tools and monitoring to provide security for processing, transmission and storage of customer information, such as payment card, employee information and other confidential or proprietary information. Our data security measures are reviewed and evaluated regularly; however, they might not protect us against increasingly sophisticated and aggressive threats. The cost and operational consequences of implementing further data security measures could be significant and there is no certainty that such measures, if purchased, could thwart all threats.

Additionally, the collection of customer and employee personal information imposes various privacy compliance related obligations on our business and increases the risks associated with a breach or failure of the integrity of our information technology systems. The collection and use of personal information are governed by privacy laws and regulations enacted in the United States and other jurisdictions around the world. Privacy regulations continue to evolve and on occasion may be inconsistent from one jurisdiction to another. Compliance with applicable privacy laws and regulations may increase our

operating costs and/or adversely impact our ability to market our products, properties and services to our customers. In addition, non-compliance with applicable privacy laws and regulations by us (or in some circumstances non-compliance by third party service providers engaged by us) may also result in damage of reputation, result in vulnerabilities that could be exploited to breach our systems and/or subject us to fines, payment of damages, lawsuits or restrictions on our use or transfer of personal information.

We are subject to environmental laws and potential exposure to environmental liabilities.

We are subject to various federal, state and local environmental laws and regulations that govern our operations, including emissions and discharges into the environment, and the handling and disposal of hazardous and non-hazardous substances and wastes. Failure to comply with such laws and regulations could result in costs for corrective action, penalties or the imposition of other liabilities or restrictions. We also are subject to laws and regulations that impose liability and clean-up responsibility for releases of hazardous substances into the environment. Under certain of these laws and regulations, a current or previous owner or operator of property may be liable for the costs of remediating contaminated soil or groundwater on or from its property, without regard to whether the owner or operator knew of, or caused, the contamination, as well as incur liability to third parties impacted by such contamination. The presence of contamination, or failure to remediate it properly, may adversely affect our ability to use, sell or rent property. There can be no assurances that these matters or other matters arising under environmental laws will not have a material adverse effect on our business, financial condition, or results of operations in the future.

The concentration and evolution of the slot machine manufacturing industry could impose additional costs on us.

A majority of our revenues are attributable to slot machines and related systems operated by us at our gaming facilities. It is important, for competitive reasons, that we offer popular and up-to-date slot machine games to our customers.

A substantial majority of the slot machines sold in the U.S. in recent years were manufactured by only a few companies, and there has been recent consolidation activity within the gaming equipment sector.

In recent years, slot machine manufacturers have frequently refused to sell slot machines featuring the most popular games, instead requiring participation lease arrangements. Participation slot machine leasing arrangements typically often require the payment of a fixed daily rental or a percentage payment of coin-in or net win. Generally, a participation lease is substantially more expensive over the long term than the cost to purchase a new machine.

For competitive reasons, we may be forced to purchase new slot machines or enter into participation lease arrangements that are more expensive than our current costs associated with the continued operation of our existing slot machines. If the newer slot machines do not result in sufficient incremental revenues to offset the increased investment and participation lease costs, it could hurt our profitability.

We are subject to litigation which, if adversely determined, could cause us to incur substantial losses.

From time to time during the normal course of operating our businesses, we are subject to various litigation claims and legal disputes. Some of the litigation claims may not be covered under our insurance policies, or our insurance carriers may seek to deny coverage. As a result, we might also be required to incur significant legal fees, which may have a material adverse effect on our financial position. In addition, because we cannot accurately predict the outcome of any action, it is possible that, as a result of current and/or future litigation, we will be subject to adverse judgments or settlements that could significantly reduce our earnings or result in losses.

The market price for our common stock may be volatile, and investors may not be able to sell our stock at a favorable price or at all.

Many factors could cause the market price of our common stock to rise and fall, including:

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

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

While gaming authorities generally focus on shareholders with more than 5% and often 10% of a company’s shares, such authorities generally can require that any beneficial owner of our common stock and other securities file an application for a finding of suitability. If a gaming authority requires a record or beneficial owner of our securities to file a suitability application, the owner must apply for a finding of suitability within 30 days or at an earlier time prescribed by the gaming authority. The gaming authority has the power to investigate an owner’s suitability and the owner must pay all costs of the investigation. If the owner is found unsuitable, then the owner may be required by law to dispose of our securities. Our certificate of incorporation also provides us with the right to repurchase shares of our common stock from certain beneficial owners declared by gaming regulators to be unsuitable holders of our equity securities. The price we may pay to any such beneficial owner may be below the price such beneficial owner would otherwise accept for his or her shares of our common stock.

Item 1B. Unresolved Staff Comments.

Not applicable.

Item 2. Properties.

Substantially all of our assets collateralize our indebtedness, as discussed in Note 6 to the consolidated financial statements set forth in “Item 8. Financial Statements and Supplementary Data.”

Silver Slipper Casino and Hotel

We own the facilities and related improvements at the Silver Slipper Casino and Hotel in Hancock County, Mississippi.  The property at year-end offered 855 slot machines and 24 table games, a surface parking lot, an approximately 800‑space parking garage and a 129‑room hotel.  The casino and hotel are located on 38 acres of leased land, including 31 acres of protected marshlands.  The lease expires on April 30, 2058 and contains a purchase option that can be exercised through October 2027.  Rent under the lease was $1.6 million in 2019 (see Note 9 to the consolidated financial statements set forth in “Item 8. Financial Statements and Supplementary Data”).  We are able to exercise our buyout option for $15.5 million plus a retained interest in the property’s operations of 3% of net income (as defined in the lease), for 10 years from the purchase date.  We also lease approximately 5.7 acres of land occupied by offices and warehouse space that are approximately four miles from our casino, as well as small parcels of land with a building and sign.  We also manage a 37‑space beachfront RV park under a management agreement, which expires on March 31, 2025, unless canceled by either party.

Bronco Billy’s Casino and Hotel

Bronco Billy’s Casino and Hotel is located on or near approximately 3.9 acres of owned land and 2.4 acres of leased land that we control in Cripple Creek, Colorado.  The property includes 36 hotel rooms and several acres of surface parking.  A portion of the casino and parking lots are subject to a long-term lease that includes renewal options in three-year increments to 2035 and a purchase option that can be exercised at any time during the lease term.  The purchase price under such option remains at $7.6 million throughout the lease.  Base rent paid in 2019 was $355,000, and such rent escalates through the term of the lease according to a defined schedule.  During 2018, we purchased the operating historic Imperial Hotel and other nearby parcels of land.  In August 2018, we commenced a lease of the freestanding Imperial Casino.  As part of our planned expansion of Bronco Billy’s, we refurbished and rebranded both the Imperial Hotel and Imperial Casino together as the Christmas Casino & Inn in November 2018.  In terms of gaming devices located throughout our property, the Christmas Casino accounted for  15% of our slot machines at year-end, with the remaining  85%  of slot machines at Bronco Billy’s Casino.  Combined, our Cripple Creek operations currently offer 828 slot machines and 10 table games as of year-end.

Rising Star Casino Resort

We own the Rising Star Casino Resort in Rising Sun, Indiana.  At year-end, the property consisted of a dockside riverboat on the Ohio River offering 825 slot machines and  24 table games, a land-based pavilion with approximately 30,000 square feet of meeting and convention space, a 190‑room hotel, a 56‑space RV park, surface parking and an 18‑hole golf course on approximately 311 acres. Additionally, we lease a 104‑room hotel pursuant to a finance lease that expires in October 2027 and contains a bargain purchase option for $1 if exercised upon maturity of the lease.  We also own 1.3 acres in Burlington, Kentucky, from where we commenced ferry boat operations in September 2018; the ferry service connects our Rising Star property in Indiana to the more populous Boone County, Kentucky.

Stockman’s Casino

Included as part of our Northern Nevada segment, we own Stockman’s Casino, located on approximately five acres in Fallon, Nevada.  The facility offers 219 slot machines and four table games as of year-end, a bar, a fine-dining restaurant and a coffee shop, and approximately 300 surface parking spaces.

Grand Lodge Casino

Included as part of our Northern Nevada segment, the Grand Lodge Casino at year-end offered 269 slot machines and 17 table games, and is integrated into the Hyatt Regency Lake Tahoe Resort, Spa and Casino in Incline Village, Nevada on the north shore of Lake Tahoe.  We operate Grand Lodge Casino pursuant to a lease with Hyatt expiring on August 31, 2023 and own the personal property, including slot machines.  The lease is secured by our interests under such lease, consisting of certain collateral (as defined and described in a security agreement), and is subordinate to our Notes due 2024.  Currently, Hyatt has an option to purchase our leasehold interest and operating assets of the Grand Lodge Casino at a defined price based partially on earnings.

Additionally, we have agreements with Hyatt that allow us to provide rooms, as well as other amenities and services, to our guests at mutually agreeable rates to support our operations.

Corporate

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

Item 3. Legal Proceedings.

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

Item 4. Mine Safety Disclosures.

Not applicable.

 

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Our common stock is traded on the Nasdaq Capital Market under the symbol “FLL.”

On March 26, 2020, we had 76 “registered holders” of record of our common stock.  We believe that a substantial number of shareholders hold their common stock in “street name” or are otherwise beneficial holders whose shares of record are held by banks, brokers, and other financial institutions.  Such holders are not included in the number of “registered holders” above.

Dividend Policy

We have not paid any dividends on our common stock to date.  The payment of dividends in the future will be at the discretion of our board of directors and will be contingent upon our revenues and earnings, if any; the terms of our indebtedness; our capital requirements; growth opportunities; and general financial condition.  Our debt covenants restrict the payment of dividends and it is the present intention of our board of directors to retain all earnings, if any, for use in our business operations, debt reduction and growth initiatives, reinvesting such earnings on behalf of shareholders.  Accordingly, we do not anticipate paying any dividends in the foreseeable future.

Item 6.  Selected Financial Data.

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

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion of our results of operations and financial condition should be read together with the other financial information and consolidated financial statements included in this Form 10‑K. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from the results anticipated in the forward-looking statements as a result of a variety of factors, including those discussed in Item 1A. “Risk Factors” and elsewhere in this report. The results of operations for the periods reflected herein are not necessarily indicative of results that may be expected for future periods. Full House Resorts, Inc., together with its subsidiaries, may be referred to as “Full House,” the “Company,” “we,” “our” or “us”.

Executive Overview

Our primary business is the ownership and/or operation of casino and related hospitality and entertainment facilities, which includes offering casino gambling, hotel accommodations, dining, golfing, RV camping, sports betting, entertainment and retail outlets, among other amenities. We own or operate five casino properties in four states – Mississippi, Colorado, Indiana and Nevada. We view our Mississippi, Colorado and Indiana properties as distinct operating segments and both of our Nevada properties as one operating segment.

Our portfolio consists of the following:

 

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

We set minimum and maximum betting limits for our slot machines and table games based on market conditions, customer demand and other factors. Our gaming revenues are derived from a broad base of guests that includes both high- and low-stakes players. Our sports book operations at Silver Slipper Casino and Hotel is in partnership with a company specializing in race and sports betting. Our operating results may also be affected by, among other things, overall economic conditions affecting the disposable income of our guests, weather conditions affecting access to our properties, achieving and maintaining cost efficiencies, taxation and other regulatory changes, and competitive factors, including but not limited to, additions and improvements to the competitive supply of gaming facilities, as well as  pandemics, epidemics, widespread health emergencies, or outbreaks of infectious diseases such as the coronavirus.

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

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

Recent Developments

Coronavirus.  Pursuant to state government orders to prevent the spread of the coronavirus, we temporarily closed all of our casino properties in March 2020. The extent to which our future results may be affected by the coronavirus will largely depend on future developments, which are highly uncertain and cannot be accurately predicted, including the timing of the reopening of our casinos and new information which may emerge concerning the severity of the coronavirus and the actions to contain the coronavirus or treat its impact, among others. For a more detailed discussion regarding casino closures and coronavirus-related impacts on our business, see “Liquidity and Capital Resources – Coronavirus” below.

Sports Wagering in Indiana and Colorado.  In the second half of 2019, we entered into six sports wagering agreements with three different parties, each allowing such parties to conduct mobile and online sports wagering throughout Indiana and Colorado, as well as the operation of an on-site sportsbook with one of such entities at both Rising Star and Bronco

Billy’s. By October 2019, we received $3 million of the total contracted $6 million in one-time market access fees. We received the remaining $3 million once sports wagering in Colorado was ratified by voters in November 2019. Additionally, once online sports wagering operations has commenced for all six agreements, we anticipate these agreements will generate an aggregate of $7 million in minimum annual revenues for us, based on the revenue-share structure of the contracting parties’ sports wagering operations in Indiana and Colorado, with minimal ongoing expenses expected by us related to these revenues. If any one of the contracting parties generates annual revenues in excess of the minimum amount set forth in its respective sports wagering agreement, we should receive more than $7 million per year. See further information below regarding the expected commencement dates of these agreements. 

Bronco Billy’s Expansion.  In 2018, we began our expansion of Bronco Billy’s, which was designed to be completed in two phases. Phase One of the Bronco Billy’s expansion project includes the construction of a 319-space parking garage and connector building, the purchase of the Imperial Hotel (which we acquired in June 2018) and certain other nearby parcels of land, and the reopening and rebranding of the Imperial Casino and Hotel as the Christmas Casino & Inn (which occurred in November 2018). In March 2020, in light of the global coronavirus pandemic, we paused construction of the parking garage, which was in the early stages of construction. We do not yet know when or if conditions will warrant the resumption of such construction. Phase Two of the Bronco Billy’s expansion project, which is expected to include a new luxury hotel tower, spa, convention and entertainment space, and two new restaurants, is contingent upon receipt of financing on acceptable terms, among other contingencies. We do not intend to commence construction of Phase Two until Phase One is completed.

 

Waukegan Proposal.  On October 29, 2019, the Company submitted an Owners Gaming License Application to the Illinois Gaming Board (“IGB”) to develop and operate American Place, a casino and entertainment destination in Waukegan, Illinois. In its first phase, American Place would include a world-class casino with a state-of-the-art sports book; a premium boutique hotel comprised of twenty luxurious villas, each ranging from 1,500 to 2,500 square feet with full butler service; a 1,500-seat live entertainment venue; and various food and beverage outlets. If awarded the license by the IGB, Full House would also develop and operate a temporary casino on that site while American Place is being constructed. American Place was one of three proposals certified by the Waukegan City Council at its October 17th special meeting. At that meeting, Waukegan Aldermen heard a presentation from the city’s consultant, which ranked American Place the top proposal amongst the various submissions on numerous different criteria. No assurance can be given that the Company will be awarded the license by the IGB.

 

Racetrack Proposal.    In 2018, the New Mexico Racing Commission (the “NMRC”) announced a competitive process regarding the issuance of the state’s sixth racing license. In accordance with that process, we formally presented our racetrack casino proposal (“La Posada del Llano”) to the NRMC in October 2018 and answered additional questions regarding our project in November 2018. In early 2019, the NRMC announced that it would not issue the sixth racing license at this time, but may do so in the future. If selected by the NRMC, La Posada del Llano is expected to include a racetrack featuring a unique “Moving Grandstand,” an 18‑hole championship golf course, a casino with up to 750 slot machines, and a 300‑guestroom hotel, among other amenities.

 

Increase in Amount of Senior Secured Notes.  In May 2019, we sold an additional $10 million in aggregate principal amount of senior secured notes due 2024 (the “Incremental Notes”), which 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 $100 million of senior secured notes due 2024 (the “Original Notes”) that we previously issued on February 2, 2018. The Incremental Notes have the same maturity date, interest rate, class and series as the Original Notes (collectively, the “Notes”) for all purposes under the Indenture. Proceeds from the Incremental Notes have been used or are expected to be used 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.

 

Key Performance Indicators

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

Gaming revenue indicators:

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

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

Room revenue indicators:

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

Adjusted EBITDA, Adjusted Property EBITDA and Adjusted Property EBITDA Margin:

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

Results of Operations – 2019 Compared to 2018

Consolidated operating results

The following summarizes our consolidated operating results for the years ended December 31, 2019 and 2018.

 

The following table details the components of our net revenues for the twelve months ended December 31, 2019 and 2018, which are comprised of casino and non-casino operations.

 

 

The following discussion is based on our consolidated financial statements for the years ended December 31, 2019 and 2018, unless otherwise described. For further discussions, refer to “Operating results – reportable segments” below.

Revenues. As indicated in the above table, consolidated net revenues increased by 0.9%, with hotel and sports wagering revenue increases at Silver Slipper helping to overcome decreases in slots and table games revenue. Casino revenue decreases were attributed mostly to a decline in hold percentage at both Silver Slipper and Grand Lodge. Additionally, we installed new slot systems at both Rising Star and Bronco Billy’s in late 2019, resulting in downtime at both casinos. The downtime was significantly longer at Rising Star, with nearly half of the property’s slot machines offline for several weeks. Rising Star was also affected by new competition, including the September 2018 opening of a new casino offering “historical racing machines” in Louisville, Kentucky. For additional detail, please see the segment detail on the following pages.

Operating expenses. Consolidated operating expenses increased by 1.8% due to a temporary increase in marketing spend at Rising Star in efforts to counter increased competition.  Additional facility costs for the Christmas Casino & Inn at Bronco Billy’s – including for rent, participation/leased slot machines, and labor – reflect a full year of operations since the June 2018 acquisition for the Imperial Hotel and the November 2018 opening of the rebranded Christmas Casino & Inn.  The opening of the Christmas Casino & Inn resulted in more than $1 million of incremental expenses without a sufficient increase in revenues to offset it.  At Silver Slipper, expenses increased to reflect a full year of sports book operations since August 2018. For additional detail, please see the segment detail on the following pages.

Interest and other non-operating expense, net.

Interest Expense

 

Interest expense increased primarily due to higher debt balances, as we issued $10 million of additional senior secured notes in May 2019.  Additionally, LIBOR rates were higher on average during 2019, resulting in higher interest costs on our floating-rate senior secured notes. 

Other non-operating expense, net

During 2019, we incurred $1.2 million of other non-operating expense from the non-cash fair value adjustment of our common stock warrant liability.  During 2018, we incurred $1.0 million of other non-operating expense due primarily to the February 2018 refinancing of our prior credit facilities, which resulted in a $2.7 million loss on extinguishment of debt. This expense was partially offset by a $1.7 million gain from the non-cash fair value adjustment of our common stock warrant liability. The common stock warrant liability is adjusted to fair value each quarter. The increase in fair value during 2019 primarily related to the increase in our share price during that period.

Income taxes. Our effective income tax rate for the years ended December 31, 2019 and 2018 was (1.4%) and (12.2%), respectively.  Our tax rate differs from the statutory rate of 21.0% primarily due to the effects of changes in tax law, changes in valuation allowance, and items that are permanently treated differently for GAAP and tax purposes.  During 2019, we continued to provide a valuation allowance against our deferred tax assets, net of any available deferred tax liabilities.  In future years, if it is determined that we meet the “more likely than not” threshold of utilizing our deferred tax assets, we may reverse some or all of our valuation allowance against our deferred tax assets.

We do not expect to pay any federal income taxes or receive any federal tax refunds related to our 2019 results. Tax losses incurred in 2019 may shelter taxable income in future years, but because of the level of uncertainty regarding sufficient prospective income, we maintain a valuation allowance against our deferred tax assets, as mentioned above.

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

Operating results – reportable segments

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

The following table presents detail by segment of our consolidated net revenue and Adjusted EBITDA. Management uses Adjusted Property EBITDA as its measure of segment profit.

 

Silver Slipper Casino and Hotel

Net revenues increased during 2019 due to successful marketing initiatives and operating efficiencies, benefits from recent property investments (including the May 2019 renovation of its casino and buffet and the August 2018 opening of its sports book), and improved weather in the first quarter as compared to sub-freezing temperatures in the prior-year period. Slot revenues decreased by 6.3% due to lower volumes and relatively flat hold. Table games revenues increased by 2.9%, while other casino revenues (principally sports betting) increased by 158.0% to reflect a full year of sportsbook operations.

Non-gaming revenues increased by 19.0%, reflecting strong increases in both food and beverage and hotel revenues.  Food and beverage revenues grew 14.2% during the year. Hotel revenues increased by 51.7% due to higher room rates, and hotel occupancy was 86.0% versus 91.6% in 2018.

Adjusted Property EBITDA increased by 8.5% to $13.2 million in 2019, primarily from the growth in net revenue described above. Likewise, guest volume increases led to an approximately 5.2% increase in expenses driven primarily by food costs and, to a lesser extent, increases in volume-related sports book fees. Adjusted Property EBITDA margin was 18.0% in 2019 compared to 17.5% in 2018. Regarding overall financial performance, 2019 was the best year in the property’s 13-year history.

On March 17, 2020, we temporarily closed Silver Slipper Casino and Hotel pursuant to government orders whereby, as a precautionary measure against the ongoing spread of COVID-19 (coronavirus), all casinos in the state temporarily halted operations.

Rising Star Casino Resort

Net revenues decreased due to an increase in competition, including the September 2018 opening of a new casino offering “historical racing machines” in Louisville and the December 2019 opening of a new land-based casino near Louisville that replaced its original casino boat. Additionally, the installation of a new slot system resulted in a significant portion of Rising Star’s slot floor being offline for several weeks. These factors resulted in lower volumes, which decreased slot revenues by 1.9% and table games revenues by 10.4%. Non-gaming revenues decreased by 7.8% during 2019 due to lower guest volumes.

Adjusted Property EBITDA decreased to $1.3 million from $2.8 million due to the decreases in net revenue described above, as well as a temporary increase in marketing expense to counter new competition and to introduce several of Rising Star’s new amenities – including Ben’s Bistro, our ferry service, and our RV park – to the communities surrounding Rising Star and

Cincinnati.  Moreover, expenses in 2019 reflect additional costs to operate the ferry boat, which began operations in September 2018. As a result, Adjusted Property EBITDA margin was 2.9% in 2019 compared to 5.8% in 2018.

During 2019, the Indiana legislature approved sports wagering at Indiana casinos. In addition to an on-site sportsbook, the new legislation allows for three mobile “skins” (the industry term for website) for each casino license in the state.  Effectively, these skins allow Rising Star to contract with three website brands for online sports wagering via the Internet, regardless of a customer’s location within the state.  Online gaming must be paired with a physical casino, even though customers do not have to visit that casino to place a bet or even register at the casino to make a bet.  As a result, the Company entered into sports wagering agreements with three different companies, one of which commenced operations on December 30, 2019.  The other two companies are expected to commence operations in mid-2020.  In summary, these sports wagering agreements allow the Company to:

Additionally, the new Indiana gaming legislation approved a reduction in certain gaming taxes for casino operators in the state, including Rising Star, beginning on July 1, 2021.

On March 16, 2020, we temporarily suspended operations at Rising Star Casino Resort pursuant to an order from the Indiana Gaming Commission whereby, as a precautionary measure against the ongoing spread of COVID-19 (coronavirus), all casinos in the state temporarily halted operations.

Bronco Billy’s Casino and Hotel

Net revenues increased during 2019, reflecting a full year of operations at the Christmas Casino & Inn, which opened in November 2018. Slot revenues increased by 5.3% and table games revenues increased by 9.6%, both reflecting higher hold percentages.

Non-gaming revenues decreased overall by 10.0% due to significant snowfall on key weekends. Food and beverage revenues decreased by 13.0% during 2019. Hotel revenues increased by 14.2% resulting from our acquisition of the Imperial Hotel in June 2018, which increased the total number of hotel rooms at Bronco Billy’s from 24 to 36 guestrooms as part of the rebranding of the Imperial Hotel to the Christmas Inn.

Adjusted Property EBITDA decreased by 23.4% due to additional operational costs related to operating the Christmas Casino. Such costs include additional rent for the building that houses the Christmas Casino, additional labor, significant participation/leased slot machine expenses, additional property taxes and other overhead, and additional gaming taxes due to the graduated gaming tax structure in Colorado. 

The Christmas Casino was part of a strategic decision to control an important corner in Cripple Creek. However, its opening resulted in more than $1 million of incremental expenses during the year without a sufficient increase in revenues to offset it.  We are in the process of evaluating ways to reduce the cost of our Christmas Casino operations while preserving our strategic goals, including the possibility of using the space for other Christmas-related concepts.  Additionally, Bronco Billy’s continues to be affected by increases in the state’s minimum wage, which increased in January 2019.  Adjusted Property EBITDA margin was 10.9% in 2019 compared to 14.5% in 2018.

Similar to Rising Star, the Company entered into sports wagering agreements in 2019 in Colorado, allowing for on-site sports wagering at Bronco Billy’s, as well as mobile/online sports wagering from anywhere within Colorado.  The Colorado legislation, which was ratified by voters in the statewide election on November 5, 2019, allows for one mobile “skin” per casino

license in addition to an on-site sportsbook.  As the Company has three casino licenses, the maximum allowed for a single company operating in the state, we entered into three sports wagering contracts related to our Colorado operations.  The Colorado agreements will allow the Company to:

On March 17, 2020, we temporarily closed Bronco Billy’s Casino and Hotel pursuant to government orders whereby, as a precautionary measure against the ongoing spread of COVID-19 (coronavirus), all casinos in the state temporarily halted operations.

Northern Nevada

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

Net revenues decreased in 2019 primarily due to a temporary decrease in activity at the nearby Naval air base at Stockman’s Casino. Additionally, a lower table games hold percentage adversely affected Grand Lodge Casino, declining to 14.9% from 15.4%. 

Adjusted Property EBITDA in Northern Nevada decreased by 6.3% for the reasons mentioned above. Though labor and operational efficiencies resulted in total expenses decreasing by 2.5% at Stockman’s Casino and by 3.1% at Grand Lodge Casino – a combined savings of approximately $0.48 million – the revenue decline resulted in a 16.5% Adjusted Property EBITDA margin in 2019 versus 17.2% in 2018.

On March 17, 2020, we temporarily closed Grand Lodge Casino in Incline Village, Nevada, and Stockman’s Casino in Fallon, Nevada, pursuant to government orders whereby, as a precautionary measure against the ongoing spread of COVID-19 (coronavirus), all casinos in the state temporarily halted operations.

Corporate

Corporate expenses increased modestly by 3.0% in 2019  due primarily to increases in legal and professional fees, as well as new business costs, related to project development expenditures.

Non-GAAP Measure

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

under GAAP. Accordingly, this measure should be considered supplemental and not a substitute for net income (loss) or cash flows as an indicator of the Company’s operating performance or liquidity.

The following table presents a reconciliation of net loss to Adjusted EBITDA:

 

The following tables present reconciliations of operating income (loss) to Adjusted Property EBITDA and Adjusted EBITDA:

 

 

 

Operating expenses deducted to arrive at operating income (loss) in the above tables include facility rents related to: (i) Silver Slipper of $1.7 million in 2019 and $1.6 million in 2018, (ii) Northern Nevada segment of $1.9 million in both 2019 and 2018, and (iii) Bronco Billy’s of $0.6 million in 2019 and $0.4 million in 2018.  Finance lease payments of $0.8 million in 2019 and $0.7 million in 2018 related to Rising Star’s smaller hotel are not deducted, as such payments are accounted for as interest expense and amortization of debt related to the finance obligation.

Liquidity and Capital Resources

Cash Flows

As of December 31, 2019, we had $28.9 million of unrestricted cash and equivalents, as well as $1.0 million of restricted cash. Management currently estimates that approximately $10 million of cash and equivalents is currently required for our day-to-day operations.

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

Cash flows – operating activities. On a consolidated basis, cash provided by operations during 2019 was $10.5 million compared to $9.8 million in 2018. Trends in our operating cash flows tend to follow trends in operating income, excluding non-cash charges, but are also affected by changes in working capital accounts such as receivables, prepaid expenses, and payables. The increase in our operating cash flows during 2019 compared to 2018 was primarily due to the receipt of $6.0 million related to one-time market access fees for sports betting at Rising Star and in Indiana, as discussed elsewhere in this document. In the 2018 period, the timing of accrued expenses benefited cash levels at the end of that year.

Cash flows – investing activities. On a consolidated basis, cash used in investing activities during 2019 was $8.7 million, which primarily related to capital expenditures for maintenance and certain growth-related projects, including the Phase One expansion at Bronco Billy’s, the renovating and rebranding of a casual restaurant at Rising Star as the new Ben’s Bistro, the remodeling of the Silver Slipper casino and the renovation of the Stockman’s Steakhouse. Cash used in investing activities during 2018 was $17.4 million, which primarily related to several growth projects at our existing properties, including our new ferry boat service at Rising Star, the refurbishment and rebranding of the Christmas Casino & Inn, and development work for the Bronco Billy’s expansion, as well as the purchase of the Imperial Hotel and other land adjacent to Bronco Billy’s.

Cash flows – financing activities. On a consolidated basis, cash provided by financing activities during 2019 was $7.4 million, which was primarily related to the net proceeds from the Incremental Notes, offset by both the finance lease payments at Rising Star (see Note 7 to the consolidated financial statements set forth in “Item 8. Financial Statements and Supplementary Data”) and the increased principal payments related to the Notes. Cash provided by financing activities during 2018 was $8.3 million, which primarily related to the proceeds from the registered direct equity offering that we completed in March 2018 and offset by payments related to the refinancing of our credit facilities, loan and lease principal payments, and purchase of an interest rate cap.

Other Factors Affecting Liquidity

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

Long-Term Debt. At December 31, 2019, we had $107.9 million of principal indebtedness outstanding from both the original $100 million of new senior secured notes due 2024 that we issued in February 2018 and the incremental $10 million of notes that we issued in May 2019 (collectively, the “Notes”). The proceeds from the February 2018 notes offering were used to pay off all of our outstanding First and Second Lien Credit Facilities, pay for costs associated with the refinancing, provide ongoing working capital, provide funds for capital expenditures, and for general corporate purposes; proceeds from the May 2019 notes offering were used for the Phase One expansion of Bronco Billy’s, capital expenditures, and general corporate purposes. We currently estimate, based on current LIBOR rates, that our cash interest expense in 2020 will be approximately $10 million, including the interest component of our finance lease. This estimate is based on our total outstanding debt and applicable interest rates within the next twelve months.

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

Common Stock Warrants. In 2016, we granted the lenders under the former Second Lien Credit Facility (the “Second Lien Lenders”) warrants representing rights to purchase approximately 1.0 million shares of our common stock at $1.67 per share, the average trading price of our common stock during a 60‑day period bracketing the date of issuance. The warrants include redemption rights which allow the warrant-holders, at their option, to require us to repurchase all or a portion of the warrants upon the occurrence of certain triggering events. The refinancing of the Second Lien Credit Facility in February 2018 qualified as a triggering event. As of the date of this filing, the Second Lien Lenders have not exercised these redemption rights, though they may do so on any six-month anniversary of the refinancing date prior to warrant expiration in May 2026. If they do exercise

their redemption rights, we have the option of paying them in cash or with a four-year note on terms stipulated in the warrant agreement. Alternatively, the warrant-holders may choose to have us register and sell the shares related to the warrants through a public offering. See Note 6 to the consolidated financial statements set forth in “Item 8. Financial Statements and Supplementary Data” for further information associated with these warrants which could affect our liquidity and capital resources.

Hyatt Option to Purchase our Leasehold Interest and Related Assets. Our lease with Hyatt to operate the Grand Lodge Casino contains an option for Hyatt, as of January 1, 2019, to purchase our leasehold interest and related casino operating assets. See Note 7 to the consolidated financial statements set forth in “Item 8. Financial Statements and Supplementary Data” for further information about this option and related rental commitments that could affect our liquidity and capital resources.

Capital Investments. We have made significant investments through 2019 and may make additional capital investments during 2020 and beyond. These investments are designed to improve the guest experience and to drive visitation at our properties, revenue and income growth.

Bronco Billy’s - As discussed above in the “Executive Overview,” we began Phase One of the two-phase expansion of our Bronco Billy’s property with our purchase of the Imperial Hotel in June 2018, along with other nearby parcels of land, and our lease of the Imperial Casino in August 2018. In November 2018, we reopened the Imperial Hotel and Casino as the rebranded Christmas Casino & Inn. The remainder of Phase One includes the construction of a 319-space parking garage and connector building. In March 2020, in light of the coronavirus pandemic, we paused construction of the parking garage, which was in the early stages of construction. We estimate that the remaining cost for Phase One’s parking garage is approximately $17 million. The timing of such capital expenditures will depend on when conditions warrant the resumption of such construction.

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

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

Coronavirus. As described in Notes 2 and 14, in March 2020, in their efforts to control the spread of the coronavirus, various state governments temporarily closed each of our casinos for the time periods discussed above. We have very little meeting and convention business relative to many other casino companies and we operate local rather than destination resorts.  Meeting and convention businesses typically book far in advance, as do many vacation travelers, so we would expect those aspects of the casino business to recover more slowly than our local casino business.   Furthermore, very few of our customers fly to reach our properties, so if individuals are less likely to travel by air in the near future due to the difficulty of “social distancing” on an airplane or in an airport, it could have less of an impact on our properties. Nevertheless, while these closures are expected to be temporary, the current circumstances are dynamic and the impacts of COVID-19 on our business operations, including the duration and impact on overall customer demand, the timing of the reopening of our casinos, new information which may emerge concerning the severity of the coronavirus, and the actions to contain the coronavirus or treat its impact, among others, cannot be reasonably estimated at this time and we anticipate this could have a material adverse impact on our business, results of operations, financial position and cash flows. Because we operate in several different jurisdictions, some of our casinos may be permitted to reopen prior to others.

We currently believe that, through our approximately $28.9 million of cash and equivalents as of December 31, 2019, we have the liquidity necessary to sustain closure for a period of time that extends beyond the currently-mandated closure periods. Additionally, as of December 31, 2019, we had $1.0 million of restricted cash. In March 2020, such cash was no longer categorized as restricted, as the Company was approved for its “master license” for sports betting by the Colorado Limited Gaming Control Commission on March 19, 2020. To preserve liquidity, upon the temporary closure of our properties in March

2020, we significantly reduced staffing levels at each of our properties and at our corporate office to a small group of essential employees. We also recently elected to pause construction of the Phase One parking garage at Bronco Billy’s, allowing us to use the cash designated for such construction to provide the Company with additional liquidity until our casinos are permitted to reopen. No assurance can be given that, should the casino closures extend for a prolonged period and require us to seek additional liquidity, we will be able to successfully raise additional funds through either the issuance of new debt or new equity or the sale of assets. The Company will work diligently to reopen its casinos as soon as it is permitted to do so.

Principal Debt Arrangements

Senior Secured Notes due 2024

On February 2, 2018, we refinanced amounts previously outstanding of $41 million under the First Lien Credit Facility and $55 million under the Second Lien Credit Facility with $100 million of senior secured notes due 2024, which we sold to qualified institutional buyers. On May 10, 2019, the Company issued an additional $10 million in aggregate principal amount of its senior secured notes due 2024 to qualified institutional buyers (collectively, the “Notes”). The Notes are collateralized by substantially all of our assets and are guaranteed by all of our material subsidiaries.

The Notes bear interest at the greater of the three-month LIBOR or 1.0%, plus a margin rate of 7.0%. The indenture governing the Notes provides for a 50 basis point interest premium if Mr. Lee reduces his equity interests by 50% or more while serving as our CEO. Mr. Lee has no current intention to sell any shares. Interest on the Notes is payable quarterly in arrears, on March 31, June 30, September 30 and December 31 of each year until the Notes mature in February 2024. On each interest payment date, we are required to make principal payments of $275,000 with a balloon payment for the remaining $103.5 million due upon maturity.

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

Covenants

The indenture governing the Notes contains customary representations and warranties, events of default, and positive and negative covenants, including financial covenants. As defined in the indenture, we are required to maintain a total leverage ratio, which measures “Consolidated EBITDA” against outstanding net debt. Additionally, we are allowed to deduct up to $15 million of our cash and equivalents (beyond estimated cash utilized in daily operations) in calculating the numerator of such ratio. For the upcoming year, the total leverage covenant ratio requirements are 6.00x through March 31, 2020, then 5.75x through September 30, 2020, and then 5.50x through December 31, 2020.

As of December 31, 2019, we were in compliance with our covenants; however, there can be no assurances that we will remain in compliance with all covenants in the future. See Note 6 to the consolidated financial statements set forth in “Item 8. Financial Statements and Supplementary Data” for more information about our Notes due 2024.

In March 2020, as discussed above and in Notes 2 and 14, our casinos were temporarily closed by various state governments as a precautionary measure to prevent the spread of the coronavirus.  While these closures are expected to be temporary, the current circumstances are dynamic and the impacts of COVID-19 on our business operations, including the duration and impact on overall customer demand, the timing of the reopening of our casinos, new information which may emerge concerning the severity of the coronavirus, and the actions to contain the coronavirus or treat its impact, among others, cannot be reasonably estimated at this time and we anticipate this could have a material adverse impact on our business, results of operations, financial position and cash flows.  Accordingly, we do not yet know the full effects of such closures on our operations.  A significant period of closure or significant declines in business volumes upon reopening would negatively impact our ability to remain in compliance with our debt covenants.  In the event that we fail to meet our debt covenants in the next twelve months, we would either seek covenant waivers or attempt to amend our covenants, though there is no certainty that we would be successful in such efforts.

Off-balance Sheet Arrangements

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

Critical Accounting Estimates and Policies

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

Impairment of Long-lived Assets, Goodwill and Indefinite-Lived Intangibles

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

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

We test our goodwill and indefinite-lived intangible assets for impairment annually during the fourth quarter or when a triggering event occurs. For our 2019 and 2018 annual impairment tests, we utilized the option to perform a qualitative analysis for our goodwill and indefinite-lived intangibles and concluded it was more likely than not that the fair values of such intangibles exceeded their carrying values. Any impairment charges incurred are not reversed if a subsequent evaluation concludes a higher valuation than the carrying value.

Fixed Asset Capitalization and Depreciation Policies

We define a fixed asset as a unit of property that (i) has an economic useful life that extends beyond 12 months and (ii) was acquired or produced for a cost greater than $2,500 for a single asset or greater than $5,000 for a group of assets. Property and equipment are stated at cost. For the majority of our property and equipment, cost was determined at the acquisition date based on estimated fair values. We acquired Bronco Billy’s in May 2016, Silver Slipper in October 2012, Rising Star in April 2011 and Stockman’s in January 2007. Project development costs, which are amounts expended on the pursuit of new business opportunities, and acquisition-related costs are expensed as incurred. Maintenance and repairs that neither materially add to the value of the property nor appreciably prolong its life are also expensed as incurred. Depreciation and amortization are provided on a straight-line basis over the estimated useful lives of the assets. When we construct assets, we capitalize direct costs

of the project, including fees paid to architects and contractors and property taxes. Salaries are capitalized only for employees working directly on the project. In addition, interest cost associated with major development and construction projects is capitalized as part of the cost of the project. Interest is typically capitalized on amounts expended on the project using the weighted-average cost of our outstanding borrowings. Capitalization of interest starts when construction activities begin and ceases when construction is substantially complete or development activity is suspended for more than a brief period.

We must make estimates and assumptions when accounting for capital expenditures. Whether an expenditure is considered a maintenance expense or a capital asset is sometimes a matter of judgment. When constructing or purchasing assets, we must determine whether existing assets are being replaced or otherwise impaired, which also may be a matter of judgment. In addition, our depreciation expense is highly dependent on the assumptions we make about our assets’ estimated useful lives. We determine the estimated useful lives based on our experience with similar assets, engineering studies, and our estimate of the usage of the asset. Whenever events or circumstances occur, which would change the estimated useful life of an asset, we account for the change prospectively.

Goodwill and Business Combinations

Goodwill represents the excess of the purchase price over fair value of net tangible and other intangible assets acquired in connection with business combinations. We accounted for our acquisitions of casino properties for Bronco Billy’s, Silver Slipper and Rising Star as business combinations. In a business combination, we determine the fair value of acquired assets, including identifiable intangible assets, assumed liabilities, and non-controlling interests, if any. The fair value of the acquired business is allocated to the acquired assets, assumed liabilities, and non-controlling interests based on their fair value, with any remaining fair value allocated to goodwill. This allocation process requires use of estimates and assumptions, including estimates of future cash flows to be generated by the acquired assets.

Intangible Assets

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

Our finite-lived intangible assets include customer loyalty programs, land leases, payments for a lease option and water rights. Finite-lived intangible assets are amortized over the shorter of their contractual or economic useful lives.

Customer loyalty programs represent the value of repeat business associated with the casinos’ loyalty programs when we acquired the properties. Such values were determined using a derivation of the income approach to valuation. The valuation analyses for the active-rated players were based on estimated revenues and attrition rates. Silver Slipper Casino and Hotel and Rising Star Casino Resort maintain historical information for the proportion of revenues attributable to the rated play, which acquisition costs were allocated to such customer loyalty programs. The combined value of the customer loyalty programs has since been fully-amortized over their assumed economic useful life, but remains a component of gross intangible assets other than goodwill, and comprises a majority of the related accumulated amortization. See Note 4 to the consolidated financial statements set forth in “Item 8. Financial Statements and Supplementary Data” for more information.

Revenue Recognition

Accrued Club Points: Operating Revenues and Related Costs and Expenses. Our revenue recognition policies follow casino industry practices. Casino revenue is the aggregate net difference between gaming wins and losses, with certain liabilities recognized, including progressive jackpots, earned customer loyalty incentives, funds deposited by customers before gaming play occurs, and for certain chips and tokens in the customers’ possession. Key performance indicators related to gaming revenue are slot coin-in and table game drop (volume indicators) and “win” or “hold” percentage.

Revenue for food and beverage, hotel, and other revenue transactions is typically the net amount collected from the customer for such goods and services, plus the retail value of (i) discretionary comps and (ii) comps provided in return for redemption of loyalty points. We record such revenue as the good or service is transferred to the customer. Additionally, we may collect deposits in advance for future hotel reservations or entertainment, among other services, which represent obligations to the Company until the service is provided to the customer. Sales and similar revenue-linked taxes (except for gaming taxes) collected from customers on behalf of, and submitted to, taxing authorities are also excluded from revenue and recorded as a current liability.

Deferred Revenues: Market Access Fees from Sports Wagering Agreements. These liabilities were created in the third quarter of 2019 when we 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, we received one-time market access fees in cash, which were recorded as a long-term liability in the same amount and will be recognized as revenue ratably over the initial term length of 10 years, beginning with the commencement of operations. See Note 2 to the consolidated financial statements set forth in “Item 8. Financial Statements and Supplementary Data” for more information.

Customer Loyalty Programs

We have separate customer loyalty programs at each of our properties – Silver Slipper Casino Players Club, Bronco Billy’s Mile High Rewards Club, Rising Star Rewards Club™, Grand Lodge Players Advantage Club® and the Stockman’s Winner’s Club. Under these programs, customers earn points based on their volume of wagering that may be redeemed for various benefits, such as free play, cash back, complimentary dining, or hotel stays, among others, depending on each property’s specific offers. We also occasionally offer sweepstakes and other promotions for tracked customers that do not require redemption of points.

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

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

Accounts Receivable Allowance for Doubtful Accounts

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

Income Taxes

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

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

Common Stock Warrant Liability

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

Stock-based Compensation

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

Recently Issued Accounting Pronouncements Not Yet Adopted

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

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

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

 

Item 8. Financial Statements and Supplementary Data.