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EX-32.2 - EXHIBIT 32.2 - FULL HOUSE RESORTS INCexhibit322q32017.htm
EX-32.1 - EXHIBIT 32.1 - FULL HOUSE RESORTS INCexhibit321q32017.htm
EX-31.2 - EXHIBIT 31.2 - FULL HOUSE RESORTS INCexhibit312q32017.htm
EX-31.1 - EXHIBIT 31.1 - FULL HOUSE RESORTS INCexhibit311q32017.htm


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
(Mark One)
 
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2017
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from         to
 Commission File No. 1-32583

 FULL HOUSE RESORTS, INC.
(Exact name of registrant as specified in its charter)  
Delaware
(State or other jurisdiction
of incorporation or organization)
 
13-3391527
(I.R.S. Employer
Identification No.)
 
 
 
One Summerlin, 1980 Festival Plaza Drive, Suite 680
Las Vegas, Nevada
(Address of principal executive offices)
 
89135
(Zip Code)
(702) 221-7800
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ   No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ    No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or emerging growth company. See definition of “large accelerated filer,” “accelerated filer”, “small reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer o
Accelerated Filer o
Non Accelerated Filer o (Do not check if a smaller reporting company)  
Smaller reporting company þ
Emerging growth company o
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act: Yes  ☐  No  ☐ 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No þ
 
As of November 7, 2017, there were 22,890,823 shares of Common Stock, $0.0001 par value per share, outstanding.
 

1




 
FULL HOUSE RESORTS, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX

2



PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

FULL HOUSE RESORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands, except per share data)
 
 
 
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2017
 
2016
 
2017
 
2016
Revenues
 
 
 
 
 
 
 
Casino
$
39,009

 
$
36,967

 
$
110,702

 
$
97,093

Food and beverage
8,760

 
8,282

 
24,759

 
21,438

Hotel
2,408

 
2,361

 
6,724

 
6,488

Other operations
1,234

 
1,252

 
3,250

 
3,094

Gross revenues
51,411

 
48,862

 
145,435

 
128,113

Less promotional allowances
(7,685
)
 
(7,601
)
 
(21,968
)
 
(20,309
)
Net revenues
43,726

 
41,261

 
123,467

 
107,804

Operating costs and expenses
 

 
 

 
 

 
 

Casino
20,102

 
19,380

 
57,556

 
49,910

Food and beverage
3,466

 
2,817

 
9,598

 
7,090

Hotel
348

 
297

 
826

 
768

Other operations
483

 
475

 
1,333

 
1,236

Selling, general and administrative
13,076

 
12,747

 
39,889

 
36,508

Project development, acquisition costs and other
65

 
439

 
249

 
1,211

Depreciation and amortization
2,193

 
2,203

 
6,428

 
5,795

 
39,733

 
38,358

 
115,879

 
102,518

Operating income
3,993

 
2,903

 
7,588

 
5,286

Other (expense) income
 

 
 

 
 

 
 

Interest expense, net of $77 capitalized for both 2017 periods
(2,718
)
 
(2,748
)
 
(8,102
)
 
(6,740
)
Debt modification costs

 
(24
)
 

 
(624
)
Adjustment to fair value of warrants
(302
)
 
181

 
(272
)
 
(60
)
 
(3,020
)

(2,591
)

(8,374
)
 
(7,424
)
Income (loss) before income taxes
973

 
312

 
(786
)
 
(2,138
)
Provision for income taxes
184

 
177

 
552

 
458

Net income (loss)
$
789

 
$
135

 
$
(1,338
)
 
$
(2,596
)
 
 
 
 
 
 
 
 
Basic income (loss) per share
$
0.03

 
$
0.01

 
$
(0.06
)
 
$
(0.13
)
Diluted income (loss) per share
$
0.03

 
$

 
$
(0.06
)
 
$
(0.13
)
 
See condensed notes to consolidated financial statements.

3



FULL HOUSE RESORTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
 
September 30,
2017
 
December 31,
2016
 
(Unaudited)
 
 
ASSETS
 
 
 
Current assets
 
 
 
Cash and equivalents
$
22,420

 
$
27,038

Accounts receivable, net of collection allowance of $122 and $53
1,575

 
1,909

Inventories
1,986

 
1,329

Prepaid expenses
3,745

 
2,809

 
29,726

 
33,085

Property and equipment, net
114,551

 
111,465

Other long-term assets
 

 
 

Goodwill
21,286

 
21,286

Intangible assets, net of accumulated amortization of $7,756 and $7,732
10,943

 
10,966

Deposits and other
894

 
404

 
33,123

 
32,656

 
$
177,400

 
$
177,206

LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Current liabilities
 

 
 

Accounts payable
$
5,321

 
$
4,910

Accrued payroll and other
12,195

 
11,122

Current portion of long-term debt
1,969

 
1,688

Current portion of capital lease obligation
413

 
419

 
19,898

 
18,139

 
 
 
 
Common stock warrant liability and other long-term obligations
1,589

 
1,117

Deferred taxes
2,458

 
1,907

Long-term debt, net of current portion
92,939

 
94,246

Capital lease obligation, net of current portion
4,978

 
5,318

 
121,862

 
120,727

Commitments and contingencies (Notes 5 and 7)


 


Stockholders’ equity
 

 
 

Common stock, $0.0001 par value, 100,000,000 shares authorized; 24,247,418 and 24,221,558 shares issued and 22,890,823 and 22,864,963 shares outstanding
2

 
2

Additional paid-in capital
51,668

 
51,271

Treasury stock, 1,356,595 common shares
(1,654
)
 
(1,654
)
Retained earnings
5,522

 
6,860

 
55,538

 
56,479

 
$
177,400

 
$
177,206

See condensed notes to consolidated financial statements.

4



FULL HOUSE RESORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (Unaudited)
(In thousands)
 
 
Common stock
 
 
 
Treasury stock
 
 
 
 
 
 
Shares
 
Dollars
 
Additional Paid-in Capital
 
Shares
 
Dollars
 
Retained Earnings
 
Total Stockholders' Equity
Balance, January 1, 2017
 
24,221

 
$
2

 
$
51,271

 
1,357

 
$
(1,654
)
 
$
6,860

 
$
56,479

Share-based compensation
 
26

 

 
397

 

 

 

 
397

Net loss
 

 

 

 

 

 
(1,338
)
 
(1,338
)
Balance, September 30, 2017
 
24,247

 
$
2

 
$
51,668

 
1,357

 
$
(1,654
)
 
$
5,522

 
$
55,538

 
See condensed notes to consolidated financial statements.

5



FULL HOUSE RESORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
 
 
 
 
Nine Months Ended 
 September 30,
 
2017
 
2016
Cash flows from operating activities:
 
 
 
Net loss
$
(1,338
)
 
$
(2,596
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 

 
 

Depreciation and amortization
6,428

 
5,795

Amortization of debt issuance and warrant costs
661

 
864

(Gain) loss on disposal of assets
(2
)
 
354

Share-based compensation
397

 
315

Change in value of stock warrants
272

 
60

Increases and decreases in operating assets and liabilities:
 

 
 

Accounts receivable
334

 
(93
)
Prepaid expenses, inventories and other
(1,306
)
 
(1,267
)
Deferred taxes
551

 
459

Accounts payable and accrued expenses
837

 
2,425

Net cash provided by operating activities
6,834

 
6,316

Cash flows from investing activities:
 

 
 

Acquisition of Bronco Billy's, net of cash acquired

 
(28,369
)
Purchase of property and equipment
(8,952
)
 
(1,736
)
Restricted cash

 
569

Refunded deposits and other, net
(163
)
 
2,861

Net cash used in investing activities
(9,115
)
 
(26,675
)
Cash flows from financing activities:
 

 
 

Repayment of First Lien Term Loan
(1,687
)
 
(2,125
)
Repayment of Revolving Loan

 
(2,000
)
Second Lien Term Loan borrowings

 
35,000

Repayment of capital lease obligation
(346
)
 
(338
)
Debt issuance costs and other
(304
)
 
(1,670
)
Net cash (used in) provided by financing activities
(2,337
)
 
28,867

 
 
 
 
Net (decrease) increase in cash and equivalents
(4,618
)
 
8,508

Cash and equivalents, beginning of period
27,038

 
14,574

Cash and equivalents, end of period
$
22,420

 
$
23,082

 
 
 
 
SUPPLEMENTAL CASH FLOW INFORMATION:
 

 
 

Cash paid for interest, net of amounts capitalized
$
7,459

 
$
5,738

 
 
 
 
 
See condensed notes to consolidated financial statements.

6



FULL HOUSE RESORTS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. ORGANIZATION
 
Organization. Formed as a Delaware corporation in 1987, Full House Resorts, Inc. owns, leases, operates, develops, manages, and/or invests in casinos and related hospitality and entertainment facilities. References in this document to "Full House", the "Company", “we”, “our”, or “us” refer to Full House Resorts, Inc. and its subsidiaries, except where stated or the context otherwise indicates.

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

We manage our casinos based on geographic regions within the United States. See Note 10 for further information.
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
 
Basis of Presentation. As permitted by the rules and regulations of the Securities and Exchange Commission, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) have been condensed or omitted. These consolidated financial statements should be read in conjunction with the Company’s 2016 annual consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

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

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

Fair Value and the Fair Value Input Hierarchy. Fair value measurements affect our accounting for net assets acquired in acquisition transactions and certain financial assets and liabilities, such as our common stock warrant liability. Fair value measurements are also used in our periodic assessments of long-lived tangible and intangible assets for possible impairment, including for property and equipment, goodwill, and other intangible assets. Fair value is defined as the expected price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. GAAP categorizes the inputs used for fair value into a three-level hierarchy. “Level 1” inputs are most readily observable, such as quoted prices in an active market for identical assets or liabilities; “Level 2” inputs, such as observable inputs for similar assets in less active markets; and “Level 3” inputs, which are unobservable and may include metrics that market participants would use to estimate values, such as revenue and earnings multiples and relative rates of return.

The Company utilizes Level 3 inputs when measuring the fair value of net assets acquired in business combination transactions, subsequent assessments for impairment, and all financial instruments, including but not limited to the estimated fair value of common stock warrants at issuance and for recurring changes in the related warrant liability (see Note 5).

Income Taxes. For interim income tax reporting, it was determined that the Company's annual effective tax rate could not be reasonably estimated. As a result, the Company used the actual year-to-date effective tax rate to determine the tax expense incurred during the three and nine months ended September 30, 2017 and 2016.

7



Effective January 1, 2017, the Company adopted Accounting Standards Update ("ASU") No. 2015-17, “Balance Sheet Classification of Deferred Taxes,” (“ASU 2015-17”) issued by the Financial Accounting Standards Board.  This update requires that deferred tax liabilities and assets, along with any related valuation allowance, be classified as non-current in a classified statement of financial position. The update allows for retrospective application. Accordingly, as of December 31, 2016, we reclassified the current portion of deferred tax assets of $42,000 and the current portion of deferred tax liabilities of $723,000, to non-current deferred tax liabilities.

Reclassifications. We made certain minor reclassifications to prior-period amounts to conform to the current-period presentation. Such reclassifications had no effect on the previously reported net income (loss) or stockholders' equity.

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

Recently Issued Accounting Standards Not Yet Adopted. As more fully explained in the notes to the Company's 2016 annual consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2016, certain accounting standards not yet effective may have a material effect on our financial statements. Such new standards include ASU 2016-02 relating to the accounting for leases as a lessee and ASU 2014-09 (as amended) relating to revenue recognition and presentation. These updates will be effective for annual reporting periods beginning after December 15, 2018 and 2017, respectively. Management is currently assessing the impact that adoption of the lease and revenue recognition accounting standards will have on its consolidated financial statements and footnote disclosures. Under the new revenue recognition standard, the Company expects it will no longer be permitted to recognize revenues for complimentary goods and services provided to customers as an inducement to gamble as gross revenue with a corresponding offset to promotional allowances to arrive at net revenues. Revenues instead will be presented net of the retail value of those complimentary goods and services.

Management believes that there are no other recently issued accounting standards not yet effective that are currently likely to have a material impact on our financial statements.
3. PROPERTY AND EQUIPMENT
 Property and equipment, including capital lease assets, consists of the following:
(In thousands)
September 30,
2017
 
December 31,
2016
 
(Unaudited)
 
 
Land and improvements
$
15,057

 
$
14,548

Buildings and improvements
106,416

 
102,410

Furniture and equipment
40,586

 
37,312

Construction in progress
2,443

 
868

 
164,502

 
155,138

Less accumulated depreciation and amortization
(49,951
)
 
(43,673
)
 
$
114,551

 
$
111,465




8



4. ACQUISITION

On May 13, 2016, we completed our acquisition of Bronco Billy's Casino and Hotel ("Bronco Billy's") for consideration of $31.1 million. The results of operations of Bronco Billy's are included in our consolidated financial statements from the date of acquisition. The acquisition was financed primarily through a $35 million increase in our Second Lien Credit Facility (see Note 5). During the fourth quarter of 2016, we completed our valuation analysis of the acquired net assets.

The following unaudited pro forma consolidated statement of operations for the Company includes the results of Bronco Billy's as if the acquisition and related financing transactions occurred on January 1, 2016. The pro forma financial information does not necessarily represent the results that might have actually occurred or may occur in the future. The pro forma amounts include the historical operating results of Full House and Bronco Billy's prior to the acquisition, adjusted only for matters directly attributable to the acquisition, which primarily include interest expense related to the Second Lien Credit Facility. The pro forma results also reflect the removal of non-recurring expenses directly attributable to the transaction of $1.2 million for the nine months ended September 30, 2016. The pro forma results do not include any anticipated synergies or other expected benefits from the acquisition.
Pro Forma Consolidated Statement of Operations
 
 
(In thousands except per share data, unaudited)
 
 
 
 
For the Nine Months Ended September 30, 2016
Net revenues
 
$
117,352

Net loss
 
(3,372
)
Basic and diluted loss per share
 
(0.17
)
5. LONG-TERM DEBT, CAPITAL LEASE AND COMMON STOCK WARRANT LIABILITY
 
Long-Term Debt

Long-term debt, related discounts and issuance costs consists of the following:
(In thousands)
September 30, 2017
 
(unaudited)
 
Outstanding Principal
 
Unamortized Discount
 
Unamortized Debt Issuance Costs
 
Long-term
Debt, Net
First Lien Term Loan
$
41,625

 
$

 
$
(374
)
 
$
41,251

Revolving Loan

 

 

 

Second Lien Term Loan
55,000

 
(346
)
 
(997
)
 
53,657

 
96,625

 
(346
)
 
(1,371
)
 
94,908

Less current portion
(1,969
)
 

 

 
(1,969
)
 
$
94,656

 
$
(346
)
 
$
(1,371
)
 
$
92,939


(In thousands)
December 31, 2016
 
Outstanding Principal
 
Unamortized Discount
 
Unamortized Debt Issuance Costs
 
Long-term
Debt, Net
First Lien Term Loan
$
43,312

 
$

 
$
(561
)
 
$
42,751

Revolving Loan

 

 

 

Second Lien Term Loan
55,000

 
(469
)
 
(1,348
)
 
53,183

 
98,312

 
(469
)
 
(1,909
)
 
95,934

Less current portion
(1,688
)
 

 

 
(1,688
)
 
$
96,624

 
$
(469
)
 
$
(1,909
)
 
$
94,246



9



The First Lien and Second Lien Credit Facilities are collateralized by substantially all of our assets and our subsidiaries guarantee our obligations under the agreements.  The Second Lien Credit Facility is subordinate to the First Lien Credit Facility.

First Lien Credit Facility. This facility includes a term loan of originally $45 million and revolving loan of $2 million and matures in May 2019. Variable rate interest payments are required monthly. Quarterly principal payments of $562,500 are payable until May 2018, with such payments increasing to $843,750 thereafter through maturity. As of September 30, 2017, $41.6 million was owed.

The interest rate of the First Lien Credit Facility is based on the greater of the elected London Interbank Offered Rate (“LIBOR”) (as defined) or 1.0%, plus a margin rate of 4.25%. The margin rate increased to 4.25% from 3.75% beginning in May 2017. There is no prepayment premium or interest rate cap associated with this facility.

Second Lien Credit Facility. This facility is a $55 million term loan and currently is scheduled to mature in November 2019. The maturity is the earlier of (i) May 13, 2022, or (ii) six months following the maturity date of the First Lien Credit Facility. Interest is currently payable monthly at a rate of 13.5%, and may vary between 12.5% and 13.5%, depending on the total leverage of the Company. All principal is due at maturity. If repaid early, the prepayment premium is 2% until May 13, 2018, 1% until May 13, 2019, and no prepayment premium thereafter.

Covenants. The First Lien and Second Lien Credit Facilities contain customary representations and warranties, events of default, and positive and negative covenants. We are also required to make capital expenditures of at least 1.425%, and no more than 5.25%, of our prior-year revenues, excluding capital expenditures made from any sale of our equity securities.

The First Lien and Second Lien Credit Facilities require that we maintain specified financial covenants, including a total leverage ratio, a first lien leverage ratio, and a fixed charge coverage ratio, all of which measure Adjusted EBITDA against outstanding debt and fixed charges (as defined in the agreements). These financial covenant ratios are currently defined as follows:
First Lien Credit Facility
 
 
Applicable Period
Maximum
Total Leverage
Ratio
 
Maximum
First Lien Leverage Ratio
March 31, 2017 through and including September 29, 2017
5.875x
 
2.625x
September 30, 2017 through and including March 30, 2018
5.750x
 
2.500x
March 31, 2018 through and including September 29, 2018
5.625x
 
2.375x
September 30, 2018 through and including March 30, 2019
5.375x
 
2.250x
March 31, 2019 and thereafter
5.250x
 
2.125x

Additionally, the Fixed Charge Coverage Ratio as of the last day of any fiscal quarter shall not be less than 1.10x.

Second Lien Credit Facility
 
 
Applicable Period
Maximum
Total Leverage
Ratio
 
Maximum
First Lien Leverage Ratio
March 31, 2017 through and including September 29, 2017
6.125x
 
2.875x
September 30, 2017 through and including March 30, 2018
6.000x
 
2.750x
March 31, 2018 through and including September 29, 2018
5.875x
 
2.625x
September 30, 2018 through and including March 30, 2019
5.625x
 
2.500x
March 31, 2019 through and including September 29, 2019
5.500x
 
2.375x
September 30, 2019 and thereafter
5.250x
 
2.250x

Additionally, the Fixed Charge Coverage Ratio as of the last day of any fiscal quarter shall not be less than 1.0x.

We were in compliance with our covenants as of September 30, 2017; however, there can be no assurances that we will remain in compliance with all covenants in the future and/or that we would be successful in obtaining waivers or modifications in the event of noncompliance.


10



Capital Lease

Our Indiana subsidiary, Gaming Entertainment (Indiana) LLC, leases a 104-room hotel at Rising Star Casino Resort. At any time during the lease term, we have the option to purchase the hotel at a price based upon the project’s actual cost of $7.7 million, reduced by the cumulative principal payments made by the Company during the lease term.  At September 30, 2017, such net amount was $5.4 million. Upon expiration of the lease term, (i) the Landlord has the right to sell the hotel to us, and (ii) we have the option to purchase the hotel.  In either case, the purchase price is $1 plus closing costs. 

On March 16, 2016, we amended the hotel lease agreement to extend the payment terms. The amendment included, among other items, a covenant that the Company make certain improvements to the Rising Star Casino Resort of at least $1 million, which the Company has already satisfied.

On September 17, 2017, we entered into a second amendment to the lease agreement to facilitate construction of the Recreational Vehicle Park adjoining the leased hotel.

Common Stock Warrant Liability

On May 13, 2016, the Company granted the Second Lien Credit Facility lenders 1,006,568 warrants. The warrants have an exercise price of $1.67 and expire on May 13, 2026. The warrants also provide for redemption rights, preemptive rights under certain circumstances to maintain their 5% ownership interest in the Company, piggyback registration rights and mandatory registration rights after two years. The redemption rights allow the warrant-holders, at their option, to require the Company to repurchase all or a portion of the warrants in the event of: (i) the maturity of the Second Lien Credit Facility, (ii) an acceleration pursuant to the Second Lien Credit Facility, (iii) a refinancing, repayment or other transaction decreasing the aggregate principal amount of the Second Lien Credit Facility debt outstanding as of May 13, 2016 by more than 50%, (iv) a liquidity event, as defined, or (v) the Company's insolvency. The repurchase value is the 21-day average price of the Company's stock at the time of the event, as defined, net of the warrant exercise price. If the redemption rights are exercised, the repurchase amount is payable by the Company in cash or through the issuance of an unsecured note with a four-year term and a minimum interest rate of 13.25%, as further defined, and would be guaranteed by the Company's subsidiaries. Alternatively, the warrant-holders may choose to have the Company register and sell the shares related to the warrants through a public stock offering.

We measure the fair value of the warrants at each reporting period. Due to the variable terms regarding the timing of the settlement of the warrants, the Company utilized a "Monte Carlo" simulation approach 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. At September 30, 2017, the simulation included the following assumptions: an expected contractual term of 2.82 years, an expected stock price volatility rate of 44.11%, an expected dividend yield of 0%, and an expected risk-free interest rate of 1.64%. The common stock warrant liability at September 30, 2017 was $1.4 million.

11



6. INCOME TAXES
 
The Company's effective income tax rate for the three- and nine-months ended September 30, 2017 was 18.9% and (70.2)%, respectively, compared to an effective income tax rate of 56.9% and (21.4)% in the prior-year periods. Our tax rate differs from the statutory rate of 34.0% primarily due to the effects of valuation allowances against net deferred tax assets and certain permanent item differences between tax and financial reporting purposes.
7. COMMITMENTS AND CONTINGENCIES
 
Litigation

In 2013 and 2014, we expended and capitalized approximately $1.6 million to repair construction defects to the parking garage at the Silver Slipper Casino and Hotel. The parking garage was originally built in 2007 and the Company acquired the Silver Slipper Casino in 2012. We hired outside legal counsel to pursue damages against the contractor and architect. During the third quarter of 2015, the case was dismissed in favor of the defendants, as the statutes of repose had expired. On November 25, 2015, we entered into a settlement and release agreement with the architect.

On January 12, 2016, we filed an appellate brief in the U.S. Court of Appeals for the Fifth Circuit ("Fifth Circuit"). On August 31, 2016, the Fifth Circuit heard oral arguments and on January 6, 2017, the Fifth Circuit reversed the District Court’s grant of summary judgment in favor of the contractor and remanded the case back to the District Court for trial.  The contractor's request for rehearing was subsequently denied. During March 2017, the Company also filed a lawsuit against the contractor's insurance company.

During September 2017, we reached a settlement with the contractor and contractor's insurance company. The parties agreed to a mutual release of all claims and counterclaims, and the contractor and the contractor's insurance company paid $675,000 to the Company. The settlement effectively compensated the Company for legal and other costs associated in pursuing the matter, including $55,000 and $98,000 of legal costs during the three and nine-months ended September 30, 2017, and $106,000 and $227,000 during the three and nine months ended September 30, 2016, respectively. The settlement proceeds reduced selling, general and administrative costs.

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

Operating Leases
 
In addition to the following leases, we have less-significant operating leases for certain office and warehouse facilities, office equipment, signage and land.

Silver Slipper Casino Land Lease through April 2058 and Options to Purchase. In 2004, our subsidiary, Silver Slipper Casino Venture, LLC, entered into a land lease with Cure Land Company, LLC for approximately 31 acres of marshlands and a seven-acre parcel on which the Silver Slipper Casino and Hotel is situated. The land lease includes base monthly payments of $77,500 plus contingent rents of 3% of monthly gross gaming revenue (as defined) in excess of $3.65 million.

The land lease also includes an exclusive option to purchase the leased land during the period from February 26, 2019 through October 1, 2027, for $15.5 million plus a seller-retained interest in Silver Slipper Casino and Hotel’s operations of 3% of net income (as defined) for ten years following the purchase date. In the event that we sell or transfer (i) substantially all of the assets of Silver Slipper Casino Venture, LLC, or (ii) our membership interests in Silver Slipper Casino Venture, LLC in its entirety, the purchase price will increase to $17.1 million plus the retained interest for ten years mentioned above.

Bronco Billy's Lease through January 2035 and Option to Purchase. Bronco Billy's leases certain parking lots and buildings, including a portion of the hotel and casino, under a long-term lease. The lease term includes six renewal options in three-year increments to 2035. Bronco Billy's exercised its first renewal option through January 2020, which increased the monthly rents from $18,500 to $25,000 for the first two years of the renewal period and $30,000 for the third year. The lease also contains a requirement for Bronco Billy's to pay the property taxes and certain other costs associated with the leased property, and includes a $7.6 million purchase option exercisable at any time during the lease and a right of first refusal.

Grand Lodge Casino Lease through August 2023.  Our subsidiary, Gaming Entertainment (Nevada), LLC, has a lease with Hyatt Equities L.L.C. ("Hyatt") to operate the Grand Lodge Casino.  The lease is collateralized by the Company’s interests under

12



the lease and property as defined and is subordinate to the liens of the First Lien and Second Lien Credit Facilities. Hyatt has an option, beginning January 1, 2019, to purchase our leasehold interest and related operating assets of the Grand Lodge Casino subject to assumption of applicable liabilities. The option price is an amount equal to the Grand Lodge Casino’s positive working capital, plus Grand Lodge Casino’s earnings before interest, income taxes, depreciation and amortization (“EBITDA”) for the twelve-month period preceding the acquisition (or pro-rated if less than twelve months remain on the lease), plus the fair market value of the Grand Lodge Casino’s personal property. Monthly rent increased from $125,000 to $145,833 on July 1, 2017, and will increase to $166,667 commencing on January 1, 2018. As a condition of the lease, the Company purchased new gaming devices and equipment and made other capital expenditures totaling up to $1.5 million and Hyatt renovated the casino at its sole cost and expense of up to $3.5 million, with both parties completing these renovations during the second quarter of 2017.

We also have an agreement with Hyatt for exclusive usage of certain hotel rooms and suites by our casino guests. The agreement, which commenced on June 1, 2016, includes a monthly fee of $41,667, a mutual six-month termination notification clause and matures on August 31, 2023, or earlier as set forth therein.

Corporate Office Lease. In August 2016, the Company executed a lease for 4,479 square feet of office space in Las Vegas, Nevada, replacing our previous office space lease that was originally due to expire in May 2018. The new lease terms include a length of 7.6 years, approximately $0.2 million of annual rents and a tenant improvement allowance of $0.2 million. The Company began occupying the new office space in June 2017. During the third quarter, the Company terminated the previous office space lease effective October 31, 2017 with the Company paying two months of additional rent.
8. EARNINGS (LOSS) PER SHARE

The weighted-average number of common and common equivalent shares used in the calculation of basic and diluted income (loss) per share consists of the following:
(In thousands)
Three Months Ended
 
Nine Months Ended
 
September 30,
2017
 
September 30,
2016
 
September 30,
2017
 
September 30,
2016
 
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
Net income (loss) attributable to Full House Resorts, Inc. - basic
$
789

 
$
135

 
$
(1,338
)
 
$
(2,596
)
Adjustment for assumed conversion of warrants

 
(181
)
 

 

Net income (loss) attributable to Full House Resorts, Inc. - diluted
$
789

 
$
(46
)
 
$
(1,338
)
 
$
(2,596
)
 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Weighted-average common share equivalents - basic
22,891

 
19,689

 
22,877

 
19,666

Potential dilution from share-based awards
772

 
195

 

 

Potential dilution from assumed conversion of warrants

 
112

 

 

Weighted-average common and common share equivalents - diluted
23,663

 
19,996

 
22,877

 
19,666

Anti-dilutive share-based awards and warrants excluded from the calculation of diluted earnings per share
1,487

 
494

 
3,545

 
3,065


In November 2016, the Company completed a rights offering to existing common stockholders. Because the rights issuance was offered to all existing stockholders at an exercise price that was less than the fair value of the stock, the weighted average shares outstanding and basic and diluted earnings per share were adjusted retroactively to reflect the bonus element of the rights offering for all periods presented. As a result, the Company retroactively adjusted the basic weighted average number of common shares outstanding from 19,018,809 to 19,689,332 for the three months ended September 30, 2016, and from 18,995,279 to 19,665,686 for the nine months ended September 30, 2016.
9. SHARE-BASED COMPENSATION
 
During the second quarter of 2017, our stockholders approved an amendment to the 2015 Equity Incentive Plan ("2015 Plan") that increased the number of shares of common stock available for issuance under the 2015 Plan from 1,400,000 to 2,500,000. In

13



addition to the increase in the number of authorized shares issuable under the 2015 Plan, the amendment included several "best practices" changes.

In May 2017, the Company issued 180,000 stock options under the 2015 Plan to various employees of the Company, all of which have an exercise price of $2.32. These stock options all vest in equal amounts over the next three years. Additionally, the Company extended the employment agreement of Daniel R. Lee, the Company's President and Chief Executive Officer, through November 2020 and simultaneously issued 240,000 stock options under the 2015 Plan to him with an exercise price of $2.32. Mr. Lee's options will vest ratably on a monthly basis between December 1, 2018 and November 30, 2020 in conjunction with his amended employment agreement. In all cases, the exercise price of the options reflects the Company's closing price on the date of grant.

As compensation for their annual service, the Company also issued to non-executive members of its Board of Directors 59,990 stock options under the 2015 Plan with an exercise price of $2.32 and a one-year vesting period; and 25,860 shares of common stock under the 2015 Plan that vested immediately.

As of September 30, 2017, we had 1,037,906 share-based awards authorized by shareholders and available for grant from the 2015 Plan.

The following table summarizes information related to our common stock options as of September 30, 2017:
 
Number
of Stock
Options
 
Weighted
Average
Exercise Price
Options outstanding at January 1, 2017
2,057,950

 
$
1.42

Granted
479,990

 
$
2.32

Exercised

 
n/a

Canceled/Forfeited

 
n/a

Options outstanding at September 30, 2017
2,537,940

 
$
1.59

Options exercisable at September 30, 2017
1,295,996

 
$
1.39


We estimated the fair value of each stock option award on the grant date using the Black-Scholes valuation model. Option valuation models require the input of highly subjective assumptions. Changes in assumptions used can materially affect the fair value estimate. Option valuation assumptions for the options granted during the nine-month period ended September 30, 2017 included: an expected volatility range between 43.6% and 44.8%, an expected dividend yield of 0%, an expected term of 4.9 to 6.2 years, and an expected weighted-average risk-free rate of between 1.9% and 2.1%.

Share-based compensation expense totaled $128,000 and $95,000 for the three months ended September 30, 2017 and 2016, respectively, and $397,000 and $315,000 for the nine months ended September 30, 2017 and 2016, respectively. As of September 30, 2017, there was approximately $0.8 million of unrecognized compensation cost related to unvested stock options previously granted that is expected to be recognized over a weighted average period of 1.4 years.
10. SEGMENT REPORTING
 
We manage our casinos based on geographic regions within the United States. The casino/resort operations include four segments: Silver Slipper Casino and Hotel (Hancock County, Mississippi); Rising Star Casino Resort (Rising Sun, Indiana); Bronco Billy's Casino and Hotel (Cripple Creek, Colorado); and the Northern Nevada segment, consisting of Grand Lodge Casino (Incline Village, Nevada) and Stockman’s Casino (Fallon, Nevada). Bronco Billy's Casino and Hotel was acquired on May 13, 2016.

The Company utilizes Adjusted Property EBITDA as the measure of segment profit in assessing performance and allocating resources at the reportable segment level. Adjusted Property EBITDA is defined as earnings before interest and other non-operating income (expense), taxes, depreciation and amortization, pre-opening expenses, impairment charges, asset write-offs, recoveries, gain (loss) from asset disposals, project development and acquisition costs, non-cash share-based compensation expense, and corporate-related costs and expenses that are not allocated to each property.


14



The following tables present the Company's segment information:

(In thousands, unaudited)
 
 
 
 
 
 
 
 

For the Three Months Ended,
 
For the Nine Months Ended,
 
September 30,
2017
 
September 30,
2016
 
September 30,
2017
 
September 30,
2016
Net Revenues
 
 
 
 
 
 
 
     Silver Slipper Casino and Hotel
$
16,425

 
$
14,987

 
$
49,520

 
$
44,326

     Rising Star Casino Resort
12,698

 
12,553

 
37,498

 
36,852

     Bronco Billy's Hotel and Casino
7,505

 
7,092

 
20,140

 
10,427

     Northern Nevada Casinos
7,098

 
6,629

 
16,309

 
16,199

 
$
43,726

 
$
41,261

 
$
123,467

 
$
107,804

 
 
 
 
 
 
 
 
Adjusted Property EBITDA
 
 
 
 
 
 
 
     Silver Slipper Casino and Hotel
$
3,054

 
$
2,304

 
$
9,013

 
$
7,335

     Rising Star Casino Resort
728

 
751

 
2,671

 
2,483

     Bronco Billy's Hotel and Casino
1,769

 
1,610

 
4,092

 
2,698

     Northern Nevada Casinos
1,892

 
1,864

 
2,391

 
3,256

 
7,443

 
6,529

 
18,167

 
15,772

 
 
 
 
 
 
 
 
Other operating (expenses) income:
 
 
 
 
 
 
 
Depreciation and amortization
(2,193
)
 
(2,203
)
 
(6,428
)
 
(5,795
)
Corporate expenses
(1,064
)
 
(889
)
 
(3,518
)
 
(3,165
)
Project development and acquisition costs
(53
)
 
(130
)
 
(238
)
 
(902
)
Gain (loss) on asset disposals, net
(12
)
 
(309
)
 
2

 
(309
)
Share-based compensation
(128
)
 
(95
)
 
(397
)
 
(315
)
Operating income
3,993

 
2,903

 
7,588

 
5,286

Other (expense) income:
 
 
 
 
 
 
 
Interest expense
(2,718
)
 
(2,748
)
 
(8,102
)
 
(6,740
)
Debt modification costs

 
(24
)
 

 
(624
)
Adjustment to fair value of warrants
(302
)
 
181

 
(272
)
 
(60
)
 
(3,020
)
 
(2,591
)
 
(8,374
)
 
(7,424
)
Income (loss) before income taxes
973

 
312

 
(786
)
 
(2,138
)
Provision for income taxes
184

 
177

 
552

 
458

Net income (loss)
$
789

 
$
135

 
$
(1,338
)
 
$
(2,596
)



15



(In thousands)
 
 
 
 
September 30,
2017
 
December 31,
2016
 
(unaudited)
 
 
Total Assets
 
 
 
     Silver Slipper Casino and Hotel
$
80,830

 
$
79,975

     Rising Star Casino Resort
37,066

 
36,444

     Bronco Billy's Hotel and Casino
35,777

 
36,732

     Northern Nevada Casinos
13,234

 
12,722

     Corporate and Other
10,493

 
11,333

 
$
177,400

 
$
177,206



16



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

This management’s discussion and analysis of financial condition and results of operations contains forward-looking statements that involve risks and uncertainties. Please see “Forward-Looking Statements” for a discussion of the uncertainties, risks and assumptions that may cause our actual results to differ materially from those discussed in the forward-looking statements. This discussion should be read in conjunction with our historical financial statements and related notes thereto and the other disclosures contained elsewhere in this Quarterly Report on Form 10-Q, and the audited consolidated financial statements and notes for the fiscal year ended December 31, 2016, which were included in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission ("SEC") on March 17, 2017. The results of operations for the periods reflected herein are not necessarily indicative of results that may be expected for future periods. Full House Resorts, Inc., together with its subsidiaries, may be referred to as “Full House”, the “Company”, “we”, “our” or “us”, except where stated or the context otherwise indicates.
 
Executive Overview

Our primary business is the ownership and/or operation of casino and related hospitality and entertainment facilities, which includes offering gaming, hotel, dining, entertainment, retail and other amenities. We own and/or operate five casino properties in four states - Mississippi, Colorado, Indiana and Nevada. We view our Mississippi, Colorado and Indiana properties as distinct operating segments and both of our Nevada properties as one operating segment.

Our portfolio consists of the following:
Property
 
Acquisition
Date
 
Location
Silver Slipper Casino and Hotel
 
2012
 
Hancock County, MS
(near New Orleans)
Bronco Billy Casino and Hotel
 
2016
 
Cripple Creek, CO
(near Colorado Springs)
Rising Star Casino Resort
 
2011
 
Rising Sun, IN
(near Cincinnati)
Stockman’s Casino
 
2007
 
Fallon, NV
(one hour east of Reno)
Grand Lodge Casino (leased and part of the Hyatt Regency Lake Tahoe Resort, Spa and Casino)
 
2011
 
Incline Village, NV
(North Shore of Lake Tahoe)

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 do 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 gaming activities, which include slot machines, table games and keno. 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 (at Rising Star Casino Resort), retail outlets and entertainment, and expect to derive additional revenues from our newly constructed projects as further described herein. Promotional allowances consist primarily of hotel rooms and food and beverages furnished to customers on a complimentary basis. The retail value of such services is included in the respective revenue classifications and is then deducted as promotional allowances to calculate net revenues. We may experience significant fluctuations in our quarterly operating results due to seasonality, variations in gaming hold percentages and other factors. Consequently, our operating results for any quarter or year are not necessarily comparable and may not be indicative of future periods’ results. 

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 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.
    

17




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 gratuitously furnished to customers, 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 the Company's performance. For a description of Adjusted EBITDA see "Non-GAAP Financial Measure". The Company utilizes 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 10 of our Condensed Notes to Consolidated Financial Statements included in this quarterly report. In addition, we use Adjusted Property EBITDA Margin which is calculated by dividing Adjusted Property EBITDA by the property's net revenues.

Results of Operations
 
Consolidated operating results
The following summarizes our consolidated operating results for the three- and nine-months ended September 30, 2017 and 2016:

(In thousands)
Three Months Ended
September 30,
 
Percent Change
 
Nine Months Ended
September 30,
 
Percent Change
 
2017
 
2016
 
 
2017
 
2016
 
Net revenues
$
43,726

 
$
41,261

 
6.0
%
 
$
123,467

 
$
107,804

 
14.5
 %
Operating expenses
39,733

 
38,358

 
3.6
%
 
115,879

 
102,518

 
13.0
 %
  Operating income
3,993

 
2,903

 
37.5
%
 
7,588

 
5,286

 
43.5
 %
Interest and other non-operating expenses
3,020

 
2,591

 
16.6
%
 
8,374

 
7,424

 
12.8
 %
Income tax expense
184

 
177

 
4.0
%
 
552

 
458

 
20.5
 %
Net income (loss)
$
789

 
$
135

 
484.4
%
 
$
(1,338
)
 
$
(2,596
)
 
(48.5
)%



18



(In thousands)
Three Months Ended
September 30,
 
Percent Change
 
Nine Months Ended
September 30,
 
Percent Change
 
2017
 
2016
 
 
2017
 
2016
 
Casino revenues
 
 
 
 
 
 
 
 
 
 
 
Slots
$
33,862

 
$
32,372

 
4.6
 %
 
$
96,028

 
$
83,711

 
14.7
%
Table games
5,022

 
4,513

 
11.3
 %
 
14,330

 
13,098

 
9.4
%
Other
125

 
82

 
52.4
 %
 
344

 
284

 
21.1
%
 
39,009

 
36,967

 
5.5
 %
 
110,702

 
97,093

 
14.0
%
Non-casino revenues, net
 
 

 


 
 
 
 

 
 
Food and beverage
3,283

 
2,860

 
14.8
 %
 
9,147

 
7,235

 
26.4
%
Hotel
568

 
521

 
9.0
 %
 
1,309

 
1,254

 
4.4
%
Other
866

 
913

 
(5.1
)%
 
2,309

 
2,222

 
3.9
%
 
4,717

 
4,294

 
9.9
 %
 
12,765

 
10,711

 
19.2
%
Total net revenues
$
43,726

 
$
41,261

 
6.0
 %
 
$
123,467

 
$
107,804

 
14.5
%


The following discussion is based on our consolidated financial statements for the three- and nine-months ended September 30, 2017 and 2016. The results of Bronco Billy's is included beginning May 13, 2016, subsequent to the beginning of the prior year nine-month comparative period.
 
Revenues. Consolidated net revenues for the three-month period increased at all of our properties, including 9.6% at Silver Slipper, 7.1% in Northern Nevada and 5.8% at Bronco Billy's.

Consolidated net revenues for the nine-month period increased due in part to the inclusion of Bronco Billy's for the full period. Excluding Bronco Billy's, our consolidated net revenues increased 6.1%, led by 11.7% at Silver Slipper and 1.8% at Rising Star, while Northern Nevada was flat.

See further information within our reportable segments described below.

Operating Expenses. Consolidated operating expenses for the three-month period increased 3.6% due primarily to increased promotional activity and customer traffic at Silver Slipper. The increase in costs was partially offset by the receipt of legal settlement proceeds to resolve the Silver Slipper parking garage litigation.

Consolidated operating expenses for the nine-month period increased 13.0% primarily due to the inclusion of Bronco Billy's for the full period. Excluding Bronco Billy's, our operating expenses increased 4.6%, primarily related to the factors described above at Silver Slipper. The increase was partially offset by a decrease in project development and acquisition costs from the Bronco Billy's transaction during 2016.

See further information within our reportable segments described below.
 
Interest and Other Non-Operating Expenses.

Interest Expense

Interest expense consists of the following:
    
(In thousands)
Three Months Ended
September 30,
 
Nine Months Ended
 September 30,
 
2017
 
2016
 
2017
 
2016
Interest cost (excluding loan fee amortization)
$
2,573

 
$
2,523

 
$
7,518

 
$
5,901

Amortization of debt costs
222

 
225

 
661

 
839

Capitalized interest
(77
)
 

 
(77
)
 

 
$
2,718

 
$
2,748

 
$
8,102

 
$
6,740


19



 
The increase in interest cost for the nine-month period was primarily due to the debt refinancing completed on May 13, 2016, which resulted in $35 million of additional debt used primarily to fund the purchase of Bronco Billy's.

Other Non-Operating Expenses, Net

For the three-month periods ended September 30, 2017 and September 30, 2016, the Company had $0.3 million of non-operating expense and $0.2 million of non-operating income, respectively, due to the change in fair value of the stock warrants. For the nine-month period ended September 30, 2017, we incurred $0.3 million of non-operating expense from the change in fair value of the stock warrants; this amount compares to $0.7 million incurred during the prior-year period, the decrease resulting primarily from debt modification costs associated with the debt refinancing during 2016.
    
 Income Tax Expense. Income tax expense was $0.2 million during each of the three-month periods ended September 30, 2017 and 2016, and was $0.6 million and $0.5 million for the nine-month periods ended September 30, 2017 and 2016, respectively. During 2017, 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 2017 results. Tax losses incurred in 2017 may shelter taxable income in future years. However, because of the level of uncertainty regarding sufficient prospective income, we maintain a valuation allowance against our remaining deferred tax assets, as mentioned above.
 
Operating Results – Reportable Segments

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, Rising Star Casino Resort and Bronco Billy's Casino and Hotel are each currently distinct segments.
 
The following table presents detail by segment of our consolidated net revenue and Adjusted EBITDA. Management uses Adjusted Property EBITDA as the measure of segment profit.
(In thousands)
Three Months Ended
September 30,
 
Percent Change
 
Nine Months Ended
September 30,
 
Percent Change
 
2017
 
2016
 
 
2017
 
2016
 
Net revenues
 
 
 
 
 
 
 
 
 
 
 
Silver Slipper Casino and Hotel
$
16,425

 
$
14,987

 
9.6
 %
 
$
49,520

 
$
44,326

 
11.7
 %
Rising Star Casino Resort
12,698

 
12,553

 
1.2
 %
 
37,498

 
36,852

 
1.8
 %
Bronco Billy's Casino and Hotel
7,505

 
7,092

 
5.8
 %
 
20,140

 
10,427

 
N/A

Northern Nevada Casinos
7,098

 
6,629

 
7.1
 %
 
16,309

 
16,199

 
0.7
 %
 
$
43,726

 
$
41,261

 
6.0
 %
 
$
123,467

 
$
107,804

 
14.5
 %
Adjusted Property EBITDA and Adjusted EBITDA
 

 
 

 
 
 
 

 
 

 
 
Silver Slipper Casino and Hotel
$
3,054

 
$
2,304

 
32.6
 %
 
$
9,013

 
$
7,335

 
22.9
 %
Rising Star Casino Resort
728

 
751

 
(3.1
)%
 
2,671

 
2,483

 
7.6
 %
Bronco Billy's Casino and Hotel
1,769

 
1,610

 
9.9
 %
 
4,092

 
2,698

 
N/A

Northern Nevada Casinos
1,892

 
1,864

 
1.5
 %
 
2,391

 
3,256

 
(26.6
)%
Adjusted Property EBITDA
7,443

 
6,529

 
14.0
 %
 
18,167

 
15,772

 
15.2
 %
Corporate
(1,064
)
 
(889
)
 
19.7
 %
 
(3,518
)
 
(3,165
)
 
11.2
 %
Adjusted EBITDA
$
6,379

 
$
5,640

 
13.1
 %
 
$
14,649

 
$
12,607

 
16.2
 %
 
Silver Slipper Casino and Hotel
 
The net revenue increases during the three- and nine-month periods ended September 30, 2017 compared to the prior-year periods were attributed to successful marketing and food and beverage promotions that resulted in increases in both customer

20



counts and gaming volumes. Slot revenues increased 6.5% during the quarter and 10.6% during the nine-month period, with both slot coin-in and slot hold percentage rising in 2017. Table games revenue increased 15.1% and 2.5% for the three- and nine-month periods, with the increase for the three-month period primarily due to a higher hold percentage. Non-gaming net revenues (principally food and beverage revenues) grew 27.6% during the quarter and 29.3% during the nine-month period due to certain promotions offered by the property and the opening of a new restaurant in July 2017. Our hotel occupancy was 89.3% compared to 88.0% in the prior-year nine-month period. The growth was achieved despite Hurricanes Harvey and Irma, which were in the Gulf of Mexico and came ashore to the west and east of the property, respectively. The storms did not affect the property directly, but caused weak periods during the quarter, as customers were distracted by the potential storm routes. Flooding in parts of Louisiana similarly affected results in the prior-year period.

Adjusted Property EBITDA for the three- and nine-month periods ended September 30, 2017 compared to the prior-year periods increased primarily from the increase in net revenues described above along with the legal settlement related to our parking garage litigation described below. Our casino expenses and food and beverage costs increased due to increases in both volumes and promotions. For the quarter, our Adjusted Property EBITDA Margin increased to 18.6% from 15.4% in the prior-year quarter, and for the nine-month period increased to 18.2% from 16.5% in the prior-year period.

During September 2017, we settled litigation involving construction defects at our parking garage. The contractor and contractor's insurance company paid the Company $675,000 in exchange for a mutual release of claims and counterclaims. The settlement, which was recorded as a reduction to selling, general and administrative costs, effectively reimbursed the Company for costs incurred in pursuing those claims including $561,000 of legal fees. See Note 7 to the accompanying consolidated financial statements for further information regarding the lawsuit.

In late-June 2017, we opened a new oyster bar on the casino floor. Additionally, during the third quarter of 2017, we opened a swimming pool and beach complex along the property's white sand beach. See Liquidity and Capital Resources - Capital Investments for further information.

Rising Star Casino Resort
 
Net revenues increased modestly during the three- and nine-month periods ended September 30, 2017 compared to the prior-year periods, primarily due to an increase in table games revenue. Table games revenues increased 18.7% and 8.0% during the three- and nine- month periods, while slot revenues and non-gaming net revenues were flat during both periods. Our hotel occupancy was 88.5% compared to 86.3% in the prior-year nine-month period.

Adjusted Property EBITDA for the three-month period ended September 30, 2017 compared to the prior-year period decreased 3.1% primarily due to increased selling, general and administrative costs and food and beverage costs. For the nine-month period ended September 30, 2017 compared to the prior-year period, Adjusted Property EBITDA increased 7.6% primarily attributed to higher revenues. Adjusted Property EBITDA Margin for the quarter was 5.7% versus 6.0% in the prior-year period, and 7.1% during the nine-month period versus 6.7% in the prior-year period.

During the third quarter of 2017, we opened our 56-space RV Park. See Liquidity and Capital Resources - Capital Investments for further information.
        
Bronco Billy's Casino and Hotel

Bronco Billy's was acquired on May 13, 2016, and therefore the year-to-date amounts for the 2016 period do not include Bronco Billy's results for the full period. See Note 4 to the consolidated financial statements for further information regarding the acquisition of Bronco Billy's.

For the three-month period ended September 30, 2017 compared to the prior-year period, net revenues increased due to an increase in slot coin-in, while Adjusted Property EBITDA increased 9.9% primarily due to the increase in revenues. Adjusted Property EBITDA Margin increased to 23.6% during the quarter from 22.7% in the prior-year quarter.

For the nine-month period ended September 30, 2017, net revenues and Adjusted Property EBITDA were consistent with the Company's expectations and recent historical performance. Adjusted Property EBITDA during the 2016 short-period included lower-than-normal gaming tax expense due to certain anomalies related to the timing of the acquisition and Colorado's graduated gaming tax rate structure. These gaming tax anomalies benefited the second quarter of 2016 by approximately $0.3 million.

The market in Cripple Creek is seasonal, favoring the summer months.


21



Northern Nevada

Net revenues increased during the three-month period ended September 30, 2017 compared to the prior-year period primarily reflecting an 8.6% increase in slot revenues. Revenues from table games remained flat. For the nine-month period ended September 30, 2017 compared to the prior-year period, net revenues were flat despite significant business interruption due to renovation construction activity at Grand Lodge Casino during the first and second quarters of 2017.

Adjusted Property EBITDA during the three-month period ended September 30, 2017 compared to the prior-year period increased slightly primarily due to the revenue increase described above, partially offset by increased promotional and marketing costs. Adjusted Property EBITDA Margin for the quarter was 26.7% compared to 28.1% in the prior-year quarter.

Adjusted Property EBITDA during the nine-month period ended September 30, 2017 compared to the prior-year period decreased 26.6% due to the renovation work during the first and second quarters, when up to two-thirds of the casino was closed for construction work, as well as increases in promotional costs and salaries and benefits. Adjusted Property EBITDA Margin for the nine-month period decreased to 14.7% from 20.1% in the prior-year period.

On June 30, 2017, we in conjunction with our landlord, completed the approximately $5 million renovation of the Grand Lodge Casino. The renovation included new decor and lighting throughout the casino, along with numerous new slot machines, table games, and slot and table chairs. We believe these changes materially improve the ambiance of the casino floor and the overall guest experience. The renovation began during February 2017 and caused us to close portions of our casino floor, which impacted our second quarter financial results. The renovation was completed on-budget and in accordance with our planned construction schedule prior to the start of our busy summer season.

The Company's 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. During the first quarter of 2017, however, the snowfall was exceptional (one of the highest in recorded Lake Tahoe history), resulting in extended periods of road closures and power outages. Nevertheless, we believe that the favorable ski season helped offset part of the construction disruption at Grand Lodge Casino from our renovation discussed above.

Corporate

Corporate expenses increased during both the three- and nine-month periods ended September 30, 2017 primarily due to increases in salaries and the cost of health care benefits.

In August 2016, the Company executed a lease for 4,479 square feet of office space in Las Vegas, Nevada. The new corporate space, while smaller, is in a higher-quality office building and more convenient for consultants, lenders, investors and others with whom the Company does business. Monthly expenditures for rent in the new office space are $14,000 per month versus $11,000 per month under the previous lease, which was nearing the end of its term and expected to increase. The Company began occupying the new office space in June 2017.

Non-GAAP Financial Measure
 
“Adjusted EBITDA” is earnings before interest and other non-operating income (expense), taxes, depreciation and amortization, preopening expenses, impairment charges, asset write-offs, recoveries, gain (loss) from asset disposals, project development and acquisition costs, and non-cash share-based compensation expense. Adjusted EBITDA information is presented solely as supplemental disclosure to measures reported in accordance with generally accepted accounting principles in the United States of America (“GAAP”) because management believes these measures are (1) widely used measures of operating performance in the gaming and hospitality industries, (2) a principal basis for valuation of gaming and hospitality companies, and (3) are utilized in the covenants within our debt agreements, although not necessarily defined in the same way as above. Adjusted EBITDA is not, however, a measure of financial performance or liquidity under GAAP. Accordingly, these measures should be considered supplemental and not a substitute for net income (loss) or cash flows as an indicator of the Company’s operating performance or liquidity.
 

22



The following table presents a reconciliation of Adjusted EBITDA to operating income and net income (loss):
(In thousands)
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Adjusted EBITDA
$
6,379

 
$
5,640

 
$
14,649

 
$
12,607

Depreciation and amortization
(2,193
)
 
(2,203
)
 
(6,428
)
 
(5,795
)
Gain (loss) on asset disposals
(12
)
 
(309
)
 
2

 
(309
)
Project development and acquisition costs
(53
)
 
(130
)
 
(238
)
 
(902
)
Share-based compensation
(128
)
 
(95
)
 
(397
)
 
(315
)
Operating income
3,993

 
2,903

 
7,588

 
5,286

Other (expense) income
 

 
 

 
 

 
 

Interest expense
(2,718
)
 
(2,748
)
 
(8,102
)
 
(6,740
)
Debt modification costs

 
(24
)
 

 
(624
)
Adjustment to fair value of warrants
(302
)
 
181

 
(272
)
 
(60
)
 
(3,020
)
 
(2,591
)
 
(8,374
)
 
(7,424
)
Income (loss) before income taxes
973

 
312

 
(786
)
 
(2,138
)
Income tax expense
184

 
177

 
552

 
458

Net income (loss)
$
789

 
$
135

 
$
(1,338
)
 
$
(2,596
)
 
The following tables present reconciliations of operating income (loss) to Adjusted EBITDA.
For the three months ended September 30, 2017
(In thousands)
 
Operating
income (loss)
 
Depreciation and
amortization
 
Loss from asset disposals
 
Project
development and
acquisition costs
 
Share-based
compensation
 
Adjusted
EBITDA
Casino properties
 
 
 
 
 
 
 
 
 
 
Silver Slipper
Casino and Hotel
$
2,174

 
$
872

 
$
8

 
$

 
$

 
$
3,054

Rising Star
Casino Resort
117

 
611

 

 

 

 
728

Bronco Billy's Casino and Hotel
1,300

 
468

 
1

 

 

 
1,769

Northern
Nevada Casinos
1,685

 
207

 

 

 

 
1,892

 
5,276

 
2,158

 
9

 

 

 
7,443

Other operations
 
 

 
 

 
 

 
 

 
 

Corporate
(1,283
)
 
35

 
3

 
53

 
128

 
(1,064
)
 
(1,283
)
 
35

 
3

 
53

 
128

 
(1,064
)
 
$
3,993

 
$
2,193

 
$
12

 
$
53

 
$
128

 
$
6,379



23



For the three months ended September 30, 2016
(In thousands)
 
Operating
income (loss)
 
Depreciation and
amortization
 
Loss from asset disposals
 
Project
development and
acquisition costs
 
Share-based
compensation
 
Adjusted
EBITDA
Casino properties
 
 
 
 
 
 
 
 
 
 
Silver Slipper
Casino and Hotel
$
1,480

 
$
818

 
$
6

 
$

 
$

 
$
2,304

Rising Star Casino Resort
83

 
660

 
8

 

 

 
751

Bronco Billy's
Casino and Hotel
1,106

 
504

 

 

 

 
1,610

Northern Nevada Casinos
1,350

 
219

 
295

 

 

 
1,864

 
4,019

 
2,201

 
309

 

 


6,529

Other operations
 
 

 
 
 
 

 
 

 
 

Corporate
(1,116
)
 
2

 

 
130

 
95

 
(889
)
 
(1,116
)
 
2

 

 
130

 
95

 
(889
)
 
$
2,903

 
$
2,203

 
$
309

 
$
130

 
$
95

 
$
5,640

 
Operating expenses deducted to arrive at operating income in the above tables for the three-month periods ended September 30, 2017 and 2016 included facility rents related to: (i) Silver Slipper of $0.4 million during 2017 and $0.3 million during 2016, (ii) Northern Nevada of $0.5 million for both periods presented, and (iii) Bronco Billy's of $84,000 for both periods presented.

For the nine months ended September 30, 2017
(In thousands)
 
Operating
income (loss)
 
Depreciation and
amortization
 
(Gain) loss from asset disposals
 
Project
development and
acquisition costs
 
Share-based
compensation
 
Adjusted
EBITDA
Casino properties
 
 
 
 
 
 
 
 
 
 
Silver Slipper
Casino and Hotel
$
6,453

 
$
2,552

 
$
8

 
$

 
$

 
$
9,013

Rising Star
Casino Resort
812

 
1,859

 

 

 

 
2,671

Bronco Billy's Casino and Hotel
2,691

 
1,407

 
(6
)
 

 

 
4,092

Northern
Nevada Casinos
1,842

 
556

 
(7
)
 

 

 
2,391

 
11,798

 
6,374

 
(5
)
 

 

 
18,167

Other operations
 
 

 
 

 
 

 
 

 
 

Corporate
(4,210
)
 
54

 
3

 
238

 
397

 
(3,518
)
 
(4,210
)
 
54

 
3

 
238

 
397

 
(3,518
)
 
$
7,588

 
$
6,428

 
$
(2
)
 
$
238

 
$
397

 
$
14,649








24



For the nine months ended September 30, 2016
(In thousands)
 
Operating
income (loss)
 
Depreciation and
amortization
 
Loss from asset disposals
 
Project
development and
acquisition costs
 
Share-based
compensation
 
Adjusted
EBITDA
Casino properties
 
 
 
 
 
 
 
 
 
 
Silver Slipper Casino and Hotel
$
4,847

 
$
2,482

 
$
6

 
$

 
$

 
$
7,335

Rising Star Casino Resort
482

 
1,993

 
8

 

 

 
2,483

Bronco Billy's Casino and Hotel
1,975

 
723

 

 

 

 
2,698

Northern Nevada Casinos
2,372

 
589

 
295

 

 

 
3,256

 
9,676

 
5,787

 
309

 

 

 
15,772

Other operations
 
 

 
 
 
 

 
 

 
 

Corporate
(4,390
)
 
8

 

 
902

 
315

 
(3,165
)
 
(4,390
)
 
8

 

 
902

 
315

 
(3,165
)
 
$
5,286

 
$
5,795

 
$
309

 
$
902

 
$
315