UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

(Exact Name of Registrant as specified in Its Charter) 

 

 

(Title of class)

  

 

 Documents Incorporated By Reference

FULL HOUSE RESORTS, INC.

TABLE OF CONTENTS

 

PART I

 

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, relating to our financial condition, profitability, liquidity, resources, business outlook, market forces, corporate strategies, contractual commitments, legal matters, capital requirements and other matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. We note that many factors could cause our actual results and experience to change significantly from the anticipated results or expectations expressed in our forward-looking statements. When words and expressions 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 are used in this Form 10-K, as well as statements containing phrases such as “in our view,” “there can be no assurance,” “although no assurance can be given,” or “there is no way to anticipate with certainty,” forward-looking statements are being made.

 

Various risks and uncertaintiesmatters 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 the following risks, uncertainties and other factors:

 

 

Formed as a Delaware corporation on January 5,in 1987, Full House Resorts, Inc. ("Full House") owns, leases, operates, develops, manages, and/or invests in casinos and related hospitality entertainment and relatedentertainment 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 statistical and other information concerning our properties as of December 31, 2015:2016:

We manage our casinos based on geographic regions within the United States.  Accordingly, Stockman’s Casino and Grand Lodge Casino comprise a Northern Nevada business segment, while Silver Slipper Casino and Hotel, Bronco Billy's Casino and Hotel, and Rising Star Casino Resort and Silver Slipper Casino & Hotel are currently distinct segments.  We previously managed certain casinos owned by Native American tribesOur corporate headquarters are in Las Vegas, Nevada.

Our revenues are primarily derived from gaming sources, which include revenues from slot machines, table games and keno. Play at our slot machines accounts for most of our revenues, but we also consideroffer a wide range of table games. We set minimum and maximum betting limits for our fee-based casino developmentproperties based on market conditions, customer demand and management services asother factors. Our gaming revenues are derived from a segment, although nonebroad base of guests that includes both high- and low-stakes players. We also derive a significant amount of revenues from our hotel rooms, food and beverage outlets, retail outlets, entertainment and our golf course at the Rising Star Casino Resort. Our financial results are dependent upon the number of patrons that we attract to our properties and the amounts those guests spend per visit. Additionally, our operating results may be affected by, among other things, overall economic conditions affecting the disposable income of our current casinoguests, weather conditions affecting access to our properties, are managed for others.achieving and maintaining cost efficiencies, taxation and other regulatory changes, and competitive factors, including but not limited to, additions and improvement to the competitive supply of gaming facilities. We may experience significant fluctuations in our quarterly operating results due to seasonality, variations in gaming hold percentages and other factors.

Our mission is to maximize shareholder value. We seek to increase revenues by providing our guests with their favorite games and amenities, high-quality customer service, and appropriate customer loyalty programs. Our customers include local value-oriented gaming customers who represent a high potential for repeat visits; generating customer satisfaction and loyaltyvisits along with this segment is a critical component of our strategy. We also have drive-in tourist patrons that we can entice for repeat visits.patrons. We continuously focus on improving the operating margins of our existing properties through a combination of top-line revenue growth and careful expense management. We also assess the potential impact of growth and development opportunities, which can includeincluding capital investments at our existing properties, the development of new properties, and the acquisition of existing third-party properties.

All of our casino properties operateare operated by us 24 hours each day, every day of the year.  Our casino operations are managed by us.  We also manageoperate the hotel and food and beverage operations at Silver Slipper, Bronco Billy's, Rising Star and Stockman's. At the Grand Lodge Casino, Hyatt Regency manages the hotel and food and beverage operations.outlets.  

On September 27, 2015, throughMay 13, 2016, we completed our wholly-owned subsidiary FHR-Colorado LLC, we entered into a definitive purchase and sale agreement to acquire the operating assets and assume certain liabilitiesacquisition of Bronco Billy’sBilly's Casino and Hotel (“Bronco Billy’s”) in Cripple Creek, Colorado for consideration of $31.1 million. This acquisition diversifies our operations into a purchasenew geographical market.

We completed a rights offering on November 10, 2016 and received a total of $5 million of gross proceeds ($4.64 million of net proceeds after offering costs) through the issuance of 3,846,154 shares of common stock at a price of $30 million, subject to an adjustment for working capital.$1.30 per share. We intend to financeuse the acquisition concurrent withnet proceeds from the refinancingrights offering to partially fund certain capital expenditure growth projects at our existing properties, as well as for general corporate purposes.

On October 1, 2012, we acquired all of the outstanding membership interests in Silver Slipper Casino Venture, LLC (which owned the Silver Slipper Casino and Hotel) for approximately $72.2 million.  The Silver Slipper Casino and Hotel is situated on the far west end of the Mississippi Gulf Coast near Bay St. Louis, Mississippi, and has approximately 37,000 square feet of gaming space, a fine-dining restaurant, a buffet, a quick-service restaurant and two casino bars. 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. The Silver Slipper Casino and Hotel currently generates the most revenue and operating income of any of our outstanding firstproperties and second lien debt. Onits 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.

We lease 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. Between February 18, 2016,2019 and October 2027, we have the option to purchase the land. Management expects to exercise the buyout option depending on the Company's resources and future capital market conditions. During the third quarter of 2015, we completed the phased opening of our newly constructed 129-room hotel, which includes nine premium gaming customer suites. During 2017, we anticipate building a swimming pool and beach club, as well as a new food and beverage offering, at the property.

 

We believe that our relationship with our employees is excellent. None of our employees nor those of our principal competitors, are currently represented by labor unions.

 

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.

 

If there were an event of default under one of our credit facilities and it is not waived (at their option) by the requisite lenders, the holders of the defaulted debt could cause all amounts outstanding with respect to that debt to be due and payable, subject to applicable grace periods. This could trigger cross-defaults under our other debt obligations. There can be no assurance that our assets or cash flow would be sufficient to repay borrowings under our outstanding credit facilities if accelerated upon an event of default, or that we would be able to repay, refinance or restructure the payments on any of those 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 that are beyond our control.

 

There can be no assurance that our business will generate sufficient cash flows from operations, or that future borrowings will be available to us under our credit facilities in amounts sufficient to enable us to pay our indebtedness as such indebtedness matures, and to fund our other liquidity needs. In such circumstances, we may need to refinance all or a portion of our indebtedness at or before maturity, and cannot provide assurances that we will be able to refinance any of our indebtedness on commercially reasonable terms, or at all. We may have to adopt one or more alternatives, such as reducing or delaying planned expenses and capital expenditures, selling assets, restructuring debt, or obtaining additional equity or debt financing or joint venture partners. 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.

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 and availability under the revolving term loan, will provide adequate resources to fund ongoing operating requirements over the next 12 months, we may need to refinance or seek additional financing to compete effectively.effectively or grow our business. Management is reviewing market conditions and exploring financing or refinancing alternatives. No assurance can be given that we will be able to obtain any additional financing or to refinance our existing debt, or to fund our growth efforts. If we are unable to obtain financing on commercially reasonable terms, it could:

 

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, 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 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. Currently, there are proposals that would 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 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

We face extensive regulation from gaming and other regulatory authorities.

We are subject to certain federal, state and other regulations.

 

We are subject to certain federal, state and local environmental laws, regulations and ordinances that apply to businesses generally. 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 department 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 obtain information on each customer’s sources of income.  This could impact our ability to attract and retain casino guests.

 

Our riverboat 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 were not in compliance with one or more of these 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, restrictions and conditions concerning alcoholic beverages, environmental matters, smoking, employees, currency transactions, taxation, zoning and building codes, 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. 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.

The imposition of a substantial penalty could have a material adverse effect on our business.

 

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.  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 significant decrease in gaming revenue and particularly, if such restrictions are not applicable to all competitive facilities in that gaming market, our business could be materially adversely affected.

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 also entail significant risks, including:

 

  

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 provide no assurancebe 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.

Our ability to obtain bank financing or to access the capital markets 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 successful in the "request for proposal" process, which is a competitive bidding process that involves unique risks.

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.  There can be no assurance 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.

and Mississippi properties’ financial performance. Additionally, we believe historically low snow levels in early 2015 in the Lake Tahoe region adversely affected visitation and financial performance at the Grand Lodge Casino. Bronco Billy's was adversely affected by nearby fires, as well as the subsequent flooding of its access roads in 2012 and 2013, and road construction in 2014. 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 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 results of operations and financial condition could be materially adversely affected by the occurrence of natural disasters, such as hurricanes, or other catastrophic events, including war and terrorism.

 

Natural disasters, such as major hurricanes, tornados, typhoons, floods, fires and earthquakes, could adversely affect our business and operating results. Hurricanes are common in the areas in which our Mississippi property is located and the severity of such natural disasters is unpredictable. 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.

 

Catastrophic events, such as terrorist and war activities in the United States and elsewhere, have had a negative effect on travel and leisure expenditures, including lodging, gaming and tourism. 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 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 would be materially adversely 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.

 

Because of significant loss experience caused by hurricanes and other natural disasters over the last several years, a number of insurance companies have stopped writing insurance in Class 1 hurricane areas, including Mississippi. Others have significantly limited the amount of coverage they will write in these markets and increased the premiums charged for this coverage. In addition, as a result of the worldwide economic conditions, there has beenAdditionally, 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.

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

 

There can be no assurance 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. Our projects, if completed, may take significantly longer than we expect to generate returns, if any. Moreover, lower-than-expected results from the opening of a new facility may negatively affect our operating results and financial condition and may make it more difficult to raise capital.

 

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 may experience an impairment of our goodwill, which could adversely affect our financial condition and results of operations.

 

We have recognized a substantial amount of goodwill in connection with the purchase of our owned properties. We test goodwill for impairment annually or more frequently if events or circumstances indicate that the carrying value may not be recoverable. A significant amount of judgment is involved in performing fair value estimates for goodwill since the results are based on estimated future cash flows and assumptions related thereto. Significant assumptions include estimates of future sales and expense trends, liquidity and capitalization, among other factors. We base our fair value estimates on projected financial information, which we believe to be reasonable. However, actual results may differ from those projections. Further, we may need to recognize an impairment of some or all of the goodwill recognized. While such impairment charges do not immediately affect cash flows from operations, they could adversely affect our financial condition and results of operations.

Our gaming operations rely heavily on technology services and an uninterrupted supply of electrical power. Our security systems and all of our slot machines are controlled by computers and are reliant on electrical power to operate.

Any unscheduled disruption in our technology services or interruption in the supply of electrical power could result in an immediate, and possibly substantial, loss of revenues due to a shutdown of our gaming operations. Such interruptions may occur as a result of, for example, a failure of our information technology or related systems, catastrophic events or rolling blackouts. Our systems are also vulnerable to damage or interruption from earthquakes, floods, fires, telecommunication failures, terrorist attacks, computer viruses, computer denial-of-service attacks and similar events.

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

We rely on information technology and other systems to maintain and transmit our customers’ personal and financial information, credit cardcredit-card settlements, credit cardcredit-card funds transmissions, mailing lists and reservations information. We have taken steps designed to safeguard our customers’ confidential personal information and have implemented systems designed to meet all requirements of the Payment Card Industry standards for data protection. However, our information and processes are subject to the ever-changing threat of compromised security in the form of a risk of potential breach, system failure, computer virus, or unauthorized or fraudulent use by customers, company employees, or employees of third partythird-party vendors. The steps we take to deter and mitigate these risks may not be successful, and any resulting compromise or loss of data or systems could adversely impact operations or regulatory compliance and could result in remedial expenses, fines, litigation, and loss of reputation, potentially impacting our financial results.

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.  To date, none of these matters have had a material adverse effect on our business, financial condition or results of operations; however, there can be no assurance that such matters will not have such an effect in the future.  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. 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, there can be no assurance that such matters will not have such an effect 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 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 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

 

 

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

 

 

Silver Slipper Casino &and Hotel

Rising Star Casino Resort

 

Grand Lodge Casino

Included as part of our Northern Nevada segment, the Grand Lodge Casino has 18,900 square feet of gaming space and is integrated into the Hyatt Regency Lake Tahoe in Incline Village, Nevada on the north shore of Lake Tahoe.  We operate the Grand Lodge Casino pursuant to a lease expiring on August 31, 2023 and own the personal property, including slot machines.  The lease is secured by the Company’s interests under the lease and is subordinate to the liens in the First and Second Lien Credit Facilities. Beginning on January 1, 2019, the Lessor has an option to purchase theour leasehold interest and the operating assets of the Grand Lodge Casino. The option purchase price is an amount equal to the Grand Lodge Casino’s positive working capital, plus Grand Lodge Casino’s 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 (including slot machines).

    

Additionally, we entered into an agreement with the Lessor to rent a lakeside villa, which includes four rooms, for use by our designated casino guests. The agreement commences on June 1, 2016, includes a six month termination clauselease expires in August 2023, but can be terminated by either party and matures on August 31, 2023, or earlier as defined.at any time with six months' notice.

Other

PART II

 

 

Our common stock is traded on the NASDAQ Capital Market under the symbol “FLL.”  The following table sets forth, for the calendar quarters indicated, the high and low sale prices of our common stock.

 

 

On March 25, 2016,14, 2017, the last sale price of our common stock as reported by the NASDAQ Capital Market was $1.55$2.32 and we had 9790 registered holders of record of our common stock. A substantial portion of holders of our common stock are "street name" or beneficial holders whose shares of record are held by banks, brokers, and other financial institutions. Such holders are not taken into consideration in the number of "registered holders" above.

 

 

We have not paid any dividends on our common stock to date.  The payment of dividends in the future 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.  Accordingly, we do not anticipate paying any dividends in the foreseeable future.

 

 

As a "smallersmaller reporting company",company, as defined by Rule 12b-2 of the Securities and Exchange Commission,Act, we are not required to provide the information required by this Item.

 

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”.

Our primary business is the ownership andand/or operation of casino and related hospitality and entertainment facilities, which includes offering gaming, hotel, dining, entertainment, retail and other amenities. We own or operate fourfive casino properties in 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:

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 revenues, which include revenues from slot machines, table games and live keno. In addition, we derive a significant amount of revenue from our hotel rooms and our food and beverage outlets. We also derive revenues from our golf course (at Rising Star Casino Resort), retail outlets and entertainment. Promotional allowances consist primarily of hotel rooms and food and beverages furnished to customers on a complimentary basis. The retail value of such services is included in the respective revenue classifications and is then deducted as promotional allowances to calculate net revenues. 

Our financial results are dependent upon the number of patrons that we attract to our properties and the amounts those guests spend per visit. Additionally, our operating results may be impacted by, among other things, overall economic conditions affecting the disposable income of our guests, weather conditions affecting our properties, achieving and maintaining cost efficiencies, competitive factors, gaming tax increases and other regulatory changes, the commencement of new gaming operations and expansion or enhancement at existing facilities. We may experience significant fluctuations in our quarterly operating results due to seasonality, variations in gaming hold percentages and other factors. Consequently, our operating results for any quarter or year are not necessarily comparable and may not be indicative of future periods’ results. Our industry is capital-intensive, and we rely on the ability of our properties to generate operating cash flow to pay interest, repay debt costs and fund maintenance capital expenditures.

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

Slot coin-in is the gross dollar amount wagered in slot machines and table game drop is the total amount of cash or promises to pay (“markers”)credit exchanged into chips for use at the Company’s table games. 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 net winnings by customers and the amount of money or markers exchanged into chips. Slot win and table game hold percentages represent the relationship between slot coin-in and table game drop to gaming wins and losses.

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

Adjusted EBITDA, Adjusted Property EBITDA and Adjusted Property EBITDA:EBITDA margin:

Management also uses Adjusted EBITDA and Adjusted Property EBITDA as measures of performance as more fully explained and discussed later herein. Adjusted Property EBITDA margin is a measure of operating profitability and is calculated by dividing Adjusted Property EBITDA by the property's net revenues. For a description of these measures, see "Non-GAAP Measures" and "Liquidity and Capital Resources - Credit Facilities - Covenants".

On September 27, 2015, throughMay 13, 2016, we completed our wholly-owned subsidiary FHR-Colorado LLC, we entered into a definitive purchase and sale agreement with Pioneer Group, Inc. to acquire the operating assets and assume certain liabilitiesacquisition of Bronco Billy’sBilly's Casino and Hotel in Cripple Creek, Colorado from Pioneer Group, Inc. for a purchase priceconsideration of $30$31.1 million, subject toincluding an adjustment for net working capital ("Bronco Billy's Purchase Agreement"). Accordingly, we made a non-refundable (except under certain conditions) deposit of $2.5 million which will be credited againstcapital. Concurrent with the purchase price upon closing. The Bronco Billy's Purchase Agreement may be terminated by Pioneer Group, Inc. if the closing has not taken place by May 14, 2016, which includes up to four 30-day extensions that we may exercise to obtain required gaming approvals. The fourth extension period requires us to increase our deposit by $100,000 by April 14, 2016. On February 18, 2016, the Colorado Limited Gaming Control Commission approved us for the necessary licenses required for our pending acquisition of Bronco Billy’s.Billy's, we entered into an amended and restated First Lien Credit Facility ("First Lien Credit Facility") with a group of banks led by Capital One Bank, N.A., ("Capital One"), which includes a First Term Loan of $45 million and Revolving Loan of $2 million. We expectalso entered into an amended and restated Second Lien Credit Facility ("Second Lien Credit Facility") with ABC Funding, LLC which included a term loan facility increase from $20 million to $55 million, of which the additional proceeds of $35 million were primarily used to complete our refinancing and closeacquisition of Bronco Billy's.  As part of the Second Lien Credit Facility, on May 13, 2016, the pending acquisition inCompany granted the second quarterlien lenders 1,006,568 redeemable warrants.

Shareholders directly subscribed for approximately 2.7 million shares under the remaining required regulatory approvalsrights offering, representing approximately 71% of the shares being offered. Shareholders also subscribed for more than 4.8 million shares via oversubscription rights, which significantly exceeded the number of available oversubscription shares.

Mr. Lee and other customary closing conditions. The transaction is not subjectvarious family-related accounts exercised their basic subscription and oversubscription rights related to a financing or due diligence condition, though we performed substantial due diligenceshares purchased prior to executionthe offering. Additionally, in connection with the standby purchase agreement that the Company entered into with Mr. Lee on October 7, 2016, Mr. Lee purchased 1,000,000 additional shares, which are restricted shares under the rules of the Securities and Exchange Commission. Under the standby purchase agreement, Mr. Lee (i) agreed to hold such shares for a minimum period, (ii) received reimbursement of his legal fees, (iii) received a priority right to purchase the first 1,000,000 shares that remained after shareholders exercised their basic subscription rights, and sale(iv) received registration rights from the Company with respect to such purchased shares. Mr. Lee received no payment for providing the standby purchase agreement. We intend to finance the acquisition concurrent with the refinancing of our outstanding first and second lien debt.

Results of Operations - 20152016 Compared to 20142015

The following summarizes our consolidated operating results for the years ended December 31, 20152016 and 2014:2015:

The following discussion is based on our consolidated financial statements for the years ended December 31, 20152016 and 2014,2015, unless otherwise described.

The above increase in interest cost above was dueprimarily attributed to the debt refinancing on May 13, 2016, which resulted in $35 million of additional debt incurred to construct the hotel at Silver Slipper and an increase in interest rate for the Second Lien Credit Facility.proceeds.

Our 2014 federalDuring 2016, we did not pay cash taxes or receive any tax return resulted in a tax loss whichrefunds. During 2015, we elected to carry-back to taxable income earned during 2012, in accordance with IRS rules. This carry-back resulted in anreceived income tax refundrefunds of $3.7$4.0 million during 2015.primarily from our federal loss carry-back election related to our 2014 tax return.

See Note 11 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 Casino and Grand Lodge Casino comprise aour Northern Nevada business segment, while Silver Slipper Casino and Hotel, Bronco Billy's Casino and Hotel and Rising Star Casino Resort and the Silver Slipper Casino & Hotel are currently distinct segments. We previously managed certain casinos owned by Native American tribes andno longer have a Development/Management segment, as we also consider our fee-based casino development and management servicesdid in 2014, as a segment, although none of our current casinowe did not manage any properties are managed for others. others during the reporting periods.

 

The following table presents detail by segment of our consolidated net revenue and Adjusted EBITDA for the years ended December 31, 20152016 and 2014.2015. Management uses Adjusted Property EBITDA as the primary profit measure for its reportable segments. See "Non-GAAP Measures" for additional information.

 

 

    

Net revenues increased 4.0% primarily due to highera full year of hotel operations of the hotel, which opened in phases between May and September 2015. The hotel helped grow both customer counts and gaming volumes reflecting the phased opening of our hotel, strategic promotional activity and enhancements to our food offerings.in 2016. Slot revenue increased 15.4%,4.9% and table games revenue rose 24.3%6.9%, primarily due to increases in slot handle and table games drop, respectively. These increases were partially offset by a decrease in non-gaming net revenues (principally food and beverage revenues) grew 39.9 % comparedof 6.4% due to reduction of certain promotional activities. Our hotel occupancy during 2016 was 88.1% versus 71.8% in the prior year.partial-year period.

Adjusted Property EBITDA increased significantly0.7% primarily due to the gamingrevenue increase noted above, and non-gaming revenue increases described above. Casino, non-casino and selling, general and administrativepartially offset by increased expenses increased by less than thedue to a full year of hotel operations, an increase in gaming revenues. As a result,promotional and marketing activity (other than food and beverage promotions), and higher property taxes due to the hotel. Adjusted Property EBITDA margin improved towas 16.9% versus 17.5% from 15.6%.in the prior-year period.

As described above in our Executive Overview section, we acquired Bronco Billy's on May 13, 2016. The market is seasonal, favoring the summer months.     

Adjusted Property EBITDA increasefrom May 13, 2016 through December 31, 2016 was $3.4 million and the resultAdjusted Property EBITDA margin was 21.1%. The property has performed in accordance with expectations.

For further information about the fair values of improvements in each quarter as follows: 26.2% in the first quarter, 25.1% inassets acquired and liabilities assumed at the second quarter, 39.0% in the third quarter, and 43.0% in the fourth quarter, comparedacquisition date, see Note 3 to the prior-year periods. The higher increasesconsolidated financial statements set forth in the second half of the year primarily reflect the opening of the hotel.“Item 8. Financial Statements and Supplementary Data”.

Net revenues decreased primarily as a result of competitive pressure from new casinos in Ohio, resulting in a decline in gaming volumes at Rising Star.increased 4.0% due to marketing enhancements and other customer-focused initiatives. Slot revenue decreased 7.6% andincreased 0.5%, table games revenue decreased 11%, whileincreased 19.7% due to increases in both table games drop and the win percentage, and non-gaming revenues (including food and beverage, hotel, golf and retail) increased 3.9%. During the fourth quarter, we enacted new marketing initiatives that helped increase net revenues by 10.9% comparedincreased 12.1%. Our hotel occupancy during 2016 increased to 85.6% from 83.7% in the prior-year period, resulting in the first quarterly increase since we purchased the property in 2011.period.

WeDuring 2015, we resolved a property tax dispute with the local governmental authorities, resulting in a $1.4 million property tax refund for the tax years 2011 through 2014 and an approximatelyapproximate $0.4 million reduction in annual property taxes during 2015.2015 and 2016. The refund was a reversal of property taxes previously expensed and resulted in a credit to operating expenses during the third quarter of 2015.

Adjusted Property EBITDA increased primarilydecreased 26.8% due to the property tax refund and a reductionreceived in current-year property taxes, cost containment measures affecting casino and selling, general and administrative expenses, and the improved fourth quarterprior-year period as described above. Apart fromabove and increased marketing and advertising costs in 2016, partially offset by the property tax resolution, Adjusted Property EBITDA still rose significantly in 2015 versus 2014. In addition to an increase in thenet revenues. Adjusted Property EBITDA margin towas 5.9% versus 8.4% from 4.3% in the prior-year period, 2015 waswhich included the first increaseproperty tax refund. Comparing Rising Star and Silver Slipper, Rising Star has a larger physical plant and gaming taxes are higher in annualIndiana than Mississippi, which accounts for much of the difference in Adjusted Property EBITDA since 2012.margin.

On March 16, 2016, we entered into the first amendment to our capital lease agreement related to our leased hotel. The amendment extended the initial term of the lease by four years to October 1, 2027, modified the rent payment schedule by lowering our monthly payments, and shall causerequires us to make a minimum of $1 million of capital improvements for the benefit ofat Rising Star by March 31, 2017.2017, which the Company intends to satisfy. If the Company does not make the $1 million of improvements, the lease will revert back to the original payment schedule. The implied interest rate for the remainder of the lease is approximately 4.5%.

    

All casinos as currently allowed by law in Indiana and Ohio have now opened. Kentucky does not permit casino gaming. AHowever, a Kentucky Supreme Court decision in 2014 however, may permit a horse racing track in northern Kentucky to install slot machine-like devices. Also, the Indiana legislature passed legislation to allow table games at racetracks beginning in 2020.2021. Although Indiana's two racetracks are not currently allowed to have table games with live dealers, they do offer electronic table games at their facilities. TheseWe believe these prospective and potential increases in competition are much more limited than the legalization and opening of a significant number of casinos in Ohio, which adversely affected the propertyRising Star over the past several years.

Net revenues decreasedincreased 5.8% due primarily as a result of decreasedto an improved ski season in the Lake Tahoe region. With elevated snow levels for the 2015/2016 ski season, customer traffic, slot winhandle and table game hold percentages. Slot revenue decreased 4.1%, table games revenue decreased 8.9%, and non-gaming net revenues were flat.

Adjusted Property EBITDA increased 1.7%, but increases in rent expense at Grand Lodge Casino, which in 2016 included additional rent for a villa, and more promotional activity partially offset increases in revenues. Rent expense at Grand Lodge Casino also increased in exchange for an extension of the Northern Nevada segment decreased duringcasino lease through August 2023 and a $5 million refurbishment of the year primarilycasino space, which is currently underway, $3.5 million of which is being funded by Hyatt. Because there are rent increases within the Hyatt lease at future dates, GAAP requires us to sum the rents due through the term of the lease and divide it by the remaining years of the lease to the swings in slot win and table game hold percentages mentioned above.calculate rent expense. Adjusted Property EBITDA margin decreased to 19.2% from 21%.was 18.6% versus 19.3% in the prior-year period.

The Company's Northern Nevada operations have historically been seasonal, with the summer months accounting for a disproportionate share of its annual profits. In addition,revenues. Additionally, the winter months can be affected by snowfall. The Grand Lodge Casino servesis located near several nearby ski resorts, including Alpine Meadows, Northstar and Squaw Valley. The snow during the 2014/2015 season was below average and the snow for the 2015/2016 season has been above average.

Corporate expenses decreased during the yearincreased 6.8% primarily due to decreasedthe hiring of an additional corporate salariesemployee and lower benefitsincreases in health care and other benefit costs.

Non-GAAP Measures    

The following table presents a reconciliation of Adjusted EBITDA to operating income (loss) and net loss:

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

 

 

TheOperating expenses deducted to arrive at operating income (loss) in the above tables include facility rents related to: (i) Silver Slipper information presented above is net of rent paid on its underlying land lease of$1.3 million in 2016 and $1.2 million in 2015, and $1(ii) Northern Nevada segment of $1.9 million in 2014.  Likewise, the Northern Nevada figures are net of2016 and $1.5 million of rent paid for the casino space at Grand Lodge Casino in both 2015 and 2014.  Rising Star Casino Resort paid $0.9 million in 2015, and 2014(iii) Bronco Billy's of $0.2 million from May 13, 2016 through December 31, 2016. Capital lease payments of $0.6 million during 2016 and $0.9 million during 2015 related to rent theRising Star’s hotel that opened in November 2013. Because this hotel lease is a capital lease, those rentare not deducted; such payments are not included in the above numbers but instead appearaccounted for as interest expense and amortization of the capitalized lease obligation and as a component of interest expense.capitalized-lease-related debt.

 

 Liquidity OutlookCash Flows

As of December 31, 2015,2016, we had $14.6$27 million of unrestricted cash and equivalents and $3 million of our $5$2 million Revolving Loan under our First Lien Credit Facility was available to draw.undrawn and fully available. Our ability to draw on our Revolving Loan is subject to, amongst other terms, our continued ability to meet our various financial covenants. Management currently estimates that approximately $12 million of cash and cash equivalents is required for the day-to-day operations of the Company.

ExcludingAs discussed in more detail above, our pending acquisitionrights offering closed on November 10, 2016, realizing $5 million of Bronco Billy's, we believegross proceeds ($4.64 million of net proceeds after offering costs). We intend to utilize the net proceeds from the rights offering to partially fund certain capital expenditure growth projects, as well as for general corporate purposes.

Our casinos are our primary sources of income and operating cash flow. There can be no assurance that our existing cash balances, cash flows from operations, and availability under our Revolving Loanbusiness will meet our financial and operating obligations over the next twelve months. However, we will continue to closely monitor and manage our cash position given the current economic environment. Our First Lien and Second Lien Credit Facilities mature on April 1, 2017, and we are currently in the process of refinancing our debt in order to meet our debt service requirements as we are unlikely to generate sufficient cash flow from operations or that future borrowings will be available in amounts sufficient to repayenable us to pay our indebtedness or fund our other liquidity needs. Subject to the principaleffects of the economic uncertainties discussed herein, we believe that adequate financial resources (including from operating cash flows and external debt and equity financing) will be available to fund ongoing operating requirements over the next 12 months, though we may need to refinance or seek additional financing to compete effectively or grow our business. Management is reviewing market conditions and exploring financing or refinancing alternatives. However, there can be no assurances of our ability to obtain any additional financing, to refinance our existing debt, upon the scheduled maturities. Additionally, we believe the refinancing of our debt, which has not yet been finalized, is expected to include an increased facility amount for the Bronco Billy's purchase obligations. This will enable us to fund the Bronco Billy's acquisition and allow us to meet our long-term liquidity requirements, including funding our operations, capital expenditures and debt service requirements. If our sources of capital are inadequateor to fund our long-term liquidity requirements, we will attemptgrowth efforts or to procure additional debt or equity financing. Management believes that, in the current capital markets and given the Company's positive trends, we will be able to refinance our debt on acceptable terms. There is no certainty, however, that we will be successful in doing so, or that we will be able to successfully fund our pending acquisition of Bronco Billy's.

Additionally, we may fund other various capital expenditure projects, during 2016 which are dependentdepending on our financial resources. Our capital expenditures may fluctuate depending ondue to our decisions with respect to strategic capital investments in new or existing facilities, and the timing of capital investments to maintain the quality of our properties.

We evaluate projects on a number of factors, including forecasted 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.

Credit Facilities

Our debt consists primarily of the  The First and Second Lien Credit Facilities that are secured by substantially all of our assets. Ourassets and our wholly-owned subsidiaries guarantee our obligationobligations under the agreements, except for the subsidiary FHR-Colorado LLC, which was formed to acquire Bronco Billy's.  The First Lien Credit Facility is a $56.3 million loan facility, including a $10 million construction term loan to fund a portion of the cost to build the hotel at Silver Slipper (together, the "First Term Loan") and a $5 million Revolving Loan. On March 11, 2016, the maturity date of the First Lien Credit Facility was extended to April 1, 2017.

As discussed in "Note 6 - Long-Term Debt", on August 5, 2015 and effective as of June 30, 2015, we entered into the Fifth Amendment toDecember 31, 2016, the First Lien Credit Facility had $43.3 million of gross principal indebtedness outstanding on our First Term Loan and Amendment No. 4 to the Second Lien Credit Facility. These amendments included the following:$2 million Revolving Loan was undrawn and fully available.

The First Lien 5th Amendment:

As of December 31, 2015,2016, the interest rate was 4.75% on the balance outstanding on the FirstSecond Lien Credit Facility basedhad $55 million of gross principal indebtedness outstanding. Interest is currently payable monthly at 13.5% (and may vary at a rate between 12.5% and 13.5% depending on the 1.0% minimum plus a 3.75% margin. In accordance with the termstotal leverage of the First Lien Credit Facility, we maintain a prepaid interest rate cap for a notionalCompany), and there are no quarterly principal payment requirements, as all principal is due at maturity. The prepayment premium is 3% of the total principal amount of $14.75 million at a LIBOR cap rate of 1.5%, which terminates on June 29, 2016.until May 13, 2017, 2% until May 13, 2018, 1% until May 13, 2019, and no prepayment premium thereafter.

The First Lien Credit Facility and Second Lien Credit FacilityFacilities contain customary negative covenants, including, but not limited to, restrictions on our and our subsidiaries’ ability to: incur indebtedness; grant liens; pay dividends and make other restricted payments; make investments; make fundamental changes; dispose of assets; and change the nature of our business. The First Lien Credit Facility and Second Lien Credit Facility require that weWe are also required to maintain specified financial covenants, including a total leverage ratio, a first lien leverage ratio, and a fixed chargefixed-charge coverage ratio, all of which measure Adjusted EBITDA (as defined in the agreements)

The First Lien Credit Facility and Second Lien Credit FacilityFacilities currently define Adjusted EBITDA as, for any four fiscal quarter period, (a) net income (loss) for such period, plus, (a)(b) to the extent deducted in determining net income (loss) for such period: (i) interest expense, (b)(ii) provisions for income taxes, and (c)(iii) depreciation and amortization and further adjusted to eliminate the impact of certain items that are either non-cash items or are not indicative of ongoing operating performance such as (d)expenses, (iv) extraordinary gains and losses (including non-cash impairment charges), (e) non-cash(v) stock compensation expense, (f) certain(vi) acquisition costs, including the Company’s canceled acquisition of the Fitz Tunica Casino & Hotel (g) costs related to the Company’s canceled S-1 registration statement filedBronco Billy's in early 2014, (h) board and management transitionan aggregate amount not to exceed $1,000,000, (vii) pre-opening expenses from the changes enacted in 2014 (i) preopening and development costs for the construction ofrelated to the hotel at Silver Slipper that opened in 2015, and (j)(viii) non-recurring development expenses for new initiatives in an aggregate amount not to exceed $500,000 for the trailing four consecutive fiscal quarters, minus (c) extraordinary gains, and minus (d) joint venture net income, unless such net income has been actually been received by the Company in the form of cash dividends or distributions. For purposes of our covenants, we also received pro forma creditAdjusted EBITDA shall include results for gaming tax reductions implemented in Indiana in 2014 andBronco Billy's as if it were owned for the first quarter of 2015.entire measurement period.

The revised financial covenant ratios, as detailed in the First Lien 5th Amendment and Amendment No. 4 to the Second Lien Credit Facility, are statedFacilities' restrictive covenants include a maximum total leverage ratio, a maximum first lien leverage ratio, and a fixed-charge coverage ratio. For further information, see Note 7 to the consolidated financial statements set forth in the tables below:

We were in compliance with our covenants as amended, as of December 31, 2015. There2016; however, there can be no assurances that we will remain in compliance with all covenants in all future periods or that, if there is a breach, lenders will waive such breach.

We are required to make prepayments under the First Lien Credit Facility, under certain conditions as defined in the agreement, in addition to the scheduled principal installments as defined. With regards to the Second Lien Credit Facility, no mandatory prepayments are required prior to the discharge of the First Lien Credit Facility.

The summary of principal terms of the amended and the amendments to therestated First Lien Credit Facility and to theamended and restated Second Lien Credit Facility in this Annual Report on Form 10-K are in all cases subject to the terms of the actual credit agreements and amendments, copies of which are referenced as Exhibits in Part IV to this Annual Report on Form 10-K.

 

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.

 

Our consolidated financial statements were prepared in conformity with accounting principles generally accepted in the United States of America (GAAP).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

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 assetcapital-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 and evaluate goodwill and indefinite-lived intangible assets using an income approach to value applying a typical discounted cash flows methodology. In determining whether the carrying value of long-lived assets is less than its estimated fair value, a discounted cash flow approach to value is used and is based on Level 3 inputs as defined by GAAP. The Company’s valuation model incorporates a discount rate considering specific transactions and/or an estimated weighted-average cost of capital and terminal value multiples that are used by market participants.  We also consider the metrics of specific business transactions that may be comparable to varying degrees. The weight assigned to these approaches to value in our impairment evaluation may vary from period to period depending upon evolving events. Forecasted prospective financial information used in the model is based on management’s expected course of action. Sensitivity analyses are also performed related to key assumptions used, including possible variations in the weighted-average cost of capital and terminal value multiples, among others. Any impairment charges incurred are not reversed if a subsequent evaluation concludes in a higher valuation than the carrying value.

 

Fixed Asset Capitalization and Depreciation Policies

 

We define a fixed asset as a unit of property that (a) has an economic useful life that extends beyond 12 months and (b) 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, including interestassets. 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 in connection with the May 2016 Bronco Billy's acquisition, the October 2012 Silver Slipper acquisition, the April 2011 Rising Star acquisition and the January 2007 Stockman's acquisition. Project development costs, associated with long-term development projects calculated using our weighted average ratewhich are amounts expended on the pursuit of borrowing.

We must make estimates and assumptions when accounting for capital expenditures. Whether an expenditure is considered a maintenance expense or a capital asset is 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 common industry practice.our estimate of the usage of the asset. Whenever events or circumstances occur which 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 acquisition of casino properties, most recently theBronco Billy's Casino and Hotel, Silver Slipper Casino and Hotel and Rising Star Casino Resort, 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 trademarks.trade names. Gaming licenses represent the rights to conduct gaming in certain jurisdictions.jurisdictions and trade names represent the fair value of the casino name's brand recognition. The value of the Rising Star Casino Resortour gaming license waslicenses were primarily estimated using a derivation of the income approach to valuation. The value of certain trademarks is basedthe Bronco Billy's trade names utilized the "relief from royalty" method which primarily on legal and recording feesutilizes comparable royalty agreements to obtain such marks.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 relationship and loyalty programs, land leases 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. The Silver Slipper Casino &and Hotel and Rising Star Casino Resort maintain historical information for the proportion of revenues attributable to the rated play.  The value of the customer loyalty programs are amortized over three years, their assumed economic useful life.  

 

Revenue Recognition and Promotional Allowances

 

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.

 

Hotel rooms, food, beverages and other services provided by us on a complimentary basis are recorded at estimated retail value, then subtracted as promotional allowances (a contra-revenue item) to calculate net revenues. The actual estimated cost of providing such goods and services is then charged as a casino operating expense.

 

Hotel, food and beverage, entertainment and other operating revenues are recognized as these services are performed.  Advance deposits on rooms and advance ticket sales are recorded as deferred revenue until services are provided to the customer without regard to whether they are refundable. 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.

Customer Loyalty Programs

 

We have customer loyalty programs at each of our properties – the Silver Slipper Casino Players Club, theBronco Billy’s MVP “Most Valuable Players” Club, 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, 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.  The cost of points redeemed for cash is recorded as a reduction of gaming revenue, and the cost of points redeemed for complimentary goods or services is recorded as an operating expense of the gaming department. 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.  Each of ourOur properties has been faced with a highly competitiveare in highly-competitive promotional environmentenvironments due to the high amounts of incentives offered by theour 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 collections allowance isallowances 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. 

Share-based Compensation

 

We have granted shares of both restricted 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.  Share-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 estimated forfeitures, is amortized as compensation cost on a straight line basis over the service period.

 

Recently Issued Accounting Pronouncements Not Yet Adopted

 

We have reviewed authoritative standardsIn February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842),” (“ASU 2016-02”), which replaces the existing guidance in ASC 840, Leases. ASU 2016-02 is effective for fiscal years, and interim periods within those years, beginning after December 31,15, 2018. ASU 2016-02 requires a dual approach for lessee accounting under which a lessee would account for leases as finance leases or operating leases. Both finance leases and operating leases will result in the lessee recognizing a right-of-use asset and a corresponding lease liability. The Company is currently assessing the impact that adoption of this guidance will have on its consolidated financial statements and footnote disclosures.

In May 2014, the FASB issued a comprehensive new revenue recognition model, ASU 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). ASU 2014-09 has been amended by ASU 2015-14, ASU 2016-08, ASU 2016-10, ASU 2016-11 and ASU 2016-12, which the FASB issued in August 2015, March 2016, April 2016, May 2016 and others not yet effective.May 2016, respectively. ASU 2014-09 outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including gaming industry specific guidance. ASU 2014-09 also provides a five-step analysis in determining how and when the revenue is recognized. ASU 2014-09 will require revenue recognition to represent the transfer of promised goods or services to customers in an amount that reflects the consideration a company expects to receive in exchange for those goods or services. Revenues are defined as inflows or other enhancements of assets of an entity or settlements of its liabilities (or a combination of both) from delivering or producing goods, rendering services, or other activities that constitute the entity’s ongoing major or central operations. As a result, we determinedrevenues will be presented net of the retail value of goods and services provided to customers on a complimentary basis.The effective date for the amended ASU 2014-09 is for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Early adoption is permitted for annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company does not plan to early adopt and is currently evaluating the newimplementation

Management believes that there are no other recently issued accounting standards not yet effective that are not likely to have any significanta material impact on our future financial statements.

 

As a "smallersmaller reporting company",company, as defined by Rule 12b-2 of the Securities and Exchange Commission,Act, we are not required to provide the information required by this Item.

 

 

 

 

 

 

 

 

 

 

 

CONSOLIDATED STATEMENTS OF OPERATIONS