10-Q 1 fll-20220331x10q.htm 10-Q
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2022

or

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

For the transition period from         to

Commission File No. 1-32583

FULL HOUSE RESORTS, INC.

(Exact name of registrant as specified in its charter)

Delaware

(State or other jurisdiction

of incorporation or organization)

    

13-3391527

(I.R.S. Employer

Identification No.)

One Summerlin, 1980 Festival Plaza Drive, Suite 680

Las Vegas, Nevada

(Address of principal executive offices)

89135

(Zip Code)

(702) 221-7800

(Registrant’s telephone number, including area code)

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

Title of each Class

  

Trading Symbol(s)

  

Name of each exchange on which registered

Common Stock, $0.0001 par value per share

FLL

The Nasdaq Stock Market LLC

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

Large accelerated filer

Accelerated filer

Emerging growth company

Non-accelerated filer

Smaller reporting company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act:  

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

As of May 5, 2022, there were 34,345,656 shares of Common Stock, $0.0001 par value per share, outstanding.

FULL HOUSE RESORTS, INC. AND SUBSIDIARIES

FORM 10-Q

INDEX

Page

PART I
FINANCIAL INFORMATION

Item 1.

Financial Statements (Unaudited)

3

Consolidated Statements of Operations for the Three Months Ended March 31, 2022 and 2021

3

Consolidated Balance Sheets at March 31, 2022 and December 31, 2021

4

Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2022 and 2021

5

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2022 and 2021

6

Condensed Notes to Consolidated Financial Statements

7

Item 2.

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

22

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

34

Item 4.

Controls and Procedures

35

PART II
OTHER INFORMATION

Item 1.

Legal Proceedings

35

Item 1A.

Risk Factors

35

Item 6.

Exhibits

36

Signatures

37

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

March 31, 

    

2022

    

2021

Revenues

 

  

 

  

Casino

$

29,084

$

32,064

Food and beverage

 

6,511

 

6,101

Hotel

 

2,179

 

2,211

Other operations, including contracted sports wagering

 

3,649

 

1,832

 

41,423

 

42,208

Operating costs and expenses

 

  

 

  

Casino

 

9,875

 

10,339

Food and beverage

 

6,568

 

5,360

Hotel

 

1,071

 

1,056

Other operations

 

462

 

395

Selling, general and administrative

 

15,393

 

14,413

Project development costs

 

165

 

47

Preopening costs

786

Depreciation and amortization

 

1,792

 

1,800

Loss on disposal of assets, net

 

8

 

104

 

36,120

 

33,514

Operating income

 

5,303

 

8,694

Other expense

 

  

 

  

Interest expense, net of amounts capitalized

(6,399)

(4,456)

Loss on modification and extinguishment of debt

(4,406)

(6,134)

Adjustment to fair value of warrants

 

 

(1,347)

 

(10,805)

 

(11,937)

Loss before income taxes

 

(5,502)

 

(3,243)

Income tax (benefit) provision

(5,612)

202

Net income (loss)

$

110

$

(3,445)

Basic earnings (loss) per share

$

$

(0.13)

Diluted earnings (loss) per share

$

$

(0.13)

See condensed notes to consolidated financial statements.

3

FULL HOUSE RESORTS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (Unaudited)

(In thousands, except share data)

March 31, 

December 31, 

    

2022

    

2021

ASSETS

Current assets

 

  

 

  

Cash and equivalents

$

109,041

$

88,721

Restricted cash

210,494

176,572

Accounts receivable, net of reserves of $259 and $257

 

5,350

 

4,693

Inventories

 

1,529

 

1,660

Prepaid expenses and other

 

3,580

 

3,726

 

329,994

 

275,372

Property and equipment, net

 

181,095

 

149,540

Operating lease right-of-use assets, net

14,998

15,814

Goodwill

 

21,286

 

21,286

Other intangible assets, net

 

10,891

 

10,896

Deposits and other

 

1,710

 

934

Deferred income taxes, net

4,556

$

564,530

$

473,842

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities

Accounts payable

$

9,926

$

8,411

Accrued payroll and related

 

4,139

 

5,473

Accrued interest

4,134

9,861

Other accrued liabilities

 

10,535

 

10,252

Current portion of operating lease obligations

3,609

3,542

Current portion of finance lease obligation

520

514

 

32,863

 

38,053

Operating lease obligations, net of current portion

 

11,963

 

12,903

Finance lease obligation, net of current portion

2,651

2,783

Long-term debt, net

 

400,590

 

301,619

Deferred income taxes, net

 

 

1,055

Contract liabilities, net of current portion

3,156

4,714

 

451,223

 

361,127

Commitments and contingencies (Note 7)

 

  

 

  

Stockholders’ equity

 

  

 

  

Common stock, $0.0001 par value, 100,000,000 shares authorized; 35,302,549 and 35,302,549 shares issued and 34,345,656 and 34,242,581 shares outstanding

 

4

 

4

Additional paid-in capital

 

109,268

 

108,911

Treasury stock, 956,893 and 1,059,968 common shares

 

(1,167)

 

(1,292)

Retained earnings

 

5,202

 

5,092

 

113,307

 

112,715

$

564,530

$

473,842

See condensed notes to consolidated financial statements.

4

FULL HOUSE RESORTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)

(In thousands)

Additional

Total

Common Stock

Paid-in

Treasury Stock

Retained

Stockholders’

Shares

Dollars

Capital

Shares

Dollars  

Earnings

Equity

Balance, January 1, 2022

35,302

$

4

$

108,911

1,060

$

(1,292)

$

5,092

$

112,715

Issuance of stock on
options exercised and
restricted stocks vested

14

(103)

125

139

Stock-based compensation

 

 

343

 

 

343

Net income

 

 

 

110

 

110

Balance, March 31, 2022

35,302

$

4

$

109,268

957

$

(1,167)

$

5,202

$

113,307

Additional

Total

Common Stock

Paid-in

Treasury Stock

Accumulated

Stockholders’

Shares

Dollars

Capital

Shares

Dollars  

Deficit

Equity

Balance, January 1, 2021

28,385

$

3

$

64,826

1,261

$

(1,538)

$

(6,614)

$

56,677

Equity offering, net

6,917

 

1

 

42,973

 

 

42,974

Issuance of stock on options exercised

36

(34)

42

78

Stock-based compensation

124

124

Net loss

 

 

 

(3,445)

 

(3,445)

Balance, March 31, 2021

35,302

$

4

$

107,959

1,227

$

(1,496)

$

(10,059)

$

96,408

See condensed notes to consolidated financial statements.

5

FULL HOUSE RESORTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In thousands)

Three Months Ended

March 31, 

    

2022

    

2021

Cash flows from operating activities:

 

  

 

  

Net income (loss)

$

110

$

(3,445)

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

 

  

 

  

Depreciation and amortization

 

1,792

 

1,800

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

 

386

 

284

Stock-based compensation

 

343

 

124

Change in fair value of stock warrants

 

 

1,347

Loss on disposal of assets, net

 

8

 

104

Loss on modification and extinguishment of debt

4,406

6,134

Increases and decreases in operating assets and liabilities:

 

  

 

  

Accounts receivable

 

(657)

 

1,103

Prepaid expenses, inventories and other

 

277

 

(1,011)

Deferred taxes

 

(5,611)

 

202

Common stock warrant liability

(4,000)

Contract liabilities

(1,555)

(350)

Accounts payable and accrued expenses

 

(7,467)

 

5,999

Net cash (used in) provided by operating activities

 

(7,968)

 

8,291

Cash flows from investing activities:

 

  

 

  

Purchase of property and equipment

 

(31,203)

 

(3,413)

Other

 

(671)

 

(8)

Net cash used in investing activities

 

(31,874)

 

(3,421)

Cash flows from financing activities:

 

  

 

  

Proceeds from Senior Secured Notes due 2028 borrowings

 

100,000

 

310,000

Proceeds from premium on Senior Secured Notes due 2028 borrowings

2,000

Proceeds from equity offering, net of issuance costs

42,974

Payment of debt discount and issuance costs

 

(7,821)

 

(9,510)

Repayment of Senior Secured Notes due 2024

(106,825)

Prepayment premiums of Senior Secured Notes due 2024

 

 

(1,261)

Repayment of finance lease obligation

(126)

(120)

Proceeds from exercise of stock options

 

139

 

78

Other

(108)

24

Net cash provided by financing activities

 

94,084

 

235,360

Net increase in cash, cash equivalents and restricted cash

 

54,242

 

240,230

Cash, cash equivalents and restricted cash, beginning of period

 

265,293

 

37,698

Cash, cash equivalents and restricted cash, end of period

$

319,535

$

277,928

Supplemental Cash Flow Information:

 

  

 

  

Cash paid for interest, net of amounts capitalized

$

15,699

$

812

Non-Cash Investing Activities:

 

  

 

  

Accounts payable related capital expenditures

$

7,001

$

478

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.

The Company currently operates five casinos: four on real estate that we own or lease and one located within a hotel owned by a third party. We are currently constructing two additional properties: Chamonix Casino Hotel (“Chamonix”), adjacent to the Company’s existing Bronco Billy’s Casino and Hotel in Cripple Creek, Colorado; and The Temporary by American Place (“The Temporary”) in Waukegan, Illinois. We also benefit currently from six permitted sports wagering “skins,” three in Colorado and three in Indiana. Upon the opening of The Temporary, we expect to benefit from an additional skin in Illinois. Other companies operate or will operate these online sports wagering sites under their brands, paying us a percentage of revenues, as defined in each respective agreement, subject to annual minimum amounts.

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

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

Segments and Properties

 Locations

Colorado

Bronco Billy’s Casino and Hotel

 

Cripple Creek, CO (near Colorado Springs)

Chamonix Casino Hotel (under construction)

Cripple Creek, CO (near Colorado Springs)

Illinois

The Temporary and American Place (under construction)

Waukegan, IL (northern suburb of Chicago)

Indiana

Rising Star Casino Resort

 

Rising Sun, IN (near Cincinnati)

Mississippi

Silver Slipper Casino and Hotel

 

Hancock County, MS (near New Orleans)

Nevada

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

 

Incline Village, NV
(North Shore of Lake Tahoe)

Stockman’s Casino

 

Fallon, NV (one hour east of Reno)

Contracted Sports Wagering

Three sports wagering websites (“skins”)

Colorado

Three sports wagering websites (“skins”)

Indiana

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

Illinois

The Company manages its casinos based on geographic regions within the United States. See Note 10 for further information.

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

7

However, the COVID-19 pandemic, and certain precautionary measures, have created economic uncertainty both in the United States and globally, as well as significant volatility in, and disruption to, financial markets, labor markets and supply chains. Global supply chain disruptions have resulted in shipping delays, increased shipping costs, supply shortages, and inflationary pressures, including overall increases in prices such as fuel, food, and building materials. These increased costs and supply shortages continued to put additional constraints on our operating business and our construction projects for the three months ended March 31, 2022. We do not know when these cost constraints and supply chain issues will materially alleviate and, accordingly, they may continue to impact our existing business and our construction projects in the near term.

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

2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation. As permitted by the rules and regulations of the Securities and Exchange Commission (“SEC”), certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) have been condensed or omitted. These consolidated financial statements should be read in conjunction with the Company’s 2021 annual consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

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

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

Fair Value and the Fair Value Input Hierarchy. Fair value measurements affect the Company’s accounting for net assets acquired in acquisition transactions and certain financial assets and liabilities. Fair value measurements are also used in the Company’s periodic assessments of long-lived tangible and intangible assets for possible impairment, including for property and equipment, goodwill, and other intangible assets. Fair value is defined as the expected price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

GAAP categorizes the inputs used for fair value into a three-level hierarchy:

Level 1: Observable inputs, such as quoted prices in active markets for identical assets or liabilities;
Level 2: Comparable inputs other than quoted prices that are observable for similar assets or liabilities in less active markets; and
Level 3: Unobservable inputs which may include metrics that market participants would use to estimate values, such as revenue and earnings multiples and relative rates of return.

The Company utilizes Level 1 inputs when measuring the fair value of its 2028 Notes (see Note 5).

The Company utilizes Level 2 inputs when measuring the fair value of its asset purchases and acquisitions (see Note 4).

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

8

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

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

Accounts Receivable. Accounts receivable consist primarily of casino, hotel and other receivables, are typically non-interest bearing, and are carried net of an appropriate reserve to approximate fair value. Reserves are estimated based on specific review of customer accounts including the customers’ willingness and ability to pay and nature of collateral, if any, as well as historical collection experience and current economic and business conditions. Accounts are written off when management deems the account to be uncollectible and recoveries of accounts previously written off are recorded when received. Management believes that, as of March 31, 2022, no significant concentrations of credit risk existed for which a reserve had not already been recorded.

Revenue Recognition:

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

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

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

Many of the Company’s customers choose to earn points under its customer loyalty programs. As points are accrued, the Company defers a portion of its gaming revenue based on the estimated standalone value of loyalty points being earned by the customer. The standalone value of loyalty points is derived from the retail value of food, beverages, hotel rooms, and other goods or services for which such points may be redeemed. A liability related to these customer loyalty points is recorded, net of estimated breakage and other factors, until the customer redeems these points under loyalty programs by property for various benefits, primarily for “free casino play,” complimentary dining, or hotel stays, among others, depending on each property’s specific offers. Upon redemption, the related revenue is recognized at retail value within the department providing the goods or services. Unredeemed points are forfeited if the customer becomes and remains inactive for a specified period of time. Such liabilities were approximately $0.8 million for each of March 31, 2022 and December 31, 2021, and these amounts are included in “other accrued liabilities” on the consolidated balance sheets.

Revenue for food and beverage, hotel, and other revenue transactions is typically the net amount collected from customers for such goods and services, plus the retail value of (i) discretionary comps and (ii) comps provided in return for redemption of loyalty points. The Company records such revenue as the good or service is transferred to the customer. Additionally, the Company may collect deposits in advance for future hotel reservations or entertainment, among other services, which represent obligations of the Company until the service is provided to the customer.

9

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

Indiana. Two of the Company’s Sports Agreements commenced operations in December 2019 and April 2021, respectively. The third party for the remaining Sports Agreement went live contractually in December 2021.

Colorado. The Company’s three Sports Agreements commenced online operations in June 2020, December 2020 and April 2021, respectively.

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

In addition to the market access fees, deferred revenue includes the annual prepayment of contracted revenue, as required in two of the Sports Agreements. We received $1.0 million of prepaid revenue for contracted sports operations that commenced in Colorado in December 2020, and $1.0 million for contracted sports operations that commenced in Indiana in April 2021. As of March 31, 2022, $1.3 million of such deferred revenue has been recognized.

Deferred revenues consisted of the following, as discussed above:

(In thousands)

March 31, 

December 31, 

    

Balance Sheet Location

2022

    

2021

Deferred revenue, current

Other accrued liabilities

$

1,826

$

1,822

Deferred revenue, net of current portion

Contract liabilities, net of current portion

3,156

4,714

$

4,982

$

6,536

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

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

Revenue by Source. The Company presents earned revenue as disaggregated by the type or nature of the good or service (casino, food and beverage, hotel, and other operations comprised mainly of retail, golf, entertainment, and contracted sports wagering) and by relevant geographic region within Note 10.

Income Taxes. For interim income tax reporting for the three-months ended March 31, 2022, the Company estimates its annual effective tax rate and applies it to its year-to-date pretax income or loss.

10

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

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

Leases. The Company determines if a contract is or contains a lease at inception or modification of the agreement. A contract is or contains a lease if there are identified assets and the right to control the use of an identified asset is conveyed for a period of time in exchange for consideration. Control over the use of the identified asset means that the lessee has both the right to obtain substantially all of the economic benefits from the use of the asset and the right to direct the use of the asset.

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

The Company does not recognize ROU assets or lease liabilities for leases with a term of 12 months or less. However, costs related to short-term leases with terms greater than one month, which the Company deems material, are disclosed as a component of lease expenses when applicable. Additionally, the Company accounts for new and existing leases containing both lease and non-lease components (“embedded leases”) together as a single lease component by asset class for gaming-related equipment; therefore, the Company does not allocate contract consideration to the separate lease and non-lease components based on their relative standalone prices.

Finance and operating lease ROU assets and liabilities are recognized based on the present value of future minimum lease payments over the expected lease term at commencement. As the implicit rate is not determinable in most of the Company’s leases, management uses the Company’s incremental borrowing rate as estimated by third-party valuation specialists in determining the present value of future payments based on the information available at the commencement date and/or modification date. The expected lease terms include options to extend the lease when it is reasonably certain that the Company will exercise such options. Lease expense for minimum lease payments is recognized on a straight-line basis over the expected lease term for operating leases. For finance leases, the ROU asset depreciates on a straight-line basis over the shorter of the lease term or useful life of the ROU asset and the lease liability accretes interest based on the interest method using the discount rate determined at lease commencement.

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

3. LEASES

The Company has no leases in which it is the lessor. As lessee, the Company has one finance lease for a hotel and various operating leases for land, casino and office space, equipment, buildings, and signage. The Company’s lease terms, including extensions, range from one month to approximately 36 years. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants, but the land lease at Silver Slipper does include contingent rent, as further discussed below.

11

Operating Leases

Silver Slipper Casino Land Lease through April 2058 and Options to Purchase. In 2004, the Company’s subsidiary, Silver Slipper Casino Venture, LLC, entered into a land lease with Cure Land Company, LLC for approximately 31 acres of marshlands and a seven-acre parcel on which the Silver Slipper Casino and Hotel is situated. The land lease includes fixed, base monthly payments of $77,500 plus contingent rents of 3% of monthly gross gaming revenue (as defined in the lease) in excess of $3.65 million, with no scheduled base rent increases through the remaining lease term ending in 2058.

From April 1, 2022 through October 1, 2027, the Company may buy out the lease for $15.5 million plus a seller-retained interest in Silver Slipper Casino and Hotel’s operations of 3% of net income (as defined) for 10 years following the purchase date. In 2021, total rent paid during the year was $2.1 million, including $1.2 million of contingent rents.

Bronco Billy’s / Chamonix Lease through January 2035 and Option to Purchase. Bronco Billy’s leases certain parking lots and buildings, including a portion of the hotel and casino, under a long-term lease. The lease term includes six renewal options in three-year increments to 2035. The Company considers the renewal options reasonably certain of being exercised through January 2026, with current annual lease payments of $0.4 million. The lease contains a $7.6 million purchase option exercisable at any time during the lease term, or as extended, and a right of first refusal on any sale of the property.  

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

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

Grand Lodge Casino Lease through August 2023. The Company’s subsidiary, Gaming Entertainment (Nevada), LLC, has a lease with Incline Hotel, LLC, the owner of the Hyatt Regency Lake Tahoe Resort (“Hyatt Lake Tahoe”), to operate the Grand Lodge Casino. It is collateralized by the Company’s interests under the lease and property (as defined in the lease) and is subordinate to the liens of the Notes (see Note 5). The lessor currently has an option to purchase the Company’s leasehold interest and related operating assets of the Grand Lodge Casino, subject to assumption of applicable liabilities. The option price is an amount equal to the Grand Lodge Casino’s positive working capital, plus Grand Lodge Casino’s earnings before interest, income taxes, depreciation and amortization (“EBITDA”) for the twelve-month period preceding the acquisition (or pro-rated if less than twelve months remain on the lease), plus the fair market value of the Grand Lodge Casino’s personal property. The current monthly rent of $166,667 is applicable through the remaining lease term ending in August 2023.

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

Finance Lease

Rising Star Casino Hotel Lease through October 2027 and Option to Purchase. The Company’s Indiana subsidiary, Gaming Entertainment (Indiana) LLC, leases a 104-room hotel at Rising Star Casino Resort. At any time during the lease term, the Company has the option to purchase the hotel at a price based upon the hotel’s original cost of $7.7 million, reduced by the cumulative principal payments made by the Company during the lease term. At March 31, 2022, such potential purchase price was $3.2 million. Upon expiration of the lease term in October 2027, (i) the landlord has the right to sell the hotel to the Company, and (ii) the Company has the option to purchase the hotel. In either case, the purchase price is $1 plus closing costs.

12

The components of lease expense are as follows:

(In thousands)

    

    

Three Months Ended

March 31, 

Lease Costs

Classification within Statement of Operations

2022

 

2021

Operating leases:

 

  

 

  

  

Fixed/base rent

 

Selling, General and Administrative Expenses

$

1,165

$

1,159

Short-term payments

Selling, General and Administrative Expenses

27

Variable payments

 

Selling, General and Administrative Expenses

 

384

 

402

Finance lease:

 

 

  

 

Amortization of leased assets

 

Depreciation and Amortization

 

39

 

39

Interest on lease liabilities

 

Interest Expense, Net

 

37

 

43

Total lease costs

$

1,652

$

1,643

Leases recorded on the balance sheet consist of the following:

(In thousands)

March 31, 

December 31, 

Leases

    

Balance Sheet Classification

    

2022

2021

Assets

 

  

 

  

  

Operating lease assets

   

Operating Lease Right-of-Use Assets, Net

   

$

14,998

$

15,814

Finance lease assets

 

Property and Equipment, Net(1)

 

4,683

 

4,722

Total lease assets

 

  

$

19,681

$

20,536

Liabilities

 

  

 

  

 

  

Current

 

  

 

  

 

  

Operating

 

Current Portion of Operating Lease Obligations

$

3,609

$

3,542

Finance

 

Current Portion of Finance Lease Obligation

 

520

 

514

Noncurrent

 

  

 

 

Operating

 

Operating Lease Obligations, Net of Current Portion

 

11,963

 

12,903

Finance

 

Finance Lease Obligation, Net of Current Portion

 

2,651

 

2,783

Total lease liabilities

 

  

$

18,743

$

19,742

__________

(1)

Finance lease assets are recorded net of accumulated amortization of $3.0 million for each of March 31, 2022 and December 31, 2021.

13

Maturities of lease liabilities as of March 31, 2022 are summarized as follows:

(In thousands)

    

Operating

    

Financing

Years Ending December 31, 

Leases

Lease(1)

2022 (excluding the three months ended March 31, 2022)

$

3,631

$

434

2023

 

3,539

 

652

2024

 

1,663

 

652

2025

 

1,466

 

652

2026

 

965

 

652

Thereafter

 

29,140

 

543

Total future minimum lease payments

 

40,404

 

3,585

Less: Amount representing interest

 

(24,832)

 

(414)

Present value of lease liabilities

 

15,572

 

3,171

Less: Current lease obligations

 

(3,609)

 

(520)

Long-term lease obligations

$

11,963

$

2,651

__________

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

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

Lease Term and Discount Rate

March 31, 2022

December 31, 2021

Weighted-average remaining lease term

 

  

  

Operating leases

 

22.3

years

21.5

years

Finance lease

 

5.5

years

5.8

years

Weighted-average discount rate

 

  

  

Operating leases

 

9.35

%

9.32

%

Finance lease

 

4.50

%

4.50

%

Supplemental cash flow information related to leases is as follows:

(In thousands)

    

Three Months Ended

March 31, 

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

2022

2021

Operating cash flows for operating leases

$

1,221

$

1,218

Operating cash flows for finance lease

$

37

$

43

Financing cash flows for finance lease

$

126

$

120

4. ACQUISITIONS

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

14

5. LONG-TERM DEBT

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

(In thousands)

March 31, 

December 31, 

2022

2021

Revolving Credit Facility due 2026

$

$

Senior Secured Notes due 2028(1)

410,000

310,000

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

 

(9,410)

 

(8,381)

$

400,590

$

301,619

__________

(1)The estimated fair value of these notes was approximately $421.9 million for March 31, 2022 and $327.5 million for December 31, 2021. The fair value was estimated using quoted market prices for these notes.

Senior Secured Notes due 2028. On February 12, 2021, the Company refinanced all $106.8 million of its outstanding Senior Secured Notes due 2024 (the “Prior Notes”) with the issuance of $310 million aggregate principal amount of 8.25% Senior Secured Notes due 2028 (the “2028 Notes”). The net proceeds from the sale of the 2028 Notes were used to redeem all of the Prior Notes (including a 0.90% prepayment premium) and to repurchase all outstanding warrants. Additionally, $180 million of bond proceeds were placed into a construction reserve account to fund construction of Chamonix. Net of transaction fees and expenses, approximately $8 million was added to unrestricted cash and equivalents.

On February 7, 2022, the Company closed a private offering of $100 million aggregate principal amount of additional 8.25% Senior Secured Notes due 2028 (the “Additional Notes”), which sold at a price of 102.0% of such principal amount. Proceeds from the sale of the Additional Notes are being used: (i) to develop, equip and open The Temporary, which the Company intends to operate while it constructs its permanent American Place facility, (ii) to pay the transaction fees and expenses of the offer and sale of the Additional Notes and (iii) for general corporate purposes. No cash restrictions were applied on the Additional Notes as similarly reserved on the 2028 Notes to fund construction. The Additional Notes were issued pursuant to the indenture, dated as of February 12, 2021 (the “Indenture”), to which the Company issued the $310 million of 2028 Notes noted above (collectively, the “Notes”). In connection with the issuance of the Additional Notes, the Company and the subsidiary guarantors party to the Indenture entered into two Supplemental Indentures with Wilmington Trust, National Association, as trustee, dated February 1, 2022 and February 7, 2022, respectively. On March 3, 2022, the Company entered into a third Supplemental Indenture to establish a special record date for the initial interest payment for the Additional Notes.

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

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

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

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

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

Redemption Periods

    

Percentage Premium

February 15, 2024 to February 14, 2025

 

104.125

%

February 15, 2025 to February 14, 2026

 

102.063

%

February 15, 2026 and Thereafter

100.000

%

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

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

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

The Credit Facility contains a number of negative covenants that, subject to certain exceptions, are substantially similar to the covenants contained in the Notes. The Credit Facility also requires compliance with a financial covenant as of the last day of each fiscal quarter, such that Adjusted EBITDA (as defined) for the trailing twelve-month period must equal or exceed the utilized portion of the Credit Facility, if drawn. The Company was in compliance with this financial covenant as of March 31, 2022.

6. INCOME TAXES

The Company’s effective income tax rate for the three-months ended March 31, 2022 and 2021 was 102.0% and (6.2%), respectively. The significant change in the effective income tax rate was primarily due to the Company’s projections for pre-tax book income in 2022, the effects of tax amortization on indefinite lived intangibles in 2022, valuation allowances, and certain permanent differences between tax and financial reporting purposes. The Company expects that it will reverse the tax benefit that was booked, as of March 31, 2022, in future interim periods as pre-tax book income offsets the year-to-date, pre-tax loss.

The Company continues to assess the realizability of deferred tax assets (“DTAs”) and concluded that it has not met the “more likely than not” threshold. As of March 31, 2022, the Company continues to provide a valuation allowance against its DTAs that cannot be offset by existing deferred tax liabilities. In accordance with Accounting Standards Codification 740 (“ASC 740”), this assessment has taken into consideration the jurisdictions in which these DTAs reside. The valuation allowance against DTAs has no effect on the actual taxes paid or owed by the Company.

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

7. COMMITMENTS AND CONTINGENCIES AND SUBSEQUENT EVENT

Litigation

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

Options to Lease Land

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

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

Contracted Sports Wagering in Illinois

In May 2022, the Company entered into an agreement with an affiliate of Circa Sports to jointly develop and manage on-site sportsbooks at both The Temporary and American Place casinos in Illinois. Circa Sports currently operates at Circa Resort & Casino in Las Vegas, and offers online sports wagering in several states. In addition to the on-site sportsbook, Circa Sports will utilize the Company’s expected mobile sports skin to conduct Internet sports wagering throughout the state. In exchange for such rights, the Company subsequently received a market access fee of $5 million in May 2022, and will also receive a percentage of revenues (as defined) totaling at least $5 million per year, on an annualized basis, once Circa Sports launches its mobile sports skin in Illinois, subject to customary regulatory approvals. The term of the agreement is for eight years, with two four-year extension opportunities at the option of Circa Sports.

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

Earnings (Loss) Per Share

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

(In thousands)

Three Months Ended

March 31, 

    

2022

    

2021

Numerator:

 

  

 

  

Net income (loss) ─ basic

$

110

$

(3,445)

Net income (loss) ─ diluted

$

110

$

(3,445)

Denominator:

 

  

 

  

Weighted-average common and common share equivalents ─ basic

 

34,262

 

27,357

Potential dilution from share-based awards

2,361

Weighted-average common and common share equivalents ─ diluted

 

36,623

 

27,357

Anti-dilutive share-based awards excluded from the calculation of diluted loss per share

 

411

 

3,140

9. SHARE-BASED COMPENSATION

Performance-Based Shares. The Company issued a total of 36,849 performance-based shares to three of the Company’s executives during the first quarter of 2022. The vesting for these performance-based shares is based on the compounded annual growth rate of the Company’s Adjusted EBITDA and Free Cash Flow Per Share, as defined, for the three-year periods ending December 31, 2022, December 31, 2023, and December 31, 2024. For the 2022 period, one-sixth of such performance-based shares will vest on the anniversary date of the award if the Company’s annual Adjusted EBITDA for 2022 reflects at least 10% per annum growth since 2019, and one-sixth of such performance-based shares will vest on the anniversary date if the Company’s annual Free Cash Flow Per Share for 2022 reflects at least 12% per annum growth since 2019. Vesting of the performance-based shares is similar for the 2023 and 2024 periods.

On March 14, 2022, the Company issued 23,325 shares of stock to one of the Company’s executives for having previously met performance-based metrics in 2021 pertaining to Adjusted EBITDA growth and Free Cash Flow Per Share growth.

As of March 31, 2022, the Company had 1,561,690 share-based awards authorized by shareholders and available for grant from the Company’s 2015 Equity Incentive Plan.

The following table summarizes information related to the Company’s common stock options as of March 31, 2022:

    

    

Weighted

Number

Average

of Stock

Exercise

Options

Price

Options outstanding at January 1, 2022

 

3,221,956

$

2.19

Granted

 

141,939

 

9.64

Exercised

 

(79,750)

 

1.74

Canceled/Forfeited

 

 

Expired

 

 

Options outstanding at March 31, 2022

 

3,284,145

$

2.53

Options exercisable at March 31, 2022

 

2,562,961

$

1.70

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Components of compensation expense are as follows:

(In thousands)

Three Months Ended

March 31, 

Compensation Expense

2022

2021

Stock options

$

218

$

103

Restricted and performance-based shares

 

125

 

21

$

343

$

124

As of March 31, 2022, there was approximately $2.1 million of unrecognized compensation cost related to unvested stock options previously granted that is expected to be recognized over a weighted-average period of approximately 2.3 years. As of such date, there was also $0.7 million of unrecognized compensation cost related to unvested restricted and performance shares, which is expected to be recognized over a weighted-average period of 1.6 years.

10. SEGMENT REPORTING AND DISAGGREGATED REVENUE

The Company manages its reporting segments based on geographic regions within the United States and type of income. Its current operating segments, as of 2022, are:  Mississippi, Indiana, Colorado, Nevada, and Contracted Sports Wagering. The Company’s management views the states where each of its casino resorts are located as operating segments, in addition to its contracted sports wagering segment. Operating segments are aggregated based on geography, economic characteristics, types of customers, types of services and products provided, the regulatory environments in which they operate, and their management and reporting structure.

The Company utilizes Adjusted Segment EBITDA as the measure of segment profit in assessing performance and allocating resources at the reportable segment level. Adjusted Segment EBITDA is defined as 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, non-cash share-based compensation expense, and corporate-related costs and expenses that are not allocated to each segment.

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The following tables present the Company’s segment information:

(In thousands)

Three Months Ended March 31, 2022

Contracted

Sports

Mississippi

Indiana

Colorado

Nevada

Wagering

Total

Revenues

Casino

$

14,683

$

6,716

$

3,631

$

4,054

$

$

29,084

Food and beverage

 

4,939

 

873

 

420

 

279

 

 

6,511

Hotel

 

1,222

 

822

 

135

 

 

 

2,179

Other operations, including
contracted sports wagering

 

469

 

225

 

47

 

78

 

2,830

 

3,649

$

21,313

$

8,636

$

4,233

$

4,411

$

2,830

$

41,423

Adjusted Segment EBITDA

$

5,950

$

1,138

$

(319)

$

828

$

2,767

$

10,364

Other operating expenses:

Depreciation and amortization

 

(1,792)

Corporate expenses

 

(1,967)

Project development costs

 

(165)

Preopening costs

(786)

Loss on disposal of assets, net

(8)

Stock-based compensation

(343)

Operating income

 

5,303

Other expenses: