FULL HOUSE RESORTS, INC. 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 10K. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from the results anticipated in the forward-looking statements as a result of a variety of factors, including those discussed in Item 1A. "Risk Factors" and elsewhere in this report. The results of operations for the periods reflected herein are not necessarily indicative of results that may be expected for future periods.Full House Resorts, Inc. , together with its subsidiaries, may be referred to as "Full House," the "Company," "we," "our" or "us".
Executive Overview
Our primary business is the ownership and/or operation of casino and related hospitality and entertainment facilities, which includes offering casino gambling, hotel accommodations, dining, golfing, RV camping, sports betting, entertainment and retail outlets, among other amenities. We own or operate five casino properties in four states -Mississippi ,Colorado ,Indiana andNevada . We view ourMississippi ,Colorado andIndiana properties as distinct operating segments and both of ourNevada properties as one operating segment. 30
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Our portfolio consists of the following:
Acquisition
Property Date Location
(near New Orleans )
(near Colorado Springs)
Rising Star Casino Resort 2011 Rising Sun, IN
(near Cincinnati)
Stockman's Casino 2007 Fallon, NV
(one hour east of Reno)
Grand Lodge Casino (leased and Incline Village, NV
part of the
Our financial results are dependent upon the number of patrons that we attract
to our properties and the amounts those guests spend per visit. While we provide
credit at some of our casinos where we are permitted to by gaming regulations,
most of our revenues are cash-based, through customers wagering with cash or
paying for non-gaming services with cash or credit cards. Our revenues are
primarily derived from slot machines, but also include other gaming activities,
along with table games, keno and sports betting. In addition, we derive a
significant amount of revenue from our hotels and our food and beverage outlets.
We also derive revenues from our golf course and ferry boat service at Rising
Star, our recreational vehicle parks ("RV parks") as owned at Rising Star and
managed at Silver Slipper, and retail outlets and entertainment.
We set minimum and maximum betting limits for our slot machines and table games
based on market conditions, customer demand and other factors. Our gaming
revenues are derived from a broad base of guests that includes both high- and
low-stakes players. Our sports book operations at Silver Slipper Casino and
Hotel is in partnership with a company specializing in race and sports betting.
Our operating results may also be affected by, among other things, overall
economic conditions affecting the disposable income of our guests, weather
conditions affecting access to our properties, achieving and maintaining cost
efficiencies, taxation and other regulatory changes, and competitive factors,
including but not limited to, additions and improvements to the competitive
supply of gaming facilities, as well as pandemics, epidemics, widespread health
emergencies, or outbreaks of infectious diseases such as the coronavirus.
We may experience significant fluctuations in our quarterly operating results
due to seasonality, variations in gaming hold percentages and other factors.
Consequently, our operating results for any quarter or year are not necessarily
comparable and may not be indicative of results in future periods.
Our market environment is highly competitive and capital-intensive. We rely on
the ability of our properties to generate operating cash flow to pay interest,
repay debt, and fund maintenance and certain growth-related capital
expenditures. We continuously focus on improving the operating margins of our
existing properties through a combination of revenue growth and expense
management. We also assess growth and development opportunities, which include
capital investments at our existing properties, the development of new
properties, and the acquisition of existing properties.
Recent Developments
Coronavirus. Pursuant to state government orders to prevent the spread of the coronavirus, we temporarily closed all of our casino properties inMarch 2020 . The extent to which our future results may be affected by the coronavirus will largely depend on future developments, which are highly uncertain and cannot be accurately predicted, including the timing of the reopening of our casinos and new information which may emerge concerning the severity of the coronavirus and the actions to contain the coronavirus or treat its impact, among others. For a more detailed discussion regarding casino closures and coronavirus-related impacts on our business, see "Liquidity and Capital Resources - Coronavirus" below. Sports Wagering inIndiana andColorado . In the second half of 2019, we entered into six sports wagering agreements with three different parties, each allowing such parties to conduct mobile and online sports wagering throughoutIndiana andColorado , as well as the operation of an on-site sportsbook with one of such entities at both Rising Star and Bronco 31
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Billy's. ByOctober 2019 , we received$3 million of the total contracted$6 million in one-time market access fees. We received the remaining$3 million once sports wagering inColorado was ratified by voters inNovember 2019 . Additionally, once online sports wagering operations has commenced for all six agreements, we anticipate these agreements will generate an aggregate of$7 million in minimum annual revenues for us, based on the revenue-share structure of the contracting parties' sports wagering operations inIndiana andColorado , with minimal ongoing expenses expected by us related to these revenues. If any one of the contracting parties generates annual revenues in excess of the minimum amount set forth in its respective sports wagering agreement, we should receive more than$7 million per year. See further information below regarding the expected commencement dates of these agreements.Bronco Billy's Expansion. In 2018, we began our expansion ofBronco Billy's , which was designed to be completed in two phases. Phase One of the Bronco Billy's expansion project includes the construction of a 319-space parking garage and connector building, the purchase of theImperial Hotel (which we acquired inJune 2018 ) and certain other nearby parcels of land, and the reopening and rebranding of theImperial Casino and Hotel as theChristmas Casino & Inn (which occurred inNovember 2018 ). InMarch 2020 , in light of the global coronavirus pandemic, we paused construction of the parking garage, which was in the early stages of construction. We do not yet know when or if conditions will warrant the resumption of such construction. Phase Two of the Bronco Billy's expansion project, which is expected to include a new luxury hotel tower, spa, convention and entertainment space, and two new restaurants, is contingent upon receipt of financing on acceptable terms, among other contingencies. We do not intend to commence construction of Phase Two until Phase One is completed. Waukegan Proposal. OnOctober 29, 2019 , the Company submitted an Owners Gaming License Application to the Illinois Gaming Board ("IGB") to develop and operateAmerican Place , a casino and entertainment destination inWaukegan, Illinois . In its first phase,American Place would include a world-class casino with a state-of-the-art sports book; a premium boutique hotel comprised of twenty luxurious villas, each ranging from 1,500 to 2,500 square feet with full butler service; a 1,500-seat live entertainment venue; and various food and beverage outlets. If awarded the license by the IGB, Full House would also develop and operate a temporary casino on that site whileAmerican Place is being constructed.American Place was one of three proposals certified by theWaukegan City Council at itsOctober 17th special meeting. At that meeting,Waukegan Aldermen heard a presentation from the city's consultant, which rankedAmerican Place the top proposal amongst the various submissions on numerous different criteria. No assurance can be given that the Company will be awarded the license by the IGB. Racetrack Proposal. In 2018, theNew Mexico Racing Commission (the "NMRC")
announced a competitive process regarding the issuance of the state's sixth
racing license. In accordance with that process, we formally presented our
racetrack casino proposal ("La Posada del Llano ") to the NRMC in October 2018
and answered additional questions regarding our project in November 2018 . In
early 2019, the NRMC announced that it would not issue the sixth racing license
at this time, but may do so in the future. If selected by the NRMC, La Posada
del Llano is expected to include a racetrack featuring a unique
"Moving Grandstand," an 18hole championship golf course, a casino with up to
750 slot machines, and a 300guestroom hotel, among other amenities.
Increase in Amount of Senior Secured Notes. In May 2019 , we sold an additional
$10 million in aggregate principal amount of senior secured notes due 2024 (the
"Incremental Notes"), which were issued on the same day at a price of 99.01% of
their face value (a 0.99% original issue discount) pursuant to the indenture (as
amended and supplemented, the "Indenture"), dated as of February 2, 2018 . The
Indenture governs $100 million of senior secured notes due 2024 (the "Original
Notes") that we previously issued on February 2, 2018 . The Incremental Notes
have the same maturity date, interest rate, class and series as the Original
Notes (collectively, the "Notes") for all purposes under the Indenture. Proceeds
from the Incremental Notes have been used or are expected to be used to
(i) provide additional liquidity for the construction of the Phase One parking
garage at Bronco Billy's Casino and Hotel and other capital expenditures;
(ii) pay fees and expenses incurred in connection with the Incremental Notes
offering; and (iii) provide funds for general corporate purposes.
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Key Performance Indicators
We use several key performance indicators to evaluate the operations of our properties. These key performance indicators include the following:
Gaming revenue indicators:
Slot coin-in is the gross dollar amount wagered in slot machines and table game drop is the total amount of cash or credit exchanged into chips at table games for use by our customers. Slot coin-in and table game drop are indicators of volume. Slot win is the difference between customer wagers and customer winnings on slot machines. Table game hold is the difference between the amount of money or markers exchanged into chips at the tables and customer winnings paid. Slot win and table game hold percentages represent the relationship between slot win and coin-in and table game win and drop.
Room revenue indicators:
Hotel occupancy rate is an indicator of the utilization of our available rooms. Complimentary room sales, or the retail value of accommodations furnished to customers free of charge, are included in the calculation of the hotel occupancy rate.
Adjusted EBITDA, Adjusted Property EBITDA and Adjusted Property EBITDA Margin:
Management uses Adjusted EBITDA as a measure of our performance. For a description of Adjusted EBITDA see "Non-GAAP Measure." We utilize Adjusted Property EBITDA as the measure of segment profit in assessing performance and allocating resources at the reportable segment level. For information regarding our operating segments, see Note 13 to the consolidated financial statements set forth in "Item 8. Financial Statements and Supplementary Data." Additionally, we use Adjusted Property EBITDA Margin, which is calculated by dividing Adjusted Property EBITDA by the property's net revenues.
Results of Operations - 2019 Compared to 2018
Consolidated operating results
The following summarizes our consolidated operating results for the years endedDecember 31, 2019 and 2018. For the Years Ended (In Thousands) December 31, Percent 2019 2018 Change Net revenues$ 165,432 $ 163,887 0.9 % Operating expenses 159,216 156,461 1.8 % Operating income 6,216 7,426 (16.3) %
Interest and other non-operating expenses, net 11,958 11,321
5.6 %
Income tax expense 80 476 (83.2) %
Net loss $ (5,822) $ (4,371) 33.2 %
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The following table details the components of our net revenues for the twelve
months ended December 31, 2019 and 2018, which are comprised of casino and
non-casino operations.
For the Years Ended
(In Thousands) December 31, Percent
2019 2018 Change
Casino revenues
Slots $ 93,228 $ 94,989 (1.9) %
Table games 17,373 18,202 (4.6) %
Other 2,789 1,133 146.2 %
113,390 114,324 (0.8) %
Non-casino revenues, net
Food and beverage 35,069 35,058 0.0 %
Hotel 11,535 9,864 16.9 %
Other 5,438 4,641 17.2 %
52,042 49,563 5.0 %
Total net revenues $ 165,432 $ 163,887 0.9 %
The following discussion is based on our consolidated financial statements for
the years ended
Revenues. As indicated in the above table, consolidated net revenues increased by 0.9%, with hotel and sports wagering revenue increases at Silver Slipper helping to overcome decreases in slots and table games revenue. Casino revenue decreases were attributed mostly to a decline in hold percentage at both Silver Slipper andGrand Lodge . Additionally, we installed new slot systems at both Rising Star andBronco Billy's in late 2019, resulting in downtime at both casinos. The downtime was significantly longer at Rising Star, with nearly half of the property's slot machines offline for several weeks. Rising Star was also affected by new competition, including theSeptember 2018 opening of a new casino offering "historical racing machines" inLouisville, Kentucky . For additional detail, please see the segment detail on the following pages. Operating expenses. Consolidated operating expenses increased by 1.8% due to a temporary increase in marketing spend at Rising Star in efforts to counter increased competition. Additional facility costs for theChristmas Casino & Inn atBronco Billy's - including for rent, participation/leased slot machines, and labor - reflect a full year of operations since theJune 2018 acquisition for theImperial Hotel and theNovember 2018 opening of the rebrandedChristmas Casino & Inn . The opening of theChristmas Casino & Inn resulted in more than$1 million of incremental expenses without a sufficient increase in revenues to offset it. At Silver Slipper, expenses increased to reflect a full year of sports book operations sinceAugust 2018 . For additional detail, please see the segment detail on the following pages.
Interest and other non-operating expense, net.
Interest Expense
(In Thousands) For the Years Ended
December 31,
2019 2018
Interest cost (excluding loan fee amortization)
9,716
Amortization of debt issuance costs and discount 1,092 790
Change in fair value of interest rate cap agreement 92 146
Capitalized interest (772)
(346)
$ 10,728 $ 10,306
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Interest expense increased primarily due to higher debt balances, as we issued
$10 million of additional senior secured notes in May 2019 . Additionally, LIBOR
rates were higher on average during 2019, resulting in higher interest costs on
our floating-rate senior secured notes.
Other non-operating expense, net
During 2019, we incurred$1.2 million of other non-operating expense from the non-cash fair value adjustment of our common stock warrant liability. During 2018, we incurred$1.0 million of other non-operating expense due primarily to theFebruary 2018 refinancing of our prior credit facilities, which resulted in a$2.7 million loss on extinguishment of debt. This expense was partially offset by a$1.7 million gain from the non-cash fair value adjustment of our common stock warrant liability. The common stock warrant liability is adjusted to fair value each quarter. The increase in fair value during 2019 primarily related to the increase in our share price during that period. Income taxes. Our effective income tax rate for the years endedDecember 31, 2019 and 2018 was (1.4%) and (12.2%), respectively. Our tax rate differs from the statutory rate of 21.0% primarily due to the effects of changes in tax law, changes in valuation allowance, and items that are permanently treated differently for GAAP and tax purposes. During 2019, we continued to provide a valuation allowance against our deferred tax assets, net of any available deferred tax liabilities. In future years, if it is determined that we meet the "more likely than not" threshold of utilizing our deferred tax assets, we may reverse some or all of our valuation allowance against our deferred tax assets.
We do not expect to pay any federal income taxes or receive any federal tax refunds related to our 2019 results. Tax losses incurred in 2019 may shelter taxable income in future years, but because of the level of uncertainty regarding sufficient prospective income, we maintain a valuation allowance against our deferred tax assets, as mentioned above.
See Note 8 to the consolidated financial statements set forth in "Item 8. Financial Statements and Supplementary Data," for a more detailed discussion.
Operating results - reportable segments
We manage our casinos based on geographic regions withinthe United States . Accordingly, Stockman's andGrand Lodge Casino comprise ourNorthern Nevada business segment, while Silver Slipper,Bronco Billy's and Rising Star are currently distinct segments. With the addition of ferry boat operations inSeptember 2018 , our Rising Star segment includes ferry boat operations betweenIndiana andKentucky . InNovember 2018 , we opened theChristmas Casino & Inn inCripple Creek, Colorado , which is included in the Bronco Billy's segment. 35
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The following table presents detail by segment of our consolidated net revenue
and Adjusted EBITDA. Management uses Adjusted Property EBITDA as its measure of
segment profit.
(In Thousands) For the Years Ended
December 31, Percent
2019 2018 Change
Net revenues
Silver Slipper Casino and Hotel $ 73,201 $ 69,350 5.6 %
Rising Star Casino Resort 45,620 47,966 (4.9) %
Bronco Billy's Casino and Hotel 27,507 26,942 2.1 %
Northern Nevada Casinos 19,104 19,629 (2.7) %
$ 165,432 $ 163,887 0.9 %
Adjusted Property EBITDA and Adjusted EBITDA
Silver Slipper Casino and Hotel $ 13,159 $ 12,126 8.5 %
Rising Star Casino Resort 1,330 2,806 (52.6) %
Bronco Billy's Casino and Hotel 3,000 3,919 (23.4) %
Northern Nevada Casinos 3,161 3,375 (6.3) %
Adjusted Property EBITDA 20,650 22,226 (7.1) %
Corporate (4,710) (4,575) 3.0 %
Adjusted EBITDA $ 15,940 $ 17,651 (9.7) %
Silver Slipper Casino and Hotel
Net revenues increased during 2019 due to successful marketing initiatives and operating efficiencies, benefits from recent property investments (including theMay 2019 renovation of its casino and buffet and theAugust 2018 opening of its sports book), and improved weather in the first quarter as compared to sub-freezing temperatures in the prior-year period. Slot revenues decreased by 6.3% due to lower volumes and relatively flat hold. Table games revenues increased by 2.9%, while other casino revenues (principally sports betting) increased by 158.0% to reflect a full year of sportsbook operations. Non-gaming revenues increased by 19.0%, reflecting strong increases in both food and beverage and hotel revenues. Food and beverage revenues grew 14.2% during the year. Hotel revenues increased by 51.7% due to higher room rates, and hotel occupancy was 86.0% versus 91.6% in 2018. Adjusted Property EBITDA increased by 8.5% to$13.2 million in 2019, primarily from the growth in net revenue described above. Likewise, guest volume increases led to an approximately 5.2% increase in expenses driven primarily by food costs and, to a lesser extent, increases in volume-related sports book fees. Adjusted Property EBITDA margin was 18.0% in 2019 compared to 17.5% in 2018. Regarding overall financial performance, 2019 was the best year in the property's 13-year history. OnMarch 17, 2020 , we temporarily closed Silver Slipper Casino and Hotel pursuant to government orders whereby, as a precautionary measure against the ongoing spread of COVID-19 (coronavirus), all casinos in the state temporarily halted operations. Rising Star Casino Resort Net revenues decreased due to an increase in competition, including theSeptember 2018 opening of a new casino offering "historical racing machines" inLouisville and theDecember 2019 opening of a new land-based casino nearLouisville that replaced its original casino boat. Additionally, the installation of a new slot system resulted in a significant portion of Rising Star's slot floor being offline for several weeks. These factors resulted in lower volumes, which decreased slot revenues by 1.9% and table games revenues by 10.4%. Non-gaming revenues decreased by 7.8% during 2019 due to lower guest volumes. Adjusted Property EBITDA decreased to$1.3 million from$2.8 million due to the decreases in net revenue described above, as well as a temporary increase in marketing expense to counter new competition and to introduce several of Rising Star's new amenities - including Ben's Bistro, our ferry service, and our RV park - to the communities surrounding Rising Star and 36
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During 2019, theIndiana legislature approved sports wagering atIndiana casinos. In addition to an on-site sportsbook, the new legislation allows for three mobile "skins" (the industry term for website) for each casino license in the state. Effectively, these skins allow Rising Star to contract with three website brands for online sports wagering via the Internet, regardless of a customer's location within the state. Online gaming must be paired with a physical casino, even though customers do not have to visit that casino to place a bet or even register at the casino to make a bet. As a result, the Company entered into sports wagering agreements with three different companies, one of which commenced operations onDecember 30, 2019 . The other two companies are expected to commence operations in mid-2020. In summary, these sports wagering agreements allow the Company to:
· Receive one-time market access fees for
which was received by the end of 2019;
· Receive a share of net sports wagering revenues, with Full House's portion of
the revenues guaranteed to total at least
any one of our contracting businesses exceeds the minimum amount on a
percentage-share basis, our revenues from sports wagering in
expected to exceed
expenses related to these revenues; and
· Have a term length of at least 10 years, and potentially as long as 20 years.
Additionally, the newIndiana gaming legislation approved a reduction in certain gaming taxes for casino operators in the state, including Rising Star, beginning onJuly 1, 2021 . OnMarch 16, 2020 , we temporarily suspended operations at Rising Star Casino Resort pursuant to an order from theIndiana Gaming Commission whereby, as a precautionary measure against the ongoing spread of COVID-19 (coronavirus), all casinos in the state temporarily halted operations.
Net revenues increased during 2019, reflecting a full year of operations at theChristmas Casino & Inn , which opened inNovember 2018 . Slot revenues increased by 5.3% and table games revenues increased by 9.6%, both reflecting higher hold percentages. Non-gaming revenues decreased overall by 10.0% due to significant snowfall on key weekends. Food and beverage revenues decreased by 13.0% during 2019. Hotel revenues increased by 14.2% resulting from our acquisition of theImperial Hotel inJune 2018 , which increased the total number of hotel rooms atBronco Billy's from 24 to 36 guestrooms as part of the rebranding of theImperial Hotel to theChristmas Inn . Adjusted Property EBITDA decreased by 23.4% due to additional operational costs related to operating theChristmas Casino . Such costs include additional rent for the building that houses theChristmas Casino , additional labor, significant participation/leased slot machine expenses, additional property taxes and other overhead, and additional gaming taxes due to the graduated gaming tax structure inColorado .The Christmas Casino was part of a strategic decision to control an important corner inCripple Creek . However, its opening resulted in more than$1 million of incremental expenses during the year without a sufficient increase in revenues to offset it. We are in the process of evaluating ways to reduce the cost of ourChristmas Casino operations while preserving our strategic goals, including the possibility of using the space for other Christmas-related concepts. Additionally,Bronco Billy's continues to be affected by increases in the state's minimum wage, which increased inJanuary 2019 . Adjusted Property EBITDA margin was 10.9% in 2019 compared to 14.5% in 2018. Similar to Rising Star, the Company entered into sports wagering agreements in 2019 inColorado , allowing for on-site sports wagering atBronco Billy's , as well as mobile/online sports wagering from anywhere withinColorado . TheColorado legislation, which was ratified by voters in the statewide election onNovember 5, 2019 , allows for one mobile "skin" per casino 37
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license in addition to an on-site sportsbook. As the Company has three casino licenses, the maximum allowed for a single company operating in the state, we entered into three sports wagering contracts related to ourColorado operations. TheColorado agreements will allow the Company to:
· Receive one-time market access fees for
which was received in the fourth quarter of 2019;
· Receive a share of net sports wagering revenues, with Full House's portion of
the revenues guaranteed to total at least
amount on a percentage share basis, our revenues from sports wagering in
minimal ongoing expenses related to these revenues; and
· Have a term length of at least 10 years, and potentially as long as 20
years. The Company expects the launch of sports wagering in
mid-2020.
OnMarch 17, 2020 , we temporarily closedBronco Billy's Casino and Hotel pursuant to government orders whereby, as a precautionary measure against the ongoing spread of COVID-19 (coronavirus), all casinos in the state temporarily halted operations.Northern Nevada OurNorthern Nevada operations have historically been seasonal, with the summer months accounting for a disproportionate share of its annual revenues. Additionally, snowfall levels during the winter months also frequently have a positive or negative effect.Grand Lodge Casino is located near several ski resorts, including Alpine Meadows, Northstar andSquaw Valley . Normally, we benefit from a "good" snow year, resulting in extended periods of operation at the nearby ski areas. Net revenues decreased in 2019 primarily due to a temporary decrease in activity at the nearby Naval air base at Stockman's Casino. Additionally, a lower table games hold percentage adversely affectedGrand Lodge Casino , declining to 14.9% from 15.4%. Adjusted Property EBITDA inNorthern Nevada decreased by 6.3% for the reasons mentioned above. Though labor and operational efficiencies resulted in total expenses decreasing by 2.5% at Stockman's Casino and by 3.1% atGrand Lodge Casino - a combined savings of approximately$0.48 million - the revenue decline resulted in a 16.5% Adjusted Property EBITDA margin in 2019 versus 17.2% in 2018. OnMarch 17, 2020 , we temporarily closedGrand Lodge Casino inIncline Village, Nevada , and Stockman's Casino inFallon, Nevada , pursuant to government orders whereby, as a precautionary measure against the ongoing spread of COVID-19 (coronavirus), all casinos in the state temporarily halted operations.
Corporate
Corporate expenses increased modestly by 3.0% in 2019 due primarily to increases in legal and professional fees, as well as new business costs, related to project development expenditures.
Non-GAAP Measure
"Adjusted EBITDA" is earnings before interest and other non-operating income (expense), taxes, depreciation and amortization, preopening expenses, impairment charges, asset write-offs, recoveries, gain (loss) from asset disposals, project development and acquisition costs, and non-cash stock-based compensation expense. Adjusted EBITDA information is presented solely as supplemental disclosure to measures reported in accordance with generally accepted accounting principles inthe United States of America ("GAAP") because management believes this measure is (i) a widely used measure of operating performance in the gaming and hospitality industries and (ii) a principal basis for valuation of gaming and hospitality companies. In addition, a version of Adjusted EBITDA (known as Consolidated EBITDA) is utilized in the covenants within our indenture, although not necessarily defined in the same way as above. Adjusted EBITDA is not, however, a measure of financial performance or liquidity 38
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under GAAP. Accordingly, this measure should be considered supplemental and not a substitute for net income (loss) or cash flows as an indicator of the Company's operating performance or liquidity.
The following table presents a reconciliation of net loss to Adjusted EBITDA:
(In Thousands) For the Years Ended
December 31,
2019 2018
Net loss $ (5,822) $ (4,371)
Income tax expense 80 476Interest expense, net of amounts capitalized 10,728 10,306
Loss on extinguishment of debt - 2,673
Adjustment to fair value of warrants 1,230 (1,671)
Other - 13
Operating (loss) income 6,216 7,426
Preopening costs - 274
Project development costs 1,037 843
Depreciation and amortization 8,331 8,397
Loss on disposal of assets, net 8 79
Stock-based compensation 348 632
Adjusted EBITDA $ 15,940 $ 17,651
The following tables present reconciliations of operating income (loss) to Adjusted Property EBITDA and Adjusted EBITDA:
For the Year EndedDecember 31, 2019 (In Thousands) Adjusted Property Operating Depreciation Loss on Project EBITDA and Income and Disposal Development Stock-Based Adjusted (Loss) Amortization of Assets Costs Compensation EBITDA
Casino properties Silver Slipper Casino and Hotel$ 9,700 $ 3,454 $ 5 $ - $ -$ 13,159 Rising Star Casino Resort (1,096) 2,426 - - - 1,330 Bronco Billy's Casino and Hotel 1,297 1,700 3 - - 3,000 Northern Nevada Casinos 2,562 599 - - - 3,161 12,463 8,179 8 - - 20,650 Other operations Corporate (6,247) 152 - 1,037 348 (4,710)$ 6,216 $ 8,331 $ 8$ 1,037 $ 348$ 15,940 39 Table of Contents For the Year EndedDecember 31, 2018 (In Thousands) Adjusted Property Operating Depreciation Loss on Project EBITDA and Income and Disposal of Preopening Development Stock-Based Adjusted (Loss) Amortization Assets Costs Costs Compensation EBITDA Casino propertiesSilver Slipper Casino and Hotel$ 8,784 $ 3,341 $ 1 $ - $ - $ -$ 12,126 Rising Star Casino Resort 150 2,511 9 136 - - 2,806Bronco Billy's Casino and Hotel 2,095 1,617 69 138 - - 3,919 Northern Nevada Casinos 2,602 773 - - - - 3,375 13,631 8,242 79 274 - - 22,226 Other operations Corporate (6,205) 155 - - 843 632 (4,575)$ 7,426 $ 8,397 $ 79$ 274 $ 843 $ 632$ 17,651 Operating expenses deducted to arrive at operating income (loss) in the above tables include facility rents related to: (i) Silver Slipper of$1.7 million in 2019 and$1.6 million in 2018, (ii)Northern Nevada segment of$1.9 million in both 2019 and 2018, and (iii)Bronco Billy's of$0.6 million in 2019 and$0.4 million in 2018. Finance lease payments of$0.8 million in 2019 and$0.7 million in 2018 related to Rising Star's smaller hotel are not deducted, as such payments are accounted for as interest expense and amortization of debt related to the finance obligation.
Liquidity and Capital Resources
Cash Flows
As ofDecember 31, 2019 , we had$28.9 million of unrestricted cash and equivalents, as well as$1.0 million of restricted cash. Management currently estimates that approximately$10 million of cash and equivalents is currently required for our day-to-day operations. Our casinos are our primary sources of income and operating cash flows. There can be no assurance that our business will generate sufficient cash flow from operations or that future borrowings will be available in amounts sufficient to enable us to pay our indebtedness or fund our other liquidity needs. Subject to the effects of the economic uncertainties discussed herein, we believe that adequate financial resources (including from operating cash flows, existing cash balances, and external debt and equity financing) will be available to fund ongoing operating requirements over the next 12 months; however, there can be no assurances of our ability to obtain additional financing to fund our growth efforts or prolonged casino closures. Cash flows - operating activities. On a consolidated basis, cash provided by operations during 2019 was$10.5 million compared to$9.8 million in 2018. Trends in our operating cash flows tend to follow trends in operating income, excluding non-cash charges, but are also affected by changes in working capital accounts such as receivables, prepaid expenses, and payables. The increase in our operating cash flows during 2019 compared to 2018 was primarily due to the receipt of$6.0 million related to one-time market access fees for sports betting at Rising Star and inIndiana , as discussed elsewhere in this document. In the 2018 period, the timing of accrued expenses benefited cash levels at the end of that year. 40
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Cash flows - investing activities. On a consolidated basis, cash used in investing activities during 2019 was$8.7 million , which primarily related to capital expenditures for maintenance and certain growth-related projects, including the Phase One expansion atBronco Billy's , the renovating and rebranding of a casual restaurant at Rising Star as the new Ben's Bistro, the remodeling of the Silver Slipper casino and the renovation of theStockman's Steakhouse . Cash used in investing activities during 2018 was$17.4 million , which primarily related to several growth projects at our existing properties, including our new ferry boat service at Rising Star, the refurbishment and rebranding of theChristmas Casino & Inn , and development work for the Bronco Billy's expansion, as well as the purchase of theImperial Hotel and other land adjacent toBronco Billy's . Cash flows - financing activities. On a consolidated basis, cash provided by financing activities during 2019 was$7.4 million , which was primarily related to the net proceeds from the Incremental Notes, offset by both the finance lease payments at Rising Star (see Note 7 to the consolidated financial statements set forth in "Item 8. Financial Statements and Supplementary Data") and the increased principal payments related to the Notes. Cash provided by financing activities during 2018 was$8.3 million , which primarily related to the proceeds from the registered direct equity offering that we completed inMarch 2018 and offset by payments related to the refinancing of our credit facilities, loan and lease principal payments, and purchase of an interest rate cap.
Other Factors Affecting Liquidity
We have significant outstanding debt and contractual obligations in addition to planned capital expenditures. Subject to the effects of the economic uncertainties discussed herein, we expect to continue to generate sufficient cash flow to meet our interest requirements and maintain our properties. Our debt matures inFebruary 2024 and we anticipate needing to refinance our debt prior to its maturity, as we are unlikely to generate sufficient cash flow in the interim and to meet these obligations. Certain planned capital expenditures designed to grow the Company will require additional financing, including perhaps the issuance of additional debt and potentially some form of equity financing. Our operations are subject to financial, economic, competitive, regulatory and other factors, many of which are beyond our control. If we are unable to generate sufficient operating cash flow and/or access the capital markets, we could be required to adopt one or more alternatives, such as reducing, delaying, or eliminating certain planned capital expenditures, selling assets, obtaining additional equity financing, or borrowing at higher costs of capital. Long-Term Debt. AtDecember 31, 2019 , we had$107.9 million of principal indebtedness outstanding from both the original$100 million of new senior secured notes due 2024 that we issued inFebruary 2018 and the incremental$10 million of notes that we issued inMay 2019 (collectively, the "Notes"). The proceeds from theFebruary 2018 notes offering were used to pay off all of our outstanding First and Second Lien Credit Facilities, pay for costs associated with the refinancing, provide ongoing working capital, provide funds for capital expenditures, and for general corporate purposes; proceeds from theMay 2019 notes offering were used for the Phase One expansion ofBronco Billy's , capital expenditures, and general corporate purposes. We currently estimate, based on current LIBOR rates, that our cash interest expense in 2020 will be approximately$10 million , including the interest component of our finance lease. This estimate is based on our total outstanding debt and applicable interest rates within the next twelve months. Interest Rate Cap Agreement. In connection with the refinancing, we purchased an interest rate cap ("Interest Rate Cap") for$238,000 onApril 6, 2018 . We entered into this interest rate derivative withCapital One, N.A. to minimize the effect of interest rate increases on approximately half of our outstanding borrowings with a notional amount of$50 million and strike rate of 3.00%, which resets every three months at the end of March, June, September, and December. The Interest Rate Cap expires onMarch 31, 2021 and is presented accordingly on our consolidated balance sheet under "Deposits and other" as a non-current asset. See Note 6 to the consolidated financial statements set forth in "Item 8. Financial Statements and Supplementary Data." Common Stock Warrants. In 2016, we granted the lenders under the former Second Lien Credit Facility (the "SecondLien Lenders ") warrants representing rights to purchase approximately 1.0 million shares of our common stock at$1.67 per share, the average trading price of our common stock during a 60day period bracketing the date of issuance. The warrants include redemption rights which allow the warrant-holders, at their option, to require us to repurchase all or a portion of the warrants upon the occurrence of certain triggering events. The refinancing of the Second Lien Credit Facility inFebruary 2018 qualified as a triggering event. As of the date of this filing, the SecondLien Lenders have not exercised these redemption rights, though they may do so on any six-month anniversary of the refinancing date prior to warrant expiration inMay 2026 . If they do exercise 41 Table of Contents
their redemption rights, we have the option of paying them in cash or with a four-year note on terms stipulated in the warrant agreement. Alternatively, the warrant-holders may choose to have us register and sell the shares related to the warrants through a public offering. See Note 6 to the consolidated financial statements set forth in "Item 8. Financial Statements and Supplementary Data" for further information associated with these warrants which could affect our liquidity and capital resources. Hyatt Option to Purchase our Leasehold Interest and Related Assets. Our lease with Hyatt to operate theGrand Lodge Casino contains an option for Hyatt, as ofJanuary 1, 2019 , to purchase our leasehold interest and related casino operating assets. See Note 7 to the consolidated financial statements set forth in "Item 8. Financial Statements and Supplementary Data" for further information about this option and related rental commitments that could affect our liquidity and capital resources. Capital Investments. We have made significant investments through 2019 and may make additional capital investments during 2020 and beyond. These investments are designed to improve the guest experience and to drive visitation at our properties, revenue and income growth.Bronco Billy's - As discussed above in the "Executive Overview," we began Phase One of the two-phase expansion of ourBronco Billy's property with our purchase of theImperial Hotel inJune 2018 , along with other nearby parcels of land, and our lease of theImperial Casino inAugust 2018 . InNovember 2018 , we reopened theImperial Hotel and Casino as the rebrandedChristmas Casino & Inn . The remainder of Phase One includes the construction of a 319-space parking garage and connector building. InMarch 2020 , in light of the coronavirus pandemic, we paused construction of the parking garage, which was in the early stages of construction. We estimate that the remaining cost for Phase One's parking garage is approximately$17 million . The timing of such capital expenditures will depend on when conditions warrant the resumption of such construction. Other Capital Expenditures - Additionally, we may fund various other capital expenditure projects, depending on our financial resources. Our capital expenditures may fluctuate due to decisions regarding strategic capital investments in new or existing facilities, and the timing of capital investments to maintain the quality of our properties. No assurance can be given that any of our planned capital expenditure projects will be completed or that any completed projects will be successful. Our annual capital expenditures typically include some number of new slot machines and related equipment; to some extent, we can coordinate such purchases to match our resources.
We evaluate projects based on a number of factors, including profitability forecasts, length of the development period, the regulatory and political environment, and the ability to secure the funding necessary to complete the development or acquisition, among other considerations. No assurance can be given that any additional projects will be pursued or completed or that any completed projects will be successful.
Coronavirus. As described in Notes 2 and 14, inMarch 2020 , in their efforts to control the spread of the coronavirus, various state governments temporarily closed each of our casinos for the time periods discussed above. We have very little meeting and convention business relative to many other casino companies and we operate local rather than destination resorts. Meeting and convention businesses typically book far in advance, as do many vacation travelers, so we would expect those aspects of the casino business to recover more slowly than our local casino business. Furthermore, very few of our customers fly to reach our properties, so if individuals are less likely to travel by air in the near future due to the difficulty of "social distancing" on an airplane or in an airport, it could have less of an impact on our properties. Nevertheless, while these closures are expected to be temporary, the current circumstances are dynamic and the impacts of COVID-19 on our business operations, including the duration and impact on overall customer demand, the timing of the reopening of our casinos, new information which may emerge concerning the severity of the coronavirus, and the actions to contain the coronavirus or treat its impact, among others, cannot be reasonably estimated at this time and we anticipate this could have a material adverse impact on our business, results of operations, financial position and cash flows. Because we operate in several different jurisdictions, some of our casinos may be permitted to reopen prior to others. We currently believe that, through our approximately$28.9 million of cash and equivalents as ofDecember 31, 2019 , we have the liquidity necessary to sustain closure for a period of time that extends beyond the currently-mandated closure periods. Additionally, as ofDecember 31, 2019 , we had$1.0 million of restricted cash. InMarch 2020 , such cash was no longer categorized as restricted, as the Company was approved for its "master license" for sports betting by theColorado Limited Gaming Control Commission onMarch 19, 2020 . To preserve liquidity, upon the temporary closure of our properties in March 42
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2020, we significantly reduced staffing levels at each of our properties and at our corporate office to a small group of essential employees. We also recently elected to pause construction of the Phase One parking garage atBronco Billy's , allowing us to use the cash designated for such construction to provide the Company with additional liquidity until our casinos are permitted to reopen. No assurance can be given that, should the casino closures extend for a prolonged period and require us to seek additional liquidity, we will be able to successfully raise additional funds through either the issuance of new debt or new equity or the sale of assets. The Company will work diligently to reopen its casinos as soon as it is permitted to do so.
Principal Debt Arrangements
Senior Secured Notes due 2024
OnFebruary 2, 2018 , we refinanced amounts previously outstanding of$41 million under the First Lien Credit Facility and$55 million under the Second Lien Credit Facility with$100 million of senior secured notes due 2024, which we sold to qualified institutional buyers. OnMay 10, 2019 , the Company issued an additional$10 million in aggregate principal amount of its senior secured notes due 2024 to qualified institutional buyers (collectively, the "Notes"). The Notes are collateralized by substantially all of our assets and are guaranteed by all of our material subsidiaries. The Notes bear interest at the greater of the three-month LIBOR or 1.0%, plus a margin rate of 7.0%. The indenture governing the Notes provides for a 50 basis point interest premium ifMr. Lee reduces his equity interests by 50% or more while serving as our CEO.Mr. Lee has no current intention to sell any shares. Interest on the Notes is payable quarterly in arrears, onMarch 31 ,June 30 ,September 30 andDecember 31 of each year until the Notes mature inFebruary 2024 . On each interest payment date, we are required to make principal payments of$275,000 with a balloon payment for the remaining$103.5 million due upon maturity. Mandatory prepayments of the Notes will be required upon the occurrence of certain events, including sales of certain assets. We may redeem the Notes, in whole or in part, at any time at the applicable redemption price plus accrued and unpaid interest. The redemption price may be prepaid at 102% of par throughFebruary 1, 2020 ; 101.5% throughFebruary 1, 2021 ; 100.5% through February
1, 2022; and 100% thereafter. Covenants The indenture governing the Notes contains customary representations and warranties, events of default, and positive and negative covenants, including financial covenants. As defined in the indenture, we are required to maintain a total leverage ratio, which measures "Consolidated EBITDA" against outstanding net debt. Additionally, we are allowed to deduct up to$15 million of our cash and equivalents (beyond estimated cash utilized in daily operations) in calculating the numerator of such ratio. For the upcoming year, the total leverage covenant ratio requirements are 6.00x throughMarch 31, 2020 , then 5.75x throughSeptember 30, 2020 , and then 5.50x throughDecember 31, 2020 . As ofDecember 31, 2019 , we were in compliance with our covenants; however, there can be no assurances that we will remain in compliance with all covenants in the future. See Note 6 to the consolidated financial statements set forth in "Item 8. Financial Statements and Supplementary Data" for more information about our Notes due 2024. InMarch 2020 , as discussed above and in Notes 2 and 14, our casinos were temporarily closed by various state governments as a precautionary measure to prevent the spread of the coronavirus. While these closures are expected to be temporary, the current circumstances are dynamic and the impacts of COVID-19 on our business operations, including the duration and impact on overall customer demand, the timing of the reopening of our casinos, new information which may emerge concerning the severity of the coronavirus, and the actions to contain the coronavirus or treat its impact, among others, cannot be reasonably estimated at this time and we anticipate this could have a material adverse impact on our business, results of operations, financial position and cash flows. Accordingly, we do not yet know the full effects of such closures on our operations. A significant period of closure or significant declines in business volumes upon reopening would negatively impact our ability to remain in compliance with our debt covenants. In the event that we fail to meet our debt covenants in the next twelve months, we would either seek covenant waivers or attempt to amend our covenants, though there is no certainty that we would
be
successful in such efforts.
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Off-balance Sheet Arrangements
We have no off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Securities and Exchange Commission Regulation S-K, that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
Critical Accounting Estimates and Policies
Our consolidated financial statements were prepared in conformity with accounting principles generally accepted inthe United States of America . Certain of our accounting policies require that we apply significant judgment in defining the appropriate assumptions for calculating estimates that affect reported amounts and disclosures. By their nature, judgments are subject to an inherent degree of uncertainty, and therefore, actual results may differ from our estimates. We believe the following critical accounting policies affect the most significant judgments and estimates used in the preparation of our consolidated financial statements. Impairment of Long-lived Assets,Goodwill and Indefinite-Lived Intangibles Our long-lived assets include property and equipment, goodwill, and indefinite-lived intangibles, and are evaluated at least annually (and more frequently when circumstances warrant) to determine if events or changes in circumstances indicate that the carrying value may not be recoverable. Examples of such events or changes in circumstances that might indicate impairment testing is warranted might include, as applicable, an adverse change in the legal, regulatory or business climate relative to gaming nationally or in the jurisdictions in which we operate, or a significant long-term decline in historical or forecasted earnings or cash flows or the fair value of our property or business, possibly as a result of competitive or other economic or political factors. In evaluating whether a loss in value is other than temporary, we consider: (i) the length of time and the extent to which the fair value or market value has been less than cost; (ii) the financial condition and near-term prospects of the casino property, including any specific events which may influence the operations; (iii) our intent related to the asset and ability to retain it for a period of time sufficient to allow for any anticipated recovery in fair value; (iv) the condition and trend of the economic cycle; (v) historical and forecasted financial performance; and (vi) trends in the general market. We review the carrying value of our property and equipment used in our operations whenever events or circumstances indicate that the carrying value of an asset may not be recoverable from estimated future undiscounted cash flows expected to result from its use and eventual disposition. If the undiscounted cash flows exceed the carrying value, no impairment is indicated. If the undiscounted cash flows do not exceed the carrying value, then an impairment is recorded based on the fair value of the asset. Fair value is typically measured using a discounted cash flow model whereby future cash flows are discounted using a weighted-average cost of capital, developed using a standard capital-asset pricing model, based on guideline companies in our industry. We test our goodwill and indefinite-lived intangible assets for impairment annually during the fourth quarter or when a triggering event occurs. For our 2019 and 2018 annual impairment tests, we utilized the option to perform a qualitative analysis for our goodwill and indefinite-lived intangibles and concluded it was more likely than not that the fair values of such intangibles exceeded their carrying values. Any impairment charges incurred are not reversed if a subsequent evaluation concludes a higher valuation than the carrying value.
Fixed Asset Capitalization and Depreciation Policies
We define a fixed asset as a unit of property that (i) has an economic useful life that extends beyond 12 months and (ii) was acquired or produced for a cost greater than$2,500 for a single asset or greater than$5,000 for a group of assets. Property and equipment are stated at cost. For the majority of our property and equipment, cost was determined at the acquisition date based on estimated fair values. We acquiredBronco Billy's inMay 2016 , Silver Slipper inOctober 2012 , Rising Star inApril 2011 and Stockman's inJanuary 2007 . Project development costs, which are amounts expended on the pursuit of new business opportunities, and acquisition-related costs are expensed as incurred. Maintenance and repairs that neither materially add to the value of the property nor appreciably prolong its life are also expensed as incurred. Depreciation and amortization are provided on a straight-line basis over the estimated useful lives of the assets. When we construct assets, we capitalize direct costs 44
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of the project, including fees paid to architects and contractors and property taxes. Salaries are capitalized only for employees working directly on the project. In addition, interest cost associated with major development and construction projects is capitalized as part of the cost of the project. Interest is typically capitalized on amounts expended on the project using the weighted-average cost of our outstanding borrowings. Capitalization of interest starts when construction activities begin and ceases when construction is substantially complete or development activity is suspended for more than a brief period. We must make estimates and assumptions when accounting for capital expenditures. Whether an expenditure is considered a maintenance expense or a capital asset is sometimes a matter of judgment. When constructing or purchasing assets, we must determine whether existing assets are being replaced or otherwise impaired, which also may be a matter of judgment. In addition, our depreciation expense is highly dependent on the assumptions we make about our assets' estimated useful lives. We determine the estimated useful lives based on our experience with similar assets, engineering studies, and our estimate of the usage of the asset. Whenever events or circumstances occur, which would change the estimated useful life of an asset, we account for the change prospectively.
Goodwill represents the excess of the purchase price over fair value of net tangible and other intangible assets acquired in connection with business combinations. We accounted for our acquisitions of casino properties forBronco Billy's , Silver Slipper and Rising Star as business combinations. In a business combination, we determine the fair value of acquired assets, including identifiable intangible assets, assumed liabilities, and non-controlling interests, if any. The fair value of the acquired business is allocated to the acquired assets, assumed liabilities, and non-controlling interests based on their fair value, with any remaining fair value allocated to goodwill. This allocation process requires use of estimates and assumptions, including estimates of future cash flows to be generated by the acquired assets.
Intangible Assets
Our indefinite-lived intangible assets primarily include the cost of gaming licenses and trade names. Gaming licenses represent the rights to conduct gaming in certain jurisdictions, and trade names represent the fair value of the casino name's brand recognition. The values of our gaming licenses were primarily estimated using a derivation of the income approach to valuation. The value of the Bronco Billy's trade names utilized the "relief from royalty" method, which primarily utilizes comparable royalty agreements to determine value. Indefinite-lived intangible assets are not amortized, unless it is determined that their useful life is no longer indefinite. We periodically review our indefinite-lived assets to determine whether events and circumstances continue to support an indefinite useful life. If it is determined that an indefinite-lived intangible asset has a finite useful life, then the asset is tested for impairment and is subsequently accounted for as a finite-lived intangible asset. Our finite-lived intangible assets include customer loyalty programs, land leases, payments for a lease option and water rights. Finite-lived intangible assets are amortized over the shorter of their contractual or economic useful lives. Customer loyalty programs represent the value of repeat business associated with the casinos' loyalty programs when we acquired the properties. Such values were determined using a derivation of the income approach to valuation. The valuation analyses for the active-rated players were based on estimated revenues and attrition rates. Silver Slipper Casino and Hotel and Rising Star Casino Resort maintain historical information for the proportion of revenues attributable to the rated play, which acquisition costs were allocated to such customer loyalty programs. The combined value of the customer loyalty programs has since been fully-amortized over their assumed economic useful life, but remains a component of gross intangible assets other than goodwill, and comprises a majority of the related accumulated amortization. See Note 4 to the consolidated financial statements set forth in "Item 8. Financial Statements and Supplementary Data" for more information. Revenue Recognition
Accrued Club Points: Operating Revenues and Related Costs and Expenses. Our
revenue recognition policies follow casino industry practices. Casino revenue is
the aggregate net difference between gaming wins and losses, with certain
liabilities recognized, including progressive jackpots, earned customer loyalty
incentives, funds deposited by customers before gaming play occurs, and for
certain chips and tokens in the customers' possession. Key performance
indicators related to gaming revenue are slot coin-in and table game drop
(volume indicators) and "win" or "hold" percentage.
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Revenue for food and beverage, hotel, and other revenue transactions is typically the net amount collected from the customer for such goods and services, plus the retail value of (i) discretionary comps and (ii) comps provided in return for redemption of loyalty points. We record such revenue as the good or service is transferred to the customer. Additionally, we may collect deposits in advance for future hotel reservations or entertainment, among other services, which represent obligations to the Company until the service is provided to the customer. Sales and similar revenue-linked taxes (except for gaming taxes) collected from customers on behalf of, and submitted to, taxing authorities are also excluded from revenue and recorded as a current liability. Deferred Revenues: Market Access Fees from Sports Wagering Agreements. These liabilities were created in the third quarter of 2019 when we entered into several agreements with various unaffiliated companies allowing for online sports wagering withinIndiana andColorado , as well as on-site sports wagering at Rising Star Casino Resort and atBronco Billy's Casino and Hotel (the "Sports Agreements"). As part of these longer-term Sports Agreements, we received one-time market access fees in cash, which were recorded as a long-term liability in the same amount and will be recognized as revenue ratably over the initial term length of 10 years, beginning with the commencement of operations. See Note 2 to the consolidated financial statements set forth in "Item 8. Financial Statements and Supplementary Data" for more information.
Customer Loyalty Programs
We have separate customer loyalty programs at each of our properties -Silver Slipper Casino Players Club ,Bronco Billy's Mile High Rewards Club , Rising Star Rewards Club™, Grand Lodge Players Advantage Club® and theStockman's Winner's Club . Under these programs, customers earn points based on their volume of wagering that may be redeemed for various benefits, such as free play, cash back, complimentary dining, or hotel stays, among others, depending on each property's specific offers. We also occasionally offer sweepstakes and other promotions for tracked customers that do not require redemption of points. As points are accrued, we defer a portion of our gaming revenue based on the estimated standalone value of loyalty points being earned by the customer. The standalone value of loyalty points is derived from the retail value of food, beverages, hotel rooms, and other goods or services for which such points may be redeemed. A liability related to these customer loyalty points is recorded, net of estimated breakage and other factors, until the customer redeems these points, primarily for "free casino play/cash back," complimentary dining, or hotel stays. Upon redemption, the related revenue is recognized at retail value within the department providing the goods or services. Unredeemed points are forfeited if the customer becomes and remains inactive for a specified period of time.
Loyalty programs are a part of the total marketing program. The amount of marketing reinvestment (complimentaries to players, promotional awards, entertainment, etc.) is based on the specific property and competitive assumptions. We track the percentage of promotional and marketing costs, compared to gaming revenue, for an efficient use and return on our marketing investment. Our properties operate in highly-competitive promotional environments due to the high amounts of incentives offered by our competition.
Accounts Receivable Allowance for Doubtful Accounts
Accounts receivable consist primarily of casino, hotel and other receivables, are typically non-interest bearing, and are carried net of an appropriate collection allowance to approximate fair value. The allowances for doubtful accounts are estimated based on specific review of customer accounts, as well as, historical collection experience and current economic and business conditions. Accounts are written off when management deems the account to be uncollectible, and recoveries of accounts previously written off are recorded when received. Income Taxes
We are subject to federal and state taxes inthe United States . Significant judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities, and any valuation allowance recorded against our net deferred tax assets. We make these estimates and judgments about our future taxable income that are based on assumptions that are consistent with our future plans. Tax laws, regulations, and administrative practices may be subject to change due to economic or political conditions, including fundamental changes to the applicable tax laws. 46 Table of Contents
Our income tax returns are subject to examination by theIRS and other tax authorities. Positions taken in tax returns are sometimes subject to uncertainty in the tax laws and may not ultimately be accepted by theIRS or other tax authorities. We assess our tax positions using a two-step process. A tax position is recognized if it meets a "more likely than not" threshold. It is then measured at the largest amount of benefit that is greater than fifty percent likely of being realized. Additionally, we recognize accrued interest and penalties, if any, related to unrecognized tax benefits in income tax expense.
Common Stock Warrant Liability
We measure the fair value of our common stock warrants at each reporting period based on Level 3 inputs as determined by GAAP. Due to the variable terms regarding the timing of the settlement of the warrants, the Company utilizes a "Monte Carlo" simulation approach, a mathematical technique used to model the probability of different outcomes, to measure the fair value of the warrants. The simulation included certain estimates by Company management regarding the estimated timing of the settlement of the warrants. Significant increases or decreases in those management estimates would result in a significantly higher or lower fair value measurement. Changes in the fair value measurement of our warrant liability are measured quarterly, including changes caused by increases or decreases in our stock price, and are expensed or credited to income during the measurement period. Stock-based Compensation
We have granted shares of common stock and stock options to key members of management and the board of directors. Accounting standards require us to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award and recognize that cost over the service period. Stock-based compensation expense from stock awards is included in general and administrative expense. Vesting is contingent upon certain conditions, including continuous service of the individual recipients. We use the Black-Scholes valuation model to determine the estimated fair value for each option grant issued. The Black-Scholes-determined fair value, net of actual forfeitures, is amortized as compensation cost on a straight-line basis over the service period.
Recently Issued Accounting Pronouncements Not Yet Adopted
See Note 2 for a discussion of recently issued accounting pronouncements not yet adopted.
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