Affinity Gaming - FORM 10-Q - November 13, 2015

Attached files

file	filename
EX-31.1 - EXHIBIT 31.1 - Affinity Gaming	ex31130sep15.htm
EX-32 - EXHIBIT 32 - Affinity Gaming	ex3230sep15.htm
EX-31.2 - EXHIBIT 31.2 - Affinity Gaming	ex31230sep15.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2015

Commission File Number 000-54085

Affinity Gaming



	Nevada		02-0815199
	State of Incorporation		IRS Employer Identification Number

3755 Breakthrough Way, Suite 300

Las Vegas, Nevada 89135

(Address, including zip code, of principal executive offices)

702-341-2400

(Registrant's telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨

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



Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	þ	Smaller reporting company	¨

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

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes þ No ¨

No established public trading market for our common stock currently exists. As of November 10, 2015, there were 20,377,247 shares of the registrant's common stock outstanding.

TABLE OF CONTENTS



PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements	1
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	28
Item 3.	Quantitative And Qualitative Disclosures About Market Risk	38
Item 4.	Controls and Procedures	38

PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	39
Item 1A.	Risk Factors	39
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	39
Item 3.	Defaults Upon Senior Securities	39
Item 4.	Mine Safety Disclosures	39
Item 5.	Other Information	40
Item 6.	Exhibits	41

	Signatures



Table of Contents	i

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements within the meaning of the U.S. federal securities laws. You can identify forward-looking statements by words such as “anticipates,” “intends,” “plans,” “seeks,” “believes,” “estimates,” “expects,” “projects,” “may,” “will” or “should,” or the negative or other variation of these or similar words, or by discussions of strategy or risks and uncertainties, and similar references to future periods. Examples of forward-looking statements include, but are not limited to, statements we make regarding:


•	the Special Committee of the Board of Directors;


•	our expectations regarding the effects of our promotional campaigns and marketing program on reducing costs and improving operating margins;


•	estimated and projected costs, capital expenditures and expense savings;


•	the adequacy of cash flows from operations, available cash and available amounts under our credit facility to meet future liquidity needs; and


•	our continued viability, our operations and results of operations.

We base these and other forward-looking statements on our current expectations and assumptions regarding our business, the economy and other future conditions; however, our actual results may differ materially from those contemplated by the forward-looking statements. We caution you, therefore, that you should not rely on any of these forward-looking statements as statements of historical fact or as guarantees or assurances of future performance. Forward-looking statements, which by their nature relate to the future, are subject to inherent uncertainties, risks and changes in circumstances which we cannot easily predict. Important factors that could cause actual results to differ materially and adversely from those in the forward-looking statements include regional, national or global political, economic, business, competitive, market and regulatory conditions, as well as the following:


•	our debt service requirements, which may adversely affect our operations and ability to compete;


•	our ability to generate cash to service our substantial indebtedness, which depends on many factors that we cannot control;


•	the impact of restrictions under, and results of noncompliance with, the terms of our credit agreement;


•	inherent construction project risks, which may hinder expansion and renovation projects;


•	rising gasoline prices;


•	intense competition;


•	extensive regulation from gaming and other government authorities;


•	changes to applicable gaming and tax laws;


•	severe weather conditions and other natural disasters that affect visitation to our casinos;


•	environmental contamination and remediation costs;


•	pending and potential litigation;


•	reductions in spending as a result of economic downturns and other factors;


•	changes in income tax, payroll tax and health care benefits laws;


•	additional gaming licenses being granted in or adjacent to jurisdictions where we operate;



Table of Contents	ii


•	breaches of our information systems resulting in loss or compromise of customer data;


•	changes in the smoking laws; and


•	other factors as described in “Part I. Item 1A. — Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2014, filed with the SEC on March 30, 2015, as amended (“2014 Form 10-K”).

Any forward-looking statement made by us in this report speaks only as of the date of this report. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise.



Table of Contents	iii

PART I - FINANCIAL INFORMATION


ITEM 1.	FINANCIAL STATEMENTS



Condensed Consolidated Balance Sheets	2
Unaudited Condensed Consolidated Statements of Operations	3
Unaudited Condensed Consolidated Statements of Cash Flows	4
Notes to Unaudited Condensed Consolidated Financial Statements	5



Table of Contents	1	Financial Statement Index

AFFINITY GAMING

Condensed Consolidated Balance Sheets

(in thousands)



	September 30, 2015			December 31, 2014
	(Unaudited)
ASSETS
Cash and cash equivalents	$	167,251		$	135,175
Restricted cash	608			608
Accounts receivable, net of reserve of $114 and $159, respectively	2,317			3,516
Income tax receivable	16			171
Prepaid expense	7,376			10,134
Inventory	2,769			2,666
Total current assets	180,337			152,270
Property and equipment, net	250,606			261,111
Other assets, net	5,056			5,738
Intangibles, net	124,667			126,543
Goodwill	68,516			68,516
Total assets	$	629,182		$	614,178
LIABILITIES AND OWNERS’ EQUITY
Accounts payable	$	12,571		$	12,902
Accrued interest	6,827			2,353
Accrued expense	23,816			22,510
Deferred income taxes	1,441			1,438
Current maturities of long-term debt	13,171			—
Other current liabilities	30			30
Total current liabilities	57,856			39,233
Long-term debt	363,271			374,701
Other liabilities	1,895			1,708
Deferred income taxes	20,443			16,081
Total liabilities	443,465			431,723

Commitments and contingencies (Note 11)

Preferred stock, $0.001 par value, 10,000,000 shares authorized, none issued or outstanding	—			—
Common stock, $0.001 par value; 200,000,000 shares authorized; 20,377,247 and 20,300,464 shares issued and outstanding for 2015 and 2014, respectively	20			20
Additional paid-in-capital	208,048			207,339
Accumulated deficit	(22,351		)	(24,904		)
Total owners’ equity	185,717			182,455
Total liabilities and owners’ equity	$	629,182		$	614,178

See notes to consolidated financial statements



Table of Contents	2	Financial Statement Index

AFFINITY GAMING

Unaudited Condensed Consolidated Statements of Operations

(in thousands)



	Quarter Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
REVENUE
Casino	$	74,414		$	74,364		$	225,016		$	224,223
Food and beverage	12,179			12,118			36,222			37,413
Lodging	6,672			6,345			20,894			20,008
Fuel and retail	16,904			16,461			45,156			45,766
Other	3,770			3,852			9,933			11,321
Total revenue	113,939			113,140			337,221			338,731
Promotional allowances	(11,989		)	(13,909		)	(36,782		)	(45,062		)
Net revenue	101,950			99,231			300,439			293,669
EXPENSE
Casino	29,271			30,383			88,961			92,219
Food and beverage	12,022			12,213			35,649			36,379
Lodging	4,345			4,083			12,451			12,464
Fuel and retail	12,601			13,183			33,540			36,662
Other	1,961			2,021			5,329			6,157
General and administrative	20,652			21,310			58,970			60,241
Depreciation and amortization	7,251			7,163			21,619			21,338
Corporate	4,763			3,626			14,058			10,620
Write downs, reserves and recoveries	37			39			(32		)	(410		)
Total expense	92,903			94,021			270,545			275,670
Operating income	9,047			5,210			29,894			17,999
Other expense
Interest expense, net	(7,692		)	(8,344		)	(22,950		)	(22,128		)
Loss on extinguishment (or modification) of debt	—			(240		)	—			(240		)
Total other expense, net	(7,692		)	(8,584		)	(22,950		)	(22,368		)
Income (loss) before income tax	1,355			(3,374		)	6,944			(4,369		)
Benefit (provision) for income taxes	641			(311		)	(4,391		)	(13,636		)
Net income (loss)	$	1,996		$	(3,685	)	$	2,553		$	(18,005	)

See notes to consolidated financial statements



Table of Contents	3	Financial Statement Index

AFFINITY GAMING

Unaudited Condensed Consolidated Statements of Cash Flows

(in thousands)



	Nine Months Ended September 30,
	2015			2014
Cash flows from operating activities:
Net income (loss)	$	2,553		$	(18,005	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization	21,619			21,338
Amortization of debt costs and discounts	2,216			1,492
Gain on sale of property and equipment	(9		)	(4		)
Unamortized loan fees related to extinguishment (or modification) of debt	—			240
Share-based compensation	975			225
Deferred income taxes	4,365			13,530
Changes in operating assets and liabilities:
Accounts receivable, net	1,199			285
Prepaid expense	2,757			1,575
Inventory	(103		)	190
Other assets	231			531
Accounts payable	1,608			(1,348		)
Accrued interest	4,474			4,359
Accrued expense	1,306			656
Income tax receivable	155			166
Other liabilities	(32		)	(86		)
Net cash provided by operating activities	43,314			25,144
Cash flows from investing activities:
Restricted cash	—			(331		)
Proceeds from sale of property and equipment	16			361
Purchases of property and equipment	(11,160		)	(10,367		)
Net cash used in investing activities	(11,144		)	(10,337		)
Cash flows from financing activities:
Payment on long-term debt	(23		)	(8,711		)
Loan origination fees	—			(2,890		)
Repurchases of vested share-based awards	(71		)	—
Net cash used in financing activities	(94		)	(11,601		)
Net increase in cash and cash equivalents	32,076			3,206
Cash and cash equivalents:
Beginning of period	135,175			140,857
End of period	$	167,251		$	144,063

Supplemental cash flow information:
Cash paid during the period for interest	$	16,402		$	16,414
Supplemental schedule of non-cash investing and financing activities:
Purchase of property and equipment financed through accounts payable	$	641		$	1,205
Acquisition of property and equipment under capital lease	$	—		$	82

See notes to consolidated financial statements.



Table of Contents	4	Financial Statement Index

AFFINITY GAMING

Notes to Unaudited Condensed Consolidated Financial Statements

NOTE 1. ORGANIZATION, CONSOLIDATION AND PRESENTATION OF FINANCIAL STATEMENTS

Organization and Business

Affinity Gaming (together with its subsidiaries, “Affinity” or “we”) is a Nevada corporation, headquartered in Las Vegas, which owns and operates 11 casinos, five of which are located in Nevada, three in Colorado, two in Missouri and one in Iowa. We also provided consulting services to Hotspur Casinos Nevada, Inc. (“Hotspur”), the operator of the Rampart Casino at the JW Marriott Resort in Las Vegas until the expiration of the related consulting agreement on April 1, 2015. Hotspur previously paid us a fixed annual fee in monthly installments.

Consolidation

We include all of our subsidiaries in our consolidated financial statements, eliminating all intercompany balances and transactions during consolidation.

Basis of Presentation

We prepare our consolidated financial statements in conformity with U.S. generally accepted accounting principles ("GAAP"). While preparing our financial statements, we make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, as well as reported amounts of revenue and expense during the reporting period. Accordingly, actual results could differ from those estimates. Reported amounts that require us to make extensive use of estimates include the fair values of assets and liabilities related to depreciation and amortization, the estimates used when computing share-based compensation expense, the estimated allowance for doubtful accounts receivable and the estimated cash flows we use in assessing the recoverability of long-lived assets, as well as the estimated fair values of certain assets related to write downs and impairments, contingencies and litigation, and claims and assessments.

We prepared the accompanying unaudited Condensed Consolidated Balance Sheet as of September 30, 2015, with the audited Consolidated Balance Sheet amounts as of December 31, 2014 presented for comparative purposes, and the related unaudited Condensed Consolidated Statements of Operations and Statements of Cash Flows in accordance with the instructions for Form 10-Q and Article 10 of Regulation S-X. In compliance with those instructions, we have omitted certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with GAAP, though management believes the disclosures made herein are sufficient to ensure that the information presented is not misleading.

Our results of operations and our cash flows as of the end of the interim periods reported herein do not necessarily indicate the results we may experience for the remainder of the year or for any other future period.

Management believes our unaudited condensed consolidated interim financial statements include all the normal recurring adjustments necessary to fairly present our unaudited Condensed Consolidated Balance Sheet as of September 30, 2015, our unaudited Condensed Consolidated Statements of Operations and our unaudited Condensed Consolidated Statements of Cash Flows for all periods presented. You should read our unaudited consolidated interim financial statements and footnotes in conjunction with our consolidated financial statements and footnotes included within our 2014 Form 10-K.



Table of Contents	5	Financial Statement Index

AFFINITY GAMING

Notes to Unaudited Condensed Consolidated Financial Statements

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Changes to Significant Accounting Policies

We recognize deferred tax assets and liabilities, which result from temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, using enacted tax rates expected to apply to taxable income in the years in which we expect those temporary differences to be recovered or settled. Any effect on deferred tax assets or liabilities resulting from a change in enacted tax rates is included in income during the period that includes the enactment date.

We reduce the carrying amounts of deferred tax assets by a valuation allowance if we determine that, more likely than not, we will be unable to realize such assets. Such assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, our forecasts of future profitability, the duration of statutory carryforward periods, and our experience with the utilization of operating loss and tax credit carryforwards before expiration.

Excluding the above clarification regarding our income tax accounting policy, we have made no material changes to our significant accounting policies as reported in our 2014 Form 10-K.

Recently Issued Accounting Pronouncements

In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-03, Simplifying the Presentation of Debt Issuance Costs. ASU 2015-03 changes the presentation of debt issuance costs in financial statements. Under ASU 2015-03, debt issuance costs will be presented in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs is reported as interest expense. In August 2015, the FASB issued an accounting standards update which clarifies that the guidance issued in ASU 2015-03 does not apply to line-of-credit arrangements. According to the additional guidance, line-of-credit arrangements will continue to present debt issuance costs as an asset and subsequently amortize the deferred debt issuance costs ratably over the term of the arrangement. ASU 2015-03 is effective for the annual and interim periods beginning after December 15, 2015. Early application is permitted. This ASU will not have a material effect on our financial condition, results of operations, cash flows or the reporting thereof.

In August 2014, the FASB modified the Accounting Standards Codification by issuing ASU 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40). The amendments in ASU 2014-15 place responsibility on management to determine whether substantial doubt exists regarding the entity’s ability to continue as a going concern. The amendments state that for each annual and interim reporting period, management should evaluate whether conditions or events, considered in the aggregate, raise doubt about the entity’s ability to continue as a going concern for one year after the financial statements are issued. If management determines that substantial doubt exists regarding the entity’s ability to continue as a going concern, the amendments require disclosure of the conditions or events that led to such determination, management’s evaluation of the significance of such conditions or events, and management’s plans to mitigate such conditions or events, including whether the plans alleviated substantial doubt. The amendments in ASU 2014-15 are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. The amendments in ASU 2014-15 will not have a material effect on our financial condition, results of operations, cash flows or the reporting thereof.

In May 2014, the FASB modified the Accounting Standards Codification by issuing ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The amendments in ASU 2014-09 stipulate that an entity should recognize revenue in an amount which reflects the consideration to which the entity expects to be entitled in exchange for transferring goods or services to customers, and they provide a five-step process to assist entities with achieving that core principle. The ASU also specifies the accounting for some costs to obtain or fulfill a contract with a customer. With regard to disclosures, ASU 2014-09 states that entities should disclose sufficient information to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers, and it requires qualitative and quantitative disclosures concerning contracts with customers, significant judgments and changes therein, and assets recognized from the costs incurred to obtain or fulfill a contract. The amendments in ASU 2014-09, have been deferred for one year and are effective for annual reporting periods beginning after December 15, 2017, including interim periods therein, and they permit either retrospective application to all prior periods or retrospective application with the cumulative effect of application recognized on the initial application date. We are currently evaluating what effect ASU 2014-09 will have.



Table of Contents	6	Financial Statement Index

AFFINITY GAMING

Notes to Unaudited Condensed Consolidated Financial Statements

We have reviewed all other recently issued accounting pronouncements and, other than those we have disclosed above or in previous filings with the SEC, we do not believe any of such pronouncements will have a material effect on our operations.

Correction of Immaterial Error and Reclassifications

During the third quarter of 2015, the Company identified that immaterial amounts of promotional items provided to its patrons including cash back awards to casino customers were improperly recorded as either casino expenses, general and administrative expenses or promotional allowances rather than being recorded as an offset to casino revenue. In accordance with ASC Topic 605-50, Revenue Recognition, cash incentives should be recorded as an offset to revenues. The following table compares previously reported net revenues and operating expenses to as adjusted amounts, reflecting the reclassification of immaterial promotional amounts in conformity with generally accepted accounting principles (in thousands):



	Quarter Ended September 30, 2014							Nine Months Ended September 30, 2014
	Previously Reported		Correction			As Adjusted		Previously Reported		Correction			As Adjusted
Net Revenue	$	99,462	$	(231	)	$	99,231	$	295,653	$	(1,984	)	$	293,669
Operating Expenses	$	94,252	$	(231	)	$	94,021	$	277,654	$	(1,984	)	$	275,670

There was no impact on previously reported operating income, net income (loss) or cash flows of the Company.

The Company has evaluated the change in presentation on prior period financial statements taking into account the requirements of the Securities and Exchange Commission Staff Accounting Bulletin (“SAB”) No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements. In accordance with the relevant guidance, we evaluated the materiality of the error from a qualitative and quantitative perspective and concluded that correcting the error did not have a material impact on any individual prior period financial statement or affect the trend of financial results. As provided by SAB No. 108, the portion of the immaterial error and reclassification that impacts previously reported net revenues and operating expenses in the quarterly periods for the six months ended June 30, 2015, and the annual and quarterly periods for the years ended December 31, 2014 and 2013 will not require the previously filed annual reports on Form 10-K or quarterly reports on Form 10-Q to be amended and the correction is permitted to be made the next time we file our prior period financial statements.

NOTE 3. RESTRICTED CASH

Restricted cash balances at September 30, 2015 and at December 31, 2014 include cash or certificates of deposit required for gaming activity in certain jurisdictions in which we operate, and for self-insured retention obligations under some of our workers compensation insurance policies.



Table of Contents	7	Financial Statement Index

AFFINITY GAMING

Notes to Unaudited Condensed Consolidated Financial Statements

NOTE 4. PROPERTY AND EQUIPMENT, NET

Property and equipment, net consist of the following (in thousands, except estimated lives):



	Estimated Life (Years)	September 30, 2015			December 31, 2014
Building and improvements	7 - 40	$	184,751		$	183,457
Gaming equipment	3 - 10	70,523			64,826
Furniture, fixtures, and equipment	3 - 10	46,673			45,302
Leasehold improvements	7	196			196
Land	—	39,493			39,493
Barge	30	15,019			15,019
Construction-in-progress		4,485			3,815
Total property and equipment		361,140			352,108
Less accumulated depreciation		(110,534		)	(90,997		)
Total property and equipment, net		$	250,606		$	261,111

NOTE 5. GOODWILL AND OTHER INTANGIBLE ASSETS

We determine the fair value of the indefinite-lived intangible assets other than goodwill using the discounted cash flow method, a form of the income approach. In determining the fair values, we make significant assumptions relating to variables based on past experiences and judgments about future performance. These variables include, but are not limited to: (1) the forecast earnings growth rate of each market, (2) risk-adjusted discount rate, and (3) expected growth rates in perpetuity to estimated terminal values.

The following table summarizes intangible assets by category (in thousands):



	September 30, 2015							December 31, 2014
	Gross Amount		Accumulated Amortization			Net Amount		Gross Amount		Accumulated Amortization			Net Amount
Finite-lived intangible assets
Customer loyalty programs	$	12,164	$	(8,082	)	$	4,082	$	12,164	$	(6,581	)	$	5,583
Trademarks	2,982		(2,274		)	708		2,982		(1,899		)	1,083
	15,146		$	(10,356	)	4,790		15,146		$	(8,480	)	6,666
Indefinite-lived intangible assets
Gaming license rights	110,646					110,646		110,646					110,646
Local tradenames	9,231					9,231		9,231					9,231
	119,877					119,877		119,877					119,877
Total intangible assets	$	135,023				$	124,667	$	135,023				$	126,543



Table of Contents	8	Financial Statement Index

AFFINITY GAMING

Notes to Unaudited Condensed Consolidated Financial Statements

The following table summarizes the changes in goodwill by reportable segment during the nine months ended September 30, 2015:



	Nevada		Midwest		Colorado		Total
Balance at December 31, 2014	$	33,665	$	14,622	$	20,229	$	68,516
Impairment of goodwill	—		—		—		—
Balance at September 30, 2015	$	33,665	$	14,622	$	20,229	$	68,516

We amortize definite-lived intangible assets ratably over their expected lives which, for customer loyalty programs, approximate seven years and, for trademarks, approximate 3.75 years. Overall, we are amortizing definite-lived intangible assets over a weighted-average expected life of approximately 6.5 years.

We obtain gaming license rights when we acquire gaming entities that operate in gaming jurisdictions where competition is limited, such as states where the law only allows a certain number of operators. We do not currently amortize gaming license rights and local tradenames because we have determined they have an indefinite useful life.

NOTE 6. OTHER ASSETS, NET

Other assets, net consist of the following (in thousands):



	September 30, 2015		December 31, 2014
Capitalized debt issuance cost, net	$	1,628	$	2,081
Long-term deposits	3,142		3,172
Other assets	286		485
Total	$	5,056	$	5,738

NOTE 7. ACCRUED EXPENSE

Accrued expense consists of the following (in thousands):



	September 30, 2015		December 31, 2014
Progressive jackpot liabilities	$	3,254	$	3,271
Accrued payroll and related	7,707		6,712
Slot club point liability	3,239		3,353
Litigation reserve	3,100		3,100
Other accrued expense	6,516		6,074
Total	$	23,816	$	22,510



Table of Contents	9	Financial Statement Index

AFFINITY GAMING

Notes to Unaudited Condensed Consolidated Financial Statements

NOTE 8. LONG-TERM DEBT

The following table presents long-term debt balances (in thousands):



	September 30, 2015			December 31, 2014
9% Senior Unsecured Notes due 2018	$	200,000		$	200,000
Unamortized debt issuance cost, net	(2,406		)	(2,986		)
Unamortized discount	(925		)	(1,148		)
9% Senior Unsecured Notes due 2018, net	196,669			195,866
Term loan due 2017	182,745			182,745
Unamortized debt issuance cost, net	(2,972		)	(3,933		)
Term loan due 2017, net	179,773			178,812
Total debt, including current maturities	376,442			374,678
Less: current maturities of long-term debt	(13,171		)	—
Plus: capital leases	—			23
Total long-term debt	$	363,271		$	374,701

The current maturities of long-term debt at September 30, 2015, includes estimated mandatory excess cash flow payments on the Initial Term Loan.

On May 9, 2012, we repaid all of the $342.1 million debt then outstanding under the senior secured loans under our credit agreement dated December 31, 2010 (the “Old Credit Facility”). We obtained the funds used to repay the Old Credit Facility by (i) issuing $200.0 million of 9.00% senior unsecured notes due 2018 (the “2018 Notes”), and (ii) borrowing under our new Credit Agreement, dated May 9, 2012, which provides for a $200.0 million term loan (the “Initial Term Loan”) due in 2017, the entirety of which the lenders disbursed to us on the closing date of the Credit Agreement, and a $35.0 million revolving credit facility (the “Revolving Credit Facility” and, together with the Initial Term Loan, the “New Credit Facility”) which remained undrawn on the closing date of the new Credit Agreement. Approximately $38.6 million of cash from the issuance of the 2018 Notes and our borrowings under the New Credit Facility remained after we paid related transaction expense and repaid our Old Credit Facility.

On December 13, 2013, we completed the first amendment to the Credit Agreement. The first amendment made several changes to the Credit Agreement (see Exhibit 10.46 to our 2013 Form 10-K), including changes to interest rates. With our completion of the second amendment, described below, the first amendment’s changes regarding interest rates were largely superseded.

On July 22, 2014, we completed the second amendment to the Credit Agreement (the “Second Amended Credit Agreement”) governing our New Credit Facility. We incur and pay interest on the Initial Term Loan under the Second Amended Credit Agreement at an uncommitted floating rate of LIBOR plus 4.00%, subject to a LIBOR floor of 1.25%. The Second Amended Credit Agreement also requires us to pay commitment fees related to the Revolving Credit Facility equal to an annualized rate of 0.50% on undrawn amounts when the Total Net Leverage Ratio is greater than 3.50 to 1.00, or equal to an annualized rate of 0.375% on undrawn amounts when the Total Net Leverage Ratio is less than or equal to 3.50 to 1.00. The New Credit Facility provides an accordion feature which allows us to seek additional borrowings of up to $80.0 million subject to certain customary terms and conditions, including pro forma compliance with a maximum leverage ratio, as defined in the Second Amended Credit Agreement.

Unamortized debt issuance cost, which we are amortizing over the life of the 2018 Notes and the Initial Term Loan, totaled $7.0 million at September 30, 2015, inclusive of both the amount we report in Other assets, net and the amount we report as an offset to the related debt.



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AFFINITY GAMING

Notes to Unaudited Condensed Consolidated Financial Statements

Under the Second Amended Credit Agreement, we must make a mandatory repayment of amounts outstanding under the Initial Term Loan in an amount equal to the net cash proceeds from any asset sale within five business days after receipt of such proceeds. However, we do not have to make such mandatory prepayment if (i) no event of default or specified default (each as defined in the Second Amended Credit Agreement) then exists and (ii) such net cash proceeds are used to purchase assets (other than working capital) used or useful in the business (x) within 548 days following receipt of the net cash proceeds or (y) if a legally binding commitment to purchase assets is entered into within such 548 day period, within 180 days after the end of such 548 day period. In the case of non-core asset sales (as defined in the Second Amended Credit Agreement), any resulting net cash proceeds must be deposited into an account subject to an account control agreement.

Under the Second Amended Credit Agreement, a change of control would occur in certain circumstances, including (i) when any person or group acquires 50% or more on a fully diluted basis of our voting equity interests, other than any person or group who, together with their respective affiliates, beneficially owned or controlled as of July 22, 2014 at least 20% or more on a fully diluted basis of our voting equity interests, or (ii) when there is a change in the majority of continuing directors, but excluding (x) the entry into or performance of the Settlement Agreement (as described in our Current Report on Form 8-K, filed on July 28, 2014), or (y) the formation of a “group” among all or some of the parties to the Settlement Agreement or their affiliates in connection with the performance of the Settlement Agreement or any other agreement in existence on July 14, 2014. A continuing director, as defined in the Second Amended Credit Agreement, is a director on the date of borrowing, a director nominated by a majority of directors which existed on the date of borrowing, and any directors appointed in accordance with the Settlement Agreement or by any Stockholder (as defined in the Settlement Agreement) party to the Settlement Agreement. A change of control would constitute an event of default under the Second Amended Credit Agreement and permit the acceleration by the lenders of all outstanding borrowings thereunder.

The Second Amended Credit Agreement contains customary covenants including, but not limited to, a maximum total net leverage ratio, a maximum secured leverage ratio, a minimum interest coverage ratio and maximum total annual capital expenditures. Additionally, the Initial Term Loan is subject to mandatory annual prepayments based on generation of excess cash flow (as defined), equal to 50% of excess cash flow when the Total Net Leverage Ratio is greater than 4.00 to 1.00, equal to 25% of excess cash flow when the Total Net Leverage Ratio is greater than 3.00 to 1.00, but less than or equal to 4.00 to 1.00, and equal to zero when the Total Net Leverage Ratio is less than or equal to 3.00 to 1.00. At September 30, 2015, the First Lien Senior Secured Net Leverage Ratio was 2.14 to 1.00, and the Interest Expense Coverage Ratio was 2.39 to 1.00. As of September 30, 2015, we remained in compliance with all debt covenants.

We issued the 2018 Notes pursuant to an indenture dated May 9, 2012 ("2018 Notes Indenture"). Under the 2018 Notes Indenture, we may choose to redeem some or all of the 2018 Notes at any time prior to May 15, 2015, upon providing notice to holders of the 2018 Notes, at a price equal to 100% of the principal amount of the 2018 Notes redeemed plus a “make-whole” premium as of the applicable redemption date, plus accrued interest. Additionally, on and after May 15, 2015, the Issuers are entitled to redeem all or a portion of the 2018 Notes upon providing not less than 30 nor more than 60 days’ notice, at the redemption prices (expressed as a percentage of principal amount on the redemption date), plus accrued and unpaid interest, if any, to the applicable redemption date (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date), if redeemed during the 12-month period commencing on May 15 of the years set forth in the table below.



Year	Percentage
2015	104.50	%
2016	102.25	%
2017 and thereafter	100.00	%

All of our current and future domestic subsidiaries that guarantee the New Credit Facility also fully and unconditionally guarantee the Issuers' payment obligations under the 2018 Notes on a senior unsecured basis.

The terms of the 2018 Notes Indenture, among other things, limit our ability to incur additional debt, issue preferred stock, pay dividends or make other restricted payments, make certain investments, create liens, allow restrictions on the ability of restricted subsidiaries to pay dividends or make other payments, sell assets, merge or consolidate with other entities, and enter into transactions with affiliates.



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AFFINITY GAMING

Notes to Unaudited Condensed Consolidated Financial Statements

If we experience certain kinds of changes in control, the Issuers must make an offer to purchase the 2018 Notes at a price equal to 101% of the aggregate principal amount of the 2018 Notes plus accrued and unpaid interest, if any, to but excluding the date of repurchase. A change of control, as defined in the 2018 Notes Indenture (as amended on July 25, 2014), occurs when we become aware of (i) any person or group becoming the beneficial owner of more than 50% of the total voting power of our voting stock, or (ii) the sale or other disposition of all or substantially all of our assets, but excluding (i) the entry into or performance of the Settlement Agreement or (ii) the formation of a group among all or some of the parties to the Settlement Agreement or their affiliates in connection with the performance of the Settlement Agreement or any other agreement in existence as of July 24, 2014. In addition, the Issuers, under certain circumstances, must make an offer to repurchase 2018 Notes with the proceeds of certain asset sales that they do not use to purchase new assets or otherwise apply in accordance with the terms of the 2018 Notes Indenture.

The 2018 Notes Indenture further provides that if any gaming authority requires a holder of the 2018 Notes to be licensed, qualified or found suitable under any applicable gaming law and such holder fails to apply for, or is denied, such license, qualification or not found suitable, the Issuers have the right, at their option, to (i) require such holder to dispose of its 2018 Notes or (ii) redeem such 2018 Notes at the applicable redemption price specified in the 2018 Notes Indenture. The Issuers will not be required to pay or reimburse any holder of the 2018 Notes who is required to apply for such license, qualification or finding of suitability.

We based the estimated fair value of the 2018 Notes and the New Credit Facility on Level 2 inputs using quoted prices in inactive markets and observable market data for similar, but not identical, instruments. The following table presents the carrying values and estimated fair values of our long-term debt at September 30, 2015 (in thousands):



	Carrying Value		Estimated Fair Value
9% Senior Unsecured Notes due 2018	$	196,669	$	195,686
Term loan due 2017	179,773		179,324
Total	$	376,442	$	375,010

NOTE 9. INCOME TAXES

We continually evaluate our deferred tax assets to determine if any portion of those assets would not be realized in a future period. Based on our analysis of all available evidence, which included consideration of our consolidated pre-tax losses in the 2013 and 2012 fiscal years as well as other data, we concluded that it is more likely than not that we will be unable to realize all of our net deferred tax assets and, as a result, we recorded a valuation allowance of $13.6 million during the quarter ended June 30, 2014. We had not previously recorded a valuation allowance related to any of our net deferred tax assets. Establishing the valuation allowance caused our effective income tax rates for the quarter and the nine months ended September 30, 2014 to vary significantly from the federal statutory rate and from our effective income tax rates for the same periods in 2015. As a result, the benefit for income taxes was $0.6 million for the quarter ended September 30, 2015 and the provision for income taxes was $0.3 million for the quarter ended September 30, 2014. The provision for income taxes was $4.4 million and $13.6 million for the nine months ended September 30, 2015 and 2014, respectively. The provision for income taxes was primarily due to amortization of indefinite-lived intangibles.

We have analyzed our filing positions in each jurisdiction where we are required to file income tax returns. We believe our income tax filing positions and deductions will be sustained on audit and we do not anticipate any adjustments which will result in a material change to our financial position.

We filed income tax returns in the United States federal jurisdiction and in several state jurisdictions. No jurisdiction is currently examining our tax filings for any tax years.

NOTE 10. SHARE-BASED COMPENSATION

We designed our share-based compensation arrangements to advance our long-term interests; for example, by allowing us to attract employees and directors, to retain them and by aligning their interests with those of our stockholders. The amount,



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AFFINITY GAMING

Notes to Unaudited Condensed Consolidated Financial Statements

frequency, and terms of share-based awards may vary based on competitive practices, our operating results, government regulations and availability under our equity incentive plans. Depending upon the form of the share-based award, new shares of our common stock may be issued upon grant, option exercise or vesting of the award.

The Affinity Gaming Amended and Restated 2011 Long-Term Incentive Plan (“LTIP”), which the Compensation Committee of our Board of Directors approved, allows us to issue up to 2,000,000 shares of common stock, subject to stock options, or as restricted stock, to employees, officers, directors and consultants. Awards vest upon the passage of time, the attainment of performance criteria, or both. Stock options awarded under the LTIP expire five years from the grant date. Awards granted to management generally vest ratably over three years from the date of the grant, and those granted to directors generally vest in two equal tranches, the first upon issuance and the second during January of the calendar year following the year of grant. Holders of restricted stock may vote their shares and receive their proportionate share of any dividends. Restricted stock remains subject to the terms and conditions contained in the applicable award agreement and our LTIP until the recipient vests in the award.

The following table summarizes the activity related to our outstanding stock options and non-vested restricted stock for the period ended September 30, 2015:



	Stock Options				Restricted Stock
	Outstanding				Non-Vested
	Shares		Weighted Average Exercise Price Per Share		Shares		Weighted Average Fair Value Per Share
December 31, 2014	177,497		$	10.99	70,061		$	11.54
Granted	212,500		9.75		84,101		9.75
Vested	—		—		(71,872	)	10.79
Forfeited	(18,383	)	11.61		—		—
Expired	(41,009	)	10.36		—		—
September 30, 2015	330,605		$	10.24	82,290		$	10.54

As of September 30, 2015, awards representing 722,490 shares or potential shares of our common stock remained outstanding; therefore, awards representing 1,277,510 shares or potential shares of our common stock remained available for issuance under our Amended 2011 Long-Term Incentive Plan.

We account for stock option awards as liabilities. As of September 30, 2015, we have reported a $1.2 million share-based compensation liability in the Other liabilities line item.

NOTE 11. COMMITMENTS AND CONTINGENCIES

Data Security Events

In late October 2013, Affinity was contacted by law enforcement regarding fraudulent credit and debit card charges which may have been linked to a data security breach in Affinity’s information technology system. We immediately initiated a thorough investigation, supported by an independent professional forensic investigation firm, to determine the nature and scope of the compromise. In December 2013, we issued a press release advising that our payment processing system had become infected by malware, which resulted in a compromise of credit card and debit card information belonging to individuals who used their cards at restaurants, hotels and gift shops at our facilities between March 14, 2013 and October 16, 2013. As of November 14, 2013, our forensics expert advised us that our credit card processing systems were free of functioning malware. We encouraged our patrons to protect against possible identity theft or other financial loss by reviewing account statements for potential fraudulent activity during the period of exposure. In April 2014, we again learned that an unauthorized intrusion and



Table of Contents	13	Financial Statement Index

AFFINITY GAMING

Notes to Unaudited Condensed Consolidated Financial Statements

installation of malware compromising the credit card processing environment had occurred. We then hired a different professional forensics investigation firm to conduct a thorough investigation of the more recently discovered event, and the security of our information technology environment as it relates to both incidents. As a result of that investigation, we have reason to believe credit card and debit card information from individuals who used their cards at restaurants, hotels and gift shops at our properties between December 7, 2013 and April 28, 2014, may have been compromised. In May 2014, we issued another press release and encouraged our patrons to protect against possible identity theft or other financial loss by reviewing account statements for potential fraudulent activity during the period of exposure.

We carry insurance coverage of $5.0 million for liability resulting from network security events. As of September 30, 2015, we have incurred $1.2 million in expense, including deductibles, for the security breaches. We do not expect to incur additional material expenses that are not covered by insurance, However, we cannot estimate the total amount which we will ultimately incur and be reimbursed by insurance carriers because, although our investigation has concluded, we have not received all of the monetary assessments and evaluations from the credit card processors and issuing banks seeking to recover the cost of replacement cards and a portion of fraudulent charges, nor have we received any third-party claims as of this date. In addition, several state attorneys general are investigating the data breach events, including how they occurred, their consequences and our responses. We are cooperating in the governmental investigation, and could be subject to fines or other obligations. We have not concluded that a loss from the investigation is probable, however, and therefore have not recorded an accrual for governmental investigation or regulatory action. We will continue to evaluate information as it becomes known and will record an estimate for loss at the time or times when it is both probable that a loss has been incurred and the amount of the loss is reasonably estimable. We intend to pursue a claim against the firm that conducted the initial forensic investigation for recovery of the costs and assessments we incurred as a result of the April 2014 incident.

Litigation

In March 2012, the Clarke County Development Corp. (“CCDC”), the local non-profit Iowa licensee for which we manage the Lakeside Hotel & Casino (“Lakeside”) in Osceola, Iowa, filed an action in Iowa state court against Affinity and Lakeside, seeking a declaratory judgment that the management contract between CCDC and Lakeside is non-assignable. We removed the case to federal court and contested CCDC's position even though we had no plans to assign the agreement. CCDC also named Lakeside, Affinity and the Iowa Racing & Gaming Commission (“IRGC”) in a separate petition in Iowa state court seeking judicial review of the IRGC's ruling, in November 2010, which approved the predecessor's creditors to become the owners of Affinity Gaming, LLC, and thereby the indirect owners of Lakeside, prior to our emergence from bankruptcy and notwithstanding CCDC’s objection that an assignment of the management agreement had occurred which required its consent. On July 29, 2013, just two weeks before the hearing on judicial review, CCDC filed a voluntary dismissal without prejudice of the petition for judicial review. On July 30, 2013, CCDC filed a motion to dismiss the federal court action without prejudice, which was granted. CCDC’s dismissal of the state court petition and the federal court action was based upon its filing in Iowa state court on August 5, 2013 of a third lawsuit, since removed to federal court in Iowa, in which it seeks to enforce a settlement agreement it alleges was reached with us during a non-binding mediation held in June 2013. On April 21, 2015, following discovery in the matter, the Court granted summary judgment in favor of the Company and against CCDC, entering judgment for the Company. CCDC appealed the grant of summary judgment to the 8^th Circuit U.S. Court of Appeals, and oral argument on the appeal was heard November 5, 2015. We do not know when a decision on the appeal will be rendered.

In March 2013, shareholder Z Capital Partners, L.L.C. and certain of its affiliates (collectively “Z Capital”), individually as well as derivatively on behalf of Affinity Gaming, filed a complaint (the “Complaint”) against us as a nominal party and our directors as defendants in the District Court, Clark County, Nevada (the “District Court”). In July 2014, representatives of Z Capital, shareholder SPH Manager, LLC (“SPH Manager”) and certain other large shareholders reached an agreement with us to settle and dismiss with prejudice the Complaint (see our Current Report on Form 8-K, filed on July 28, 2014, for more information).

In November 2013, Chartwell Advisory Group, Ltd. (“Chartwell”), a professional services firm that facilitated filing refund requests with the Nevada Tax Commission for sales and use tax paid by certain casinos on the cost of complimentary meals for periods beginning in 2004, filed a lawsuit against numerous Nevada casino operators, including one of our subsidiaries, alleging that it is owed a percentage of the tax casinos did not have to pay as a result of a 2012 state tax regulation and related settlement agreement. Our subsidiary had entered into an agreement with this firm prior to the bankruptcy whereby Chartwell would receive a percentage of any refund we received from the state of sales tax previously paid by our subsidiary. Although Chartwell asserts that we owe them approximately $0.3 million, we do not believe any amounts are due to Chartwell and accordingly, we have not recorded an accrual. Discovery in the case has just begun.



Table of Contents	14	Financial Statement Index

AFFINITY GAMING

Notes to Unaudited Condensed Consolidated Financial Statements

We are party to certain other claims, legal actions and complaints arising in the ordinary course of business or asserted by way of defense or counterclaim in actions we filed. We believe that our defenses are substantial in each of these matters and that we can successfully defend our legal position without material adverse effect on our consolidated financial statements.

Environmental Remediation

During excavation at the site of our new travel center at Whiskey Pete’s Hotel & Casino in Primm, Nevada, in September 2011, we encountered several contaminated sites on the property which required soil remediation and groundwater testing. Much of the contamination resulted from underground fuel storage tanks related to a gas station operated more than 30 years ago, as well as from abandoned underground fuel lines. We also began testing at the direction of the Nevada Division of Environmental Protection (the “NDEP”) to determine the extent to which the contamination has affected the groundwater, and we have agreed to continue monitoring the groundwater for a period of at least three years.

For the nine months ended September 30, 2015, we incurred approximately $0.1 million on remediation work at the Whiskey Pete’s site. From the beginning of construction through September 30, 2015, we have incurred a total of approximately $3.9 million on remediation work and received $1.9 million from our insurer. We have an insurance policy which provides coverage for environmental remediation costs of up to $5.0 million.

Although we believe that incurring additional cost related to the testing and ongoing monitoring of groundwater for contamination is probable, we cannot reasonably estimate an amount to accrue at this time because the NDEP has not told us what additional work, if any, it will require us to perform. Additionally, we believe some or all of the ongoing monitoring costs will be reimbursed by insurance as part of our initial claim. We also filed suit in Nevada state district court for partial recovery against the environmental consultant that managed the initial remediation. The ultimate cost to us will depend on the extent of contamination found, if any, as a result of our ongoing testing, the amount of remediation we are required to perform, and the amount we are reimbursed. The litigation against the environmental consultant is in the discovery phase. As we complete our ongoing monitoring obligation, we intend to analyze any cost incurred, and we will expense or capitalize it as necessary.



Table of Contents	15	Financial Statement Index

AFFINITY GAMING

Notes to Unaudited Condensed Consolidated Financial Statements

NOTE 12. SEGMENT INFORMATION

The following table presents the components of net revenue by segment (in thousands):



	Quarter Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
Gross revenue
Nevada	$	69,467		$	67,204		$	203,221		$	202,802
Midwest	33,390			34,472			101,128			101,803
Colorado	11,082			11,464			32,872			34,126
Total gross revenue	113,939			113,140			337,221			338,731
Promotional allowances
Nevada	(8,013		)	(9,279		)	(25,179		)	(30,356		)
Midwest	(2,817		)	(3,397		)	(7,984		)	(10,076		)
Colorado	(1,159		)	(1,233		)	(3,619		)	(4,630		)
Total promotional allowances	(11,989		)	(13,909		)	(36,782		)	(45,062		)
Net revenue
Nevada	61,454			57,925			178,042			172,446
Midwest	30,573			31,075			93,144			91,727
Colorado	9,923			10,231			29,253			29,496
Total net revenue	$	101,950		$	99,231		$	300,439		$	293,669

We use earnings before interest expense; income tax; depreciation and amortization; share-based compensation expense; pre-opening costs; write offs, reserves and recoveries; loss on extinguishment or modification of debt; loss on impairment of assets; gains or losses on the disposition of assets; and restructuring and reorganization costs ("Adjusted EBITDA") as a measure of profit and loss to manage the operational performance of our segments.

Adjusted EBITDA is a measure which does not conform to generally accepted accounting principles in the United States (“GAAP”). You should not consider this information as an alternative to any measure of performance as promulgated under GAAP, such as operating income and net income. Our calculation of Adjusted EBITDA may be different from the calculations used by other companies; therefore, comparability may be limited. We have included a reconciliation of Adjusted EBITDA to the most directly comparable GAAP measure, which in our case is operating income from operations.

The following table presents Adjusted EBITDA by segment and by corporate and other (in thousands):



	Quarter Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
Adjusted EBITDA
Nevada	$	10,153		$	5,527		$	31,590		$	19,466
Midwest	9,321			8,954			29,450			26,110
Colorado	1,624			1,557			4,499			3,971
Corporate and other	(4,455		)	(3,520		)	(13,083		)	(10,395		)
Total Adjusted EBITDA	$	16,643		$	12,518		$	52,456		$	39,152



Table of Contents	16	Financial Statement Index

AFFINITY GAMING

Notes to Unaudited Condensed Consolidated Financial Statements

The following tables reconcile Adjusted EBITDA to operating income (in thousands):



	Quarter Ended September 30, 2015
	Adjusted EBITDA			Depreciation and Amortization			Share-Based Compensation			Write Downs, Reserves and Recoveries			Operating Income
Nevada	$	10,153		$	(3,722	)	$	—		$	(37	)	$	6,394
Midwest	9,321			(1,919		)	—			—			7,402
Colorado	1,624			(1,314		)	—			—			310
Corporate and other	(4,455		)	(296		)	(308		)	—			(5,059		)
Total operations	$	16,643		$	(7,251	)	$	(308	)	$	(37	)	$	9,047



	Quarter Ended September 30, 2014
	Adjusted EBITDA			Depreciation and Amortization			Share-Based Compensation			Write Downs, Reserves and Recoveries			Operating Income
Nevada	$	5,527		$	(3,656	)	$	—		$	(39	)	$	1,832
Midwest	8,954			(1,913		)	—			—			7,041
Colorado	1,557			(1,288		)	—			—			269
Corporate and other	(3,520		)	(306		)	(106		)	—			(3,932		)
Total operations	$	12,518		$	(7,163	)	$	(106	)	$	(39	)	$	5,210



	Nine Months Ended September 30, 2015
	Adjusted EBITDA			Depreciation and Amortization			Share-Based Compensation			Write Downs, Reserves and Recoveries			Operating Income
Nevada	$	31,590		$	(11,108	)	$	—		$	83		$	20,565
Midwest	29,450			(5,712		)	—			—			23,738
Colorado	4,499			(3,880		)	—			(58		)	561
Corporate and other	(13,083		)	(919		)	(975		)	7			(14,970		)
Total operations	$	52,456		$	(21,619	)	$	(975	)	$	32		$	29,894



Table of Contents	17	Financial Statement Index

AFFINITY GAMING

Notes to Unaudited Condensed Consolidated Financial Statements



	Nine Months Ended September 30, 2014
	Adjusted EBITDA			Depreciation and Amortization			Share-Based Compensation			Write Downs, Reserves and Recoveries		Operating Income
Nevada	$	19,466		$	(10,964	)	$	—		$	410	$	8,912
Midwest	26,110			(5,621		)	—			—		20,489
Colorado	3,971			(3,857		)	—			—		114
Corporate and other	(10,395		)	(896		)	(225		)	—		(11,516		)
Total operations	$	39,152		$	(21,338	)	$	(225	)	$	410	$	17,999

The following table presents total assets by reportable segment (in thousands):



	September 30, 2015		December 31, 2014
Total assets by reportable segment
Nevada	$	222,829	$	226,897
Midwest	205,456		209,897
Colorado	78,169		78,766
Reportable segment total assets	506,454		515,560
Corporate and other	122,728		98,618
Total assets	$	629,182	$	614,178

Total assets in the Corporate and other line consist primarily of cash at the corporate entity.

The following table presents additions to property and equipment by reportable segment (in thousands):



	Quarter Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
Additions to property and equipment by reportable segment
Nevada	$	1,970	$	2,433	$	3,468	$	3,666
Midwest	686		1,338		2,310		2,894
Colorado	529		385		1,613		1,021
Reportable segment additions	3,185		4,156		7,391		7,581
Corporate	1,490		311		1,936		591
Total additions to property and equipment	$	4,675	$	4,467	$	9,327	$	8,172



Table of Contents	18	Financial Statement Index

AFFINITY GAMING

Notes to Unaudited Condensed Consolidated Financial Statements

The following table presents cash paid for capital expenditures by reportable segment (in thousands):



	Quarter Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
Cash paid for capital expenditures by reportable segment
Nevada	$	1,808	$	1,613	$	4,807	$	4,976
Midwest	643		1,207		2,472		3,558
Colorado	535		530		1,826		1,260
Reportable segment capital expenditures	2,986		3,350		9,105		9,794
Corporate	1,456		303		2,055		573
Total cash paid for capital expenditures	$	4,442	$	3,653	$	11,160	$	10,367

NOTE 13. CONDENSED CONSOLIDATED GUARANTOR DATA

All of our current and future domestic subsidiaries which guarantee the New Credit Facility also fully and unconditionally guarantee our payment obligations under the 2018 Notes on a senior unsecured basis (see Note 8 for more information regarding our debt). All of the guarantees are joint and several, and all of the guarantor subsidiaries are wholly-owned by us.

We prepared and are presenting the condensed consolidating financial statements in this footnote using the same accounting policies which we used to prepare the financial information located elsewhere in our unaudited condensed consolidated interim financial statements and related footnotes. Although Affinity Gaming Finance Corp. (“AG Finance”) is a co-issuer of the 2018 Notes, we present our indebtedness as an obligation of Affinity Gaming only. AG Finance reflects no activity during any period presented, and we did not have any non-guarantor subsidiaries during any period presented.



Table of Contents	19	Financial Statement Index

AFFINITY GAMING

Notes to Unaudited Condensed Consolidated Financial Statements

Affinity Gaming and Subsidiaries

Unaudited Condensed Consolidating Balance Sheet

September 30, 2015

(000s)



	Affinity Gaming (Co-Issuer)		AG Finance (Co-Issuer)		Guarantor Subsidiaries		Eliminating Entries			Total
ASSETS
Cash and cash equivalents	$	113,737	$	—	$	53,514	$	—		$	167,251
Restricted cash	469		—		139		—			608
Accounts receivable, net	191		—		2,126		—			2,317
Income tax receivable	16		—		—		—			16
Prepaid expense	971		—		6,405		—			7,376
Inventory	—		—		2,769		—			2,769
Total current assets	115,384		—		64,953		—			180,337
Property and equipment, net	3,575		—		247,031		—			250,606
Intercompany receivables	—		—		104,374		(104,374		)	—
Investment in subsidiaries	556,551		—		—		(556,551		)	—
Other assets, net	3,771		—		1,285		—			5,056
Intangibles	—		—		124,667		—			124,667
Goodwill	—		—		68,516		—			68,516
Total assets	$	679,281	$	—	$	610,826	$	(660,925	)	$	629,182

LIABILITIES AND OWNERS’ EQUITY
Accounts payable	$	2,256	$	—	$	10,315	$	—		$	12,571
Intercompany payables	104,374		—		—		(104,374		)	—
Accrued interest	6,827		—		—		—			6,827
Accrued expense	1,704		—		22,112		—			23,816
Deferred income taxes	46				1,395		—			1,441
Current maturities of long-term debt	13,171		—		—		—			13,171
Other current liabilities	—		—		30		—			30
Total current liabilities	128,378		—		33,852		(104,374		)	57,856
Long-term debt	363,271		—		—		—			363,271
Other liabilities	1,369		—		526		—			1,895
Deferred income taxes	546		—		19,897		—			20,443
Total liabilities	493,564		—		54,275		(104,374		)	443,465

Common stock	20		—		—		—			20
Other equity	185,697		—		556,551		(556,551		)	185,697
Total owners’ equity	185,717		—		556,551		(556,551		)	185,717
Total liabilities and owners’ equity	$	679,281	$	—	$	610,826	$	(660,925	)	$	629,182



Table of Contents	20	Financial Statement Index

AFFINITY GAMING

Notes to Unaudited Condensed Consolidated Financial Statements

Affinity Gaming and Subsidiaries

Condensed Consolidating Balance Sheet

December 31, 2014

(000s)



	Affinity Gaming (Co-Issuer)		AG Finance (Co-Issuer)		Guarantor Subsidiaries		Eliminating Entries			Total
ASSETS
Cash and cash equivalents	$	88,737	$	—	$	46,438	$	—		$	135,175
Restricted cash	469		—		139		—			608
Accounts receivable, net	916		—		2,600		—			3,516
Income tax receivable	171		—		—		—			171
Prepaid expense	1,086		—		9,048		—			10,134
Inventory	—		—		2,666		—			2,666
Total current assets	91,379		—		60,891		—			152,270
Property and equipment, net	3,016		—		258,095		—			261,111
Intercompany receivables	—		—		82,764		(82,764		)	—
Investment in subsidiaries	548,541		—		—		(548,541		)	—
Other assets, net	4,223		—		1,515		—			5,738
Intangibles	—		—		126,543		—			126,543
Goodwill	—		—		68,516		—			68,516
Total assets	$	647,159	$	—	$	598,324	$	(631,305	)	$	614,178

LIABILITIES AND OWNERS’ EQUITY
Accounts payable	$	1,737	$	—	$	11,165	$	—		$	12,902
Intercompany payables	82,764		—		—		(82,764		)	—
Accrued interest	2,353		—		—		—			2,353
Accrued expense	1,152		—		21,358		—			22,510
Deferred income taxes	108		—		1,330		—			1,438
Other current liabilities	—		—		30		—			30
Total current liabilities	88,114		—		33,883		(82,764		)	39,233
Long-term debt	374,678		—		23		—			374,701
Other liabilities	1,207		—		501		—			1,708
Deferred income taxes	705		—		15,376		—			16,081
Total liabilities	464,704		—		49,783		(82,764		)	431,723

Common stock	20		—		—		—			20
Other equity	182,435		—		548,541		(548,541		)	182,435
Total owners’ equity	182,455		—		548,541		(548,541		)	182,455
Total liabilities and owners’ equity	$	647,159	$	—	$	598,324	$	(631,305	)	$	614,178



Table of Contents	21	Financial Statement Index

AFFINITY GAMING

Notes to Unaudited Condensed Consolidated Financial Statements

Affinity Gaming and Subsidiaries

Unaudited Condensed Consolidating Statement of Operations

Quarter ended September 30, 2015

(000s)



	Affinity Gaming (Co-Issuer)			AG Finance (Co-Issuer)		Guarantor Subsidiaries			Eliminating Entries			Total
REVENUE
Casino	$	—		$	—	$	74,414		$	—		$	74,414
Food and beverage	—			—		12,179			—			12,179
Lodging	—			—		6,672			—			6,672
Fuel and retail	—			—		16,904			—			16,904
Other	—			—		3,770			—			3,770
Total revenue	—			—		113,939			—			113,939
Promotional allowances	—			—		(11,989		)	—			(11,989		)
Net revenue	—			—		101,950			—			101,950
EXPENSE
Casino	—			—		29,271			—			29,271
Food and beverage	—			—		12,022			—			12,022
Lodging	—			—		4,345			—			4,345
Fuel and retail	—			—		12,601			—			12,601
Other	—			—		1,961			—			1,961
General and administrative	—			—		20,652			—			20,652
Depreciation and amortization	296			—		6,955			—			7,251
Corporate	4,763			—		—			—			4,763
Write downs, reserves and recoveries	—			—		37			—			37
Total expense	5,059			—		87,844			—			92,903
Operating income (loss)	(5,059		)	—		14,106			—			9,047
Other income (expense)
Interest expense, net	(7,692		)	—		—			—			(7,692		)
Intercompany interest income	7,737			—		—			(7,737		)	—
Intercompany interest expense	—			—		(7,737		)	7,737			—
Income from equity investments in subsidiaries	6,474			—		—			(6,474		)	—
Total other expense, net	6,519			—		(7,737		)	(6,474		)	(7,692		)
Income (loss) before income tax	1,460			—		6,369			(6,474		)	1,355
Benefit (provision) for income taxes	536			—		105			—			641
Net income (loss)	$	1,996		$	—	$	6,474		$	(6,474	)	$	1,996



Table of Contents	22	Financial Statement Index

AFFINITY GAMING

Notes to Unaudited Condensed Consolidated Financial Statements

Affinity Gaming and Subsidiaries

Unaudited Condensed Consolidating Statement of Operations

Quarter ended September 30, 2014

(000s)



	Affinity Gaming (Co-Issuer)			AG Finance (Co-Issuer)		Guarantor Subsidiaries			Eliminating Entries			Total
REVENUE
Casino	$	—		$	—	$	74,364		$	—		$	74,364
Food and beverage	—			—		12,118			—			12,118
Lodging	—			—		6,345			—			6,345
Fuel and retail	—			—		16,461			—			16,461
Other	—			—		3,852			—			3,852
Total revenue	—			—		113,140			—			113,140
Promotional allowances	—			—		(13,909		)	—			(13,909		)
Net revenue	—			—		99,231			—			99,231
EXPENSE
Casino	—			—		30,383			—			30,383
Food and beverage	—			—		12,213			—			12,213
Lodging	—			—		4,083			—			4,083
Fuel and retail	—			—		13,183			—			13,183
Other	—			—		2,021			—			2,021
General and administrative	—			—		21,310			—			21,310
Depreciation and amortization	306			—		6,857			—			7,163
Corporate	3,626			—		—			—			3,626
Write downs, reserves and recoveries	—			—		39			—			39
Total expense	3,932			—		90,089			—			94,021
Operating income (loss)	(3,932		)	—		9,142			—			5,210
Other income (expense)
Interest expense, net	(8,344		)	—		—			—			(8,344		)
Intercompany interest income	8,386			—		—			(8,386		)	—
Intercompany interest expense	—			—		(8,386		)	8,386			—
Loss on extinguishment (or modification) of debt	(240		)	—		—			—			(240		)
Income from equity investments in subsidiaries	(63,696		)	—		—			63,696			—
Total other income (expense), net	(63,894		)	—		(8,386		)	63,696			(8,584		)
Income (loss) before income tax	(67,826		)	—		756			63,696			(3,374		)
Benefit (provision) for income taxes	64,141			—		(64,452		)	—			(311		)
Net income (loss)	$	(3,685	)	$	—	$	(63,696	)	$	63,696		$	(3,685	)



Table of Contents	23	Financial Statement Index

AFFINITY GAMING

Notes to Unaudited Condensed Consolidated Financial Statements

Affinity Gaming and Subsidiaries Unaudited Condensed Consolidating Statement of Operations Nine Months Ended September 30, 2015 (000s)

	Affinity Gaming (Co-Issuer)			AG Finance (Co-Issuer)		Guarantor Subsidiaries			Eliminating Entries			Total
REVENUE
Casino	$	—		$	—	$	225,016		$	—		$	225,016
Food and beverage	—			—		36,222			—			36,222
Lodging	—			—		20,894			—			20,894
Fuel and retail	—			—		45,156			—			45,156
Other	—			—		9,933			—			9,933
Total revenue	—			—		337,221			—			337,221
Promotional allowances	—			—		(36,782		)	—			(36,782		)
Net revenue	—			—		300,439			—			300,439
EXPENSE
Casino	—			—		88,961			—			88,961
Food and beverage	—			—		35,649			—			35,649
Lodging	—			—		12,451			—			12,451
Fuel and retail	—			—		33,540			—			33,540
Other	—			—		5,329			—			5,329
General and administrative	—			—		58,970			—			58,970
Depreciation and amortization	919			—		20,700			—			21,619
Corporate	14,058			—		—			—			14,058
Write downs, reserves and recoveries	(7		)	—		(25		)	—			(32		)
Total expense	14,970			—		255,575			—			270,545
Operating income (loss)	(14,970		)	—		44,864			—			29,894
Other income (expense)
Interest expense, net	(22,950		)	—		—			—			(22,950		)
Intercompany interest income	23,078			—		—			(23,078		)	—
Intercompany interest expense	—			—		(23,078		)	23,078			—
Income from equity investments in subsidiaries	8,010			—		—			(8,010		)	—
Total other income (expense), net	8,138			—		(23,078		)	(8,010		)	(22,950		)
Income (loss) before income tax	(6,832		)	—		21,786			(8,010		)	6,944
Benefit (provision) for income taxes	9,385			—		(13,776		)	—			(4,391		)
Net income (loss)	$	2,553		$	—	$	8,010		$	(8,010	)	$	2,553



Table of Contents	24	Financial Statement Index

AFFINITY GAMING

Notes to Unaudited Condensed Consolidated Financial Statements

Affinity Gaming and Subsidiaries Unaudited Condensed Consolidating Statement of Operations Nine Months Ended September 30, 2014 (000s)

	Affinity Gaming (Co-Issuer)			AG Finance (Co-Issuer)		Guarantor Subsidiaries			Eliminating Entries			Total
REVENUE
Casino	$	—		$	—	$	224,223		$	—		$	224,223
Food and beverage	—			—		37,413			—			37,413
Lodging	—			—		20,008			—			20,008
Fuel and retail	—			—		45,766			—			45,766
Other	—			—		11,321			—			11,321
Total revenue	—			—		338,731			—			338,731
Promotional allowances	—			—		(45,062		)	—			(45,062		)
Net revenue	—			—		293,669			—			293,669
EXPENSE
Casino	—			—		92,219			—			92,219
Food and beverage	—			—		36,379			—			36,379
Lodging	—			—		12,464			—			12,464
Fuel and retail	—			—		36,662			—			36,662
Other	—			—		6,157			—			6,157
General and administrative	—			—		60,241			—			60,241
Depreciation and amortization	896			—		20,442			—			21,338
Corporate	10,620			—		—			—			10,620
Write downs, reserves and recoveries	—			—		(410		)	—			(410		)
Total expense	11,516			—		264,154			—			275,670
Operating income (loss)	(11,516		)	—		29,515			—			17,999
Other income (expense)
Interest expense, net	(22,128		)	—		—			—			(22,128		)
Intercompany interest income	22,254			—		—			(22,254		)	—
Intercompany interest expense	—			—		(22,254		)	22,254			—
Loss on extinguishment (or modification) of debt	(240		)	—		—			—			(240		)
Income from equity investments in subsidiaries	29,923			—		—			(29,923		)	—
Total other income (expense), net	29,809			—		(22,254		)	(29,923		)	(22,368		)
Income (loss) before income tax	18,293			—		7,261			(29,923		)	(4,369		)
Benefit (provision) for income taxes	(36,298		)	—		22,662			—			(13,636		)
Net income (loss)	$	(18,005	)	$	—	$	29,923		$	(29,923	)	$	(18,005	)



Table of Contents	25	Financial Statement Index

AFFINITY GAMING

Notes to Unaudited Condensed Consolidated Financial Statements

Affinity Gaming and Subsidiaries

Unaudited Condensed Consolidated Statements of Cash Flows

Nine Months Ended September 30, 2015

(000s)



	Affinity Gaming (Co-Issuer)			AG Finance (Co-Issuer)		Guarantor Subsidiaries			Total
Net cash (used in) provided by operating activities	$	(18,029	)	$	—	$	61,343		$	43,314

Cash flows from investing activities:
Proceeds from sale of property and equipment	11			—		5			16
Purchases of property and equipment	(2,055		)	—		(9,105		)	(11,160		)
Net cash used in investing activities	$	(2,044	)	$	—	$	(9,100	)	$	(11,144	)

Cash flows from financing activities:
Change in intercompany accounts	45,144			—		(45,144		)	—
Payments on long-term debt	—			—		(23		)	(23		)
Repurchases of vested share-based awards	(71		)	—		—			(71		)
Net cash provided by (used in) financing activities	$	45,073		$	—	$	(45,167	)	$	(94	)

Net increase in cash and cash equivalents	25,000			—		7,076			32,076

Cash and cash equivalents
Beginning of year	88,737			—		46,438			135,175
End of period	$	113,737		$	—	$	53,514		$	167,251



Table of Contents	26	Financial Statement Index

AFFINITY GAMING

Notes to Unaudited Condensed Consolidated Financial Statements

Affinity Gaming and Subsidiaries

Unaudited Condensed Consolidated Statements of Cash Flows

Nine Months Ended September 30, 2014

(000s)



	Affinity Gaming (Co-Issuer)			AG Finance (Co-Issuer)		Guarantor Subsidiaries			Total
Net cash (used in) provided by operating activities	$	(63,876	)	$	—	$	89,020		$	25,144

Cash flows from investing activities:
Restricted cash	(331		)	—		—			(331		)
Proceeds from sale of property and equipment	—			—		361			361
Purchases of property and equipment	(573		)	—		(9,794		)	(10,367		)
Net cash used in investing activities	$	(904	)	$	—	$	(9,433	)	$	(10,337	)

Cash flows from financing activities:
Change in intercompany accounts	77,890			—		(77,890		)	—
Payment on long-term debt	(8,501		)	—		(210		)	(8,711		)
Loan origination fees	(2,890		)	—		—			(2,890		)
Net cash provided by (used in) financing activities	$	66,499		$	—	$	(78,100	)	$	(11,601	)

Net increase in cash and cash equivalents	1,719			—		1,487			3,206

Cash and cash equivalents
Beginning of year	98,296			—		42,561			140,857
End of period	$	100,015		$	—	$	44,048		$	144,063



Table of Contents	27	Financial Statement Index


ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

EXECUTIVE OVERVIEW

Headquartered in Las Vegas, Nevada, Affinity Gaming (together with its subsidiaries, “Affinity” or “we” ) is a diversified, multi-jurisdictional Nevada corporation which operates casinos through wholly-owned subsidiaries in Nevada, Missouri, Iowa and Colorado. Casino operations as of September 30, 2015 included the following wholly-owned casinos (by segment):



Nevada
Silver Sevens Hotel & Casino	Las Vegas, NV	(“Silver Sevens”)
Primm Valley Resort & Casino	Primm, NV	(“Primm Valley”)
Buffalo Bill’s Resort & Casino	Primm, NV	(“Buffalo Bill’s”)
Whiskey Pete’s Hotel & Casino	Primm, NV	(“Whiskey Pete’s”)
Rail City Casino	Sparks, NV	(“Rail City”)
(Collectively, Primm Valley, Buffalo Bill’s and Whiskey Pete’s are referred to as the “Primm Casinos.”)

Midwest
St Jo Frontier Casino	St. Joseph, MO	(“St Jo”)
Mark Twain Casino	La Grange, MO	(“Mark Twain”)
Lakeside Hotel & Casino	Osceola, IA	(“Lakeside”)

Colorado
Golden Mardi Gras Casino	Black Hawk, CO	(“Golden Mardi Gras”)
Golden Gulch Casino	Black Hawk, CO	(“Golden Gulch”)
Golden Gates Casino	Black Hawk, CO	(“Golden Gates”)
(Collectively, Golden Mardi Gras, Golden Gulch and Golden Gates are referred to as the “Black Hawk Casinos.”)

As of September 30, 2015, casino operations collectively offered approximately 288,000 square feet of gaming space with approximately 7,000 slot machines and 131 table games, while lodging operations offered approximately 3,100 hotel rooms.

Prior to April 1, 2015 we also provided consulting services to Hotspur Casinos Nevada, Inc. (“Hotspur”), the operator of the Rampart Casino at the JW Marriott Resort in Las Vegas. Under the terms of the consulting agreement, which expired on April 1, 2015, Hotspur previously paid us a fixed annual fee in monthly installments.

Seasonality

Our casinos in Northern Nevada, the Midwest and Colorado occasionally experience extreme weather conditions which interrupt our operations. Additionally, our casinos in Missouri are subject to flooding depending on the water levels of the Missouri and Mississippi Rivers. Snow and other adverse weather resulted in a significant number of days with lost or reduced business at our Midwest and Colorado properties during the winter of 2014-2015. If there is a prolonged disruption at any of our properties or if there are a disproportionate number of weekends affected by extreme weather, our results of operations and financial condition could be materially adversely affected.



Table of Contents	28	Financial Statement Index

Matters Affecting Comparability of Results

Significant factors or events have had a material impact on our results of operations for the periods discussed below and affect the comparability of our results of operations from period to period.

Debt and Interest Expense. On December 13, 2013, we completed the First Amendment to the Credit Agreement, which, among other things, reduced the interest rate applicable to our Initial Term Loan, which as of June 30, 2014 was 1.25% less than prior to the First Amendment.

On July 22, 2014, we completed the Second Amendment to the Credit Agreement. In addition to other changes, the Second Amendment increased the interest rate applicable to our Initial Term Loan, which as of September 30, 2014 was 1% more than that specified in the First Amendment, and 0.25% less than that specified prior to the First Amendment. The Second Amendment also adjusted the financial covenants by changing a maximum Total Net Leverage Ratio of 6.5x through June 30, 2014 (calculated using total leverage, net of $25 million cash) to a maximum First Lien Net Leverage Ratio of 3.75x through March 31, 2016 (calculated using outstanding first lien senior secured debt, net of $40 million cash) and by lowering the minimum required interest coverage ratio from 2.0x through December 31, 2014 and 2.15x thereafter to a constant minimum ratio of 1.5x.

Key Performance Indicators

We assess a variety of financial and operational performance indicators to manage our business, but the key performance indicators which we use include gross gaming revenue, promotional allowances and marketing expense, net revenue and controllable operating costs.

Key volume indicators such as slot machine win per unit per day, table game win per unit per day, and promotional allowances as a percentage of gross gaming revenue are analyzed in connection with our casino operations. In addition to the volume indicators, we also analyze the number of patron trips and the amount of money spent per patron trip. The industry uses the term “average daily rate” (“ADR”) to define the average amount of hotel revenue per occupied room per day, and the term “occupancy percentage” to define the total percentage of rooms occupied (i.e., the number of rooms occupied divided by the total number of rooms available). We use ADR and occupancy percentage to analyze the performance of our hotel operations. Fuel and retail operations include revenue from gas stations and convenience stores which we own and operate. Management measures the performance of fuel operations based on gallons sold and profit margin per gallon.



Table of Contents	29

RESULTS OF OPERATIONS

Reportable Segment Results

The following tables present financial information by reportable segment and by corporate and other (in thousands):



	Quarter Ended September 30,								Nine Months Ended September 30,
	2015			2014			Percent Change		2015			2014			Percent Change
Gross revenue
Nevada	$	69,467		$	67,204		3.4	%	$	203,221		$	202,802		0.2	%
Midwest	33,390			34,472			(3.1	)%	101,128			101,803			(0.7	)%
Colorado	11,082			11,464			(3.3	)%	32,872			34,126			(3.7	)%
Total gross revenue	113,939			113,140			0.7	%	337,221			338,731			(0.4	)%
Promotional allowances
Nevada	(8,013		)	(9,279		)	(13.6	)%	(25,179		)	(30,356		)	(17.1	)%
Midwest	(2,817		)	(3,397		)	(17.1	)%	(7,984		)	(10,076		)	(20.8	)%
Colorado	(1,159		)	(1,233		)	(6.0	)%	(3,619		)	(4,630		)	(21.8	)%
Total promotional allowances	(11,989		)	(13,909		)	(13.8	)%	(36,782		)	(45,062		)	(18.4	)%
Net revenue
Nevada	61,454			57,925			6.1	%	178,042			172,446			3.2	%
Midwest	30,573			31,075			(1.6	)%	93,144			91,727			1.5	%
Colorado	9,923			10,231			(3.0	)%	29,253			29,496			(0.8	)%
Total net revenue	$	101,950		$	99,231		2.7	%	$	300,439		$	293,669		2.3	%



	Quarter Ended September 30,								Nine Months Ended September 30,
	2015			2014			Percent Change		2015			2014			Percent Change
Adjusted EBITDA
Nevada	$	10,153		$	5,527		83.7	%	$	31,590		$	19,466		62.3	%
Midwest	9,321			8,954			4.1	%	29,450			26,110			12.8	%
Colorado	1,624			1,557			4.3	%	4,499			3,971			13.3	%
Corporate and other	(4,455		)	(3,520		)	26.6	%	(13,083		)	(10,395		)	25.9	%
Total Adjusted EBITDA	$	16,643		$	12,518		33.0	%	$	52,456		$	39,152		34.0	%



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The following tables reconcile Adjusted EBITDA to operating income (in thousands):



	Quarter Ended September 30, 2015
	Adjusted EBITDA			Depreciation and Amortization			Share-Based Compensation			Write downs, Reserves and Recoveries			Operating Income
Nevada	$	10,153		$	(3,722	)	$	—		$	(37	)	$	6,394
Midwest	9,321			(1,919		)	—			—			7,402
Colorado	1,624			(1,314		)	—			—			310
Corporate and other	(4,455		)	(296		)	(308		)	—			(5,059		)
Total operations	$	16,643		$	(7,251	)	$	(308	)	$	(37	)	$	9,047



	Quarter Ended September 30, 2014
	Adjusted EBITDA			Depreciation and Amortization			Share-Based Compensation			Write downs, Reserves and Recoveries			Operating Income
Nevada	$	5,527		$	(3,656	)	$	—		$	(39	)	$	1,832
Midwest	8,954			(1,913		)	—			—			7,041
Colorado	1,557			(1,288		)	—			—			269
Corporate and other	(3,520		)	(306		)	(106		)	—			(3,932		)
Total operations	$	12,518		$	(7,163	)	$	(106	)	$	(39	)	$	5,210



	Nine Months Ended September 30, 2015
	Adjusted EBITDA			Depreciation and Amortization			Share-Based Compensation			Write Downs, Reserves and Recoveries			Operating Income
Nevada	$	31,590		$	(11,108	)	$	—		$	83		$	20,565
Midwest	29,450			(5,712		)	—			—			23,738
Colorado	4,499			(3,880		)	—			(58		)	561
Corporate and other	(13,083		)	(919		)	(975		)	7			(14,970		)
Total operations	$	52,456		$	(21,619	)	$	(975	)	$	32		$	29,894



	Nine Months Ended September 30, 2014
	Adjusted EBITDA			Depreciation and Amortization			Share-Based Compensation			Write Downs, Reserves and Recoveries		Operating Income
Nevada	$	19,466		$	(10,964	)	$	—		$	410	$	8,912
Midwest	26,110			(5,621		)	—			—		20,489
Colorado	3,971			(3,857		)	—			—		114
Corporate and other	(10,395		)	(896		)	(225		)	—		(11,516		)
Total operations	$	39,152		$	(21,338	)	$	(225	)	$	410	$	17,999



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Quarter Ended September 30, 2015 Compared to Quarter Ended September 30, 2014

Overall. We recorded net revenue of $102.0 million during the quarter ended September 30, 2015, an increase of $2.7 million, or 2.7%, compared to the same quarter in the prior year. Adjusted EBITDA during the third quarter was $16.6 million, an increase of $4.1 million, or 33.0%, compared to the same quarter of 2014. Adjusted EBITDA, excluding corporate expense, increased $5.1 million, or 31.6%. These increases were primarily due to our efforts during 2015 to continue to analyze the effectiveness of our promotional campaigns and refine our marketing programs, which have had the effect of reducing costs and increasing profitable play on the gaming floor. While we can provide no assurances, we believe this trend will continue through 2015.

Nevada. Nevada operations include Rail City, Silver Sevens and the Primm Casinos. In addition to casino, lodging and food and beverage operations, our results from the Primm Casinos include the operation of three gas station/convenience stores and a California lottery outlet. Nevada operations accounted for approximately 61% and 59% of our gross revenue during the quarters ended September 30, 2015 and 2014, respectively.

In our Nevada segment, net revenue increased $3.5 million, or 6.1%. Casino revenue increased $1.5 million, or 4.3%. Excluding complimentary revenue, food and beverage revenue increased $0.5 million and lodging revenue increased $1.0 million. We continue to focus our promotional campaigns to convert complimentary customers to cash customers. Fuel and retail revenue increased $0.5 million, or 2.9%, due to increased fuel prices during the quarter ended September 30, 2015.

Nevada Adjusted EBITDA increased $4.6 million, or 83.7%. The Adjusted EBITDA contribution from casino operations increased $3.3 million, or 28.1%, primarily as a result of an effort to reduce promotional campaigns and refine marketing programs in 2015 compared to 2014, along with an increase in the Adjusted EBITDA contribution from fuel and retail operations of $1.0 million, or 32.2%.

Midwest. Midwest operations include St Jo and Mark Twain in Missouri, and Lakeside in Iowa. Midwest operations accounted for approximately 29% and 30% of our gross revenue during the quarters ended September 30, 2015 and 2014, respectively.

Net revenue from our Midwest segment decreased $0.5 million, or 1.6%. Adjusted EBITDA from our Midwest segment increased $0.4 million, or 4.1%. The increase in Adjusted EBITDA was primarily as a result of an effort to reduce promotional campaigns and refine marketing programs in 2015 compared to 2014. We are encouraged by our Midwest properties’ performance during the quarter, and we anticipate improved operating margins in the Midwest as we continue to analyze and refine our marketing campaigns.

Colorado. Colorado operations include the Golden Gates, the Golden Gulch and the Golden Mardi Gras casinos in Black Hawk. Colorado operations accounted for approximately 10% of our gross revenue during each of the quarters ended September 30, 2015 and 2014.

Net revenue from our Colorado segment decreased $0.3 million, or 3.0%. The decrease in net revenue was primarily the result of a $0.3 million decrease in casino revenue related to eliminating an unprofitable marketing campaign implemented in 2014. Colorado Adjusted EBITDA increased $0.1 million, or 4.3%, driven primarily by the lower spend on promotional campaigns and lower slot participation fees as we change the variety of games on our casino floor.

Nine Months Ended September 30, 2015 Compared to Nine Months Ended September 30, 2014

Overall. We recorded net revenue from operations of $300.4 million during the nine months ended September 30, 2015, compared to net revenue from operations of $293.7 million for the same period in the prior year, an increase of $6.8 million, or 2.3%. Adjusted EBITDA was $52.5 million compared to $39.2 million during the same period of 2014, an increase of $13.3 million, or 34.0%. Adjusted EBITDA, excluding corporate expense, increased $16.0 million, or 32.3%. These increases were primarily due to our efforts to continue to analyze the effectiveness of our promotional campaigns and refine our



Table of Contents	32

marketing programs, which have had the effect of reducing costs and driving more profitable play on the gaming floor. While we can provide no assurances, we believe this trend will continue through 2015.

Nevada. Nevada operations accounted for approximately 60% of our gross revenue from operations during each of the nine months ended September 30, 2015 and 2014.

In our Nevada segment, net revenue increased $5.6 million, or 3.2%. Casino revenue increased $2.2 million, or 2.1%, while lodging revenue increased $0.7 million, or 3.9%. Excluding complimentary revenue, food and beverage revenue increased $1.3 million and lodging revenue increased $2.4 million. We continue to focus our promotional campaigns to convert complimentary customers to cash customers. Fuel and retail revenue decreased $0.5 million, or 1.2%, due to reduced fuel prices during the nine months ended September 30, 2015.

Nevada Adjusted EBITDA increased $12.1 million, or 62.3%. The Adjusted EBITDA contribution from casino operations increased $9.9 million, or 29.1%, primarily as a result of an effort to reduce promotional campaigns and refine marketing programs in 2015 compared to 2014. In addition, the Adjusted EBITDA contribution from fuel and retail operations increased $2.5 million, or 28.5%.

Midwest. Midwest operations accounted for approximately 30% of our gross revenue from operations during each of the nine months ended September 30, 2015 and 2014.

Net revenue from our Midwest segment increased $1.4 million, or 1.5%. Adjusted EBITDA from our Midwest segment increased $3.3 million, or 12.8%. These increases primarily resulted from more focused marketing campaigns, which drove more profitable play on the gaming floor. We are encouraged by our Midwest properties’ performance and we anticipate improved operating margins in the Midwest as we continue to analyze and refine our marketing campaigns.

Colorado. Colorado operations accounted for approximately 10% of our gross revenue from operations during each of the six month periods presented.

Net revenue from our Colorado segment decreased $0.2 million, or 0.8%. The decrease in net revenue was primarily related to lower gaming volumes in 2015 as a result of eliminating an unprofitable marketing campaign implemented in 2014. Colorado Adjusted EBITDA increased $0.5 million, or 13.3%, driven primarily by a increase of $1.1 million, or 10.9%, in the Adjusted EBITDA contribution from casino operations, the result of more focused marketing campaigns on profitable players in 2015.



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Revenue and Expense by Category

The following table presents detail of our consolidated gross revenue and expense by category (in thousands):



	Quarter Ended September 30,								Nine Months Ended September 30,
	2015			2014			Percent Change		2015			2014			Percent Change
Total revenue
Casino	$	74,414		$	74,364		0.1	%	$	225,016		$	224,223		0.4	%
Food and beverage	12,179			12,118			0.5	%	36,222			37,413			(3.2	)%
Lodging	6,672			6,345			5.2	%	20,894			20,008			4.4	%
Fuel and retail	16,904			16,461			2.7	%	45,156			45,766			(1.3	)%
Other	3,770			3,852			(2.1	)%	9,933			11,321			(12.3	)%
Total revenue	113,939			113,140			0.7	%	337,221			338,731			(0.4	)%
Promotional allowances	(11,989		)	(13,909		)	(13.8	)%	(36,782		)	(45,062		)	(18.4	)%
Net revenue	$	101,950		$	99,231		2.7	%	$	300,439		$	293,669		2.3	%

Departmental cost and expense
Casino	$	29,271		$	30,383		(3.7	)%	$	88,961		$	92,219		(3.5	)%
Food and beverage	12,022			12,213			(1.6	)%	35,649			36,379			(2.0	)%
Lodging	4,345			4,083			6.4	%	12,451			12,464			(0.1	)%
Fuel and retail	12,601			13,183			(4.4	)%	33,540			36,662			(8.5	)%
Other	1,961			2,021			(3.0	)%	5,329			6,157			(13.4	)%
General and administrative	20,652			21,310			(3.1	)%	58,970			60,241			(2.1	)%
Depreciation and amortization	7,251			7,163			1.2	%	21,619			21,338			1.3	%
Corporate	4,763			3,626			31.4	%	14,058			10,620			32.4	%
Write downs, reserves and recoveries	37			39			(5.1	)%	(32		)	(410		)	(92.2	)%
Departmental cost and expense	$	92,903		$	94,021		(1.2	)%	$	270,545		$	275,670		(1.9	)%

Departmental Adjusted EBITDA Margins
Gaming	60.7		%	59.1		%			60.5		%	58.9		%
Food and beverage	1.3		%	(0.8		)%			1.6		%	2.8		%
Lodging	34.9		%	35.7		%			40.4		%	37.7		%
Fuel and retail	25.5		%	19.9		%			25.7		%	19.9		%
Other	48.0		%	47.5		%			46.4		%	45.6		%

Gross Revenue. Generally, the industry defines gaming revenue as gaming wins less gaming losses. We derive the majority of our gaming revenue, which we report in the Casino line item, from slot machines. Casino revenue also includes table game revenue and bingo, keno and poker revenue, where offered. Our gross revenue also includes:


•	food and beverage revenue, which we earn from sales in restaurants and outlets we own and operate at our casinos and from room service sales;


•	lodging revenue, which we earn from rooms we provide to customers;



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•	fuel and retail revenue, which we earn from sales of fuel, food and beverage items at franchised food outlets, lottery tickets and other retail items at facilities we own at the Primm Casinos, and at facilities we own and lease to third-parties at the Primm Casinos and Lakeside; and


•	other revenue, which we earn from sources such as consulting agreements, leasing agreements, entertainment services, and ATMs at our casino properties.

We recognize revenue at the time we provide the product, room or service to the guest or the third-party.

Promotional allowances consist primarily of food, beverage, lodging and entertainment furnished gratuitously to customers, as well as incentives earned in our guest rewards program such as cash rewards or complimentary goods and services. We include the retail value of items or services furnished gratuitously to customers in the respective revenue classifications, then we deduct the total amount of promotional allowances from total revenue. The cost of complimentary items or services is recorded primarily as a casino expense.

Cost and Expense. We aggregate our direct costs and expense, including selling, general and administrative expense for each of our operations, and include them in the expense of our reportable segments, as discussed in “Reportable Segment Results.”

Corporate expense represents unallocated payroll, professional fees and other expense which we do not directly attribute to our reportable segments, as well as share-based compensation. We present corporate expense net of management fees or expense charged to our properties and cash fees earned under our consulting agreement with the operator of the Rampart Casino at the JW Marriott Resort in Las Vegas, from which we collected $0.5 million and $1.5 million in management fees during nine months ended September 30, 2015 and 2014, respectively. The consulting agreement with JW Marriott expired on April 1, 2015.

Quarter Ended September 30, 2015 Compared to Quarter Ended September 30, 2014

Corporate expense, excluding share-based compensation, increased by $0.9 million, or 26.6%, primarily as a result of increased payroll and benefits expense in the current quarter as well as the expiration of our consulting agreement with JW Marriott Resort on April 1, 2015. These items were partially offset by a decrease in expenses we incurred as part of activities that we do not consider part of regular operations. During the third quarter of 2015, such activities included the Special Committee of our Board of Directors evaluating third party proposals to acquire the Company as well as other strategic alternatives and strategic initiatives. During the third quarter of 2014, such activities included evaluating strategic initiatives, searching for a new Chief Executive Officer and reconstituting our Board, remediating a data breach and contributing to the industry’s opposition to the Colorado racino initiative. The Second Amended Credit Agreement allows us to add back such non-recurring expense to EBITDA, as defined in the credit agreement, when calculating our debt covenants. We incurred $0.3 million of non-recurring expense during the quarter ended September 30, 2015, compared to $1.2 million in the same period of the prior year. Excluding the non-recurring expense items and share-based compensation, we incurred $4.1 million and $2.3 million of corporate expense during the quarters ended September 30, 2015 and 2014, respectively.

Net interest expense decreased $0.7 million, or 7.8%, as a result of costs associated with the second amendment to the New Credit Facility and the modification of the indenture governing the 2018 Notes.

The income tax benefit for the quarter ended September 30, 2015 was $0.6 million, and the income tax provision for the quarter ended September 30, 2014 was $0.3 million. During the quarter ended June 30, 2014, we evaluated our deferred tax assets and concluded that it is more likely than not that we will be unable to realize all of our net deferred tax assets and, as a result, recorded a valuation allowance of $13.6 million. Establishing the valuation allowance caused our effective income tax rate to vary significantly from the federal statutory rate and from our effective income tax rate for the quarters ended September 30, 2015 and 2014, respectively. The provision for income taxes was primarily due to amortization of indefinite-lived intangibles.



Table of Contents	35

Nine Months Ended September 30, 2015 Compared to Nine Months Ended September 30, 2014

Corporate expense, excluding share-based compensation, increased by $2.7 million, or 25.9%, primarily as a result of increased payroll and benefits expense in the current period, as well as the expiration of our consulting agreement with the JW Marriott Resort on April 1, 2015. These items were partially offset by a decrease in expenses we incurred as part of activities that we do not consider part of regular operations. During the nine months ended September 30, 2015, such activities included evaluating proposals from Z Capital Partners, L.L.C. as well as other strategic alternatives and strategic initiatives, and searching for a new Chief Financial Officer. During the same period in 2014, such activities evaluating strategic initiatives, searching for a new CEO and reconstituting our Board, remediating a data breach and contributing to the industry’s opposition to the Colorado racino initiative. The Second Amended Credit Agreement allows us to add back such non-recurring expense to EBITDA, as defined in the credit agreement, when calculating our debt covenants. We incurred $1.9 million of non-recurring expense during the nine months ended September 30, 2015, compared to $3.1 million in the same period of the prior year. Excluding the non-recurring expense items and share-based compensation, we incurred $11.2 million and $7.3 million of corporate expense during the nine months ended September 30, 2015 and 2014, respectively.

Net interest expense increased $0.8 million, or 3.7%, as a result of costs associated with the second amendment to the New Credit Facility and the modification of the indenture governing the 2018 Notes. Also in relation to the second amendment to the New Credit Facility and the modification of the indenture governing the 2018 Notes, we expensed unamortized debt issuance costs of $0.2 million in the nine months ended September 30, 2014.

The income tax provision for the nine months ended September 30, 2015 and 2014 was $4.4 million, and $13.6 million, respectively. During the quarter ended June 30, 2014, we evaluated our deferred tax assets and concluded that it is more likely than not that we will be unable to realize all of our net deferred tax assets and, as a result, recorded a valuation allowance of $13.6 million. Establishing the valuation allowance caused our effective income tax rates for the nine months ended September 30, 2015 and 2014 to vary significantly from the federal statutory rate and from our effective income tax rate for the same period in 2015. The provision for income taxes was primarily due to amortization of indefinite-lived intangibles.

LIQUIDITY AND CAPITAL RESOURCES

Overview

We rely on cash flows from operations as our primary source of liquidity. The New Credit Facility permits us to incur limited indebtedness for trade payables and capital leases in the ordinary course of business, and provides an accordion feature, whereby we may borrow up to an additional $80.0 million subject to certain terms and conditions, including compliance with a maximum leverage ratio (as defined in the Second Amended Credit Agreement). We cannot assure you that, if required, we will be able to obtain the necessary approval for additional borrowing under our New Credit Facility.

We incur and pay interest on the Initial Term Loan under the Second Amended Credit Agreement at an uncommitted floating rate of LIBOR plus 4.00%, subject to a LIBOR floor of 1.25%. The Second Amended Credit Agreement also requires us to pay commitment fees related to the Revolving Credit Facility equal to an annualized rate of 0.50% on undrawn amounts when the net leverage ratio is greater than 3.50 to 1.00, or equal to an annualized rate of 0.375% on undrawn amounts when the net leverage ratio is less than or equal to 3.50 to 1.00. Unamortized loan fees, which we are amortizing over the life of the 2018 Notes and the Initial Term Loan, totaled $7.0 million at September 30, 2015, inclusive of both the amount we report in Other assets and the amount we report as an offset to the related debt. As of September 30, 2015, we remained in compliance with all covenants specified in the Second Amended Credit Agreement.

As more fully described in Note 8 to our financial statements, the Second Amended Credit Agreement requires us to make a mandatory repayment of amounts outstanding under certain circumstances. The agreement also requires that we deposit proceeds from the sale of non-core assets into an account subject to an account control agreement.

The New Credit Facility and the 2018 Notes contain various covenants which limit our ability to take certain actions including, among other things, our ability to:


•	incur additional debt;



Table of Contents	36


•	issue preferred stock;


•	pay dividends or make other restricted payments;


•	make investments;


•	create liens;


•	allow restrictions on the ability of restricted subsidiaries to pay dividends or make other payments;


•	sell assets; merge or consolidate with other entities; and


•	enter into transactions with affiliates.

Our primary cash needs for the next twelve months of operation include interest payments on our debt and capital expenditures. Our capital expenditure needs include maintenance capital and capital for the acquisition of slot machines and of other equipment required to keep our facilities competitive. The Second Amended Credit Agreement potentially requires an annual principal prepayment based on excess cash flow (as defined in such agreement) calculated at the end of each calendar year. For the year ended December 31, 2014, we were not required to make an excess cash flow repayment. The most significant components of our working capital are cash, prepaid expense, accounts payable and accrued expense. Our liquidity position benefits from the fact that we generally collect cash from transactions with customers the same day or, in the case of credit or debit card transactions, within a few days of the related transaction.

A variety of factors, many of which are outside of our control, affect our cash flow; those factors include litigation, regulatory issues, competition, financial markets, smoking bans (particularly in Missouri where the bans are determined by municipalities) and other general business conditions. We believe that we will have sufficient liquidity through available cash which, as of September 30, 2015, was $167.3 million, trade credit and cash flow to fund our cash requirements and maintenance capital expenditures for at least the next twelve months. However, we cannot assure you that we will generate sufficient income and cash flow to meet all of our liquidity requirements.

Cash Flows from Operating Activities

Operating activities provided $43.3 million through September 30, 2015, compared to $25.1 million provided through September 30, 2014. The increase in cash provided by operating activities was driven by the increase in net income and payment timing related to the elements of working capital. Net income during the nine months ended September 30, 2014 included income tax expense related to the deferred tax asset valuation allowance, which has no effect on cash flow.

Cash Flows from Investing Activities

Investing activities used $11.1 million through September 30, 2015, compared to using $10.3 million through September 30, 2014. Net cash used in investing activities is primarily comprised of capital expenditures, which were $11.2 million and $10.4 million during the nine months ended September 30, 2015 and 2014, respectively.

Cash Flows from Financing Activities

Financing activities used $0.1 million and $11.6 million, respectively, during the nine months ended September 30, 2015 and 2014, which primarily represented repayments of long-term debt. The prior year period also includes approximately $2.9 million of fees paid in relation to the Second Amended Credit Agreement.

Off-Balance Sheet Arrangements

We currently have no material off-balance sheet arrangements.



Table of Contents	37

Critical Accounting Policies

For a discussion of our critical accounting policies and the means by which we develop estimates therefrom, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K, filed with the SEC on March 30, 2015 (“2014 Form 10-K”), and as clarified in Note 2 to our financial statements in relation to our accounting for income taxes.

Recently Issued Accounting Pronouncements

Please refer to Note 2 in the Notes to Unaudited Condensed Consolidated Financial Statements included elsewhere in this report for a discussion regarding recently issued accounting pronouncements which may affect us.


ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk, primarily related to interest rate exposure of our debt obligations that bear interest based on floating rates. None of our cash or cash equivalents as of September 30, 2015 are subject to market risk based on changes in interest rates. We are exposed to market risk due to floating or variable interest rates on our indebtedness under the New Credit Facility. Both the Initial Term Loan and the Revolving Credit Facility bear interest at an uncommitted floating rate of LIBOR plus 4.00%, subject to a LIBOR floor of 1.25%. At September 30, 2015, the principal amount of the related borrowings under our New Credit Facility was $182.7 million. A hypothetical 1.0% increase in LIBOR (or base rate) above the current floor would result in an approximately $1.8 million annual increase in interest expense.

The carrying values of our cash, trade receivables, and trade payables approximate their fair value primarily because of the short maturities of these instruments. We estimate the fair value of our long-term debt based on the quoted market prices for the same or similar issues or on the current rates offered to us for debt of the same remaining maturities. Based on the borrowing rates currently available to us for debt with similar terms and average maturities, we estimated the fair value of current debt outstanding at approximately $375.0 million as of September 30, 2015.


ITEM 4.	CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain a set of disclosure controls and procedures designed to ensure that the information we must disclose in reports we file or submit under the Securities Exchange Act of 1934, as amended (Exchange Act) is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. We designed our disclosure controls with the objective of ensuring we accumulate and communicate this information to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operations of our disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under Exchange Act, as of the end of the period covered by this report. Based on our evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report to ensure that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms.

Changes in Internal Control over Financial Reporting

We made no change in our internal control over financial reporting during the fiscal quarter ended September 30, 2015 which has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



Table of Contents	38

PART II - OTHER INFORMATION


ITEM 1.	LEGAL PROCEEDINGS

For a description of our previously reported legal proceedings, refer to “Part I. Item 3. — Legal Proceedings” in our 2014 Form 10-K, as updated in Note 11 to the accompanying unaudited condensed consolidated financial statements.

We are party to other ordinary and routine litigation incidental to our business. We do not expect the outcome of any pending litigation to have a material adverse effect on our consolidated financial position or results of operations.


ITEM 1A.	RISK FACTORS

Other than as described below, we have not identified any material changes to the risk factors described in our 2014 Form 10-K. Risks other than those described below or in our 2014 Form 10-K may materially adversely affect our business, financial condition or future results, including risks and uncertainties not currently known to us or those that we currently believe are immaterial.

There are risks and uncertainties as a result of Z Capital’s non-binding proposals to acquire the Company.

On April 3, 2015 the Board of Directors received a letter from Z Capital Partners, L.L.C. in which, among other things, Z Capital Partners, L.L.C. and its affiliated funds (“Z Capital”) submitted a non-binding proposal to acquire all of the outstanding common shares of the Company that are not already owned by Z Capital at a purchase price of $9.75 per share in cash (the “$9.75 Proposal”). In response, the Board of Directors established a Special Committee (the “Special Committee”) of independent directors authorized to, among other things, review the $9.75 Proposal as well as other strategic alternatives that may be available to the Company.

On May 19, 2015, the Special Committee delivered a letter to Z Capital indicating that the Special Committee believed that the $9.75 Proposal significantly undervalued the Company and was not in the best interests of the Company or its shareholders. Later that day, the Special Committee received a letter from Z Capital indicating that by its terms, the $9.75 Proposal had expired. On June 29, 2015, the Special Committee received a letter from Z Capital in which, among other things, Z Capital submitted a second non-binding proposal to acquire all of the outstanding common shares of the Company that are not already owned by Z Capital at a purchase price of $11.50 per share in cash (the “$11.50 Proposal”). On July 10, 2015, the Special Committee received a letter from Z Capital indicating that by its terms, the $11.50 Proposal had expired. The Company has incurred and may continue to incur significant costs, expenses and fees for professional services and other transaction costs in connection with the Special Committee’s mandate, and these fees and costs have been and, in many instances, will be payable by the Company regardless of whether or not any potential transaction is consummated.


ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.


ITEM 3.	DEFAULTS UPON SENIOR SECURITIES

None.


ITEM 4.	MINE SAFETY DISCLOSURES

Not applicable.



Table of Contents	39


ITEM 5.	OTHER INFORMATION

None.



Table of Contents	40


ITEM 6.	EXHIBITS



Exhibit Number		Description
31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32		Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS		XBRL Instance Document*
101.SCH		XBRL Taxonomy Extension Schema Document*
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document*
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB		XBRL Taxonomy Extension Label Linkbase Document*
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document*

Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.



Table of Contents	41	Financial Statement Index

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



		AFFINITY GAMING

Dated:	November 13, 2015	By:	/s/ Michael Silberling
		Name:	Michael Silberling
		Title:	Chief Executive Officer

Dated:	November 13, 2015	By:	/s/ Walter Bogumil
		Name:	Walter Bogumil
		Title:	Senior Vice President, Chief Financial Officer and Treasurer

Affinity Gaming - FORM 10-Q - November 13, 2015

Attached files

Affinity Gaming Reports