Lewis Fanger - CFO Dan Lee - President & CEO.

Howard Rosencrans - Value Advisory Brian Warner - Performance Capital.

Welcome to the Full House Resorts’ Second Quarter 2016 Earnings Call. Today’s conference is being recorded. At this time, I'd like to turn the conference over to Mr. Lewis Fanger, Chief Financial Officer of Full House Resorts. Please go ahead, sir..

Good afternoon. Welcome to the Full House Resorts second quarter 2016 earnings call.

As usual we may make forward-looking statements on this call and if we do well you know the usual [indiscernible] and we also may reference non-GAAP results as well for reconciliation of any non-GAAP measures please look to our earnings release or any of our 10Q or 10K filings as filed with the SEC. And with that let me turn it over to Dan..

We purposely started a little bit late because we just filed an S3 offering. We wanted to make sure that was up and available for everybody to look at so I could reference it and it's a rights offering for $5 million and I will address that a little more later. I apologize.

We wanted to get that out earlier this morning but the legal profession being what it is and everything that had to be wrapped up on that kind of being a foot race here at the end to get it filed, but it is filed and it is available and we will address it.

First let me address the earnings results, we’re actually pretty good but the quarter was complicated by the acquisition financing and win percentages that were light compared to what they formally and in particular compared to last year with a little above normal.

Starting with the Silver Slipper, the revenue was up slightly despite a pretty big negative swing in win percentage.

The normal with that property and normal varies from property to property depending on the number of times tips are used before the loss are cashed in and they tends to be fairly consistent number at one property but you can't really compare property to property but if you take the Silver Slipper the average for the last three years was 17.4, last year in the quarter was 18.7 that’s only a little bit above normal and this year it was 16.7 which only a little below normal but when you're comparing from year to year it actually had a pretty big impact.

The table game drop was actually up 8.2% but the revenues we got from table games because that's when the swing win percentage were actually down.

The revenues would have been worse except we had opened the hotel last year in stages between May and September and the biggest part of it opened in May and we also therefore had the cost of operating that hotel and then the market itself has got pretty promotional.

The Hollywood Casino in particular has all sorts of promotions that we've had to react to and somewhat lesser Island Grand as well. Bottom line is our EBDIT at that property was down about 11%. If the win percentage had been flat EBDIT would have been about flat as well so that was [Technical Difficulty].

At Rising Star revenue was up 2.4% in that case actually win percentage helped a little but the norm is 18.7, we are at 17% this year but it was kind of an abnormally low 14.2 last year, but the income was off just a little of this property average [ph] pretty close to breakeven so you get big percentage swings but it was at 437,000 versus 592,000.

Now we have some promotional stuff we keep trying different things at this property kind of it's like the patient and the hospital you keep giving it shock and adrenaline and everything else right, and it's shown a lot of improvement in the last few quarters.

This quarter we had some stuff that worked like we have now a passport party that happens once a month that celebrates a different country each time. So in March it was.

St Patty's Day and in July it was France and so on and it gives people a reason to come there on a Thursday every month and then at the end of the year somebody has their passport fully stamped out gets a special price of --and that's been helpful it's not huge but it's helpful.

It's one of the many things we try to do all the time, but we did do one thing in the quarter that didn't work and we sponsored a book festival with the couple of dozen hot air balloons in it and brought thousands of people to property and a lot of publicity but frankly a few of those people seem to go to the casino and even fewer gamble so.

So we lost a little bit of money on the balloon festival. It wasn't for the balloon festival quarter would have been well still probably not quite flat but close and with lot of stuff we’re looking to do and Rising Sun that we think will make it a more solid property.

In Northern Nevada it's off-season at the high-end in the second quarter, the peak season for them is the third quarter which we’re now in the heart of it had a swing in win percentage in the quarter, there 15.8% is normal. Last year it did 18.0, this year it did 12.1.

So again last year it's a bit above normal, this year was quite a bit below normal and the swing from year to year was pretty big and then it happened in the off season now. Now Fallon which is the other half of Northern Nevada segment is less seasonal and it just fine and table games are pretty irrelevant there.

But because of the swing in percentage the Northern Nevada segment was off did about 624,000 versus 679,000. Again if the win percentage have been normal it actually would have been up nicely over the prior year. Third quarter is by far with most important quota there and it seems we’re doing fine.

Bronco Billy's recognize we're just halfway through the third quarter so knock on wood. Bronco Billy' contributed 11. million in the 47 days in quarter, real happy to have property, good property, good team of people there and it provides pretty important diversity for us.

Bronco Billy' is a summer seasonal also with the third quarter being the most important quarter and the earnings historically and we think perspectively we’re in the ballpark of about 5 million a year of the EBDIT.

Now in the quarter we did 1.1 so something seems wrong there because 1.1 we had it for about half the quarter, 1.1 times 2 would be 2.2, how come we're not looking for 8.8 million of EBDIT. And there's a little nuance here that I think is important to understand there's a progressive tax rate in Colorado as there is also in Indiana.

And the way the state does it their fiscal year starts September 1st of each year and your first revenue is tax lower because you are in the lower tax tier and over the course of the State's fiscal year as your cumulative revenues get higher your tax rate goes up.

So that you would think that they would forecast revenue for the year and do some sort of true up that they don't. So, in the third quarter of every year both in Indiana and in Colorado we have kind of an abnormally low gaming tax rate and then in the second calendar quarter which is the fourth fiscal quarter we have a higher tax rates.

So their first fiscal quarter is our third calendar quarter right, and their fourth fiscal quarter when we have the high tax rate is our second quarter. Okay.

And usually it doesn't matter because it's kind of consistent year to year, maybe it makes the property both in Indiana and in Colorado look a little more seasonal than it is because the seasonally the third quarter, third calendar quarter is most important quarter and also happens to be the quarter where the state does their taxes where we have the lowest tax rate and so it makes it look like the earnings are really important third quarter and they are.

But there's a nuance here and that was that we bought this in the middle of May and so the state viewed us as a new gaming licensee which we are and from that stub period from a May 13th to June 13th we were taxed at a low rate because it was a new entity and that's probably about half of that 1.1 million of income that we had.

So we do smooth it out going forward but we had a benefit here -- we smoothed it for GAAP purposes but we did have a benefit in second quarter that accounted for about half of that 1.1 million and the results frankly were good other than that they were consistent with the prior year and I think consistent with our expectation of about 5 million a year of EBDIT at Cripple Creek.

If you go below the EBDIT line interest expense was up due to the acquisition, not surprisingly we paid for Bronco Billy's a 100% with debt and that was the more expensive second tier debt and then there were a lot of costs related to the acquisition, lawyers, accountants licensing and so on.

There were debt issuance costs related to the refinancing of our debt, the modifications of our debt and then frankly we provided warrants to some of the second lien lender for 5% of the company.

The warrants under certain circumstances become redeemable warrants, albeit if we can pay them with another note that has a four year extension but that's enough to give typical gap account completion.

So they spent weeks trying to figure out how to account for that and the end result is we have kind of this redeemable warrant issue and if anything is in future quarters if our stock goes up then we have a liability that has gone up and therefore there is a little charge and our stock was down.

We have a liability it's gone down and therefore we get a little credit all of which gets GAAP [ph] accounts very excited and bottom line is it really doesn't matter very much. It's not a very big number to us. You'll notice our depreciation was down despite the acquisition and that's because we bought the Silver Slipper three years ago.

There are a number of assets particularly the gaming license that was assigned a three year life and that is now [indiscernible] and a player database, so that’s appreciation. Now let me address the S3.

First when we did the deal and it was complicated deal you have to remember this company has danced around its covenants on that first lein debt for quite some time and when the new management team came in and we started dealing with the banks we found out that probably over half the banks had us in their workout group and you're really dealing with bankruptcy lawyers who are trying to get repaid and we certainly talking about you know extending the maturity of refinancing the debt and they just don't know how to spell that.

And so we have dealt with that for a while and then we found Cripple Creek, we got the operations turned around and it was time to try to refinance everything and we did get there in the end with the first lien debt.

They allowed us to buy Cripple Creek using second debt etcetera, etcetera but one of the things they wanted to see us do was raise 5 million of equity. I understand it.

We’re making a $30 million dollar acquisition, they want at least a piece of it to be equity financed, but they didn't require us to do it instead they incentivized us to do it with an agreement that if we didn't do it by May of 2017 our interest rate would go up 0.5% which is about $200,000 a year to us and so we raised $5 million, if all we did was set upon bonfire and burned up the money it still get us a 4% return on the 5 million because we save it on the interest expense.

More importantly we're not going to have a bonfire with the money.

We've located a whole bunch of things that we think have a potential very high returns for us and adds up to about $10 million and that's apart from about 3 million a year of maintenance CapEx or about 6 million over two years and you tend to think of this is as two years, it will take us about two years to get all the stuff done.

Now the biggest part of maintenance CapEx is slot change at least half of it. And those companies but this companies bought very few slot machines in recent years, the machines are getting old, our change machines frankly break down all the time where people try to change out their tickets and those suckers are about $25,000 each.

Even stuff like the Roof and Fallon leaks you go up there when it's raining fortunately it's the high desert doesn't rain that often but when it does rain the staff actually knows where to put the buckets because they know where the leaks are.

All of that's being fixed and to the tune of about $6 million over a two year time frame, but apart from that there's $10 million of stuff that we think we can put money to work at that will significantly augment earnings.

So you know the fixing the change machines or fixing the roof doesn't do anything for earnings, it's just something you’ve to do it if the property falls apart but there's $10 million of that we think gets a good return or frankly very high return and so this is all in the S3 and we actually referenced some of it in the most of it in the proxy intro letter to the proxy that we had a couple months ago and the proxy actually has some pictures that we dropped in that frankly we wanted to drop them into the S3 today but we get if got things got so hectic we didn’t have time to do it, but they'd be the same pictures that are in the proxy so they're readily available but starting with the Grand Lodge which is leased from Hyatt, that lease was coming due in September 2018 but more importantly at the property which is a really nice hotel on the north shore of Lake Tahoe with over a 1000 feet of tonnage [ph] right the lake and surrounded by homes that are millions of dollars and tens of millions of dollars and frankly it's virtually impossible to replicate that hotel today.

With the environmental regulations and the cost of land title I don't think you could build another hotel like that at least not in our lifetime.

So very special property, Hyatt has taken very good care of it, they have put quite a bit of money into it in the last few years into the hotel adding a wonderful spot, a great pool area and so on but nobody's put any money in the casino in like 15 years and it was kind of a catch 22 because they have used the casino as ours and we’ve used the casino as a short term lease so why should either one of us put money into it and so we sat down with the Hyatt folks and said let's bring the casino up to the level of the rest of the hotel, we will contribute part of the money and then ended up being we put up a million and a half, they put up three and a half, the rent goes from a $1.5 million a year to $2 million a year but we added five years to the lease and you can compute that in many, many different ways but since we make about $3 million a year net of rent the ROI at it is stratospheric no matter how you calculate it and so it's a good relationship of Hyatt we know the casino side of it, they know the hotel side of it.

We've hired the design firm TAL Studio who does frankly a lot of work for to for [indiscernible] very talented people, we have worked with them before at [indiscernible] St Louis and they've come up with a great refurbishment plan for the property.

So it's summer season but they have a strong second season there which is the ski season when the ski areas are open leaving the shoulder seasons of the fall and spring being pretty weak and so the plan is to go in there in between mid-March and we may screw up a little bit of the tail end of the ski season and mid-June we need that long a period of time and even that's moving very quickly, but that's when we plan to do this refurbishment.

We won't actually close the casino we will do it half by half, but frankly we need to order the carpet in September and stuff like that in order to have it all in a warehouse in February. So we're ready to go and move quickly in that timeframe and so that's about a $1.5 million of it and a very high ROI.

Why at Stockman's we figured out that that Stockman used to have about a 35% market share in Churchill County and it's down to 25%, there's no new competition or anything it's just kind of a property beat up and so we've been fixing up a little bit but we also figured out that there's a major weakness, in the parking, principle parking lot that most everybody parks in, it's on the east side of the building there's no entrance to the side of the building because that's where the back of the house and the kitchens are.

So they literally have to walk around the corner of the building to the south side where there is pretty nondescript entrance to go in.

There were two nice casino entrances on the west side of the building that nobody ever uses because there's an administrative office building the block your view of it and it's a 40 year old [indiscernible] block building that's nothing special in it and that was originally a strip hall, it doesn't even play itself out very efficiently for opposites.

And I'm not sure how that ended up, there must have been a dispute with a neighbor and the neighbor decided to screw him by blocking their entrances or something but it's been that way for decades and finally one day I called the fellows or manager there day to day and I say I'm thinking about blowing up your offices and he's like thank god somebody would finally have the courage to do that because he's been dealing with this for decades and so we the construction trailers or modular office space arrived a couple days ago, they put together now and then we're moving the executive people out of that office building and somewhere around Labor Day the mayor and I are going to drive a bulldozer into that building and then we're going to create a parking lot on the West Side of the building which is where it should be where there's nice casino entrances that go in it will dramatically change the curb appeal of the place, it's already the nicest casino in town [indiscernible] but it's a nice casino and by giving it better appeal and better perking I think we can call our way back towards the market share it had five years ago and the return on that is quite high, that's about a $1.5 million.

And frankly we think we can have that done by year-end so that one is moving pretty quickly. At Rising Star this was a Riverboat Casino that originally cruised, actually was originally -- they held the casino in New Orleans.

It was brought up to the Rising Sun, Indiana and was the first casino in the region and in those days is the first in -- and the region includes Cincinnati Indianapolis and Louisville and it's 7 million, 7 million people and that was originally the only casino and so people lined up in this pavilion building to buy admission tickets to get on the casino boat and the casino boat was designed to make sure people could get off and people could get on quickly and they don’t really care about the sense for arrival because there are such crowds trying to get on and people paid admission fees and that was crazy and there was this big pavilion where people could queue up and hang out or get something to eat and drink waiting for the boat to come and go.

It didn't go very far because we went more than about 100 feet it was in Kentucky and everybody's going to get arrested but it would cast off in the dock and sit 10 feet off the dock, it was crazy and that was in the 1990s. In 2001 Indiana changed the law you didn't have to cruise anymore.

In fact you sit at the dock and then in 2005 the racetracks outside of Indianapolis were allowed to put large land based casino, they don't have tables yet but they will have tables of about four years and they have slot machines, a lot of them 2000 slot machines and those are very much like the Las Vegas casino.

The sea of slot machines and the restaurants around the edge of it and so the restaurants are interspersed with the casino and then Ohio legalized casinos and again they're basically land based casinos designed like Las Vegas.

So we ended up with boat that’s quite outdated at this point, what we call a VIP room is almost an embarrassment, there's a little pony wall about four feet tall, the top part of its glass and it separates some tables and some slot machines from the rest of the casino but otherwise that's it that's for your VIP you get a pony wall.

So if you go and look at our competition they have real VIP rooms and this is something I did at pinnacle at of [indiscernible] where we created the VIP room as you walked right on the casino.

That's convenient for the high end players who are staying in your hotel or maybe they're down to play golf or something and they walk on and you have a VIP room that's right there, it doesn't have to be very big but it has to be nice and even if you're not headed for that room it kind of elevates things banks because you look at and say well someday if I'm willing to gamble $25 or $100 at hand that’s where I go , that’s nice but you know what let me go find identical [ph] slot machine.

So it actually elevates the experience even for the people who aren't there and then the pavilion because it's no longer servicing crowds as now there's the [indiscernible] space but you walk through and we're going to put some artificial trees in there and hang some lower lights and so on to warm it up and give you a better sense of revivalists as you went to it and we've allocated a $1.8 million for all of that stuff most of which will be done next year and then that our casino there has way more capacity than it needs.

We have the lowest win per slot machine per day in the entire state which is okay. It's just the sign of the times, right and it says that we don't need gaming capacity we have. So we actually want to remove part of the gaming capacity and put a restaurant on the casino poker. So that you have a restaurant there now.

Today you have to leave our boat to go get something to eat and then if you decide to go back to the casino we have to pay a head tax again. So just the savings on the head tax helps pay for the restaurant and then if we can make a restaurant that's kind of fanciful and draws people down from Cincinnati.

We have a concept in mind then that will also drive business so we've allocated a $1 million for putting a restaurant in the casino and by the way that access gaming capacity that we're allowed to have under law that was part of what drove us to make that proposal in Indianapolis.

To the airport authority, airport authority ended up canceling their whole RFP, I think the idea that somebody would build a casino near the airport just scared the bejesus out of them but now we've got a number of phone calls from other places in the state saying well if the airport doesn't want you would you come here? So we're still looking at the possibility of relocating our excess capacity from Rising Sun to other places but there's no money from that in this right to offer it but that is something we're still looking at.

And then we have these big parking lots, some of the parking lots haven't been used in a long time, that was part of why we hit the balloon festival we had all those surplus land, makes good place to launch a bunch of balloons, unfortunately just in bring a lot of gamblers to the place.

So we're going to take one of those parking lots put an RV park, 50 space RV park we think we can do it about $30,000 a space that's way cheap for the building and hotel and frankly because it's driving one of these $100,000 RVs I think that’s some real money.

That's a pretty common thing you in Las Vegas, like Sam's Town has one, the California Hotel has one, Boulder Station I think has one, no one of them down by Boulder Station , there's several casinos out there, Circus has one. There are several casinos in Las Vegas that have RV parks very common in the south.

We have one at f the Silver Slipper and so ironically most of these RVs are made in Indiana. Elkhart, Indiana is where they're made and there's a pretty good RV ownership in Indiana and Ohio but none of the casinos in the region have an RV park and so we have existing parking lot that works very well for it.

Now we're going to chew up the parking lot because we're going to put utility lines and [indiscernible] lines and all the stuff and we already had it but we have a good deal of landscaping that fits.

We've now got in town approval to do it which is not always easy for an ARV park and so we're looking to have that done by May 1st of next year and then finally a [indiscernible] now the Rising Star is on the Ohio River, but there's no bridge there and there's a bridge 15 miles north that takes you right to the Hollywood Casino and there's a bridge 20 miles south that takes you right to the Belterra Casino and we're sitting there with no bridge.

Now historically there was a ferry boat there from the early 1800s until 1946 when it hit ice and sank and it didn't get replaced because that competing for ferry boats on both sides but then eventually you had bridges built north and south but at this point there's this long stretch of river with no bridge and no ferry boat.

It would be wonderful to have a bridge but nobody's got a $100 million to build a bridge that can go over the boat traffic which you have on the Ohio River but we can start a ferry service pretty inexpensively.

The trick to this was getting a piece of land in Kentucky that would be zoned appropriately to accommodate a ferry and we've now achieved that. We acquired a piece of land directly across from us.

We did get the approval of the Board of adjustment which is the zoning authority that we needed, approved it, it wasn’t that easy there were some neighbors who opposed it.

I think they were fearful that we were talking about a bigger noisier ferry than we are, we’re just talking about a little 10 car ferry boat that goes back and forth, but just like a dripping faucet eventually fills a bucket a little 10 care ferry boat going back and forth 14 hours a day 365 days a year eventually moves a lot of people.

And part of the reason they do that is there is probably a 100,000 people, I think Boone County directly across as I mentioned 20,000 probably half of those people are going to be closer to us than any other casino with this ferry and we ran the math from our player base, we know the people who live around us on the Indiana side we get about $280 per [indiscernible] if I remember correctly and the people who lived directly across from us in a place called Rabbit Hash, Kentucky we hit $8 per capita [ph] which is really not too surprising because it's a 15 minute drive from directly across from us.

It's a three minute ferry boat and so we think we kind of improved our geography pretty significantly with little ferry boat.

Now that the boat itself is really just little push start with a barge which can be purchased there's many of those available at any given time but we have to build roads on both sides and landings into the river and that's actually the bulk of the 1.7 million that we have in here as an estimate.

We need to build those roads in accordance with the core of engineers rules and we need their sign off on it which takes time because there is bureaucracy of sorts but we hired good engineers and we will meet the core of engineers standards and itself estimate the Coast Guard standards and the crew estimate the Coast Guard standards.

You know all said and done hopefully we can get this thing running by a year from now and we've budgeted at a 1.7 million. You can play the numbers a little bit, this is something that's probably got a really high return. I mean this could pay for itself in a year or two. So that's the ferry service.

Down the Silver Slipper property is in good shape and of course the hotel is new but it's lacking one really important thing it does not have a pool and in that part of the world the summer is long and hot and humid and people like having pools.

Our competition all have pools, really nice pools for the most part but we do have one advantage we’re at the foot of a beautiful eight mile long beach. Now you don't really want to go swimming up the beach because once you go into the water it's muddy.

In fact not too long ago somebody got some brain eating disease out of the waters but it's muddy because it's where the mouth of the Mississippi goes into the Gulf and so you can't really see very far, it's not polluted it's just a warm brackish water but the sand beach itself is beautiful and in effect we have of all of the casinos on the Mississippi Gulf Coast we've by far have the nicest beach setting and that beach is the closest beach to the cities of New Orleans and Baton Rouge which are 3 million people and so when they're looking to go to the beach we’re their beach.

And frankly property kind of ignores it. You drive along this beautiful beach and then you park in a parking garage or in our property and we really have no amenities on that beach at all.

And so we're planning to build a pool that's out along the beach with a bar on it that will be at the front of the property quite visible when you come and go and we think that helps us fill the hotel mid-week but on weekends especially in the summer the high rollers they tell us their wives want to go visit our competition because they have pools and spas and we don't and so if we can have a nice pull out along the beach it also helps us get a better level of player on the weekends when we're already full but we think we can upgrade to what we have and it's about $400,000.

This isn't a huge lazy river swimming pool area it's more like what a nice hotel in a Caribbean would have, it's a nice pool with the deck around it and a bar next to it. So it's a place to sit out, enjoy the beach surrounding and you can take a dip in the pool without having it going to the brackish water of the Gulf.

So again the goal there is to get it done by May 1 next year and then up at Bronco Billy's part of the reason we bought this is it has the land next to it where one can build a hotel and we think Cripple Creek can follow the same trend that's going on now for five or six years of the Black Hawk where the casinos have added nice hotels and that's grown the market with people coming in from Denver.

Now it's Cripple Creek will always be smaller than Blackhawk because Colorado Springs is smaller than Denver. But we think there's an opportunity for that same sort of thing.

In fact we notice one of our competitors century gaming has said they're going to build a nice little hotel that's kitty corner from us which we think is great and we like to do the same. This is a historical town with very tough architectural standards and historical commissions and so on. So it would -- which is appropriate.

So this isn't something where we say okay we're going to build something that looks like a Fairfield Inn and slap it on that would not get approved.

So this is going to take some thought and thinking and so we do have in the budget $100,000 to design this hotel to actually build it it's probably $20 million or $30 million and we don't have that money today but if all the stuff works hopefully it gets our EBDIT upto something in the mid-20s versus right now in the very high teens or for about 20 and at that point we're leveraged four times to five times and that's probably the magic number at which you can refinance debt on much better terms and maybe as part of that you put a credit facility in place to build the hotel in Cripple Creek.

So that's the $10 million that we plan to spend. Today we're sitting on about $20 million of cash, about $10 million to $12 million of that’s used in operation so it's literally sitting in slot machines and leaving a little less than $10 million that would be available for this. We do have $2 million of credit facility which is unused at the moment.

We generate $5 million to $7 million a year in free cash flow and so if you start looking at maintenance CapEx plus this $10 million you're up to about '16 that's pretty close to working but it's cutting it a little close, if we didn't raise any equity and I don't want to rely too much on free cash flow because if you had a recession in the middle of this you might have projects you can't finish and frankly half a ferryboat doesn't do anybody any good.

So we wanted to get a little more comfort plus that makes the banks more comfortable. So that put us in a position of needing to raising a modest amount of equity and we didn’t need too much but $5 million was the number, that was the number of the banks drew out and we agreed too.

So then how do you do it? Well we looked at a public offering really way too expensive. You know by the time you get an investment banker involved and the company would have an attorney they'd have an attorney and you know how it works.

Once you have two attorneys, legal fees triple because they negotiate against each other and then the investment bank itself takes a fee and $5 million is just too small for them to get excited about. We look to doing and frankly they said well you know raised 20 million.

So like we don't need 20 million, we just need $5 million and we didn’t like the dilution for doing more than that. We looked at doing a pipe which is a private investment of public equity usually done by hedge funds and similar and that's also expensive and so they started -- it ends up being expensive.

So finally we settled on a rights offering and I will tell you rights offering is not that common in the U.S. So there's been a few of them. Actually in the really days of MGM that’s how [indiscernible] got the company going and he did two rights offerings that he backed up himself and raised the equity to go build MGM brand.

More recently Empire Gaming has done a couple including a really large back on the first quarter to fund a big casino in the Catskills. Overseas they're quite common, countries like Italy and Sweden probably 80% of the equity they raised is through rights offerings and they are pretty common in England. Just not that common in the U.S.

The best way to describe it is kind of a reverse dividend, instead of us sending money to the shareholders saying here's your dividends we’re kind of going out saying hey we need a little bit of money so you guys send us money and frankly if everybody did it that would be great and the way this works out is we have about 19 million shares outstanding so our market caps about 38 million we need five and so it's kind of a way of saying well for every $7 you’ve invested send us $1 and then all will be happy.

We will have over $5 million, doesn't really work that way now. Now if you are but you’ve the right to subscribe to this then your ownership doesn't change and if you run the numbers let's say you own 1% of our company and then you use your direct rights to subscribe to 1% of the 5 million you will still own 1% of the company.

And the company will go on up in value by having the $5 million of the balance sheet, all is fine with the work [ph]. Your ownership is exactly the same. Hopefully because you own the stock, hopefully you have confidence in us and now you have the ability to have a little more money invested in us and hopefully you view that as a positive.

And so if you could just if it were partnership we are just passing the hat and everybody put money all would be well with the world but in a public company you know some people won't exercise, they forgot they own the stock. They were Krysler dealers in the certificates underneath their socks and their sock drawers.

So some people aren't going to just like if a company pays a dividend it always amazed me how many dividend checks don't get cashed. But eventually end up going to the state but -- so some people aren't going to accept it.

And so what you do to incentivize people to exercise is to set the price at a discount and so you get the right to buy additional shares of stock at a discount to where the stock is been trading.

It's interesting, it took me a while to understand this but if you are subscribing shareholder in other words you're going to exercise your proportionate share of those rights, the direct rights so to speak the actual exercise prices are relevant but the lower the price the fewer shares you get but the fewer shares company itself is getting and you end up in exactly the same place you can model it out.

I modeled it out a couple of times to make sure I really understood it and the easiest way to think about this is what I just told you a minute ago if you own 1% of the company and you take 1% of the offering you will still own 1% of a company that's now a little more valuable things are unchanged.

Notice in that explanation there's no mention of the exercise [ph] it's actually irrelevant. Okay now it is relevant to somebody who does not exercised, called the sleeping shareholder, right, because you really should exercise.

Now maybe there's somebody out there who just doesn't want to put more money in the company in which case you kind of wonder why they own the stock in the first place or somebody who just doesn't have the money. And so there will be some people who don't exercise.

Well to make sure that the company gets the full 5 million I personally have committed to buy any of the rights that others don't exercise and it's very similar although I'm not Kirk Kerkorian, I'm wealthy enough to do that for this company and it's what he did then, that’s what Katie Lim [ph] did recently with Empire Gaming basically says fine here is your chance to participate in this rights offering.

If you choose not to do it we have a backed up party who's going to put up the money on your behalf and that's fine.

You will still own your stock is just you'll be diluted a little bit if you had 1% of the company you'll now own a little less than 1% company, in fact the exact number is 16.8% less of the company and so I agreed to backstop that and of course so I'm taking some risk, I could end up writing a $5 million check.

I get paid for that because of those rights not exercised I get to exercise first $1 million of them. And so that's basically my fee if you will but it doesn't cost the company anything. In effect I'm paid by the sleeping shareholders and the company gets the benefit of $5 million guarantee on the offering without any cost to the company whatsoever.

And you know there is probably some benefit to the company of having the CEO take out a checkbook write a significant check.

If everybody exercises their direct rights, I won't get any ships and I will get no fee for having done the guarantee but that would be okay, the shareholders all raised the money and contributed pro-rata, it's the great sign of confidence and that's fine but I'm confident not everyone will.

Now the rights offerings is also typically have a thing called the over-allotment provision which says that let's suppose you own some of our stock and you'd like to increase your ownership and you'd like to do it by buying some shares at that $1.30 well if there is a lot of shares not exercised after I've taken the first million the rest go into a pool and any shareholder can try to for to space in that pool up to five times their direct rights and if there's enough shares in that pool you can significantly increase your ownership.

If there's not enough shares in that pool that will be allocated out pro-rata and if very few people exercise in this then anything left over I have to buy, so that to put to value.

Let me let me put the numbers on that, let's suppose you want to 100,000 shares of our stock you will receive rights to buy 20,000 shares approximately 1 for 5 and that's direct rights you give first priority that that holds your ownership the same that's your pro-rata for participation on the offering and so if you exercise that and send us a check for a $1.30 times 20,000 then you will continue to own the same ownership position but if you want to increase your position you can also put in to buy as much as 100,000 additional shares five times that 20 and so and if there's enough shares in this pool then you could end up owning 220,000 shares having purchased 120,000 of those at a $1.30 but it's anyone's guess as to whether there would be enough unsold -- unexercised rights for that pool.

Good chance there's some, it may not be enough for everybody to get what they want and it'll be allocated based on what they ask for just like a normal offering is supposed to be and so that's how it works and now as a result the company is highly likely to get $5 million and from the company's point of view it kind of doesn't matter who it comes from, whether it comes from the me, or it comes from you or it comes from somebody else, company is highly likely to get the $5 million.

So therefore the company and its Board has not taken a position on whether you as an individual should exercise or not and you should take consider that pretty seriously because you are buying stock albeit at a $1.30 which is a discount to where it's been.

And by the way I should mention that discount, we messed around with a lot, originally it was going to be a $1.20 and then stock ran up, our stock is pretty volatile and a lot of it depends what's the right discount.

Pretty normal range of discounts on these is 20% to 30% this is almost exactly 20% of where the stock is traded on average in the last six months -- year-to-date, seven months. If you look at it versus the last 30 days it's a bigger discount than that.

If you look at today's price it's a bigger discount than that but frankly we're in the process of preparing all this and our stock was moving all over the place. So we finally just settled on a $1.30. Again for the subscribing shareholder it doesn't matter.

Frankly, from my perspective it matters but there's a yin and yang in it, the smaller the discount, the more shares I'd be likely to get but at a little higher price and so even myself I was kind of wasn't sure whether I wanted it to be higher or lower but we ended up in the negotiation between me and the Board resolving it at a $1.30.

So that's how it works. Everything is filed with the SEC. We will find out within a couple weeks whether they're going to review it or not. Pretty good chance that they do because they haven't reviewed our stuff in quite some time we tried our best to make it as clear a document as possible.

So that maybe they took a cursory look at it and said no this is pretty clear we don't have to review this, if they don't review it.

Then we would go effective with the rights offering some time in September and be outstanding for something like 20 days and 20 days for everybody to send us what they want to do and then we would close a deal shortly thereafter.

If we get reviewed with the SEC it will push it off into the fall sometime and I should mention the record date under the NASDAQ rules has to be at least 10 days from today and so it's 10 trading days from today so it is Monday, August 25th is the record date.

So if somebody wanted to own shares and get the rights they could buy shares in the next 10 calendar days and then they would receive the rights and the over subscription rates with that if you buy stock after that 10 day period give or not. The rights are not transferable with the stock at $2 a share.

It was just like -- wasn't worth bookkeeping trouble and then the other nuance I'd point out and it's really a nuance as we discovered late in this let's suppose absolutely nobody exercised their rights. I would end up -- would have ended up buying the entire $5 million offering that would have mounted like 21% of the stock.

Under the NASDAQ rules I'm not allowed to buy over 20% unless we go ahead with shareholder vote and we didn't want to go through the cost and time of trying to have a shareholder vote. So my cap is technically limited to some odd number of shares that works out to 98.85% of all the rights that are available.

Now you'll notice in the S3 that Brad Tirpak was our are chairman and Craig Thomas was in on our Board and me we jointly own about 7% of the stock and we've all indicated that we intend to exercise the direct rights that we receive.

So with those intentions and my commitment capped at the NASDAQ rule you end up at over 5 million but you'll notice that little nuance in there we talked about my backstop being capped at 98.85% of the total deal that's why we didn't want to have to go get a shareholder vote, as a practical matter it's pretty irrelevant it's highly unlikely that less than 2% of our shareholders exercise their rights.

So I think effectively really guarantees the deal. Mr.

Lewis you did not -- got exhaustive let's do a quick Q&A?.

Yes, and please come up with questions because maybe it will highlight something I missed. .

[Operator Instructions]. And we will take our first question from Chad Beynon with Macquarie..

This is actually [indiscernible] on for Chad. Looking at the Silver Slipper it appears that the new property in [indiscernible] hasn't really affected results in the Gulf part.

These [indiscernible] has performed relatively stable?.

You know that property is like an hour away from us. So it doesn't really affect us directly, you're talking about the Scarlet Pearl.

Probably more importantly about a year ago the Island View added a big hotel tower like 400 rooms it was pretty significant investment and their casino revenues didn't rise much and so they've kind of put it into overdrive to try to make sure that they fill those rooms and that's affected us up.

Now maybe because they're 20 or 30 minutes east of us so they are 20 to 30 minutes or maybe 30 minutes west of block city [ph]. So it's kind of like maybe Island View is impacted by the Scarlet Pearl and therefore we're being indirectly hurt by the Scarlet Pearl.

So I'm going to say the Scarlet Pearl has had no effect but it's pretty minimal and frankly the Scarlet Pearl if you go there you arrive -- you’re within sight of [indiscernible] and that’s like I don’t know if you give me a fantastic hamburger and it's about three feet from me and there's a McDonald's hamburger that's a foot from the I'm probably going to reach for the three feet and so I think actually in an odd way the Scarlet Pearl is a positive for us because there's no limit on the number of casinos in Mississippi and there's all sorts of lamb that people are always looking at trying to finance a new casino and an if I remember correctly Chad they invested somewhere in the neighborhood of $300 million and I don't think they are getting much of a return and that's going to make a really hard for about a dozen other projects that are floating out there at any given time to try to get their financing.

You know this is a pretty built up market.

It's hard to make the numbers work on a new casino in Mississippi and every now and then somebody gets a dream they get running out and try to make it go but I think the numbers are hard to make work in the case of the Scarlet Pearl the owner wrote a really large equity check, I think it's over 50% equity in the project and he's going to end up with a pretty low return on his equity and I think that's going to stabilize the market for a while in an odd way..

And then just across the portfolio in general, a lot of competitors were noting that May and June were a bit weaker than expected, kind of notwithstanding some of those negative whole trend, can you kind of talk about some of the monthly trends you saw across your portfolio in general?.

Well I can't remember, May was a bad calendar and then June was a catch up calendar if I remember correctly and then so May was kind of a hiccup but then when you realized it one last week than normal and that you kind of picked it up in the adjoining month and ended up kind of okay.

I was talking with one of our general managers last night we were kicking ourselves because it seems like every four years you have a weak couple of weeks with the Olympics.

Everybody stays on the watch as the Olympics is on television and you don't see it Tahoe where people are having vacation but you see in a market like Fallon we have local people and it's a little bit soft.

We're kind of kicking ourselves that we didn't dream up some promotion that says every time they play the American anthem we will pass on [indiscernible] or something and this is a guy like me who's been around the industry for a long time. We're both kicking ourselves that we knew that there would be this Olympic phenomena.

Now a part of that we're actually having a pretty good August but just the last week was a little bit soft and I'll bet you'll find people grumping about the Olympics as they did four years ago and eight years ago and twelve years ago.

But back in -- by the way it's not huge, it's just a little soft, same way it's just soft and then you realize you know when I'm talking -- the Olympics playing in the background, you hear the Olympics play at the background, maybe what it looks like. But I didn't see anything in the second quarter that was untoward if that's what you're wondering.

I will mention it's raining a fair amount in Louisiana and Louisiana is a place where it does rain a fair amount and 10,000 people have been evacuated from Baton Rouge and so on and so forth and Baton Rouge is like an hour and half west of us. So far we're okay.

We actually had an okay weekend and our property has not been flooded, our roads leading to us aren't flooded and our customers live where it's raining but they seem to be still coming. I think it has affected other people in Louisiana. We're actually in Mississippi on the edge of Louisiana, but we're doing okay despite the rain..

And then just one last follow up, could you just maybe please just highlight on some of the trends you’re seeing with rated versus unrated and then maybe just across the players in general?.

Well most of our players are rated but if you're talking about really high end we have really small really high end. If you’re trying to look for a macroeconomic features I didn't pick up on anything like recession or something.

I wish we could make book on the presidential race that would be a very popular bet but you got to go to London to do that and I think it's been okay but you know what I'm not sure we know, you almost have to ask somebody like Penn or Pinnacle who has got a large number of properties.

We're more focused on what sort of promotion did the Hollywood did in St. Louis last week and there's something going on in the macro economy, I'm not sure we pick up on it as quickly as they would..

And it really does depend on by the property. If you look at the Silver Slipper in Q2 our retail business that’s an R-Rated play actually did quite well. We defined in the rated player too but it really depends by the property and I don’t know if you can really get a whole of ton of useful information from us given how small we are as a company..

And we have two questions left. Next we will go to Howard Rosencrans with Value Advisory..

The maintenance CapEx number that you gave out on an ongoing basis excluding the growth CapEx number was 6 million?.

No 3 million a year but the 10 million that we intend to spend on all these different projects is kind of a two year time frame. So over that two year time frame it would be 6 million but it's about 3 million a year and about half of that should be slots.

And frankly you don't have to look a few, add up we’re at 2800 spots now? Where are we with Cripple Creek? Somebody will look at that number, so let's say it's in the ballpark of 3000 slots and if you went to replace all the slot machines today it would cost you about $22,000 a slot machine that's $66 million.

So what's the turnover rate on the slots well if it's once in 10 years that 6 million.

Fortunately slot machines last a long time and you don't really have to change over a large part of the floor every year, you just have to refresh it enough that that -- it's sounds like going of the county fair every year as long as they had one new ride people still want to go to the county fair and probably 20 of the rides are sold, you probably shouldn’t be getting on it.

But you do have to constantly refresh that casino floor and that's probably a 1.5 million of the 3 million right there and the rest of it is stuff like groups and a little bit leak [ph]. We had a chiller blowout of the Silver Slipper the other day and you know so it's just stuff that you have to replace that you would.

And it's a little bit subjective what that number is but that's kind of the number we've settled on and I view that as stuff we have to do that we don't really expect and rely on it but if you don't do it you're property eventually gets more and more tired and then you got a problem. .

And just to understand your where you stand on your debt for the moment.

It's due in -- there is a piece due in '19, the other piece is due in '22 but you have to pay it at the same time in '19 or the back end question to that was, can you do something to reduce the rate meaningfully or you have to get to a four times leverage ratio would seem with your free cash flow levels or your projected free cash flow levels if I take out the growth CapEx you have a good amount of free cash flow I would hope somebody would be more than willing in this friendly environment to lend you at a friendlier rate..

Well first of the $10 million of stuff we're spending -- I mean the second lien piece is expensive. It's a 13.5 plus there were upfront fees plus the warrants and everything else it's expensive debt, but frankly the return we expect to get on this 10 even though it's unlevered is even higher than that. otherwise we wouldn’t be doing this.

We'd be trying to pay down cycling debt, but when we were doing the refinancing the first lien debt was willing to roll basically and they reduce their amortization to help us make these investments and there was very few fees on that almost none. but they only wanted to go to a new three year term.

The second lien debt had fees and warrants and all this stuff and it has a grid as our leverage gets better the cost on that debt comes down, not dramatically but it does come down.

And it can get down to 12.5% and it's none -- if we tried to pay it off today it's one of one off three in next year and one of two and one of one and then particularly, but they were willing to go out six years. I would too if I was getting 13.5%.

And so we kind of -- but they said they're willing to go six but they don't want to be years after the first lien. So the way we resolved is we said okay, the first lien will go three years and the second lien at our choice is either due at a six year term or six months after the first lien comes due.

Now the real intent is to work with the bank group to now do a normal five year term on that.

So that the second lien debt is out there for its full six years and the first lien debt becomes more common five year term and then at some point you know year or two from now when our leverage is lower than we can look to refinance that second lien debt at much lower interest rate than where it is and at that point we could pay it off with very little penalty and go to a much normal thing.

It was a tough call honestly when you bought Cripple when we bought Cripple Creek, that second lien debt is so expensive it sucks up a lot of the value of what Cripple Creek earns if you just run the math.

We did it because it gave us diversity and because you know that the debt is not going to be out there forever whereas hopefully we will own Cripple Creek forever and so it was not unlike when Steve [ph] was building when on the Las Vegas trip he had some expensive debt and he was pretty pissed off about it and he choked on everything else but he swallowed hurt, borrowed the money, built the hotel and then later refinanced it on better terms and those were the very similar scenario.

We weren't happy with the it, the summit guys are smart guys and they were there when we needed them and their good to work for, they are not cheap they're and so we're happy to have them but somewhere down the road we would like to have this company be on a stronger financial footing and not have to pay 13% on this debt..

Does this take you out of the box to get out on the street and tell the story until after the rights are complete?.

Yes because they recognize with the S3 we are in registration. So everything I've said is in the registration statement which I hope I'm pretty clear with it.

So we have to be careful to adhere to what's in the registration statement but we’re more than happy to talk to anybody at any time and frankly you will see us out about but we have to be -- we have to be careful since we are technically in registration that we are not just technically if we are in registration..

I will tell you Howard, the last year and a half for us it's really been about just fixing day to day operations kind of keeping our heads down and just building it piece by piece and we are really excited to get this rights offering done and for the first time really go out on the road and sell the story which we haven't had time to do yet quite frankly..

And these things don't happen by themselves. I'm mean you know by pushing people to get this stuff done, to get the designs done, to get the bulldozer up the Fallon and blow up their executive office building. In any company there's an inertia on this stuff.

So when you start telling people who have been in those offices for 30 years that you're going to move the offices and tear them down and put a parking lot, their first impressions is that makes a lot of sense because we have these entrances.

But then when you start saying yeah we're going to blow up your office, we need you to clean it up and move out because we're going to blow up your office and then you run into the inertia and when the bulldozer is outside of that building and they park it there for a few days just to kind of incentivize them we will get them out of those offices and move it along.

So a good part of what I do is provide adrenaline to an organization..

And we do have another question up from Brian Warner with Performance Capital..

Just a few little [indiscernible].

Can you give us a little more color on what the ferry boats impact might be on sort of traffic to Rising Star and how that might translate on to EBITDA? I know it's a big under-utilized property and then additionally I'm just wondering sort of how you’re feeling about the occupancies at the new hotel tower at the Slipper now that’s -- I don’t know if stabilized the right word but how you are generally feeling about that and then just lastly candidly you know with the gaming and leisure properties of the world out there looking for properties sort of all the time.

Are you guys way-off the opportunity to dramatically reduce your total cost of debt and capital and versus sort of running the business on a going forward basis. I mean I assume at some point it's something you’re going to consider..

Okay. I'm going to take those on reverse order. The REIT thing is certainly a possibility, we’ve thought about it from time to time. Frankly we have been so busy on other stuff that we haven't focused on it but it's certainly a possibility at some point.

And of course they like nice stable properties so they would love this over Slipper fit right in our portfolio. I probably have to stabilize Rising Sun a little better and I think if they got to know the Cripple Creek which we just bought they would be interested in that too.

So it is something that we could do down the road, but we don't have any urgency to do it you know as you can see despite being a fairly leveraged company our capital needs aren't that much.

I mean we looked at and we said $5 million of equity capital and at one point I will just write the check and then a company can't just sell me $5 million worth of stock. So here we have a rights offering and which is a good way for all shareholders to participate in that. At the moment the deals somewhat is quite fresh.

We just paid a lot of fees and so on but sure somewhere down the road when we're trying to refinance all this debt would we consider GOPI [ph] or some other REIT? Of course we would. And I don't think there's an urgent need for it but something we always keep in mind.

And by the way if you run the math we very easily could pay off our debt with that sort of sales lease back. If you go to the Silver Slipper occupancy, we’re now up plus 90%. The goal is 100%.

I will tell you when I worked with Steve Wynn at Mirage Resorts we had some months where the Mirage with 3000 rooms would go an entire month without an unsold room and those last unsold rooms, the last few points of occupancy it's all profit. It's really all profit.

So the goal is 100%, 90% is pretty good and we've got there and then you start looking and saying well why is it not a 100%, well it's not a 100% because it's mid-week, the swimming pool will help the midweek pretty significantly and if you run the math and say well what if it helps us rent four rooms a night, five nights a week, eight months of the year and we get I think it's $120 of room revenue and gaming revenue per occupied room and you run that math the pool pays for it's up pretty quickly and make your own assumptions but it's not too hard to run that now.

But then you start to realize kind of the anecdotally here that are some are most important customers will stay with us most of the year but in the hottest part of the summer they're over to Island View because they have a spa and two swimming pools and they drive past us to go there.

And so can we improve the gaming propensity to gamble by the people staying at the place on weekends and I think we can. So we’re happy with how it's going.

We're finally upto 90%, it will get more challenging in the off season and I'm always pointing out that the fact that we're not at a 100% is a marketing opportunity how do we fill those extra rooms. We're not on the freeway. We're like eight miles off the freeway.

So we don't have the chance of putting a sign up that says $25 rooms tonight, drive your truck in here because we're quite a ways off the freeway. So we have to be more creative and trying to figure out how to get people to come to us.

And then your first question the ferry boat, I mean you can run the math yourself but it's a 10 car ferry boat goes back and forth probably four times an hour, so that's 40 cars an hour.

Now that's 40 cars each way so it's really 80 cars an hour but the only ones that matter to us are the ones that are westbound they are coming from Kentucky into Indiana. Somebody in Indiana going to Kentucky they're going over there to go shopping or something so that that doesn't help us. So there's 40 cars an hour, that's total potential.

Let's say it only runs half that so it's 20 cars an hour and let's say only half of those cars going into our casino so that 10 cars an hour but there's two people per car. So 20 people per hour coming into our casino.

Our casino revenues divided by our admissions are about $65 dollars so that’s $1300 an hour let's say it's 12 hours a day, 365 days a year that’s $5.7 million a year incremental revenue. That could be profit. Okay. Now I've run this map 17 different ways and I get wildly different numbers every time I do it.

But there's in my mind I think it's highly likely that this very boat gets higher than a 20% return on investment and it might be a 100% return on investment. It's very hard to know because I don't know how big an impediment to people view getting on a ferry boat versus going over bridge.

The fact that we will charge $5 a car but then give it back in the casino.

And one of the things I worry about is on a Saturday somebody drives down and find out there's 30 cars ahead of them and then they have to wait an hour to catch a ferry boat -- we intended to have a website where you can go to and reserve a place on the ferry boat and half the positions of the hold held through reservations.

So when you leave your home you know you have a spot on that boat. So we could get around that. But I think just -- you should run the math yourself just about any set of assumptions. You'll find that it moves the needle at Rising Sun and that's why we're doing it..

Hey David that’s probably all that we have time for today..

I will turn the call back over to Dan Lee for any additional comments or closing remarks..

I will just add Lewis and I are around, call us at anytime, we’re always available and switch to 702-221-7800 and we have to be careful of what we say because we’re on registration but we have not hired a solicitation agent or even a information agent because we’re pretty small company and we think we can answer the phones and answer people's questions and save the money.

So on that I thank everybody for your attention. I apologize for having to start it a little bit. We had a lot to talk about but I wanted to make sure the S3 got filed first. Thank you..

That concludes today's conference. Thank you for your participation. You may now disconnect..