Affinity Gaming 10-Q 2014 Q1 Quarterly report

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 March 31, 2014

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  R    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  R    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  R

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  R    No  £

No established public trading market for our common stock currently exists. As of May 15, 2014, 20,243,262 of the registrant's shares of common stock were 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	25
Item 3.	Quantitative And Qualitative Disclosures About Market Risk	34
Item 4.	Controls and Procedures	34
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	36
Item 1A.	Risk Factors	36
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	36
Item 3.	Defaults Upon Senior Securities	36
Item 4.	Mine Safety Disclosures	36
Item 5.	Other Information	36
Item 6.	Exhibits	37
	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.

We base 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. Examples of forward-looking statements include, but are not limited to, statements we make regarding: (i) the adequacy of cash flows from operations, available cash and available amounts under our credit facility to meet future liquidity needs; (ii) expectations regarding the operation of slot machines at our casino properties; or (iii) our continued viability, our operations and results of operations.  Additional 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 may adversely affect our operations and ability to complete,

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

• 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 which affect visitation to our casinos,

• environmental contamination and remediation costs,

• pending and potential litigation,

• the global financial crisis and, in particular, the economic downturn in Nevada and California,

• changes in income and payroll tax laws,

• changes in health care benefits laws,

• additional gaming licenses, approval of video lottery terminals, slots or other forms of gaming may be granted in jurisdictions where we operate adversely affecting our operations,

• security 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, 2013 (“2013 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

Table of Contents ii

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)

	March 31, 2014			December 31, 2013
	(Unaudited)
ASSETS
Cash and cash equivalents	$	150,312		$	140,857
Restricted cash	608			608
Accounts receivable, net of reserve of $583 and $537, respectively	3,932			3,371
Income tax receivable	361			420
Prepaid expense	9,122			9,858
Inventory	2,424			2,977
Deferred tax asset	4,112			3,640
Total current assets	170,871			161,731
Property and equipment, net	265,885			271,729
Other assets, net	12,526			12,719
Intangibles, net	128,419			129,044
Goodwill	68,516			68,516
Total assets	$	646,217		$	643,739
LIABILITIES AND OWNERS’ EQUITY
Accounts payable	$	12,947		$	15,825
Accrued interest	6,968			2,468
Accrued expense	22,799			22,141
Current maturities of long-term debt	9,961			9,961
Other current liabilities	163			187
Total current liabilities	52,838			50,582
Long-term debt	379,473			379,833
Other liabilities	3,225			3,232
Deferred income taxes	6,068			5,573
Total liabilities	441,604			439,220
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; 20,243,262 shares issued and outstanding	20			20
Additional paid-in-capital	205,773			205,726
Retained earnings	(1,180		)	(1,227		)
Total owners’ equity	204,613			204,519
Total liabilities and owners’ equity	$	646,217		$	643,739

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 March 31,
	2014			2013
REVENUE
Casino	$	75,954		$	78,088
Food and beverage	12,518			11,401
Lodging	6,907			6,609
Fuel and retail	13,519			15,079
Other	3,689			3,249
Total revenue	112,587			114,426
Promotional allowances	(16,017		)	(13,380		)
Net revenue	96,570			101,046
EXPENSE
Casino	31,273			30,403
Food and beverage	11,861			11,622
Lodging	4,392			4,422
Fuel and retail	10,888			13,092
Other	2,155			1,933
General and administrative	19,129			18,172
Depreciation and amortization	7,066			6,871
Corporate	2,937			3,590
Write downs, reserves and recoveries	23			—
Total expense	89,724			90,105
Operating income from continuing operations	6,846			10,941
Other expense
Interest expense, net	(6,777		)	(7,529		)
Total other expense, net	(6,777		)	(7,529		)
Income from continuing operations before income tax	69			3,412
Provision for income taxes	(22		)	(1,196		)
Income from continuing operations	$	47		$	2,216
Discontinued operations (Note 13):
Loss from discontinued operations before income tax	—			(369		)
Benefit from income taxes	—			133
Loss from discontinued operations	$	—		$	(236	)
Net income	$	47		$	1,980

See notes to consolidated financial statements

Table of Contents 3 Financial Statement Index

AFFINITY GAMING

Unaudited Condensed Consolidated Statements of Cash Flows

(in thousands)

	Quarter Ended March 31,
	2014			2013
Cash flows from operating activities:
Net income	$	47		$	1,980
Adjustments to reconcile net income to net cash provided by operating activities:
Loss from discontinued operations, before income taxes	—			369
Depreciation and amortization	7,066			6,871
Amortization of debt costs and discounts	247			537
Gain on sale of property and equipment	—			(10		)
Share-based compensation	47			333
Deferred income taxes	23			1,265
Receivable from related party (Truckee Gaming, LLC)	—			(582		)
Changes in operating assets and liabilities:
Accounts receivable	(230		)	809
Prepaid expense	736			(1,019		)
Inventory	553			137
Other assets	26			197
Accounts payable	(152		)	1,488
Accrued interest	4,500			4,589
Accrued expense	658			1,607
Income tax payable/receivable	59			(772		)
Other liabilities	(20		)	(44		)
Net cash provided by operating activities	13,560			17,755
Cash flows from investing activities:
Restricted cash	—			(17,419		)
Proceeds from sale to Truckee Gaming, LLC	—			17,447
Proceeds from sale of property and equipment	—			10
Purchases of property and equipment	(3,557		)	(6,658		)
Net cash used in investing activities	(3,557		)	(6,620		)
Cash flows from financing activities:
Payment on long-term debt	(548		)	(500		)
Loan origination fees	—			(62		)
Net cash used in financing activities	(548		)	(562		)
Net increase in cash and cash equivalents	9,455			10,573
Cash and cash equivalents:
Beginning of period	140,857			126,873
End of period	$	150,312		$	137,446
Cash flows from discontinued operations:
Cash flows from operating activities	$	—		$	36
Cash flows from investing activities	—			(4,695		)
Cash flows from discontinued operations	$	—		$	(4,659	)
Supplemental cash flow information:
Cash paid during the period for interest	$	2,076		$	2,683
Supplemental schedule of non-cash investing and financing activities:
Purchase of property and equipment financed through accounts payable	$	307		$	670
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

Affinity Gaming (formerly known as Affinity Gaming, LLC, and together with its subsidiaries, “Affinity” or “we”) originally organized as Herbst Gaming, LLC in Nevada on March 29, 2010. We subsequently changed our name to Affinity Gaming, LLC on May 20, 2011.

On December 20, 2012 (the “Effective Time”), we converted Affinity Gaming, LLC from a Nevada limited liability company into a Nevada corporation after adopting a Conversion Agreement (the “Conversion”) and filing Articles of Conversion with the Secretary of State of the State of Nevada. The resulting entity is now known as Affinity Gaming. Pursuant to the Conversion, at the Effective Time, among other things, (i) the membership interests of Affinity Gaming, LLC held by its members were converted into common shares of Affinity Gaming on a one-to-one basis and the members of Affinity Gaming, LLC became stockholders of Affinity Gaming, (ii) all property, subsidiaries, rights, privileges, powers and franchises of Affinity Gaming, LLC vested in Affinity Gaming, and all liabilities and obligations of Affinity Gaming, LLC became liabilities and obligations of Affinity Gaming, and (iii) the Articles of Organization and the Operating Agreement of Affinity Gaming, LLC, in each case as in effect immediately prior to the Effective Time, ceased to have any force or effect, and the Articles of Incorporation, together with the Addendum thereto, and the Bylaws of Affinity Gaming were adopted. Upon consummation of the Conversion, shares of our common stock were deemed to be registered under Section 12(g) of the Securities Exchange Act of 1934, as amended, pursuant to Rule 12g-3(a) promulgated thereunder. For purposes of Rule 12g-3(a), we are the successor issuer to Affinity Gaming, LLC.

Also on December 20, 2012, we adopted a shareholders' rights plan, which is intended to improve the bargaining position of our Board of Directors in the event of an unsolicited offer to acquire our outstanding common stock, by entering into a Rights Agreement, dated December 21, 2012, with American Stock Transfer & Trust Company, LLC, as rights agent. The Board of Directors implemented the rights plan by declaring a dividend of one preferred share purchase right (a “Right”) for each outstanding share of our common stock held of record as of December 21, 2012, and directing the issuance of one Right with respect to each share of our common stock that shall become outstanding thereafter until the rights become exercisable or they expire as described below. Each right initially entitles holders of our common stock to buy from us one one-thousandth of a share of our Series A Preferred Stock, par value $0.001 per share (the “Preferred Shares”) at a price of $45.00 per one one-thousandth of a Preferred Share represented by a Right, subject to adjustment. The Rights will generally become exercisable only following the tenth day after a person or group acquires or obtains the right to acquire or announces a tender or exchange offer that if consummated would result in such person or group acquiring beneficial ownership of 15% or more of our outstanding common stock (or, if such person or group already owns 15% or more of our outstanding common stock, upon such person or group acquiring one additional share of our common stock). Upon the occurrence of such a triggering event, the Rights will entitle every holder of our common stock, other than the acquirer, to purchase our stock or stock of our successor on terms that would likely be economically dilutive to the acquirer. Our Board of Directors, however, has the power to amend the terms of the Rights without the consent of the holders of the Rights so that it does not apply to a particular acquisition proposal or to redeem the rights for a nominal value before they become exercisable.

In addition, if we are acquired in a merger or other business combination transaction, or sell 50% or more of our assets or earnings power then, in lieu of the right to purchase our Preferred Shares, each Right will thereafter generally entitle its holder to receive the number of shares of common stock of the acquiring company using the same formula as for our common stock. The Rights expire on December 21, 2015 unless extended or earlier redeemed or terminated. We believe these features will likely encourage an acquirer to negotiate with our Board of Directors and pay a control premium before purchasing a majority of our common stock in the open market, commencing a tender offer or conditioning a tender offer on the board taking action to prevent the rights from becoming exercisable, as the Rights may cause substantial dilution to a person or group that acquires or seeks to acquire 15% or more of our outstanding common stock.

In relation to the litigation they initiated, which we describe in Note 11, Z Capital Partners, L.L.C. and certain of its affiliates (collectively “Z Capital”) filed a motion for preliminary injunction to enjoin the enforcement of the Rights Agreement as well as a provision in our Articles of Incorporation pertaining to the right of the Board of Directors to find a stockholder unsuitable to gaming regulators and to redeem that stockholder's shares. On May 3, 2013, the District Court granted the motion in part, enjoining Affinity and its Board of Directors from enforcing the Rights Agreement, while denying the remainder of the motion. The defendants filed an appeal of the District Court's decision to the Nevada Supreme Court, which appeal is pending. Despite the District Court's ruling on the preliminary injunction motion, we can neither evaluate the likelihood of an

Table of Contents 5 Financial Statement Index

unfavorable outcome nor estimate the potential loss or range of loss because discovery just began and plaintiffs have not articulated their theory of the case with respect to monetary damages.

Business

We are 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 provide 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, Hotspur pays us a fixed annual fee in monthly installments. In addition to the monthly installments, we are entitled to an incentive fee in any year in which EBITDA (as defined in the consulting agreement) equals or exceed the threshold EBITDA for that year.

On February 1, 2013, we completed the sale to Truckee Gaming, LLC (“Truckee Gaming”) of the Sands Regency Casino Hotel in Reno, Nevada, the Gold Ranch Casino & RV Resort in Verdi, Nevada, and the Dayton Depot Casino in Dayton, Nevada (“Truckee Disposition”). In December 2013, we closed the Henderson Casino.

Consolidation

We include all of our subsidiaries in our consolidated financial statements, eliminating all significant 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 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 March 31, 2014, with the audited Consolidated Balance Sheet amounts as of December 31, 2013 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 March 31, 2014, 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 2013 Form 10-K.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Changes to Significant Accounting Policies

We have made no material changes to our significant accounting policies as reported in our 2013 Form 10-K.

Table of Contents 6 Financial Statement Index

Recently Issued Accounting Pronouncements

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

NOTE 3. RESTRICTED CASH

Restricted cash balances at March 31, 2014 and at December 31, 2013 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 policies.

NOTE 4. PROPERTY AND EQUIPMENT

Property and equipment consist of the following (in thousands):

	Estimated Life (Years)	March 31, 2014			December 31, 2013
Building and improvements	7 - 40	$	181,699		$	180,333
Gaming equipment	3 - 10	56,172			55,277
Furniture, fixtures, and equipment	3 - 10	42,142			40,183
Leasehold improvements	7	196			196
Land	—	39,493			39,848
Barge	30	15,019			15,019
Construction-in-progress		2,682			5,964
Total property and equipment		337,403			336,820
Less accumulated depreciation		(71,518		)	(65,091		)
Total property and equipment, net		$	265,885		$	271,729

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.

Table of Contents 7 Financial Statement Index

AFFINITY GAMING

Notes to Unaudited Condensed Consolidated Financial Statements

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

	March 31, 2014							December 31, 2013
	Gross Amount		Accumulated Amortization			Net Amount		Gross Amount		Accumulated Amortization			Net Amount
Finite-lived intangible assets
Customer loyalty programs	$	12,164	$	(5,080	)	$	7,084	$	12,164	$	(4,580	)	$	7,584
Trademarks	2,982		(1,524		)	1,458		2,982		(1,399		)	1,583
	$	15,146	$	(6,604	)	$	8,542	$	15,146	$	(5,979	)	$	9,167
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				$	128,419	$	135,023				$	129,044

The following table summarizes the changes in goodwill by reportable segment during the quarter ended March 31, 2014:

	Nevada		Midwest		Colorado		Total
Balance at December 31, 2013	$	33,665	$	14,622	$	20,229	$	68,516
Impairment of goodwill	—		—		—		—
Balance at March 31, 2014	$	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

Other assets consist of the following (in thousands):

	March 31, 2014		December 31, 2013
Capitalized loan fees, net	$	8,114	$	8,279
Long-term deposits	3,855		3,855
Other assets	557		585
Total	$	12,526	$	12,719

Table of Contents 8 Financial Statement Index

AFFINITY GAMING

Notes to Unaudited Condensed Consolidated Financial Statements

NOTE 7. ACCRUED EXPENSE

Accrued expense consists of the following (in thousands):

	March 31, 2014		December 31, 2013
Progressive jackpot liabilities	$	3,084	$	3,294
Accrued payroll and related	8,092		7,353
Slot club point liability	3,816		3,574
Litigation reserves	3,100		3,100
Other accrued expense	4,707		4,820
Total	$	22,799	$	22,141

NOTE 8. LONG-TERM DEBT

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

	March 31, 2014			December 31, 2013
9% Senior Unsecured Notes due 2018	$	200,000		$	200,000
Unamortized discount	(1,370		)	(1,452		)
9% Senior Unsecured Notes due 2018, net	198,630			198,548
Term loan due 2017	190,759			191,246
Total debt, including current portion	389,389			389,794
Less: current maturities	(9,961		)	(9,961		)
Plus: long-term portion of capital leases	45			—
Total long-term debt	$	379,473		$	379,833

On May 9, 2012, we repaid all of the $342.1 million debt then outstanding under the senior secured loans we borrowed 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 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 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 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 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 expenses and repaid our Old Credit Facility.

On December 13, 2013, we completed the First Amendment to the Credit Agreement (now, the “Amended Credit Agreement”). The First Amendment reduces the applicable LIBOR rate floor on the New Credit Facility from 1.25% to 1.00%, and it reduces the applicable margin from 4.25% to 3.25% in the case of Eurodollar term loans and from 3.25% to 2.25% in the case of base rate term loans. In addition, the First Amendment excludes holders of at least 20% of our voting equity as of the First Amendment closing date from the change of control provisions of the credit agreement, increases the threshold for a change of control from 40% to 50% of our voting equity and removes the cross-default provisions to a change of control to our outstanding existing 2018 Notes. The First Amendment also adds flexibility to make asset sales and extends the reinvestment period for asset sale proceeds from 12 months to 18 months, while adding a soft call protection for the lenders whereby we

Table of Contents 9 Financial Statement Index

AFFINITY GAMING

Notes to Unaudited Condensed Consolidated Financial Statements

must pay a 1% fee on the amount of any term loans which we reprice within the first six months after the First Amendment closing date.

We incur and pay interest on the Initial Term Loan under the Amended Credit Agreement at an uncommitted floating rate of LIBOR plus 3.25%, subject to a LIBOR floor of 1.00%.  The 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.  The New Credit Facility provides an accordion feature which allows us to seek additional borrowings of up to $80 million subject to certain customary terms and conditions, including pro forma compliance with a maximum leverage ratio, as defined in the Amended Credit Agreement. Total unamortized loan fees as of March 31, 2014 totaled $8.1 million, inclusive of $1.8 million in fees and pre-payment penalties attributable to lenders that participated in both the original and refinanced debt.  We are amortizing capitalized loan fees over the life of the 2018 Notes and the Initial Term Loan.

Under the 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 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 Amended Credit Agreement), any resulting net cash proceeds must be deposited into an account subject to an account control agreement.

Under the 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, or (ii) when there is a change in the majority of continuing directors. A continuing director, as defined in the Amended Credit Agreement, is a director on the date of borrowing or a director nominated by a majority of directors which existed on the date of borrowing.  A change of control would constitute an event of default under the Amended Credit Agreement and permit the acceleration by the lenders of all outstanding borrowings thereunder.

The Amended Credit Agreement contains customary covenants including maximum total leverage ratio, maximum secured leverage ratio, 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 net leverage ratio is greater than or equal to 4.00 to 1.00, equal to 25% of excess cash flow when the 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 net leverage ratio is less than or equal to 3.00 to 1.00.  At March 31, 2014, we were in compliance with all financial covenants related to our debt agreements; the Leverage Ratio on that date was 6.19 to 1.00 and the Interest Coverage Ratio was 2.11 to 1.00. The excess cash flow payment for the year ended December 31, 2013 was $8,014, which we paid on April 3, 2014. The excess cash flow payment is included in the current portion of long-term debt in the accompanying unaudited Condensed Consolidated Balance Sheet as of March 31, 2014.

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, at any time prior to May 15, 2015, upon providing notice to holders of the 2018 Notes, the Issuers may choose to redeem up to 35% of the 2018 Notes with the net cash proceeds from one or more equity offerings at a redemption price equal to 109% of the principal amount of the 2018 Notes to be redeemed, plus accrued and unpaid interest to the redemption date, as long as at least 65% of the aggregate principal amount of the 2018 Notes originally issued remains outstanding immediately after giving effect to any such redemption and the redemption occurs not more than 180 days after the date of the closing of the equity offering.  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.

Table of Contents 10 Financial Statement Index

AFFINITY GAMING

Notes to Unaudited Condensed Consolidated Financial Statements

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

All of our current and future domestic subsidiaries that guarantee the Senior Secured 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.

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, 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. 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 Senior Secured 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 March 31, 2014 (in thousands):

	Carrying Value		Estimated Fair Value
9% Senior Unsecured Notes due 2018	$	198,630	$	212,534
Term loan due 2017	190,759		190,759
Total	$	389,389	$	403,293

NOTE 9. INCOME TAXES

For the quarters ended March 31, 2014 and 2013, our overall effective income tax rates were 31.9% and 35.0%, respectively.

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. Our federal income tax returns for fiscal years 2011 and 2012 are currently under examination.

Table of Contents 11 Financial Statement Index

AFFINITY GAMING

Notes to Unaudited Condensed Consolidated Financial Statements

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, 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 following table summarizes the activity related to our outstanding and non-vested stock options and restricted stock units for the period ended March 31, 2014:

	Stock Options								Restricted Stock
	Outstanding				Non-Vested				Non-Vested
	Shares		Weighted Average Exercise Price Per Share		Shares		Weighted Average Fair Value Per Share		Shares		Weighted Average Fair Value Per Share
December 31, 2013	348,399		$	10.05	44,171		$	4.88	52,361		$	11.86
Granted	55,148		11.61		55,148		5.44		—		—
Vested	—		—		(26,955	)	4.25		(36,272	)	11.83
Canceled	—		—		—		—		—		—
Forfeited	(8,446	)	10.25		(8,446	)	5.46		—		—
March 31, 2014	395,101		$	10.26	63,918		$	5.34	16,089		$	11.91

As of March 31, 2014, awards representing 638,362 shares or potential shares of our common stock remained outstanding; therefore, awards representing 361,638 shares or potential shares of our common stock remained available for issuance under our 2011 LTIP.

We account for stock option awards as liabilities. As of March 31, 2014, we have reported a $2.2 million share-based compensation liability in the Other liabilities line item.

NOTE 11. COMMITMENTS AND CONTINGENCIES

Data Security Event

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 system. We immediately initiated a thorough investigation, supported by a professional forensic investigative firm, to determine the nature and scope of the compromise. In December 2013, we issued a press release advising that our payment processing system became 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 and October 16, 2013. As of November 14, 2013, our third-party forensics expert advised us that our credit card processing systems were secured. 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 learned that an unauthorized intrusion and installation of malware compromising the credit card processing environment again occurred. We have hired a different professional forensics investigation firm with globally-recognized expertise in data security to conduct a thorough investigation of the more recent occurrence, and the security of our entire information technology environment as it relates to both incidents. Although the investigation is on-going, we have reason to believe that 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.

Table of Contents 12 Financial Statement Index

AFFINITY GAMING

Notes to Unaudited Condensed Consolidated Financial Statements

Affinity carries insurance coverage of $5.0 million for liability resulting from network security events. We cannot estimate the total amount which we will ultimately incur because the investigation is in its early stages; however, we believe we will likely incur at least $0.25 million, which is our self-insured retention related to each event.

Litigation

On March 5, 2013, 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”), seeking (A) a judgment, among other things: (i) declaring that the conversion of Affinity Gaming, LLC from a Nevada limited liability company into a Nevada corporation (the “Corporate Conversion”) was ineffective and void ab initio and that Affinity Gaming, LLC remains in existence as a Nevada limited liability company governed by its Operating Agreement dated as of December 31, 2010 (the “Operating Agreement”); or in the alternative (ii) striking and invalidating, and enjoining the recognition or enforcement of the agreements and governing documents purportedly entered into in connection with the Corporate Conversion, and reforming them to comply with the requirements of the Operating Agreement; (iii) enjoining defendants from taking any action inconsistent with the Operating Agreement and refusing to take any action required by the Operating Agreement; and (iv) declaring that the Rights Agreement, dated effective December 21, 2012, between Affinity Gaming and American Stock Transfer & Trust Company, LLC, as Rights Agent is void ab initio and unenforceable, as well as (B) related general, special, consequential and punitive damages. Based on our preliminary review of the complaint, we and our Board of Directors believe that the claims brought by Z Capital are without merit and we intend to defend against them vigorously.

Z Capital filed a motion on April 9, 2013 for a preliminary injunction which would enjoin the enforcement of the Rights Agreement as well as a provision in our Articles of Incorporation pertaining to the right of the Board of Directors to find a stockholder unsuitable to gaming regulators and to redeem that stockholder's shares. On May 3, 2013, the District Court granted the motion in part, enjoining Affinity and its Board of Directors from enforcing the Rights Agreement, while denying the remainder of the motion. The defendants filed an appeal of the District Court's decision to the Nevada Supreme Court, which appeal is pending and scheduled to be heard June 4, 2014. Despite the District Court's ruling on the preliminary injunction motion, we can neither evaluate the likelihood of an unfavorable outcome nor estimate the potential loss or range of loss because discovery just began and plaintiffs have not articulated their theory of the case with respect to monetary damages.

Representatives of Z Capital and of SPH Manager, LLC (“SPH Manager”) have reached a tentative understanding which would involve (1) reconstituting the Board to include seven members, consisting of the Affinity’s Chief Executive Officer, two members designated by Z Capital and four members, including two independent directors, designated by the SPH Manager and stockholders other than Z Capital, and (2) resolving and dismissing the existing litigation between Z Capital and Affinity (and certain of its directors). The tentative understanding will not become final and binding until definitive agreements with respect thereto are executed and delivered by all parties and there can be no assurance that such definitive agreements will be so executed and delivered.

In March 2012, the Clarke County Development Corp. (“CCDC”), the local non-profit Iowa licensee for which we manage the Lakeside Resort & Casino (“Lakeside Iowa”) in Osceola, Iowa, filed an action in Iowa state court against Affinity Gaming and Lakeside Iowa, seeking a declaratory judgment that the management contract between CCDC and Lakeside Iowa 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 Iowa, Affinity Gaming 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 Iowa, 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 is based upon its filing in Iowa state court on August 5, 2013 of a third lawsuit in which it seeks to enforce a settlement agreement it alleges was reached with us during a non-binding mediation held in June 2013.  The mediation resulted in a written memorandum of understanding (“MOU”) pursuant to which the state court petition and federal court action were to be dismissed upon Lakeside Iowa’s payments of $600,000 to CCDC and $2.5 million to an account controlled by the Clarke County Reservoir Commission; Lakeside Iowa was to incrementally reduce to zero over a period of ten years a 0.5% capital improvement set-off against the 2.5% of adjusted gross revenue (“AGR”) the casino pays to CCDC and its local government affiliates; and, for a period of five years, CCDC would not unreasonably withhold its consent to the assignment of the management agreement to a third party, provided the assignee agrees to immediately eliminate the capital improvement set-off and to pay the greater of 3% or the state maximum percentage of AGR.  However, subsequent to the mediation, when the

Table of Contents 13 Financial Statement Index

AFFINITY GAMING

Notes to Unaudited Condensed Consolidated Financial Statements

parties exchanged drafts of the formal written settlement agreement contemplated by the MOU, it became apparent that a meeting of the minds regarding settlement had not occurred, as CCDC took the position that any assignee of the management agreement would have to increase its percentage of AGR payment by 1.5%, rather than the 0.5% to which we believed we had agreed.  Because CCDC has only recently filed its action to enforce the alleged settlement agreement, an evaluation of the likelihood of an unfavorable outcome cannot be made; however, we estimate the potential loss to be the $3.1 million in payments set forth in the MOU.

On June 25, 2012, the Nevada Tax Commission adopted a regulation requiring gaming companies to pay sales tax on customer complimentary meals and employee meals. The adoption of this regulation stems from a February 15, 2012 Nevada Tax Commission decision concerning another gaming company which states that complimentary meals provided to customers are subject to sales tax at the retail value of the meal and employee meals are subject to use tax at the cost of the meal. The other gaming company filed in District Court a petition for judicial review of the Nevada Tax Commission decision, and as a result we began accruing the applicable sales and use tax from the date of the most recent Nevada Department of Taxation ruling. In June 2013, substantially all the gaming companies in Nevada, including certain of our subsidiaries, entered into a settlement agreement with the Nevada Tax Commission which effectively provided, among other things, that the complimentary meals furnished to customers and employees would neither be subject to sales and use tax retroactively nor prospectively. As a result, we reversed the $1 million we had recorded and presented in accrued expense, $0.6 million of which we had accrued during the second half of 2012.

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, has 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 the 2012 regulation and related settlement agreement. Our subsidiary 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 $0.275 million, we do not believe any amounts are due to Chartwell and accordingly, we have not recorded an accrual. We intend to vigorously defend the lawsuit and our subsidiary has recently filed a motion to dismiss the claims against it, which motion is pending.

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 the excavation phase at the site of our new travel center in Primm, Nevada, 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.

Through March 31, 2014, we have incurred approximately $3.7 million on remediation work at the Whiskey Pete’s site. We have an insurance policy which provides coverage for environmental remediation costs of up to $5.0 million, and we received $1 million from our insurer in 2013. Following a demand for further reimbursement, we have reached an agreement to receive an additional $0.5 million from our insurer, without prejudice to any claims we may have against our environmental remediation consultant. We expect to collect the proceeds during the second quarter of 2014.

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. The ultimate cost 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. 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 14 Financial Statement Index

AFFINITY GAMING

Notes to Unaudited Condensed Consolidated Financial Statements

Asset Retirement Obligation

We continue to accrete an asset retirement obligation in association with a lease for real property at our Primm, Nevada location. The Predecessor recorded a liability of $0.5 million in 2007, using a 6.7% discount rate and a 3.0% inflation rate, related to costs it expected to incur to return the leased land to its original state at the end of the lease agreement. The following table reconciles the value of the asset retirement obligation for the periods presented.

	March 31, 2014		December 31, 2013
Balance at beginning of period	$	773	$	724
Accretion expense	13		49
Balance at end of period	$	786	$	773

NOTE 12. SEGMENT INFORMATION

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

	Quarter Ended March 31,
	2014			2013
Gross revenue
Nevada	$	67,888		$	68,517
Midwest	33,079			34,549
Colorado	11,620			11,360
Total gross revenue	112,587			114,426
Promotional allowances
Nevada	(10,819		)	(8,614		)
Midwest	(3,217		)	(2,828		)
Colorado	(1,981		)	(1,938		)
Total promotional allowances	(16,017		)	(13,380		)
Net revenue
Nevada	57,069			59,903
Midwest	29,862			31,721
Colorado	9,639			9,422
Total net revenue	$	96,570		$	101,046

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.

Table of Contents 15 Financial Statement Index

AFFINITY GAMING

Notes to Unaudited Condensed Consolidated Financial Statements

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

	Quarter Ended March 31,
	2014			2013
Adjusted EBITDA
Nevada	$	7,356		$	8,668
Midwest	8,256			10,414
Colorado	1,260			2,320
Corporate and other	(2,890		)	(3,257		)
Total Adjusted EBITDA	13,982			18,145

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

	Quarter Ended March 31, 2014
	Adjusted EBITDA		Depreciation and Amortization		Share-Based Compensation		Write Downs, Reserves and Recoveries		Operating Income from Continuing Operations
Nevada	7,356		(3,664	)	—		(23	)	3,669
Midwest	8,256		(1,820	)	—		—		6,436
Colorado	1,260		(1,290	)	—		—		(30	)
Corporate and other	(2,890	)	(292	)	(47	)	—		(3,229	)
Continuing operations	13,982		(7,066	)	(47	)	(23	)	6,846

	Quarter Ended March 31, 2013
	Adjusted EBITDA		Depreciation and Amortization		Share-Based Compensation		Write Downs, Reserves and Recoveries	Operating Income from Continuing Operations
Nevada	8,668		(3,590	)	—		—	5,078
Midwest	10,414		(1,757	)	—		—	8,657
Colorado	2,320		(1,307	)	—		—	1,013
Corporate and other	(3,257	)	(217	)	(333	)	—	(3,807	)
Continuing operations	18,145		(6,871	)	(333	)	—	10,941

Table of Contents 16 Financial Statement Index

AFFINITY GAMING

Notes to Unaudited Condensed Consolidated Financial Statements

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

	March 31, 2014		December 31, 2013
Total assets by reportable segment
Nevada	$	227,595	$	228,956
Midwest	211,380		213,671
Colorado	82,005		83,149
Reportable segment total assets	520,980		525,776
Corporate and other	125,237		117,963
Total assets	$	646,217	$	643,739

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

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

	Quarter Ended March 31,
	2014		2013
Capital expenditures by reportable segment
Nevada	$	33	$	2,553
Midwest	665		577
Colorado	149		1,406
Reportable segment capital expenditures	847		4,536
Corporate	22		4
Total capital expenditures	$	869	$	4,540

NOTE 13. DISCONTINUED OPERATIONS

During the quarter ended March 31, 2013, we recorded the final adjustments related to the Truckee Disposition, which closed on February 1, 2013. Net of selling expense, we recorded a gain of $21,000. Including the impairment losses we recognized in the second half of 2012 related to Truckee Disposition, we recognized an overall loss, net of selling expense, of $14.8 million. We have presented the operating results for the casinos subject to the Truckee Disposition in discontinued operations in the accompanying condensed consolidated statements of operations for the quarter ended March 31, 2013.

The following table summarizes operating results for discontinued operations (in thousands):

	Quarter Ended March 31,
	2014		2013
Net revenue	$	—	$	3,289
Pretax income (loss) from discontinued operations	$	—	$	(369	)
Discontinued operations, net of tax	$	—	$	(236	)

Table of Contents 17 Financial Statement Index

AFFINITY GAMING

Notes to Unaudited Condensed Consolidated Financial Statements

NOTE 14. CONDENSED CONSOLIDATED GUARANTOR DATA

On May 9, 2012, we completed the offering and sale of the 2018 Notes. We used the net proceeds from the sale of the 2018 Notes, together with borrowings under the New Credit Facility, to terminate and repay in full all outstanding indebtedness under the existing Old Credit Facility, plus related fees and expense.

All of our current and future domestic subsidiaries that guarantee the New Credit Facility also fully and unconditionally guarantee our payment obligations under the 2018 Notes on a senior unsecured basis. 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 in accordance with Rule 3-10 of SEC Regulation S-X, and using the same accounting policies as we did to prepare the financial information located elsewhere in our consolidated financial statements and related footnotes. In 2012, we formed Affinity Gaming Finance Corp. (“AG Finance”), which is a co-issuer of the 2018 Notes. Though we present AG Finance as a co-issuer in the accompanying 2012 condensed consolidated guarantor data, we present our indebtedness as an obligation of Affinity Gaming only.

Table of Contents 18 Financial Statement Index

AFFINITY GAMING

Notes to Unaudited Condensed Consolidated Financial Statements

Affinity Gaming and Subsidiaries

Unaudited Condensed Consolidating Balance Sheet

March 31, 2014

(000s)

	Affinity Gaming (Co-Issuer)		AG Finance (Co-Issuer)		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminating Entries			Total
ASSETS
Cash and cash equivalents	$	105,167	$	—	$	45,145	$	—	$	—		$	150,312
Restricted cash	469		—		139		—		—			608
Accounts receivable, net	789		—		3,143		—		—			3,932
Income tax receivable	361		—		—		—		—			361
Prepaid expense	741		—		8,381		—		—			9,122
Inventory	—		—		2,424		—		—			2,424
Deferred income tax asset	220		—		3,892		—		—			4,112
Total current assets	107,747		—		63,124		—		—			170,871
Property and equipment, net	3,116		—		262,769		—		—			265,885
Intercompany receivables	—		—		42,266		—		(42,266		)	—
Investment in subsidiaries	527,460		—		—		—		(527,460		)	—
Other assets, net	10,483		—		2,043		—		—			12,526
Intangibles	—		—		128,419		—		—			128,419
Goodwill	—		—		68,516		—		—			68,516
Long-term deferred tax asset	—		—		—		—		—			—
Total assets	$	648,806	$	—	$	567,137	$	—	$	(569,726	)	$	646,217
LIABILITIES AND OWNERS’ EQUITY
Accounts payable	$	1,960	$	—	$	10,987	$	—	$	—		$	12,947
Intercompany payables	42,266		—		—		—		(42,266		)	—
Accrued interest	6,968		—		—		—		—			6,968
Accrued expense	1,030		—		21,769		—		—			22,799
Current maturities of long-term debt	9,961		—		—		—		—			9,961
Other current liabilities			—		163		—		—			163
Total current liabilities	62,185		—		32,919		—		(42,266		)	52,838
Long-term debt, less current portion	379,428		—		45		—		—			379,473
Other liabilities	2,438		—		787		—		—			3,225
Deferred income tax liability	142		—		5,926		—		—			6,068
Total liabilities	444,193		—		39,677		—		(42,266		)	441,604
Common stock	20		—		—		—		—			20
Other equity	204,593		—		527,460		—		(527,460		)	204,593
Total owners’ equity	204,613		—		527,460		—		(527,460		)	204,613
Total liabilities and owners’ equity	$	648,806	$	—	$	567,137	$	—	$	(569,726	)	$	646,217

Table of Contents 19 Financial Statement Index

AFFINITY GAMING

Notes to Unaudited Condensed Consolidated Financial Statements

Affinity Gaming and Subsidiaries

Condensed Consolidating Balance Sheet

December 31, 2013

(000s)

	Affinity Gaming (Co-Issuer)		AG Finance (Co-Issuer)		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminating Entries			Total
ASSETS
Cash and cash equivalents	$	98,296	$	—	$	42,561	$	—	$	—		$	140,857
Restricted cash	469		—		139		—		—			608
Accounts receivable, net	510		—		2,861		—		—			3,371
Income tax receivable	420		—		—		—		—			420
Prepaid expense	586		—		9,272		—		—			9,858
Inventory	—		—		2,977		—		—			2,977
Deferred income tax asset	267		—		3,373		—		—			3,640
Total current assets	100,548		—		61,183		—		—			161,731
Property and equipment, net	3,395		—		268,334		—		—			271,729
Intercompany receivables	—		—		36,129		—		(36,129		)	—
Investment in subsidiaries	523,859		—		—		—		(523,859		)	—
Other assets, net	10,648		—		2,071		—		—			12,719
Intangibles	—		—		129,044		—		—			129,044
Goodwill	—		—		68,516		—		—			68,516
Total assets	$	638,450	$	—	$	565,277	$	—	$	(559,988	)	$	643,739
LIABILITIES AND OWNERS’ EQUITY
Accounts payable	$	2,097	$	—	$	13,728	$	—	$	—		$	15,825
Intercompany payables	36,129		—		—		—		(36,129		)	—
Accrued interest	2,468		—		—		—		—			2,468
Accrued expense	832		—		21,309		—		—			22,141
Current maturities of long-term debt	9,961		—		—		—		—			9,961
Other current liabilities	—		—		187		—		—			187
Total current liabilities	51,487		—		35,224		—		(36,129		)	50,582
Long-term debt, less current portion	379,833		—		—		—		—			379,833
Other liabilities	2,459		—		773		—		—			3,232
Deferred income tax liability	152		—		5,421		—		—			5,573
Total liabilities	433,931		—		41,418		—		(36,129		)	439,220
Common stock	20		—		—		—		—			20
Other equity	204,499		—		523,859		—		(523,859		)	204,499
Total owners’ equity	204,519		—		523,859		—		(523,859		)	204,519
Total liabilities and owners’ equity	$	638,450	$	—	$	565,277	$	—	$	(559,988	)	$	643,739

Table of Contents 20 Financial Statement Index

AFFINITY GAMING

Notes to Unaudited Condensed Consolidated Financial Statements

Affinity Gaming and Subsidiaries

Unaudited Condensed Consolidating Statement of Operations

Quarter ended March 31, 2014

(000s)

	Affinity Gaming (Co-Issuer)			AG Finance (Co-Issuer)		Guarantor Subsidiaries			Non-Guarantor Subsidiaries		Eliminating Entries			Total
REVENUE
Casino	$	—		$	—	$	75,954		$	—	$	—		$	75,954
Food and beverage	—			—		12,518			—		—			12,518
Lodging	—			—		6,907			—		—			6,907
Fuel and retail	—			—		13,519			—		—			13,519
Other	—			—		3,689			—		—			3,689
Total revenue	—			—		112,587			—		—			112,587
Promotional allowances	—			—		(16,017		)	—		—			(16,017		)
Net revenue	—			—		96,570			—		—			96,570
EXPENSE
Casino	—			—		31,273			—		—			31,273
Food and beverage	—			—		11,861			—		—			11,861
Lodging	—			—		4,392			—		—			4,392
Fuel and retail	—			—		10,888			—		—			10,888
Other	—			—		2,155			—		—			2,155
General and administrative	—			—		19,129			—		—			19,129
Depreciation and amortization	292			—		6,774			—		—			7,066
Corporate	2,937			—		—			—		—			2,937
Write downs, reserves and recoveries	—			—		23			—		—			23
Total expense	3,229			—		86,495			—		—			89,724
Operating income (loss) from continuing operations	(3,229		)	—		10,075			—		—			6,846
Other income (expense)
Interest expense, net	(6,777		)	—		—			—		—			(6,777		)
Intercompany interest income	6,820			—		—			—		(6,820		)	—
Intercompany interest expense	—			—		(6,820		)	—		6,820			—
Income from equity investments in subsidiaries	2,217			—		—			—		(2,217		)	—
Total other income (expense), net	2,260			—		(6,820		)	—		(2,217		)	(6,777		)
Loss from continuing operations before income tax	(969		)	—		3,255			—		(2,217		)	69
Benefit from (provision for) income taxes	1,016			—		(1,038		)	—		—			(22		)
Income (loss) from continuing operations	$	47		$	—	$	2,217		$	—	$	(2,217	)	$	47

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 March 31, 2013

(000s)

	Affinity Gaming			AG Finance (Co-Issuer)		Guarantor Subsidiaries			Non-Guarantor Subsidiaries		Eliminating Entries			Total
REVENUE
Casino	$	—		$	—	$	78,088		$	—	$	—		$	78,088
Food and beverage	—			—		11,401			—		—			11,401
Lodging	—			—		6,609			—		—			6,609
Fuel and retail	—			—		15,079			—		—			15,079
Other	—			—		3,249			—		—			3,249
Total revenue	—			—		114,426			—		—			114,426
Promotional allowances	—			—		(13,380		)	—		—			(13,380		)
Net revenue	—			—		101,046			—		—			101,046
EXPENSE
Casino	—			—		30,403			—		—			30,403
Food and beverage	—			—		11,622			—		—			11,622
Lodging	—			—		4,422			—		—			4,422
Fuel and retail	—			—		13,092			—		—			13,092
Other	—			—		1,933			—		—			1,933
General and administrative	—			—		18,172			—		—			18,172
Depreciation and amortization	217			—		6,654			—		—			6,871
Corporate	3,590			—		—			—		—			3,590
Total expense	3,807			—		86,298			—		—			90,105
Operating income (loss) from continuing operations	(3,807		)	—		14,748			—		—			10,941
Other income (expense)
Interest expense, net	(7,690		)	—		—			—		161			(7,529		)
Intercompany interest income	7,569			—		—			—		(7,569		)	—
Intercompany interest expense	—			—		(7,569		)	—		7,569			—
Income from equity investments in subsidiaries	4,588			—		—			—		(4,588		)	—
Total other income (expense), net	4,467			—		(7,569		)	—		(4,427		)	(7,529		)
Income from continuing operations before income tax	660			—		7,179			—		(4,427		)	3,412
Benefit from (provision for) income taxes	1,320			—		(2,516		)	—		—			(1,196		)
Income from continuing operations	$	1,980		$	—	$	4,663		$	—	$	(4,427	)	$	2,216
Discontinued operations
Loss from discontinued operations before tax	—			—		(369		)	—		—			(369		)
Benefit for income taxes	—			—		133			—		—			133
Loss from discontinued operations	$	—		$	—	$	(236	)	$	—	$	—		$	(236	)
Net income (loss)	$	1,980		$	—	$	4,427		$	—	$	(4,427	)	$	1,980

Table of Contents 22 Financial Statement Index

AFFINITY GAMING

Notes to Unaudited Condensed Consolidated Financial Statements

Affinity Gaming and Subsidiaries

Unaudited Condensed Consolidated Statements of Cash Flows

Quarter Ended March 31, 2014

(000s)

	Affinity Gaming (Co-Issuer)			AG Finance (Co-Issuer)		Guarantor Subsidiaries			Non-Guarantor Subsidiaries		Total
Net cash (used in) provided by operating activities	$	(5,256	)	$	—	$	18,816		$	—	$	13,560
Cash flows from investing activities:
Purchases of property and equipment	(20		)	—		(3,537		)	—		(3,557		)
Net cash used in investing activities	$	(20	)	$	—	$	(3,537	)	$	—	$	(3,557	)
Cash flows from financing activities:
Change in intercompany accounts	12,634			—		(12,634		)	—		—
Payments on long-term debt	(487		)	—		(61		)	—		(548		)
Net cash provided by (used in) financing activities	$	12,147		$	—	$	(12,695	)	$	—	$	(548	)
Net increase in cash and cash equivalents	6,871			—		2,584			—		9,455
Cash and cash equivalents
Beginning of year	98,296			—		42,561			—		140,857
End of period	$	105,167		$	—	$	45,145		$	—	$	150,312

Table of Contents 23 Financial Statement Index

AFFINITY GAMING

Notes to Unaudited Condensed Consolidated Financial Statements

Affinity Gaming and Subsidiaries

Unaudited Condensed Consolidated Statements of Cash Flows

Quarter Ended March 31, 2013

(000s)

	Affinity Gaming			AG Finance (Co-Issuer)		Guarantor Subsidiaries			Non-Guarantor Subsidiaries		Total
Net cash (used in) provided by operating activities	$	(5,546	)	$	—	$	23,301		$	—	$	17,755
Cash flows from investing activities:
Restricted cash	(17,419		)	—		—			—		(17,419		)
Proceeds from sale to Truckee Gaming, LLC	17,447			—		—			—		17,447
Proceeds from sale of property and equipment	—			—		10			—		10
Purchases of property and equipment	(142		)	—		(6,516		)	—		(6,658		)
Net cash used in investing activities	$	(114	)	$	—	$	(6,506	)	$	—	$	(6,620	)
Cash flows from financing activities:
Change in intercompany accounts	12,623			—		(12,623		)	—		—
Payment on long-term debt	(500		)	—		—			—		(500		)
Loan origination fees	(62		)	—		—			—		(62		)
Net cash provided by (used in) financing activities	$	12,061		$	—	$	(12,623	)	$	—	$	(562	)
Net increase (decrease) in cash and cash equivalents	6,401			—		4,172			—		10,573
Cash and cash equivalents
Beginning of year	89,063			—		37,810			—		126,873
End of period	$	95,464		$	—	$	41,982		$	—	$	137,446
Cash flows from discontinued operations:
Cash flows from operating activities	—			—		36			—		$	36
Cash flows from investing activities	—			—		$	(4,695	)	$	—	(4,695		)
Cash flows from discontinued operations	$	—		$	—	$	(4,659	)	$	—	$	(4,659	)

Table of Contents 24 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 (formerly known as Affinity Gaming, LLC, and together with its subsidiaries, “Affinity” or “we” ) is a diversified, multi-jurisdictional Nevada corporation which operates casinos through wholly-owned subsidiaries in Nevada, Missouri, and Iowa and Colorado. Casino operations as of March 31, 2014 included the following wholly-owned casinos (by segment):

Nevada
Silver Sevens Hotel & Casino (f/k/a Terrible’s Hotel & Casino)	Las Vegas, NV	(“Silver Sevens”)
Primm Valley Casino, Resort & Spa	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”)
Midwest
St Jo Frontier Casino	St. Joseph, MO	(“St Jo”)
Mark Twain Casino	La Grange, MO	(“Mark Twain”)
Lakeside Casino Resort	Osceola, IA	(“Lakeside Iowa”)
Colorado
Golden Mardi Gras Casino	Black Hawk, CO	(“Golden Mardi Gras”)
Golden Gulch Casino	Black Hawk, CO	(“Golden Gulch”)
Golden Gate Casino	Black Hawk, CO	(“Golden Gate”)

As of March 31, 2014, casino operations collectively offered approximately 283,000 square feet of gaming space with 7,588 slot machines and 135 table games, while lodging operations offered 3,125 hotel rooms.

We also provide 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 ends on April 1, 2015, Hotspur pays us a fixed annual fee in monthly installments. In addition to the monthly installments, we are entitled to an incentive fee in any year in which EBITDA (as defined in the consulting agreement) equals or exceeds the threshold EBITDA for that year.

Seasonality

Our casinos in Northern Nevada, the Midwest and Colorado experience extreme weather conditions that 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 2013-2014. 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 25 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. In addition to the other changes described in our 2013 Form 10-K, the First Amendment reduced the interest rate applicable to our Initial Term Loan, which as of March 31, 2014 was 1.25% less than prior to the First Amendment.

Discontinued Operations. On February 1, 2013, we completed the sale to Truckee Gaming, LLC (“Truckee Gaming”) of the Sands Regency Casino Hotel in Reno, Nevada, the Gold Ranch Casino & RV Resort in Verdi, Nevada, and the Dayton Depot Casino in Dayton, Nevada (“Truckee Disposition”).

Key Performance Indicators

We assess a variety of financial and operational performance indicators to manage our business, but the key performance indicators that 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 games 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 spend per patron trip. The industry uses the term “average daily rate” (“ADR”) to define the average amount of 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.

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 each geographical region in which we operate, and to discuss our results with the investment community.

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 continuing operations.

RESULTS OF OPERATIONS

The number of customers that visit our casino properties, as well as the amounts they spend while visiting, drive our financial results.  Most of our casino properties focus on local customers with an emphasis on slot machine play.  Our casinos primarily rely on drive-in traffic from feeder markets to provide visitation.  While the economy has shown signs of improvement over the last couple of years, recent changes in federal tax rates, California state tax rates, payroll taxes, the cost of health care, and other uncertainty related to ongoing political deadlock on fiscal issues have affected our business. Many of our customers continue to face financial difficulties, and we expect that discretionary spending will remain at reduced levels over the near term. However, we believe that our business strategy, which focuses on attracting and fostering repeat business from our local gaming patrons, leaves us well-positioned for improvement should the economic recovery continue. Additionally, our casinos in the Midwest and Colorado experienced significant business disruption due to extreme winter weather during the first quarter of 2014.

Table of Contents 26

Reportable Segment Results

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

	Quarter Ended March 31,
	2014			2013			Percent Change
Gross revenue
Nevada	$	67,888		$	68,517		(0.9	)%
Midwest	33,079			34,549			(4.3	)%
Colorado	11,620			11,360			2.3	%
Total gross revenue	112,587			114,426			(1.6	)%
Promotional allowances
Nevada	(10,819		)	(8,614		)	25.6	%
Midwest	(3,217		)	(2,828		)	13.8	%
Colorado	(1,981		)	(1,938		)	2.2	%
Total promotional allowances	(16,017		)	(13,380		)	19.7	%
Net revenue
Nevada	57,069			59,903			(4.7	)%
Midwest	29,862			31,721			(5.9	)%
Colorado	9,639			9,422			2.3	%
Total net revenue	$	96,570		$	101,046		(4.4	)%

	Quarter Ended March 31,
	2014			2013			Percent Change
Adjusted EBITDA
Nevada	$	7,356		$	8,668		(15.1	)%
Midwest	8,256			10,414			(20.7	)%
Colorado	1,260			2,320			(45.7	)%
Corporate and other	(2,890		)	(3,257		)	(11.3	)%
Total Adjusted EBITDA	13,982			18,145			(22.9	)%

Table of Contents 27

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

	Quarter Ended March 31, 2014
	Adjusted EBITDA		Depreciation and Amortization		Share-Based Compensation		Write downs, Reserves and Recoveries		Operating Income from Continuing Operations
Nevada	7,356		(3,664	)	—		(23	)	3,669
Midwest	8,256		(1,820	)	—		—		6,436
Colorado	1,260		(1,290	)	—		—		(30	)
Corporate and other	(2,890	)	(292	)	(47	)	—		(3,229	)
Continuing operations	13,982		(7,066	)	(47	)	(23	)	6,846

	Quarter Ended March 31, 2013
	Adjusted EBITDA		Depreciation and Amortization		Share-Based Compensation		Write downs, Reserves and Recoveries	Operating Income from Continuing Operations
Nevada	8,668		(3,590	)	—		—	5,078
Midwest	10,414		(1,757	)	—		—	8,657
Colorado	2,320		(1,307	)	—		—	1,013
Corporate and other	(3,257	)	(217	)	(333	)	—	(3,807	)
Continuing operations	18,145		(6,871	)	(333	)	—	10,941

Quarter Ended March 31, 2014 Compared to Quarter Ended March 31, 2013

Nevada. Nevada operations include Rail City, Silver Sevens and our three Primm casinos. In addition to casino, lodging and food and beverage operations, our results from Primm include the operation of three gas station/convenience stores and a California lottery outlet.  Nevada operations accounted for 60% of our gross revenue from continuing operations during the each of the quarters ended March 31, 2014 and 2013. Nevada operations include the results of the Henderson Casino for the quarter ended March 31, 2013. The Henderson Casino closed in December 2013.

Gross revenue from our Nevada segment declined $0.6 million, or 0.9%. Net of promotional allowances, Nevada segment revenues declined $2.8 million, or 4.7%, primarily attributable to a $2.2 million, or 25.6%, increase in promotional allowances. Promotional allowance increases resulted from aggressive campaigns designed to foster additional visitation and spend per visit in competition with the rich promotional gaming and lodging offers in the Las Vegas market. Fuel and retail net revenues declined $1.6 million, or 10.5%, due to the leased diesel fuel operations at Primm. During the third quarter of 2013, we completed the new travel center at Whiskey Pete's and entered into an equipment lease agreement whereby a third-party operates the diesel fuel sales and a maintenance station for commercial vehicles. We receive lease income based on gallons of diesel fuel sold and maintenance services rendered at the station which replaces the net revenue and operating expenses recorded while we operated the diesel fuel station during the same period in the prior year. Increases in food and beverage revenue of $0.6 million, or 7.7%, and in other revenue of $0.4 million, or 14.4%, partially offset the declines in casino and fuel and retail revenue. Food and beverage revenue increased as a result of added promotional food offers, while other revenue increased because we hosted more shows at our Primm entertainment venues.

Nevada Adjusted EBITDA decreased $1.3 million, or 15.1%. The Adjusted EBITDA contribution from casino operations declined by $2.9 million, or 19.9%, as a result of the increased promotional offers and related expense which did not materially increase the spend per trip or the number of trips for rated players, a dichotomy which suggests that patrons’ discretionary

Table of Contents 28

gaming budgets are constrained, especially in the lower tiers where we targeted our marketing efforts. Casino operations bear the expense of non-gaming complimentary items or services we provide, resulting in the casino EBITDA contribution decline and non-gaming EBITDA increase during the quarter. The Adjusted EBITDA contributions from food and beverage operations and from lodging operations increased by $0.7 million, or 881.6%, and $0.2 million, or 10.2%, respectively. The Adjusted EBITDA contribution from fuel and retail operations increased $0.7 million, or 33.9%, with the operation of the new travel center at Whiskey Pete’s.

Midwest. Midwest operations include the St Jo Frontier Casino in Missouri, the Mark Twain Casino in Missouri and the Lakeside Casino Resort in Iowa. Midwest operations accounted for approximately 30% of our gross revenue from continuing operations during all periods presented.

Gross revenue from our Midwest segment decreased $1.5 million, or 4.3%, entirely in the casino division. Extreme winter weather and market declines impacted our revenues in the Midwest. Similar to the experiences of other regional gaming operators in the Midwest, our revenues have suffered from the effects of the slow economic recovery and its impact on our customers’ discretionary spending.

Midwest Adjusted EBITDA decreased by $2.2 million, or 21%, driven almost entirely by the casino revenue declines described in the previous paragraph. During periods of significant revenue declines driven by weather, our ability to reduce operating expense and maintain EBITDA margins is limited, primarily due to the nature of our operations (which consist primarily of slots, single-outlet food operations with a combination buffet/coffee shop, and the hotel in Iowa).

Colorado. Colorado operations include the Golden Gates, the Golden Gulch and the Golden Mardi Gras casinos in Black Hawk. Colorado operations accounted for 10% of our gross revenue from continuing operations during the each of the quarters ended March 31, 2014 and 2013.

Gross revenue from our Colorado segment increased $0.3 million, or 2.3%. Our recent improvements to the Golden Mardi Gras included the addition of a buffet-style restaurant, which drove an increase in gross revenue despite the impact of the severe weather.

Colorado Adjusted EBITDA decreased $1.1 million, or 45.7%, almost entirely due to casino operating expense increases, including promotional allowances. During the first quarter of 2014, we implemented aggressive marketing and promotional campaigns designed to recapture patrons who did not visit our properties during the renovation period and to attract new patrons. Revenue increased as a result of the aggressive marketing programs, but significant weather-related declines offset the increase. Our Colorado casino operations consist primarily of slots, a combination buffet/coffee shop restaurant and two quick-serve restaurants. Similar to our Midwest operations, expense reduction opportunities during periods of significant weather related revenue declines are limited. As a result, the Adjusted EBITDA margins and corresponding Adjusted EBITDA declined during the first quarter of 2014 when compared to the same quarter in prior year.

Table of Contents 29

Revenue and Expense by Category

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

	Quarter Ended March 31,
	2014			2013			Percent Change
Total revenue
Casino	$	75,954		$	78,088		(2.7	)%
Food and beverage	12,518			11,401			9.8	%
Lodging	6,907			6,609			4.5	%
Fuel and retail	13,519			15,079			(10.3	)%
Other	3,689			3,249			13.5	%
Total revenue	112,587			114,426			(1.6	)%
Promotional allowances	(16,017		)	(13,380		)	19.7	%
Net revenue	$	96,570		$	101,046		(4.4	)%
Departmental cost and expense
Casino	$	31,273		$	30,403		2.9	%
Food and beverage	11,861			11,622			2.1	%
Lodging	4,392			4,422			(0.7	)%
Fuel and retail	10,888			13,092			(16.8	)%
Other	2,155			1,933			11.5	%
General and administrative	19,129			18,172			5.3	%
Depreciation and amortization	7,066			6,871			2.8	%
Corporate	2,937			3,590			(18.2	)%
Write downs, reserves and recoveries	23			—			—	%
Departmental cost and expense	$	89,724		$	90,105		(0.4	)%
Departmental Adjusted EBITDA Margins
Gaming	58.8		%	61.1		%
Food and beverage	5.2		%	(1.9		)%
Lodging	36.4		%	33.1		%
Fuel and retail	19.5		%	13.2		%
Other	41.6		%	40.5		%

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The following table presents revenue and expense by category as a percentage of total gross revenue:

	Quarter Ended March 31,
	2014		2013
Total revenue
Casino	67.5	%	69.2	%
Food and beverage	11.1	%	10.0	%
Lodging	6.1	%	4.8	%
Fuel and retail	12.0	%	13.2	%
Other	3.3	%	2.8	%
Total revenue	100.0	%	100.0	%
Promotional allowances	(14.2	)%	(11.7	)%
Net revenue	85.8	%	88.3	%
Departmental cost and expense
Casino	27.8	%	26.6	%
Food and beverage	10.5	%	10.2	%
Lodging	3.9	%	3.9	%
Fuel and retail	9.7	%	11.4	%
Other	1.9	%	1.7	%
General and administrative	17.0	%	15.9	%
Depreciation and amortization	6.3	%	6.0	%
Corporate	2.6	%	3.1	%
Write downs, reserves and recoveries	—	%	—	%
Departmental cost and expense	79.7	%	78.8	%

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. 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;

• 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 Iowa; 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.

Promotional allowances consist primarily of free play and promotional credits redeemed at our slot machines, as well as food, beverage, lodging and entertainment furnished gratuitously to customers. We include the retail value of items or services

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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 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.”

Quarter Ended March 31, 2014 Compared to Quarter Ended March 31, 2013

Corporate expense represents unallocated payroll, professional fees and other expense which we do not directly attribute to our reportable segments. 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 in management fees for the quarters ended March 31, 2014 and 2013. Overall, corporate expense during the quarter ended March 31, 2014 decreased $0.7 million, or 18.2%. Share-based compensation expense declined $0.3 million, or 85.9% due to the reduction in grants to employees and directors compared to prior year. Excluding share-based compensation cost, corporate expense decreased $0.4 million, or 11.3%. During the quarters ended March 31, 2014 and 2013, we incurred approximately $0.5 million and $0.1 million, respectively, in non-recurring expense unrelated to our core operations, such as for the shareholder litigation and strategic initiative evaluation. Adjusted to account for non-recurring expense in both periods, corporate expense remained essentially unchanged.

Net interest expense attributable to continuing operations decreased $0.8 million, or 10.0%, as a result of the December 2013 amendment to our New Credit Facility and the resulting interest rate reduction.

The income tax provisions from continuing operations for the quarters ended March 31, 2014 and 2013 were approximately $22,000 and $1.2 million, respectively. The effective tax rate used in calculating the benefit or provision related to income from continuing operations for the quarters ended March 31, 2014 and 2013 was 31.9% and 35.1%, respectively.  The decline in the effective tax rate was attributable to variations in state tax rates included in the blended rate. Income tax receivable as of March 31, 2014 consists primarily of federal alternative minimum tax included in the 2012 income tax estimates which we expect to be refunded.

LIQUIDITY AND CAPITAL RESOURCES

Overview

We rely on cash flows from operations as our primary source of liquidity.  The New Credit Facility described earlier permits us to incur limited indebtedness for trade payables and capital leases in the ordinary course of business and provide an accordion feature, whereby we may borrow up to an additional $80 million of debt subject to certain terms and conditions, including compliance with a maximum leverage ratio (as defined in the 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 Amended Credit Agreement at an uncommitted floating rate of LIBOR plus 3.25%, subject to a LIBOR floor of 1.00%.  The 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.  The New Credit Facility provides an accordion feature which allows us to seek additional borrowings of up to $80 million subject to certain customary terms and conditions, including pro forma compliance with a maximum leverage ratio, as defined in the Amended Credit Agreement. Total unamortized loan fees as of March 31, 2014 totaled $8.1 million, inclusive of $1.8 million in fees and pre-payment penalties attributable to lenders that participated in both the original and refinanced debt.  We are amortizing capitalized loan fees over the life of the 2018 Notes and the Initial Term Loan. As of March 31, 2014, we had complied with all debt covenants.

As more fully described in Note 8 in the Notes to Unaudited Condensed Consolidated Financial Statements, the 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.

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

• incur additional debt;

• 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 other of equipment required to keep our facilities competitive. Our debt requires an annual principal prepayment based on excess cash flow (as defined in the Amended Credit Agreement) calculated at the end of each calendar year.  For the year ended December 31, 2013, the excess cash flow repayment was $8.0 million, reflected in current portion of long-term debt and paid in early April 2014. The most significant components of our working capital are current accounts receivable, accounts payable and other current liabilities.  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 and other general business conditions.  We believe that we will have sufficient liquidity through available cash which, as of March 31, 2014, was $150.3 million, the $35 million Revolving Credit Facility, 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 $13.6 million through March 31, 2014, compared to $17.8 million provided through March 31, 2013. The decrease in cash provided by operating activities was driven by the decrease in net income.

Cash Flows from Investing Activities

Investing activities used $3.6 million through March 31, 2014, compared to using $6.6 million through March 31, 2013.  Net cash used in investing activities is primarily comprised of capital expenditures, which were $3.6 million and $6.7 million during the quarters ended March 31, 2014 and 2013, respectively.

Cash Flows from Financing Activities

Financing activities used $0.5 million and $0.6 million, respectively, during the quarters ended March 31, 2014 and 2013, which primarily represented repayments of long-term debt.

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Off-Balance Sheet Arrangements

We currently have no material off-balance sheet arrangements.

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 31, 2014 ("2013 Form 10-K").

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 March 31, 2014 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 Senior Secured Credit Facility.  Both the Initial Term Loan and the Revolving Credit Facility bear interest at an uncommitted floating rate of LIBOR plus 3.25%, subject to a LIBOR floor of 1.00%.  At March 31, 2014, the principal amount of the related borrowings under our New Credit Facility was $190.8 million. A hypothetical 1.0% increase in LIBOR (or base rate) above the current floor would result in an approximately $1.9 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 $403.3 million as of March 31, 2014.

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.

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Changes in Internal Control over Financial Reporting

We made no change in our internal control over financial reporting during the fiscal quarter ended March 31, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Table of Contents 35 Financial Statement Index

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 2013 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. RISKFACTORS

We have not identified any material changes to the risk factors described in our 2013 Form 10-K. Risks other than those described in our 2013 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.

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.

ITEM 5. OTHER INFORMATION

None.

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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 37 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:	May 15, 2014	By:	/s/ David D. Ross
			Name: David D. Ross
			Title: Chief Executive Officer
Dated:	May 15, 2014	By:	/s/ Donna Lehmann
			Name: Donna Lehmann
			Title: Senior Vice President, Chief Financial Officer and Treasurer