Gaming Investment Primer

GAMING INVESTMENT PRIMER

OVERCOMING TYPICAL BARRIERS TO ENTRY TO CASINO INVESTMENT

GaryGreenGAMIN

G©2017 GARY GREEN GAMING, INC. (WWW.GARYGREENGAMING.COM)

IN GAMING, STANDARD VALUATION FORMULAS AND FINANCIAL MODELING DO NOT SEEM TO APPLY.For an investor entering the gaming world for the first time, casino valuation metrics seem, at best, absurdly out of line with any known business reality. Any given casino purchase, with valuation determined through traditional metrics, perhaps should sell from $5-million to $900-million (depending on the property and location). However, in the topsy-turvy word of gaming, a different set of metrics might price those same properties from $30-million to $3-billion in a seemingly abandonment of logic.

Valuations and financing for a casino are typically more complex than for a traditional business or for a real estate purchase. That, plus the out-of-traditional-sync valuations, consequently make traditional financing only rarely available; many recent casino finance investments have been made by either high-risk hedge funds, high-net worth individuals, or special-case investors.

The standard business valuation metrics based on expectations of future profits and return on investment (typically 3x or 4x, maximum 6x earnings) as assessment of purchase price of a business…are very rare in the casino world. The alternative valuation from appraisal of the tangible assets and FF&E, almost never has been applied as the single determining factor for purchase of casinos; and especially not in Nevada. Equally subordinate (and seemingly absent) have been most standard acquisition methods of accounting: valuations from casino income statement; cash flow and balance statements; book value, market value, enterprise value; and all the metrics that compare value to operations in a traditional business . Even typical SDC data reports coupled to include capital structure and enterprise value (which might show a precedent transaction table of 12x to 16x EBITDA for traditional businesses) alone are inoperable in the complex valuation of casino purchases.

©2017 GARY GREEN GAMING, INC. (WWW.GARYGREENGAMING.COM)

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This does not, in anyway, preclude the absolute necessity of professional valuation, application of GAAP, and definitely the 157 Fair Value Measurement guidelines of the Financial Accounting Standards Board. However, it does require more emphasis than would normally be applied to comparable company analysis as well as precedent transactions analyses. (More on this shortly)

Because gaming is such an exceptionally high cash-flow business , the most important metrics for company valuation revolve around operational parameters, comparable analysis, and those traditional formulas weighed against the casino-seller’s perceptions and precedent transactions.

For example, traditional analysis may show gross operating costs that are substantially out of line with highly formulaic industry standards. While measure of operating costs is a standard metric in any good valuating analysis, the specific methodology for evaluating those costs is industry-centric and complex in the casino world. The single metric of specialized casino operating efficiencies, alone can (and have often) impact an earnings multiple by 50% or more … before other factors are even applied. These “special” metrics are neither mystical nor particularly complex; in fact, they are highly formulaic, but they are also highly specialized. It is navigation through that specialization that is one of the hallmarks of Gary Green Gaming.


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It, also, is this specialization of valuation formulas and financial modeling that creates the first barrier to entry in the gaming universe: Gaming metrics are often out of line with traditional modeling paradigms. This document offers navigation through that complexity plus it introduces the methodology of identification, vetting, and due diligence to identify a viable investment and operational opportunity.

Valuation models used by our company begin with two traditional methodologies and one industry-specific technique: discounted cash flows, comparison methods, and win-per-unit models. However, each of these models, with the exception of the latter, then must be adapted to the eccentricities of the gaming industry. These traditional models become extremely useful in some of our verticals, specifically slot machine placement inside casinos, greenfield casino development projects, and casino-based entertainment projects. The “win-per-unit” method is applicable to almost all gaming industry projects.

The discounted cash flow model used by our company, typically takes the value of any gaming asset as the net present value (NPV) of the sum of expected future cash flows. This is represented by a relatively standard valuation formula used by financial analysists in multiple industries:

NPV = Σnt=1 CF1 / (1+r)t

In our usage of this formula, r is the risk-adjusted required rate of return for the investor; CF1 is the projected cash flow in the time period (t ), and n is the number of future period over which the cash stream is to be received.

To illustrate this most simply, let’s assume that the expected rate of return is 9% and the expected cash flow from our share of revenue of a small foreign slot machine company is $3-million, $2-million, and $1-million for the next three years. Let’s also assume that the lease agreement for the games is for a three-year term and therefore that investment has no value after the third year . The Net Present Value of the contract would then be $5.205-million, as shown here:

3/(1.0 + 0.09) + 2/(1.0 + 0.09)2 + 1/(1.0 + 0.09)3 = 2.75 + 1.683 + .07722 = $5.205-million

MOST CASINO VALUATION METHODS HAVE PROVEN TO BE LITTLE MORE THAN FICTION . . . and therefore investor disappointment.Applying this discounted cash flow model to the unusual and complex business model of slot machine distribution, we are able to project a decision-trigger for valuation of that type of investment for our company and our investors. The only piece remain is a thorough understanding of the distribution model , which we will address elsewhere in this prospectus. Meanwhile, using the comparison models, Gary Green Gaming often evaluates a wide range of proximity and comparable property metrics including:

• Revenue figures reported to various gaming regulatory boards in jurisdictions where such reporting is public record;

• In jurisdictions where revenue numbers are proprietary, we frequently do regression-analysis of gaming taxes paid (thus determining actual revenue of specific comparable properties or at very least districts);

• In the few jurisdictions where the information is available, we review known price multiples of cash flows, estimates of earnings, owners’ equity, and revenue growth relative to those of similar properties in proximity;

• For comparison targets that are publicly-traded and use different accounting standards, one of the best methodologies is to examine the ratio of property enterprise value (EV) to EBITDA. Enterprise value , equals total common shares outstanding times share price plus debt minus cash.

This comparison model is adequate in the casino world only for determining the validity of market-pricing of a particular property; but it is completely inadequate for determining true asset valuation.

5©2017 GARY GREEN GAMING, INC. (WWW.GARYGREENGAMING.COM)

For a more accurate (and operatively useful) valuation of a casino property (hotel, resort, etc.), we rely heavily on a gaming industry standard metric to develop our own analysis; the win-per-unit model. This gambling metric, primarily for slot machines, is the net amount of money wagered minus payouts to “winning” players. For each slot machine (and for each seat at a table) we measure this as “win” for the casino . Referring to slot machines as a “unit”, we denote this metric as either wpu (for “win per unit”) or wpupd (“win per unit per day”).

We create a specialized application of that metric and combine it with a modification of the 1970’s Texas Instrument Corporation’s ZBB (zero based budgeting ). Focusing on our core business of increasing casino investment value, this proprietary and often-proven casino operational methodology gives us a well-known competitive advantage in the industry, instituting what we have defined as “operating efficiencies” in running a casino property.

That aside, the technique also gives us the best tool for quickly and accurately determining a value proposition for potential investment in a casino resort.

We begin with the dual propositions that (1) at least 80% of total property revenue (not just gaming revenue) comes from slot machines ; and (2) OPEX for the entire property (again, not just gaming) is something less than 80% of total revenue . Given that both propositions are valid, then 100% of OPEX for all of the property’s departments and business units can be expressed as a percentage of slot machine revenue; even the non-gaming departments.


This simple basis, when combined with our proprietary marketing methodology (described elsewhere in this document) and implemented in strict adherence to our model, provides an operational blueprint that structures all operating costs (non-CAPEX) at 51% (or less) of slot machine win per unit per day. Again, this margin includes OPEX for the entire property (casino, F&B, entertainment, hotel, valet, etc.) but is based solely on slot machine revenue. This has the net effect of 100% of revenues generated by operating units other than the Slot Department going directly to the bottom line; hence a “break even” in, for example, a casino showroom, is theoretically banked as pure profit.

Implementing that model, we can line-item budget the entire operation against projected slot revenue and adjust expenses accordingly. Moreover, using the on-the-fly flexibility of this management technique, the only “fixed costs” are related to the investment; debt service and an “absolute return” for equity.

In tandem, operational workload indicators and decisions can be made as a function of these formulas. This also means that since the hotel, food & beverage, entertainment, and amenities are not essential for meeting even their own OPEX, any revenue generated by those operating units can be applied directly to the “bottom line” (after associated taxes). Additionally, it allows the casino operations (the source of operating income) to liberally “comp” rooms, food & beverage, entertainment, and other property amenities without inter-departmental charge-backs impacting the balance sheet.

This copyrighted win-per-unit-to-OPEX model (featured on Gary Green’s television show and outlined in detail in several of his books) allows us to forecast accurately the return on investment weighed against the cost of the investment; hence giving us a closer true valuation of our AUM or even FPAUM projects.

Using a comparative-multiple approach synthesizing three valuation techniques (the two standard methods plus our own industry-specific wpu process) and combining them with our considerable knowledge of the industry and our network of other casino insiders, we are able to posit the most accurate and market advantageous valuations of projects.


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CASINO PURCHASE PRICES TYPICALLY ARE 8 TO 10 FIGURES.

As noted above in discussing valuations, there are a number of factors driving up typical casino property selling prices to levels generally beyond the investment capabilities of most individual or small institutional investors. Among these influences are:

• The previously discussed industry-specific valuation metrics distort expected sale prices and thus impact actual purchase prices (and thus comparables);

• The nature of the casino business is high cash-flow ; a factor that artificially inflates seller perceptions about the business itself. But cash-flow / gross revenue is not reflective of earnings;

• Precedent transactions (the premise that the value of a company can be estimated by analyzing the prices paid by purchasers of similar companies under similar circumstances) have consistently reinforced the out-of-proportion sales prices (measured against more traditional businesses or even standard hotel, food & beverage, and hospitality business metrics) .


The entry point for a casino purchase is often well into eight figures and can go as high as

ten figures; far beyond the

threshold for small to mid-range

accredited investors.

Even within the same SIC and NAICS code sectors (that equate a casino with a hotel, resort, restaurant, bar, or other hospitality investment) the generally-used casino-centric valuation factors skew typical selling prices beyond the reach of most small to mid-level investors and funds. This restricts such investment to hedge funds, very-high-net-worth institutions and individuals, and, of course, publicly traded gaming companies with market caps that keep even the few non-institutional investors in gaming as “small fish in a very large pond.”Casinos generally sell for tens of millions to hundreds of millions of dollars, typically financed through nearly- unfathomable leverage schemes. The ratio of those prices to valuation has given rise to financing structures that defy small-investor logic and have resulted in some of the most formidable casino-resort bankruptcies of the past decades . Our alternate methodology for avoiding such fiascos is so cutting-edge and in-demand that, as noted, it is the subject of Frogwater Media’s new television series “Casino Rescue” starring our co-founder Gary Green. Partially because of that methodology, we are able, through syndication and access to debt financing, to offer entry points for a smaller accredited investor. At the same time, that methodology and our diversification protects such smaller investments while at the same time allowing investors to have substantial equity in the venture and greater-than-average R.O.I.


ABSURDLY INTRUSIVE SUITABILITY INVESTIGATIONS

This is probably the most onerous barrier to entry to casino ownership. Laws and regulations in most

gaming states (and certainly in Nevada) require that any person who owns five percent (5%) or more

equity in a casino or gaming venture be subject to some of the most intense (and expensive)

investigative processes in the country; far more intrusive that most investors are willing to tolerate.

Using Nevada as an example, the voluminous forms begin with a 45-page personal history inquiry

about family history, education, marital status, civil litigation, criminal charges, residential information,

employment history, licenses of any kind, and character references. The next 20 pages cover financial

information including amount and source of investment capital, complete personal income tax

records, bankruptcy disclosures, salary information, and minute details of assets and liabilities.

Finally, there is a “personal history disclosure” that becomes part of the public record of the State.

Additionally, the investor has to release and indemnify the regulators from any liability; must sign

requests to third party banks and employers (not just recent ―but lifetime); provide certified

fingerprints and authorization of records along with an affidavit that full disclosure has been made.

Further, employment must correspond with places of residency and gaps in employment must be

explained in detail.

In Nevada, for example, the cost of the investigation typically ranges from $80,000 for a very simple

licensing to more than $1.5-million for complex investigations …per person. And this is just for an

INVESTOR in a casino.


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Birth certificate Current and previous passports Wills Trust agreements, trust tax returns Stock option agreements Detailed narrative of any questioning

by any government agency ever Copies of all litigation or arbitration

from the individual, partnerships, member/manger in LLCs, shareholder or director of any corporation; as a plaintiff, defendant, or respondent;

Written narratives describing any of the above legal actions;

Any business licenses of any type; Federal, state, local income tax returns

for at least five years, including all supporting schedules;

Current registration of all vehicles owned or leased;

Complete bank account/savings/brokerage statements including copies of all canceled checks, savings statements, deposit slips (and clear explanation of the source of each deposit), check registers;

Copies of notes and receivable agreements;

Escrow documents and real estate records (including current appraisals on all real estate);

Pension and retirement plan statements and insurance policies;

Copies of notes payable and credit line agreements for five years;

All of the above for the investor’s businesses including general ledgers, cash and disbursement journals, meeting minutes, articles of incorporation, AP and AR ledgers, payroll records, etc.

TYPICAL DOCUMENTATION REQUIRED FROM EACH INVESTOR INCLUDES:


These are just the documents required; once they are submitted, the investigation begins. At the end of the investigation, a Gaming Control Board licensing hearing is held to question the investor further. An investor’s application can be denied based on: Arrest or conviction

of a crime involving violence, gambling, of “moral turpitude”;

Unexplained patter of arrests;

Arrest (without conviction) of a gambling crime;

Association with “unsuitable persons”;

Failure to list negative information on the application;

“Poor business ethics”;

Drug use;

Tax evasions or bribes;

Failure to be truthful to investigative agents of the Board;

Unsuitable past operation of a casino;

Poor, absent, or incorrect recordkeeping;

A pattern of regulatory violations (intentional or not);

Lack of diligence in completing the application;

Failure to respond timely to agents’ inquiries.

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All of those intrusive inquires, the investigation, and the licensing, must be completed before the investor is allowed to take any ownership of five-percent (5%) or more equity in the casino.

Our business model offers the investor one of three avenues of relief to avoid the intrusive requirement:

• Individuals owning less than 5% equity in any one licensed casino simply have to register with the regulatory authority (though registration and approval must be made before obtaining ownership). The registration process, while still involving a background investigation, is minimalist compared to the full licensing requirement for investors with more than 5% equity. Hence our model focuses Shares equivalent to 4.99% or less of the equity in any one asset, but returns in excess of the what a stake would return in more traditional investments. (That is not to say we are only interested in investors at that level; but that is optimal for minimal investor licensing .)

• For individuals owning 5% or less of a publicly traded company, no registration is required in any manner. Depending on a vote of investors and shareholders, our company could purchase the entirety of an over-the-counter publicly traded company and convert it to our entity for a particular investment project. Using that “reverse-shell” technique, no regulatory licensing would be required for the investment.

©2017 GARY GREEN GAMING, INC. (WWW.GARYGREENGAMING.COM) 12

OPERATING A SUCCESSFUL CASINO IS OVERLY-COMPLEX

This document has an entire (quite lengthy) section detailing our business and marketing plans. However, for our purposes here ─exploring barriers to entry and how to overcome them― a brief overview of operational strategies is germane. It is our contention that a failure to provide this basic clarification for investors has contributed to massive investor disappointment in some other firms’ projects.

It has been said that gaming is a relatively small and misunderstood industry. That makes it potentially lucrative for investors armed with knowledge and a frightful minefield for those who try to understand it through application of textbook methodologies of generic industries.

Unlike opening a dry cleaner, pretzel stand, or bookstore, the casino world is a complete enigma in the world of traditional entrepreneurs. There are few other non-merchandise industries where daily cash-flow at one mid-sized location is typically in excess of $5-million dollars . Moreover, we have already seen that the metrics for measuring the business are nothing like commercial real estate, manufacturing, the service industry, or even the hotel/hospitality industry.

Time and again headlines have shown us that mispriced, highly-regulated, complex entry-barrier, casinos companies cannot be operated successfully within entertainment, hospitality, real estate, retail, and other non-casino parameters. Wall Street learned this the hard way.


The eccentricities of casino operations management seem to be a complete enigma to traditional

business metrics.

CASINO PURCHASE PRICES TYPICALLY ARE 8 TO 10 FIGURES.

At one-time wisdom for a non-insider investor in the casino industry was to enter into a management contract with a large casino operating company to “assure” financial success of the business. For the most part, those operating companies were managed by extremely capable Wharton, Harvard, or other business school graduates with strong Wall Street credentials. However, recent headlines have confirmed that traditional business acumen may actually be a detriment in day-to-day eccentricities of casino operations. The news stories go on and on to combine with some seemingly very perplexing example questions about casino operations:

• For example, Las Vegas’ Monte Carlo casino’s one-year EBITDA was $57.4-million and the casino literally next door, New York-New York, earned $87.2-million while the City Center on the other side next door lost $56-million. This is even more alarming when we note that all three properties have the same games and same number of games...and same corporate management.

• In Atlantic City one month, the Borgata casino’s gaming revenue was $55.5-million and 2½-miles away (before it closed) the Trump Plaza’s revenue was only $10.7-million for the same month…again with a similar number of games and the Plaza actually having a higher head-count of customers.


*actual headlines 2016,

2015, 2014, and 2013

• In another representative month, the Isle of Capri in Pompano Florida made $10.3-million and Gulfstream casino, 21 miles away, only made $4.5-million (again with the same number of games and same payouts).

• And equally perplexing, the Las Vegas Rio Casino in a recent fiscal year had EBITDA of more than $80-million but still lost money.

These headlines and examples are just symptomatic (albeit very real) representations of the complexities of casino operational management baffling some of the sharpest business operators and Wall Street managers.

Several years ago, while performing due diligence on a mid-size Atlantic City casino, an analyst from Wells Fargo Bank accompanied us on a tour of the target casino’s gaming floor. After observing the slot machines, he concluded that the “business could be saved” simply by increasing the denomination of minimum bets on the machines and “requiring” players to bet more while replacing cashiers with automated cash-out machines for slot winnings. In short, his operational solution was a text book necessity to raise the price point and decrease labor costs. He confessed that he had never been in a casino before this analysis (except to attend a bachelor party in Vegas the year before); yet he was ready to apply the same expertise that gave the world the headlines above and lead to the 2014 crash of Atlantic City.


Without a basic understanding of some seemingly intangible metrics, any promising casino enterprise cannot expect to maintain long term revenue or support essential innovation and growth. Actually, the metrics are not complicated; they are simply different from conventional businesses… as we have discussed already.

Properly run (with our previously outlined methodology) a casino should expect a minimum 25% of its revenue to be left for earnings. We can call that a thumbnail measure and note that it cost about 75% of revenue to operate a casino. That number will vary wildly, based on dozens of variables, and in some cases can be reduced to 50% or less; however, it is a good concise representation and summary number .

This seemingly vast generalization is accurate enough to be useful as a thumbnail-sketch measure for owners, developers, operators, and analysts seeking a starting point in understanding casino financials. It, of course, is not the single nor even universal metric; but it is an excellent starting point.

A property not operating at least at that ratio needs to make some major adjustments …as the headlines have proven. It is realistic to expect that metric as the axiomatic bottom line. The actual metrics that explain most of those headlines and questions are woven into ownership decisions about what to do with that 25% (or more); that was certainly the case of the investor disasters of both the Caesar’s bankruptcy and the Atlantic City Revel disaster.

Again, for the purpose of discussing barriers to entry, it is sufficient to note that the performance track record of non-gaming management within the casino industry has proven to be at least one barrier to entry.

The most successful casinos have been operated by executives grown from within the industry rather than simply diversifying a retail portfolio; but in recent years the overall financial trend has been for casinos to be headed by non-gaming funds and their operatives.


For illustrative purposes only, the table below shows a very small sampling of just Las Vegas casinos, recently successful and recently failed. It is notable that a significant number of the failed casinos are fund-driven and the successful ones are operated with casino business philosophy more in line with the methodologies.


CASINO OWNERSHIP STATUS CASINO OWNERSHIP STATUS

Riviera Hedge Fund IMPLODED Planet HollywoodHedge Fund

BANKRUPTCY

Wynn Casino Group SOLVENT Caesars PalaceHedge Fund

BANKRUPTCY

Venetian Casino Group SOLVENT Bally’sHedge Fund

BANKRUPTCY

SLS Real Estate Fund LICENSE DENIED Harrah’sHedge Fund

BANKRUPTCY

LV Hilton REIT Fund BANKRUPTCY CosmopolitanHedge Fund

BANKRUPTCY

Flamingo Hedge Fund BANKRUPTCY RioHedge Fund

BANKRUPTCY

Tropicana New owners revived from 2 failures BANKRUPTCY Boulder StationHedge Fund

BANKRUPTCY

Red RockHedge Fund

BANKRUPTCY Green Valley RanchHedge Fund

BANKRUPTCY

FiestaHedge Fund

BANKRUPTCY Sunset StationHedge Fund

BANKRUPTCY

Wild-wild WestHedge Fund

BANKRUPTCY Santa Fe StationHedge Fund

BANKRUPTCY

While this short list is only illustrative , it certainly offers noteworthy correlations that have to be aa reflection of the top management / investment philosophies that spurred the investment in the first place. Rather than a condemnation of those funding philosophies, we have elected to pull from them a “best of breed” style synthesis between the funding methodology and the operational management; adopting those things that worked exceptionally well and avoiding those things that were disastrous.

Clearly at least one impetus driving those investments is the uncommon return on successful casino enterprises. Industry observers know well that a $10.4-million investment in Las Vegas’ MGM Resorts over a ten-year period saw fluxuations as wide as $563-million ; or more concretely, a $45,000 investment for three percent equity in Las Vegas’ Frontier Hotel and Casino turned into Steve Wynn’s $3.8-billion empire; more germane to our company history, co-founder Buddy Levy’s initial brokering of an approximate $6-million initial investment into the Seminole Tribe becoming the only company in the history of gaming to maintain an investment grade rating from the S&P, Moody’s and Fitch Ratings all at once.

In general, this document addresses barriers to entry, investment pitfalls, and a solid pathway to success by offering the proven track record and detailed methodologies for avoiding the specific pitfalls and failings typical for first-time investment in the casino industry.

We are confident that we have successfully created a pathway to not only successful over-performing investment


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For more information:www.GaryGreenGaming.comE-mail: Buddy J. Levy, [email protected]

http://www.garygreengaming.com/

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Gaming Investment Primer