Full House Resorts, Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. This filing reports full-year results, not standalone fourth-quarter results. The company owns or operates five casino properties in Mississippi, Colorado, Indiana and Nevada. Financial statements were audited; the auditor did not audit or express an opinion on internal control over financial reporting.
Financial performance
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Net revenue | $146.0 million | $124.4 million | +17.3% |
| Operating income | $6.2 million | $5.0 million | +22.7% |
| Operating margin | 4.2% | 4.1% | Improved slightly |
| Net loss | $5.1 million | $1.3 million | Loss widened |
| Loss per share | $0.26 | $0.07 | — |
| Adjusted EBITDA | $16.2 million | $14.0 million | +15.9% |
| Cash from operating activities | $7.9 million | $7.5 million | +5.5% |
Casino revenue was $131.6 million; non-casino revenue was $14.4 million. Promotional allowances were $27.4 million, deducted from gross revenue to calculate net revenue. Interest expense rose to $9.5 million from $6.7 million, while debt-modification costs of $0.6 million and a $0.5 million warrant fair-value expense also weighed on results. The company recorded a $0.6 million income tax provision despite a pretax loss, primarily reflecting its deferred-tax valuation allowance.
Liquidity, debt and investment
- At year-end, cash and equivalents were $27.0 million, current assets $33.1 million and current liabilities $18.9 million. The $2 million revolving facility was undrawn and available, subject to covenants. Management estimated approximately $12 million was needed for day-to-day operations.
- Gross funded debt was $98.3 million: $43.3 million first-lien debt and $55.0 million second-lien debt. The second-lien rate was 13.5% at year-end, with a stated range of 12.5%–13.5%; first-lien debt carries a variable LIBOR-based rate. A further $5.7 million capital-lease obligation related to the Rising Star hotel was reported separately.
- The first-lien facility matures in May 2019; the second-lien facility currently matures in November 2019. Scheduled principal maturities total $1.7 million in 2017, $2.8 million in 2018 and $93.8 million in 2019. Management estimated about $10 million of cash interest payments over the next 12 months.
- Operating cash flow was $7.9 million; investing activities used $28.5 million, primarily for the Bronco Billy’s acquisition; financing activities provided $33.1 million. Year-end cash increased by $12.5 million.
- The company acquired Bronco Billy’s for approximately $31.1 million in May 2016. It also raised $5.0 million gross, or $4.64 million net, through a rights offering, issuing 3.85 million shares at $1.30 per share.
Comparative performance and operating developments
- Revenue growth included Bronco Billy’s, which contributed $16.2 million in revenue and $3.4 million in Adjusted Property EBITDA from acquisition through year-end. Excluding Bronco Billy’s, consolidated revenue increased 4.3%.
- Silver Slipper revenue rose 4.0%; Adjusted Property EBITDA increased 0.7%, and its margin declined to 16.9% from 17.5%, partly reflecting a full year of hotel costs and higher property taxes.
- Rising Star revenue rose 4.0%, but Adjusted Property EBITDA fell 26.8% to $2.9 million. The 2015 comparison included a $1.4 million property-tax refund; higher 2016 marketing costs also affected results.
- Northern Nevada revenue rose 5.8% and Adjusted Property EBITDA increased 1.7%. Improved Lake Tahoe ski conditions helped Grand Lodge; Stockman’s benefited from improvements and marketing. Segment margin decreased to 18.6% from 19.3%.
- Operating expenses increased 17.1%, broadly in line with revenue growth and primarily reflecting Bronco Billy’s and higher casino and selling, general and administrative costs. Adjusted EBITDA is a non-GAAP measure and excludes items including interest, taxes, depreciation and certain other expenses.
Outlook, risks and unusual items
- Management said available cash, expected operating cash flow and the revolving facility should fund ongoing requirements for the next 12 months, while noting that refinancing or additional financing may be needed for growth. No specific revenue or earnings guidance was provided.
- Planned projects included approximately $6 million of Rising Star improvements, including a ferry service subject to approvals; about $1.5 million of company-funded Grand Lodge refurbishment alongside Hyatt’s $3.5 million contribution; Stockman’s improvements; and approximately $0.8 million of Silver Slipper amenities. Funding and completion are not assured.
- Debt is substantial, secured by substantially all company assets and subject to restrictive financial covenants. The company reported covenant compliance at December 31, 2016, but warned future compliance and refinancing are uncertain. Warrant holders may have redemption rights that could require cash repurchase or issuance of a high-interest unsecured note; the warrants also create dilution risk.
- Other material risks include gaming competition and regulation, regional concentration, weather and limited property access routes, leased-property and lessor rights, construction and financing risks, and potential increases in taxes, labor, insurance and operating costs.
- The Silver Slipper parking-garage contractor dispute was remanded for trial after an appellate reversal; trial was expected in the third or fourth quarter of 2017, and the company separately sued the contractor’s insurer in March 2017. Management did not expect other ordinary-course proceedings to materially affect results.
- Full House was exploring proposed Indiana legislation to relocate some Rising Star gaming capacity to Terre Haute; approval and development were uncertain. The earlier American Place proposal was discontinued after the airport authority canceled its RFP.
Key facts for investors to verify
- Whether the company can refinance or repay the large 2019 debt maturities, service high interest costs and remain within tightening covenant limits.
- Whether operating cash flow and liquidity can support planned capital projects while preserving adequate cash for operations.
- Bronco Billy’s post-acquisition performance and the sustainability of revenue and Adjusted EBITDA gains at existing properties.
- Progress, total cost, financing and required approvals for Rising Star, Grand Lodge, Stockman’s and Silver Slipper projects, including the proposed ferry.
- Potential warrant redemption, dilution and related-party terms associated with CEO Daniel Lee’s rights-offering standby purchase and the lender warrants.
- Outcome and potential recovery from the Silver Slipper garage litigation, and whether any subsequent developments create material exposure.