Full House Resorts, Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This annual filing reports full-year results; it does not provide a clear standalone Q4 financial summary. Full House operated five casino properties in Mississippi, Colorado, Indiana and Nevada.
Financial performance
| Metric | 2018 | 2017 |
|---|---|---|
| Net revenue | $163.9 million | $161.3 million |
| Operating income | $7.4 million | $7.1 million |
| Net loss | $4.4 million | $5.0 million |
| Adjusted EBITDA (non-GAAP) | $17.7 million | $16.5 million |
| Cash from operations | $9.8 million | $7.1 million |
| Cash used in investing | $17.4 million | $11.2 million |
- Net revenue increased 1.6%; operating income increased 5.2%. Net loss improved by $0.7 million. Basic loss per share was $0.17 versus $0.22; diluted loss per share was $0.23 versus $0.22.
- Adjusted EBITDA rose 7.2%; its margin was approximately 10.8% of net revenue, versus 10.2% in 2017. This is a non-GAAP measure and is not a substitute for GAAP earnings or cash flow.
- Cash and equivalents were $20.6 million at year-end. Management estimated approximately $10 million was needed for day-to-day operations.
- Year-end principal notes debt was $99.0 million; the balance-sheet carrying amount, net of discount and issuance costs, was $95.2 million. Capital lease obligations totaled $4.8 million. The company reported $9.4 million of cash interest paid, net of capitalized amounts.
- Operating cash flow less property and equipment purchases was approximately negative $7.2 million. The company reported no material off-balance-sheet arrangements.
Changes and segment results
- Results reflect the January 2018 adoption of ASC 606 using the modified retrospective method. Net revenue was reduced by $0.9 million versus a 2018 presentation without the new standard, while operating income was reduced by $21,000. 2017 was not restated; large shifts between casino and non-casino revenue and expense lines make those departmental comparisons less directly comparable.
- Silver Slipper revenue increased 8.3% to $69.4 million and Adjusted Property EBITDA increased 13.0% to $12.1 million. Higher gaming and non-gaming activity, marketing, new amenities and sports betting contributed; occupancy was 91.7% versus 88.3%.
- Rising Star revenue fell 3.6% to $48.0 million, primarily amid severe winter weather and access-road closures. Adjusted Property EBITDA increased 4.8% to $2.8 million on cost efficiencies.
- Bronco Billy’s revenue increased 2.7% to $26.9 million, but Adjusted Property EBITDA fell 17.6% to $3.9 million, reflecting higher operating, promotional and labor costs.
- Northern Nevada revenue declined 7.6% to $19.6 million, with ASC 606 affecting presentation; Adjusted Property EBITDA rose 21.0% to $3.4 million. Stockman’s faced reduced activity associated with construction at a nearby Navy base.
Liquidity, debt and plans
- In February 2018, the company refinanced prior credit facilities with $100 million of senior secured notes due 2024, issued at a 2% original discount. Notes bear interest at the greater of three-month LIBOR or 1%, plus 7%; quarterly principal payments are $250,000, with a $94 million balloon at maturity. Substantially all assets secure the notes.
- Management estimated 2019 cash interest expense at approximately $10 million, including interest on the capital lease. A $50 million notional interest-rate cap with a 3% strike runs through March 31, 2021, covering approximately half of outstanding borrowings.
- The company was in compliance with debt covenants at December 31, 2018. Maximum leverage limits tighten over time, reaching 4.75x for the final two quarters of 2019 and 4.00x from the third quarter of 2021 onward. Management said refinancing would likely be needed before the 2024 maturity.
- Bronco Billy’s Phase One expansion was estimated at $20 million; approximately $5 million had been invested, with the remaining $15 million expected in 2019 from cash on hand and anticipated operating cash flow. The parking garage was expected to begin construction in the first half of 2019 and finish by year-end. Phase Two, including a hotel tower and additional amenities, remained contingent on financing and other conditions; completion of the overall expansion was then expected in 2021.
- A Silver Slipper casino remodel was planned for Q2 2019 at a cost below $1 million. Management intended to exercise the Silver Slipper land purchase option, priced at $15.5 million plus a 3% net-income interest for ten years, subject to available resources and capital-market conditions.
- The March 2018 equity offering raised approximately $11.4 million net and issued 3.94 million shares. Approximately 1.0 million warrants carry redemption and registration rights; holders had not exercised those rights as of the filing, but exercise could create a cash or note obligation or share dilution.
Commentary, risks and unusual items
- Management attributed growth at Silver Slipper and Bronco Billy’s partly to new amenities and marketing, while weather weighed on Rising Star. It stated that operating cash flow and external financing were expected to fund operating needs for the next 12 months, but gave no assurance financing would be available for growth projects.
- Key risks include substantial debt and tightening covenant limits; variable-rate interest exposure; dependence on access, regional economies and gaming volumes; competition and possible gaming expansion in neighboring markets; regulatory and licensing requirements; construction cost, schedule and financing risks; and leased-property and insurance risks.
- Hyatt could exercise an option beginning January 1, 2019 to purchase Full House’s Grand Lodge Casino leasehold and operating assets under a formula based partly on earnings. The filing does not state that the option was exercised.
- The New Mexico racetrack-casino proposal faced uncertainty because of litigation involving another applicant. No license decision or project outcome was assured.
- Other notable items included a $2.7 million loss on debt extinguishment, partly offset by a $1.7 million non-cash gain from remeasurement of warrant liability. The company recorded a $0.5 million income tax expense despite a pretax loss and maintained a valuation allowance against deferred tax assets.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective. The company reported no legal proceedings expected to have a material effect.
Important facts for investors to verify
- Whether operating cash flow can cover interest, required principal, maintenance spending and planned expansion, given the negative cash flow after property and equipment purchases.
- Current covenant headroom and sensitivity to weaker EBITDA or higher LIBOR, including the effect of the scheduled tightening in leverage limits.
- Actual cost, funding, timing and returns of Bronco Billy’s Phase One and any decision to proceed with Phase Two.
- Whether warrant holders exercise redemption or registration rights, and the resulting liquidity impact or dilution.
- Whether Hyatt exercises its Grand Lodge purchase option and whether Full House exercises the Silver Slipper land option.
- How much of reported revenue and segment change reflects underlying business trends versus ASC 606 presentation changes.
- Progress and economics of the Rising Star ferry service, and status of the New Mexico license proposal and related litigation.