FULL HOUSE RESORTS INC files 10-K

FULL HOUSE RESORTS INC files 10-K in a filing on March 14.

half of our outstanding borrowings with a notional amount of $50 million and strike rate of 3.00%, which resets every three months at the end of March, June, September, and December. However, we do not maintain interest rate caps with respect to all of our variable rate indebtedness, and our interest rate cap may not fully mitigate our interest rate risk. In addition, on July 27, 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, announced its intention to phase out LIBOR by the end of 2021. It is unclear if LIBOR will cease to exist at that time or if new methods of calculating LIBOR will be established such that it continues to exist after 2021. If LIBOR ceases to exist, we may need to renegotiate our debt agreements. This could have an adverse effect on our financing costs.

While gaming authorities generally focus on shareholders with more than 5% and often 10% of a company’s shares, such authorities generally can require that any beneficial owner of our common stock and other securities file an application for a finding of suitability. If a gaming authority requires a record or beneficial owner of our securities to file a suitability application, the owner must apply for a finding of suitability within 30 days or at an earlier time prescribed by the gaming authority. The gaming authority has the power to investigate an owner’s suitability and the owner must pay all costs of the investigation. If the owner is found unsuitable, then the owner may be required by law to dispose of our securities. Our certificate of incorporation also provides us with the right to repurchase shares of our common stock from certain beneficial owners declared by gaming regulators to be unsuitable holders of our equity securities. The price we may pay to any such beneficial owner may be below the price such beneficial owner would otherwise accept for his or her shares of our common stock.

We own the facilities and related improvements at the Silver Slipper Casino and Hotel in Hancock County, Mississippi. The property at year-end offered 920 slot machines and 26 table games, a surface parking lot, an estimated 800-space parking garage and a 129-room hotel. The casino and hotel are located on 38 acres of leased land, including 31 acres of protected marshlands. The lease expires on April 30, 2058 and contains a purchase option that can be exercised from February 2019 through October 2027. Rent under the lease was $1.5 million in 2018 (see Note 9 to the consolidated financial statements set forth in ‘Item 8. Financial Statements and Supplementary Data’). As of 2019, we are able to exercise our buyout option for $15.5 million plus a retained interest in the property’s operations of 3% of net income (as defined in the lease), for 10 years from the purchase date. We also lease approximately 5.7 acres of land occupied by offices and warehouse space that are approximately four miles from our casino, as well as small parcels of land with a building and sign. We also manage a 37-space beachfront RV park under a management agreement, which expires on March 31, 2020, unless canceled by either party.

Bronco Billy’s Casino and Hotel is located on or near approximately 3.6 acres of owned land and 2.4 acres of leased land that we control in Cripple Creek, Colorado. The property includes 36 hotel rooms and several acres of surface parking. A portion of the casino and parking lots are subject to a long-term lease that includes renewal options in three-year increments to 2035 and a purchase option that can be exercised at any time during the lease term. The purchase price under such option remains at $7.6 million throughout the lease. Base rent paid in 2018 was $300,000, and such rent escalates through the term of the lease according to a defined schedule. During 2018, we purchased the operating historic Imperial Hotel and other nearby parcels of land. In August 2018, we commenced a lease of the freestanding Imperial Casino. As part of our planned expansion of Bronco Billy’s, we refurbished and rebranded both the Imperial Hotel and Imperial Casino together as the Christmas Casino & Inn in November 2018. In terms of gaming devices located throughout our property, the Christmas Casino accounted for 16% of our slot machines at year-end, with the remaining 84% of slot machines at Bronco Billy’s Casino. Combined, our Cripple Creek operations currently offer 885 slot machines and 10 table games as of year-end.

Revenues. As indicated in the above table, net revenues increased 1.6%, despite the $0.9 million impact of the adoption of the new revenue recognition standard in 2018. The accounting change had the greatest impact on net revenues for Grand Lodge Casino, a part of our Northern Nevada segment, as third-party payments for hotel guestrooms, food, and beverages are now classified as offsets to casino revenue; whereas in 2017, they were charged to operating expenses under legacy revenue recognition standards. Rising Star was the least affected by ASC 606 during the year, but had declines in net revenues due to significant weather issues particularly in the first quarter, which reduced gaming volumes for the local casino market in southeastern Indiana as a whole.

Income taxes. Our effective income tax rate for the years ended December 31, 2018 and 2017 was (12.2)% and 2.9%, respectively. Our tax rate differs from the statutory rate of 21.0% primarily due to the effects of changes in tax law, changes in valuation allowance, and items that are permanently treated differently for generally accepted accounting principles in the United States of America (‘GAAP’) and tax purposes. During 2018, we continued to provide a valuation allowance against our deferred tax assets, net of any available deferred tax liabilities. In future years, if it is determined that we meet the ‘more likely than not’ threshold of utilizing our deferred tax assets, we may reverse some or all of our valuation allowance against our deferred tax assets.

On December 22, 2017, the Tax Cuts and Jobs Act (the ‘Tax Act’) was enacted which, beginning in 2018, reduced the maximum corporate statutory rate from 35% to 21%. As of the date of enactment, we reduced our federal deferred tax assets and related valuation allowance for the new statutory rate, resulting in an income tax benefit of $0.9 million in 2017.

Under the new revenue recognition standard, departmental revenues and expenses varied significantly due to reclassifications between the various departments, as well as other changes discussed in Note 2. Apart from this accounting change, slot revenues, which accounted for approximately 88% of our casino revenue, increased by 6.3%. Meanwhile, table games revenue increased by 5.8%.

Apart from the accounting change, food and beverage revenues grew 7.4% during the year. Hotel occupancy was 91.7% compared to 88.3% in the prior year. In addition to the sports book operations mentioned above, 2018 also reflects a full year of new amenities at the property, including the Beach Club and the Oyster Bar, which both opened in mid-2017.

Adjusted Property EBITDA increased by 13.0% to $12.1 million in 2018, primarily from the growth in net revenue described above. Of note, Adjusted Property EBITDA in September 2017 included settlement proceeds of $675,000 related to the conclusion of litigation for construction defects at our parking garage, of which there was no comparable non-recurring credit or charge in 2018. Adjusted Property EBITDA margin was 17.5% in 2018 compared to 16.8% in 2017.

Net revenues decreased during 2018 due to adverse weather conditions, most notably during the first quarter from approximately 21 days of heavy snowfall, as well as two days when the casino was closed due to the flooding of nearby access roads. This affected guest volumes, as reflected in a 3.6% decrease of slot coin-in during the year.

Absent the accounting change, slot revenues decreased by 2.7% and table games revenues decreased by 10.3% due to lower volumes, while promotional allowances decreased by 7.9%. Non-gaming net revenues decreased by 2.0% during 2018, in part reflecting a temporary reduction in the number of available room-nights due to hotel improvements during the year. Average daily room rate remained flat.

Absent the accounting change noted above, slot revenues increased slightly by 0.3% due to higher volumes brought on by the opening of our Christmas Casino in November 2018. However, table games revenue decreased by 1.6% due to lower volumes.

Apart from the accounting change, food and beverage revenues increased by 5.7% during 2018, reflecting a full year of revenue generated from the Crippled Cow outlet, which opened in mid-2017, as well as Rudy’s Diner and an additional bar at the Christmas Casino, which opened in November 2018. Hotel revenues increased by 18.4% resulting from our acquisition of the Imperial Hotel in June 2018, which increased the total number of hotel rooms at Bronco Billy’s from 24 to 36 guestrooms. In November 2018, we rebranded the Imperial Hotel and reopened the Imperial Casino, together as the Christmas Casino & Inn.

Adjusted Property EBITDA decreased by 17.6% due to rising operational costs. These costs included higher promotional expenses related to changes in the accruals for the property’s loyalty marketing program. Operational costs were also affected by an increase in the state’s minimum wage, as well as the additional labor needed for the Christmas Casino & Inn.

Absent the accounting change, slot revenues in our Northern Nevada division increased, with both slot coin-in and win increasing and slot hold percentage remaining relatively flat. Though table games revenue decreased slightly, our overall casino revenue increased during the year by 1.6%.

Regarding non-gaming net revenues, which within the division are primarily at Stockman’s, food and beverage revenue increased by 9.7%, reflecting the completion of construction at the property and improved products.

Adjusted Property EBITDA in Northern Nevada increased by 21.0%, reflecting the completion of a significant renovation of Grand Lodge Casino in mid-2017, as well as exterior improvements, improved parking access at Stockman’s Casino, and a focus on controlling costs. Additionally, an improved ski season at Grand Lodge Casino in the fourth quarter of 2018 benefited results.

Corporate expenses increased slightly by 1.9% in 2018 due primarily to increases in legal and professional fees, and salaries and benefits.

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The Notes bear interest at the greater of the three-month LIBOR or 1.0%, plus a margin rate of 7.0%. The indenture governing the Notes provides for a 50 basis point interest premium if Mr. Lee reduces his equity interests by 50% or more while serving as our CEO. Mr. Lee has no current intention to sell any shares. During the fourth quarter, he purchased 15,000 shares on the open market. Interest on the Notes is payable quarterly in arrears, on March 31, June 30, September 30 and December 31 of each year until the Notes mature in February 2024. On each interest payment date, we are required to make principal payments of $250,000 with a balloon payment for the remaining $94 million due upon maturity.

Mandatory prepayments of the Notes will be required upon the occurrence of certain events, including sales of certain assets. We may redeem the Notes, in whole or in part, at any time at the applicable redemption price plus accrued and unpaid interest. The redemption price may be prepaid at 102% of par through February 1, 2020; 101.5% through February 1, 2021; 100.5% through February 1, 2022; and 100% thereafter.

Senior Secured Notes. On February 2, 2018, the Company sold $100 million of senior secured notes due 2024 (the ‘Notes’) to qualified institutional buyers. The Notes were issued on the same day at 98% of their face value (a 2% original issue discount). Proceeds from the Notes were used to (i) pay fees and expenses incurred in connection with the debt offering; (ii) refinance the entire amounts outstanding under the First and Second Lien Credit Facilities; (iii) provide ongoing working capital; and (iv) provide funds for capital expenditures and for general corporate purposes. As of February 2, 2018, immediately prior to the issuance of the Notes, we had approximately $41 million outstanding under the First Lien Credit Facility and $55 million outstanding under the Second Lien Credit Facility, which were extinguished at a loss of $2.7 million, reflecting the call premiums on such debt and the write-off of related unamortized debt issuance costs.

The Notes bear interest at the greater of the three-month London Interbank Offered Rate (‘LIBOR’) or 1%, plus a margin rate of 7.0%. Interest on the Notes is payable quarterly in arrears, on March 31, June 30, September 30 and December 31 of each year until the Notes mature on February 2, 2024. On each interest payment date, we are required to make principal payments of $250,000 with a balloon payment for the remaining $94 million due upon maturity.

Prior Credit Facilities. The First Lien Credit Facility was due to mature in May 2019 and included quarterly principal payments as defined and interest based on the greater of the elected LIBOR (as defined) or 1.0%, plus a margin rate of 4.25%. The Second Lien Credit Facility was due to mature in November 2019 with all principal due at maturity, included interest at 13.5% and had a prepayment premium of 2% immediately prior to the refinancing. As discussed above, both the First Lien Credit Facility and the Second Lien Credit Facility were refinanced in February 2018 in their entirety through the issuance of the Notes due 2024.

Interest Rate Cap Agreement. In April 2018, the Company purchased an Interest Rate Cap from Capital One, N.A. (‘Capital One’) for $238,000 in order to manage expected interest rate increases on the Notes. The agreement is for a notional amount of $50 million and expires on March 31, 2021. The Interest Rate Cap has a strike rate of 3.00% and resets every three months at the end of March, June, September, and December. If the three-month LIBOR exceeds the strike rate at the end of any covered period, the Company will receive cash payments from Capital One.

As part of the Second Lien Credit Facility, the Company granted the second lien lenders 1,006,568 warrants, representing 5% of the outstanding common equity of the Company at that time, as determined on a fully-diluted basis. The warrants have an exercise price of $1.67 (the average trading price of the Company’s common stock during a 60-day period bracketing the completion of the financing) and expire on May 13, 2026. The warrants also provide the warrant holders with redemption rights, pre-emptive rights under certain circumstances to maintain their 5% ownership interest in the Company, piggyback registration rights and mandatory registration rights after two years. In addition to a refinancing, the redemption rights allow the warrant holders, at their option, to require the Company to repurchase all or a portion of the warrants upon the occurrence of certain events, including: (i) a liquidity event, as defined in the warrant purchase agreement, or (ii) the Company’s insolvency. The repurchase value is the 21-day average price of the Company’s stock at the time of such liquidity event, net of the warrant exercise price. If the redemption rights are exercised, the repurchase amount is payable by the Company in cash or through the issuance of an unsecured note with a four-year term and a minimum interest rate of 13.25%, as further defined in the warrant purchase agreement, and would be guaranteed by the Company’s subsidiaries. Alternatively, the warrant-holders may choose to have the Company register and sell the shares related to the warrants through a public stock offering.

higher or lower fair value measurement. At December 31, 2018, the simulation included the following assumptions: an expected contractual term of 7.37 years, an expected stock price volatility rate of 43.26%, an expected dividend yield of 0%, and an expected risk-free interest rate of 2.64%. The Company also used the Monte Carlo simulation approach for its valuation at December 31, 2017, which included the following assumptions: an expected contractual term of 3.84 years, an expected stock price volatility rate of 47.55%, an expected dividend yield of 0%, and an expected risk-free interest rate of 2.13%. The Company recognized $1.7 million of other non-operating income in 2018 and $1.4 million of other non-operating expense during 2017, associated with changes in the fair value of the warrant liability.

The lease expires on October 1, 2027, and rent payments are as follows: (i) $48,537 per month from April 2016 through March 2017, (ii) $56,537 per month from April 2017 through March 2018; (iii) $57,537 per month from April 2018 through March 2019; and (iv) $63,537 per month from April 2019 through March 2020. Beginning April 1, 2020 through the end of the lease, the scheduled monthly payment will be $54,326. The Company was also required to make certain improvements to the Rising Star Casino Resort of at least $1 million by March 31, 2017, which the Company satisfied. The lease payments include an annual interest rate of 3.5% through September 30, 2017 and 4.5% thereafter.

The Tax Act also established new tax laws that affect 2018, including, but not limited to, (1) reduction of the U.S. federal corporate tax rate from 35% to 21%; (2) eliminated the corporate alternative minimum tax (‘AMT’); (3) limited the deductible interest expense; (4) limited the deductibility of certain executive compensation; and (5) limited the use of net operating losses (‘NOLs’) generated after December 31, 2017, to 80% of taxable income.

The Company’s utilization of net operating loss (NOL) and the general business tax credit carryforwards may be subject to an annual limitation under Sections 382 and 383 of the Internal Revenue Code of 1986 (IRC), and similar state provisions due to ownership changes that may have occurred or that could occur in the future. These ownership changes may limit the amount of NOL and tax credit carryforwards that can be utilized annually to offset future taxable income and tax, respectively. In general, an ownership change, as defined by Sections 382 and 383, results from transactions increasing ownership of certain stockholders or public groups in the stock of the corporation by more than 50 percentage points over a three-year period. While the Company has not completed an IRC Section 382/383 analysis to determine if there are any annual limitations on the utilization of NOLs and tax credit carryforwards, the Company does not believe that there have been greater than 50% ownership change in the last three years that would prohibit the Company from utilizing all of their tax attributes.

Silver Slipper Casino Land Lease through April 2058 and Options to Purchase. In 2004, our subsidiary, Silver Slipper Casino Venture, LLC, entered into a land lease with Cure Land Company, LLC for approximately 31 acres of marshlands and a seven-acre parcel on which the Silver Slipper Casino and Hotel is situated. The land lease includes base monthly payments of $77,500 plus contingent rents of 3% of gross gaming revenue (as defined) in excess of $3.65 million in any given month. We recognized $1.5 million of rent expense, including $0.6 million of contingent rents, during 2018, and $1.4 million of rent expense, including $0.5 million of contingent rents, during 2017.

The land lease also includes an exclusive option to purchase the leased land (‘Purchase Option’) after February 26, 2019 through October 1, 2027, for $15.5 million plus a retained interest in Silver Slipper Casino and Hotel’s operations of 3% of net income (as defined), for 10 years from the purchase date. In the event that Full House sells or transfers (i) substantially all of the assets of Silver Slipper Casino Venture, LLC, or (ii) its membership interests in Silver Slipper Casino Venture, LLC in its entirety, the purchase price will increase to $17.1 million plus the retained interest for 10 years mentioned above. In either case, we also have an option to purchase only a four-acre portion of the leased land for $2 million, which may be exercised at any time in conjunction with the development of a hotel and which accordingly reduces the purchase price of the remaining land by $2 million.

We sponsor a defined contribution pension plan for all eligible employees providing for voluntary contributions by eligible employees and matching contributions made by us. Matching contributions made by us were $0.3 million for each of 2018 and 2017, excluding nominal administrative expenses assumed. For 2018 and 2017, the Company’s employer contribution rate was 50% up to 4% of compensation.

Prior to the adoption of the 2015 Plan and outside of the 2006 Plan, in order to recruit our executive officers, we issued a non-qualified stock option to purchase 943,834 shares to Daniel R. Lee, our President and Chief Executive Officer, and a non-qualified stock option to purchase 300,000 shares to Lewis Fanger, our Senior Vice President, Chief Financial Officer and Treasurer. Messrs. Lee and Fanger’s stock options vested with respect to 25% of the shares on the first anniversary of their respective grant dates, and continue to vest with respect to an additional 1/48th of the shares on each monthly anniversary thereafter.