Full House Resorts, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Full House owns or operates five casino properties across Mississippi, Colorado, Indiana and Nevada. Unless otherwise noted, amounts are in millions of dollars.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Net revenue | $30.9 | $40.5; down 23.8% |
| Operating income (loss) | $(3.4); operating margin (11.1%) | $1.3; margin 3.1% |
| Net income (loss) | $(4.4); diluted loss per share $(0.22) | $(1.6); diluted loss per share $(0.06) |
| Adjusted EBITDA (non-GAAP) | $(1.2) | $3.6 |
| Operating cash flow | $(4.2) | $(0.7) |
| Capital expenditures | $1.0 | $1.3 |
| Cash and equivalents at period-end | $24.3 | $28.9 at Dec. 31, 2019 |
| Senior secured notes | $107.7 principal; $104.0 carrying value, including current portion | $107.9 principal at Dec. 31, 2019 |
Casino revenue fell 26.7%; food and beverage revenue fell 19.3%; hotel revenue fell 27.3%. Other operations revenue rose 38.3%, including $0.4 million from sports wagering. Interest expense, net, was $2.5 million. A noncash $1.7 million warrant fair-value gain partly offset expenses; without it, the reported loss would have been higher. The effective tax rate was (2.2%), and the company reported a $0.1 million tax provision.
At March 31, total assets were $202.9 million and stockholders’ equity was $51.8 million. Cash used in financing activities was $0.4 million, primarily for debt and finance-lease repayments. Management estimated cash burn during property closures at approximately $3 million per month, including interest and principal payments.
Material changes and operating results
- Government orders closed all casino properties in mid-March because of COVID-19. Management said operations had performed largely as expected in January, February and early March; closures reduced the quarter to roughly two-thirds of normal operating activity.
- All four reporting segments had lower revenue. Adjusted Property EBITDA was $1.8 million at Silver Slipper, $(1.1) million at Rising Star, $(0.5) million at Bronco Billy’s and $(0.4) million in Northern Nevada, versus $3.8 million, $0.4 million, $0.6 million and $(0.01) million, respectively, in Q1 2019.
- Rising Star also faced increased competition, including a nearby casino opening and live table games at Indiana racetrack casinos. Northern Nevada results are seasonal; management noted winter weather and summer tourism affect performance.
- The company suspended construction of Bronco Billy’s Phase One parking garage in March. It estimated approximately $16 million remained to complete the project; Phase Two is contingent on financing and completion of Phase One.
Outlook, liquidity, risks and unusual items
- Going concern: Management concluded substantial doubt exists about the company’s ability to continue as a going concern within the required look-forward period, principally because closure duration, reopening demand and other COVID-19 effects were uncertain and outside its control. The financial statements contain no adjustments for the outcome of this uncertainty.
- Liquidity and cost actions: Management believed cash could sustain closures beyond then-mandated periods, but cautioned that prolonged closures or weak post-reopening business could require additional liquidity that might not be available. Staffing was reduced from approximately 1,600 to about 30, plus limited security and surveillance personnel; management salaries were partly deferred. The company also paused construction and curtailed significant capital spending.
- Debt and covenants: The $110 million notes bear interest at the greater of three-month LIBOR or 1%, plus 7%, and mature February 2024. The April 28 amendment removed the March 31, 2020 leverage-covenant test; maximum leverage ratios remained 5.75x through September 2020 and 5.50x through December 2020. The company paid a $376,775 amendment fee and said future covenant relief was under discussion, with no assurance of success. Notes are secured by substantially all company assets.
- Reopening expectations: At filing, management expected Silver Slipper to reopen by May 22, Northern Nevada properties in late May, Bronco Billy’s in early June and Rising Star on June 14, 2020. Dates were subject to change; limited amenities and gaming restrictions, added operating costs and uncertain customer demand were anticipated.
- Sports wagering: Colorado online/mobile wagering went live May 1, 2020, while Indiana had one operating website and two providers awaiting licensure. Management expected all six contracted websites to launch by the end of Q3 2020. Contracts were expected to generate a combined minimum $7 million annually after launch, with minimal related costs; timing and delivery were uncertain.
- Subsequent CARES Act loans: On May 8, subsidiaries received $5.6 million in unsecured loans at 1% interest, with a two-year term and six-month payment deferral. Proceeds were intended principally to rehire employees. Forgiveness was possible but not assured; eligibility, government review and repayment risks were disclosed.
- Lease concessions included $155,000 of Silver Slipper rent forgiveness for April and May, plus payment deferrals at Bronco Billy’s and Rising Star. The company said it had no material off-balance-sheet arrangements. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Important facts for investors to verify
- Actual reopening dates, operating restrictions, customer demand and cash burn after reopening; compare these with the estimated $3 million monthly closure burn.
- Available cash after operating needs and whether the company can maintain liquidity or obtain additional financing if closures or a slow recovery persist.
- Compliance with future debt covenants, progress on lender amendments, and the ability to refinance the notes due in 2024.
- Whether the $5.6 million CARES Act loans qualify for forgiveness, and any amounts ultimately repayable or subject to regulatory action.
- Launch timing and realized economics of sports wagering agreements relative to the stated $7 million annual minimum expectation.
- Resumption, financing and remaining cost of the Bronco Billy’s garage project, and any impairment or other accounting impacts from prolonged disruption.