Full House Resorts, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Full House operates five casinos across Mississippi, Colorado, Indiana, and Nevada.
Financial results
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net revenue | $41.2 million | $40.1 million | $79.2 million | $79.7 million |
| Operating income | $2.0 million | $1.3 million | $2.5 million | $3.6 million |
| Net loss | $0.7 million | $1.5 million | $4.9 million | $2.1 million |
| Adjusted EBITDA | $4.4 million | $3.7 million | $7.4 million | $8.3 million |
| Operating cash flow | — | — | $0.7 million | $2.3 million |
Q2 operating margin was approximately 4.9%, versus 3.3% a year earlier; first-half operating margin was approximately 3.2%, versus 4.5%. Adjusted EBITDA margin was approximately 10.7% in Q2 and 9.4% for the first half. First-half investing cash outflow was $7.0 million and financing cash inflow was $9.1 million. Cash increased to $22.7 million from $19.9 million at year-end 2017; management estimated about $12 million was needed for day-to-day operations.
At June 30, long-term debt carrying value was $95.4 million, including the current portion; capital lease obligations totaled about $5.1 million. The company reported $21.3 million in current assets and $21.3 million in current liabilities. A $2.1 million warrant liability was classified as current.
Changes and operating drivers
- Q2 net revenue rose 2.8%; first-half revenue fell 0.7%. Comparisons are affected by adoption of ASC 606 in 2018: prior-year figures were not restated, and promotional allowances are no longer presented separately. Management said the accounting change was not expected to materially affect operating income, net income, or cash flow on an ongoing basis.
- Q2 Adjusted EBITDA increased 19.7%, while first-half Adjusted EBITDA decreased 10.6%. Silver Slipper grew on slot marketing and new amenities; Northern Nevada benefited from completed renovations. First-half results were pressured by severe winter weather, especially at Rising Star and Grand Lodge.
- Rising Star’s first-half Adjusted Property EBITDA declined 35.1%; Bronco Billy’s declined 15.6%. Bronco Billy’s Q2 Adjusted Property EBITDA fell 15.0%, with higher operating, healthcare, benefits, and wage costs cited.
- Casino revenue was lower year over year in reported figures, while food and beverage and hotel revenue were higher; these departmental changes are substantially affected by ASC 606 presentation and should not be read as directly comparable underlying trends.
Debt, plans, risks, and outlook
- In February 2018, the company issued $100 million of senior secured notes due February 2024, primarily refinancing prior credit facilities. The notes bear interest at three-month LIBOR, subject to a 1% floor, plus 7%; quarterly principal payments are $250,000, with approximately $94 million due at maturity. The refinancing generated a $2.7 million extinguishment loss. The company reported covenant compliance at June 30, but noted future compliance is not assured.
- A $238,000 interest-rate cap covers $50 million of notional principal, at a 3% LIBOR strike, through March 2021. The company also completed a March registered direct offering, receiving approximately $11.4 million net for general corporate purposes, including Bronco Billy’s Phase One.
- Phase One of the Bronco Billy’s expansion has an estimated $14 million budget, with the Imperial Casino expected to open by year-end 2018 and the parking garage expected in the first half of 2019. Phase Two includes a planned hotel and other amenities, is contingent on financing on acceptable terms and other conditions, and was expected to open in 2020. A competitor sued the company and the city over project approvals; management did not expect the suit to delay or prevent the project.
- The company expected to invest about $5.3 million in listed projects during the remainder of 2018. Rising Star ferry service was expected to begin in Q3 2018, subject to completion of access roads and required approvals. Ferry operations bring regulatory, marine safety, weather, insurance, and liability risks.
- Management believed resources would be adequate for operating needs over the next 12 months, but cautioned that operating cash flow and access to financing are uncertain. It may need additional financing for growth and could reduce or defer capital expenditures if funding is insufficient. Other risks include seasonality, weather, competition, labor costs, covenant compliance, warrant-related dilution or cash demands, and construction execution.
Important facts for investors to verify
- Underlying property revenue and cost trends after separating ASC 606 presentation changes from operational performance.
- Cash generation, liquidity needs, debt-service capacity, and compliance with the senior-note leverage covenant as its limits tighten.
- Funding and execution of Bronco Billy’s Phase One and whether acceptable financing can be secured for Phase Two.
- Potential warrant-holder redemption or registration demands and the resulting cash, debt, or dilution impact.
- Progress on Rising Star ferry approvals and launch, and the status and potential effect of the Bronco Billy’s project lawsuit.