Full House Resorts, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Full House operated five casino properties across Mississippi, Colorado, Indiana and Nevada. Bronco Billy’s was acquired in May 2016, so 2017 includes a full first half while the 2016 comparison includes only the period after its acquisition.
Financial results
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Net revenue | $40.1 million, up 16.1% year over year | $79.7 million, up 19.8% |
| Operating income | $1.3 million, versus $0.9 million | $3.6 million, versus $2.4 million |
| Net loss | $1.5 million, versus $2.4 million; loss per share $0.07 versus $0.12 | $2.1 million, versus $2.7 million; loss per share $0.09 versus $0.14 |
| Adjusted EBITDA (non-GAAP) | $3.7 million, versus $3.4 million | $8.3 million, versus $7.0 million |
| Cash from operations | $2.3 million for the first half, versus $1.9 million |
Second-quarter operating margin was approximately 3.3%, compared with 2.5% a year earlier; first-half operating margin was approximately 4.5%, compared with 3.6%. Net loss margins were approximately 3.8% and 2.7% of revenue for the quarter and first half, respectively, improving from approximately 6.9% and 4.1%.
At June 30, cash and equivalents were $22.0 million; current assets were $29.3 million and current liabilities $18.8 million. The $2 million revolving facility was undrawn and available, subject to covenants. Debt principal totaled $97.8 million ($42.8 million first lien and $55 million second lien); debt net of discounts and issuance costs was $95.8 million. Capital-lease obligations totaled $5.5 million. First-half capital expenditures were $6.3 million, and cash declined $5.0 million to $22.0 million.
Material changes and operating trends
- Revenue growth reflected Bronco Billy’s ownership for the full 2017 comparison period. Excluding Bronco Billy’s, revenue rose 6.8% in Q2 and 6.2% in the first half.
- Silver Slipper revenue increased 13.4% in Q2 and 12.8% in the first half, supported by marketing, customer activity and food-and-beverage promotions. Rising Star revenue rose 4.5% and 2.1%, respectively.
- Northern Nevada revenue declined 7.7% in Q2 and 3.8% in the first half. Grand Lodge renovations restricted casino capacity and disrupted activity; the renovation was completed June 30. Q2 segment Adjusted Property EBITDA was negative $53,000, versus positive $624,000 a year earlier.
- Interest expense increased to $2.7 million in Q2 and $5.4 million in the first half, mainly reflecting debt used to acquire Bronco Billy’s. The 2016 comparison also included $0.6 million of debt-modification costs.
- First-half operating cash flow exceeded the prior-year period, but investing outflows of $6.3 million and financing outflows of $1.1 million drove the cash decline.
Outlook, risks and unusual items
- Management provided no specific earnings or revenue guidance. It said available cash, operating cash flow and credit were expected to support operating needs over the next 12 months, while noting refinancing or additional financing may be needed to fund growth and compete effectively.
- The company expected approximately $1.5 million of additional investment during the remainder of 2017 for disclosed projects. Rising Star improvements included hotel-room renovations, an RV park and a proposed ferry service; the ferry remained subject to additional approvals. Grand Lodge’s renovation was completed, and further property projects were described as planned or underway.
- First- and second-lien facilities mature in May 2019 and November 2019, respectively. The second-lien loan bears interest currently at 13.5%; first-lien pricing increased in May 2017. The facilities are secured by substantially all company assets and impose leverage and fixed-charge covenants. The company reported covenant compliance at June 30, 2017, but cautioned future compliance is not assured.
- Management identified seasonality, gaming hold variability, competition, weather, regulatory approvals, capital access and refinancing as risks. Northern Nevada was affected by unusually heavy snowfall, road closures and power outages in Q1, in addition to renovation disruption.
- Litigation over defects in the Silver Slipper parking garage was remanded for trial, scheduled to begin in September 2017; the company also sued the contractor’s insurer. Management did not expect other ordinary-course proceedings to materially affect results.
- Second-lien lender warrants carry redemption rights that could require cash payment or issuance of a high-interest unsecured note upon specified events. The warrant liability was $1.1 million at quarter-end. The company also reported stock-option grants and an increase in shares available under its equity incentive plan.
Important facts for investors to verify
- Whether revenue and property-level earnings gains continue after separating acquisition-related growth from same-property trends.
- Post-renovation performance at Grand Lodge and whether Northern Nevada recovers from its Q2 decline.
- Cash generation, planned capital spending, covenant headroom and the company’s refinancing plan ahead of 2019 maturities.
- The cost and status of Rising Star projects, required permits for the ferry, and the performance of completed investments.
- Developments in the Silver Slipper litigation and any potential warrant-redemption exposure.