Full House Resorts, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. The company owns or operates five casino properties across Mississippi, Indiana, Colorado and Nevada. Results include Bronco Billy’s from its May 13, 2016 acquisition.
Financial performance and liquidity
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net revenue | $41.8 million | $34.3 million | $108.6 million | $94.1 million |
| Operating income | $2.9 million | $3.3 million | $5.3 million | $4.3 million |
| Net income (loss) | $0.1 million | $2.0 million | $(2.6) million | $(0.1) million |
| Adjusted EBITDA* | $5.6 million | $6.3 million | $12.6 million | $11.3 million |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $6.3 million | $5.6 million |
- Q3 net revenue rose 21.9%, principally from Bronco Billy’s; excluding that acquisition, revenue was flat. Nine-month revenue rose 15.4%; excluding Bronco Billy’s, it increased 3.6%.
- Q3 operating income fell 11.0% as operating expenses increased 25.3%; higher interest and other expense contributed to the decline in net income. Nine-month operating income increased 23.2%, but higher interest and refinancing costs contributed to a larger net loss.
- Q3 Adjusted EBITDA margin was approximately 13.5%, compared with 18.2% a year earlier; nine-month margin was approximately 11.6%, compared with 12.0%. Adjusted EBITDA is a non-GAAP measure and is not a substitute for operating cash flow or net income.
- At September 30, cash and equivalents were $23.1 million; working capital was approximately $11.4 million. The $2 million revolving facility was undrawn and available, subject to covenants. Management estimated approximately $13 million was needed for day-to-day operations.
- Gross debt was $98.9 million: $43.9 million first-lien and $55 million second-lien principal. The second-lien loan carries interest of 12.5%–13.5%; the first-lien rate is based on LIBOR (minimum 1.0%) plus a 3.75% margin, scheduled to increase by 50 basis points in May 2017. Debt is secured by substantially all company assets.
- Nine-month investing cash use was $26.7 million, primarily for the Bronco Billy’s acquisition; financing provided $28.9 million, principally from the additional second-lien borrowing. Cash increased $8.5 million over the period.
Material changes and operating developments
- Bronco Billy’s was acquired for estimated consideration of $31.1 million, financed primarily with a $35 million increase in the second-lien facility. Since acquisition, it contributed $11.1 million in revenue and $1.9 million in net income through September 30. Purchase-price allocations remain preliminary.
- Performance varied by property. Q3 revenue was broadly flat at Silver Slipper and Rising Star and declined 2.3% in Northern Nevada. Adjusted Property EBITDA fell at all three legacy segments: 4.5% at Silver Slipper, 69.4% at Rising Star and 16.3% in Northern Nevada. Rising Star’s comparison was affected by a $1.4 million prior-year property-tax refund and unusually low table-game hold in Q3 2016.
- On November 10, 2016, after quarter-end, the company completed a rights offering: 3,846,154 shares at $1.30 per share generated $5 million gross proceeds, or an estimated $4.7 million net. CEO Daniel R. Lee purchased 1 million shares as standby purchaser.
- At September 30, total assets were $174.3 million and stockholders’ equity was $54.2 million, compared with $141.5 million and $56.5 million, respectively, at year-end 2015. Long-term debt, net of current portion and issuance costs, was $94.6 million; capital lease obligations totaled $5.8 million.
Outlook, risks and contingencies
- The filing provides no specific earnings or revenue guidance. Management said it expects to fund debt service and planned capital needs through operating cash flow, available cash, the rights offering, revolving-credit availability and eventual refinancing, but cautioned that funding and refinancing are not assured.
- Planned projects include approximately $6 million of Rising Star improvements, approximately $1.5 million of company-funded Grand Lodge renovations, a $1.5 million Stockman’s project and approximately $0.5 million of Silver Slipper improvements. Rising Star’s proposed ferry service still requires additional approvals, including from the Army Corps of Engineers and U.S. Coast Guard.
- The company was in compliance with debt covenants at September 30, 2016, but warned future compliance is uncertain. First-lien debt matures May 2019; second-lien debt currently matures November 2019, with $55 million principal due at maturity. A covenant breach could accelerate debt or restrict access to credit.
- Second-lien lenders received warrants representing 5% of fully diluted common equity, with a $1.67 exercise price and redemption rights under specified events. A redemption could require cash payment or issuance of an unsecured note carrying at least 13.25% interest, creating potential liquidity and dilution risks.
- Key risks include high debt and interest expense, refinancing access, regional competition and economic conditions, weather and access disruptions, gaming regulation and taxes, leased-property exposure, and execution and funding of planned projects. The filing notes seasonality and fluctuations in gaming hold.
- The company is pursuing an appeal in litigation concerning Silver Slipper parking-garage repair costs; it had settled with the architect and was awaiting an appellate opinion in its case against the contractor. Management said other ordinary-course legal matters were not expected to have a material effect.
Important facts for investors to verify
- Debt covenant headroom, interest-rate exposure and the ability to refinance the 2019 maturities.
- Use of rights-offering proceeds, project costs and approvals, and whether planned investments generate expected returns.
- Bronco Billy’s results after acquisition and the final purchase-price allocation.
- Whether Rising Star’s operating performance improves, separating recurring trends from prior-year tax refunds and gaming-hold volatility.
- Potential warrant redemption obligations and dilution, as well as the terms and risks of the company’s leased-property arrangements.
*Adjusted EBITDA is a company-defined non-GAAP measure.