Full House Resorts, Inc. — Q2 2019 Form 10-Q
Business context and reporting period. The filing covers the quarter and six months ended June 30, 2019. Full House operates five casinos across Mississippi, Colorado, Indiana and Nevada, with related hotel, dining and entertainment operations. Amounts below are in millions unless otherwise stated.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net revenue | $41.7 | $41.2 | $82.2 | $79.2 |
| Operating income | $1.9 | $2.0 | $3.2 | $2.5 |
| Net loss | $(1.0) | $(0.7) | $(2.6) | $(4.9) |
| Adjusted EBITDA | $4.3 | $4.4 | $7.8 | $7.4 |
Revenue increased 1.1% in Q2 and 3.8% year to date. Operating margin was about 4.6% in Q2 versus 4.9% a year earlier, and 3.9% for the first half versus 3.2%. Adjusted EBITDA is a non-GAAP measure; its margin was about 10.2% in Q2 and 9.5% year to date.
- Q2 casino revenue declined 0.6%, while food and beverage revenue rose 0.9% and hotel revenue rose 18.2%. First-half casino revenue increased 2.1%; hotel revenue increased 18.5%.
- Silver Slipper led growth: first-half revenue rose 12.3% and Adjusted Property EBITDA rose 22.7%. Rising Star revenue fell 5.4% and EBITDA fell 20.6%; Bronco Billy’s EBITDA fell 24.0%; Northern Nevada revenue fell 2.0%.
- Q2 interest expense increased to $2.9 million from $2.5 million, primarily reflecting higher LIBOR, additional notes and debt-cost amortization. First-half net loss improved mainly because 2018 included a $2.7 million debt-extinguishment loss.
Cash, debt and liquidity
- Cash and equivalents were $23.9 million at June 30, 2019, versus $20.6 million at year-end. Current assets were $32.4 million and current liabilities $21.4 million.
- Operating cash flow was negative $1.7 million for the first half, versus positive $0.7 million in 2018, as working-capital changes more than offset improved operating income. Investing cash use was $3.1 million; financing provided $8.1 million. Cash increased $3.3 million.
- In May, the company issued $10 million of additional senior secured notes, bringing principal issued to $110 million. The notes mature in February 2024, bear interest at the greater of three-month LIBOR or 1% plus 7%, and accrued at 9.33% as of June 30. The reported debt carrying value, net of discounts and issuance costs, was approximately $104.1 million, including current debt.
- Management estimated that about $10 million of cash was needed for day-to-day operations and said it believed available resources could fund operating requirements for the next 12 months, subject to uncertainties. The company was in covenant compliance at quarter-end; the leverage-ratio limit was 6.00x for the remainder of 2019.
Changes, outlook and risks
- Silver Slipper renovations completed in May 2019 helped increase guest volumes and restaurant covers; its hotel revenue rose despite lower occupancy, as average daily room rates increased. Rising Star was affected by road construction expected to finish by year-end 2019. Northern Nevada faced lingering heavy snowpack and lower visitation.
- Bronco Billy’s Phase One includes a roughly 300-space parking garage and connector building. Construction began in Q2; completion was expected in the first half of 2020. Phase Two, including a hotel tower and casino expansion, depends on acceptable financing and other conditions; management said a 2021 hotel completion was possible if financing were arranged in time.
- Management gave no consolidated earnings or revenue guidance. It cited seasonality, gaming hold fluctuations, competition, operating costs and reliance on property cash flows as factors affecting results and liquidity.
- In August 2019, after quarter-end, the New Mexico Racing Commission said it would not issue a sixth racing license at that time. The company had renewed land purchase options through July 2020.
- The company adopted ASC 842 on January 1, 2019, recognizing $18.8 million of operating lease right-of-use assets and related obligations; prior periods were not recast, affecting comparability. Its Silver Slipper land lease runs through 2058 and has contingent rent and purchase options.
- Other risks include substantial debt and refinancing needs, covenant compliance, financing and construction risks for expansion, potentially dilutive warrants and options, and exposure to regulatory, weather and competitive changes. Warrant holders had not exercised redemption rights as of the filing; a redemption could affect liquidity. Management did not expect pending ordinary-course litigation to have a material effect.
Important facts for investors to verify
- Whether operating cash flow improves and cash remains adequate after day-to-day operating needs and planned capital spending.
- Debt-service capacity, the 6.00x leverage covenant and the ability to refinance or repay the 2024 notes, including the maturity balloon.
- Progress, cost and financing for Bronco Billy’s Phase One and any decision to proceed with Phase Two.
- Whether Silver Slipper’s gains persist and Rising Star, Bronco Billy’s and Northern Nevada recover from their reported revenue or margin pressures.
- Potential liquidity effects of warrant redemption rights and the comparability effects of lease accounting adoption.