Full House Resorts, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Amounts are in U.S. dollars; financial statement figures are in thousands unless otherwise stated.
Business context
Full House owns or operates five casinos across Mississippi, Colorado, Indiana and Nevada, with related hotel, dining and entertainment operations. Casino gaming is its primary revenue source. Results can fluctuate with seasonality, gaming hold, weather and customer traffic.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net revenue | $44.3M | $44.0M | $126.4M | $123.2M |
| Operating income | $3.4M | $3.7M | $6.6M | $6.3M |
| Net income (loss) | $0.9M | $1.6M | ($1.7M) | ($3.4M) |
| Adjusted EBITDA | $5.8M | $6.5M | $13.6M | $13.9M |
| Operating cash flow | — | — | $5.7M | $6.4M |
Q3 revenue rose 0.5%, but operating income declined 9.1% and net income declined 40.1%. Nine-month revenue increased 2.6%; the net loss narrowed by about half. Operating margin was approximately 7.7% for Q3 (8.5% prior year) and 5.2% year to date (5.1% prior year). Adjusted EBITDA margin was approximately 13.1% for Q3 (14.7% prior year) and 10.8% year to date (11.3% prior year). Adjusted EBITDA is a non-GAAP measure.
At September 30, cash and equivalents were $27.8M, versus $20.6M at year-end 2018; management estimated about $10M was needed for day-to-day operations. Current assets were $36.0M and current liabilities $22.7M. Senior secured notes had $108.2M principal outstanding, carried at $104.1M net of unamortized discounts and issuance costs. The notes bear interest at the greater of three-month LIBOR or 1%, plus 7%; the stated rate was 9.10%. They mature in February 2024, with a $103.5M balloon due at maturity. The company reported covenant compliance at quarter-end; the maximum total leverage ratio for the remainder of 2019 was 6.00x.
Nine-month investing cash use was $6.2M, including $5.7M for property and equipment. Financing provided $7.7M, primarily from the $10M incremental notes issuance. The company adopted ASC 842 on January 1, 2019; it recorded $18.2M of operating lease right-of-use assets and total lease liabilities of about $22.9M. Comparative lease amounts were not recast.
Material changes and operating drivers
- Silver Slipper revenue increased 8.4% year to date, supported by higher guest volumes, renovations and hotel rate growth; its year-to-date Adjusted Property EBITDA increased 14.3%.
- Rising Star revenue fell 4.9% year to date and Adjusted Property EBITDA fell 44.6%. Management cited road construction, competition, lower volumes, marketing and severance costs, and added ferry operating expense. Q3 Adjusted Property EBITDA was $0.2M.
- Bronco Billy’s revenue grew 4.3% year to date, partly due to the Christmas Casino & Inn opening in late 2018; year-to-date Adjusted Property EBITDA declined 10.2%, reflecting facility and transition costs.
- Northern Nevada revenue declined 1.4% year to date; Adjusted Property EBITDA was approximately flat.
- Interest expense was $8.1M for the nine months, up from $7.5M, primarily reflecting the incremental notes and higher LIBOR, partly offset by capitalized interest. The prior-year period included a $2.7M debt-extinguishment loss, absent in 2019.
Outlook, risks and unusual items
- Sports wagering: Agreements in Indiana and Colorado provide for $6M in one-time market-access fees and a stated minimum $7M of aggregate annual revenue share, with minimal expected ongoing costs. At the filing date, $3M of fees had been received; the remaining $3M depended on certification of Colorado’s sports-wagering vote. Operations and partner performance remain uncertain.
- Development: Phase One of the Bronco Billy’s expansion, including a parking garage and connector, was expected to finish in 2020. Phase Two, including a hotel and casino expansion, depends on acceptable financing and other conditions. Management said operating resources were expected to cover Phase One, but noted that financing may be needed for growth and/or debt refinancing.
- Liquidity and debt: Management believed resources were adequate for operating requirements over the next 12 months, but gave no assurance that operating cash flow or future borrowing would be sufficient. Substantial debt, floating-rate interest, covenant compliance and refinancing are material risks.
- Other projects: The Waukegan, Illinois proposal advanced to the Illinois Gaming Board, but remained subject to license selection. New Mexico declined to issue a sixth racing license at that time; the company renewed related land options.
- Contingencies and accounting: Management did not expect ordinary-course litigation to materially affect results. A prior material weakness in review of accounting for the 2017 Tax Act was identified and remediated; the related tax adjustment was described as immaterial to previously issued statements. The company maintained a valuation allowance against remaining deferred tax assets.
- Warrants: Approximately 1.0M warrants have redemption rights triggered by the 2018 refinancing. Holders had not exercised them as of filing, but a redemption could affect liquidity. The recorded warrant liability was $1.0M.
The filing provides no formal earnings or revenue guidance. Management’s forward-looking expectations are subject to construction, financing, regulatory, competitive, weather, labor, gaming and sports-wagering risks.
Investor verification priorities
- Track the timing, certification conditions and actual economics of sports-wagering fees and minimum revenue-share payments.
- Verify Rising Star’s recovery from traffic disruption and whether added marketing and operating costs translate into improved property EBITDA.
- Monitor Bronco Billy’s Phase One cost and completion, and the financing terms and feasibility of Phase Two.
- Review debt service, floating-rate exposure, leverage covenant headroom and refinancing needs against cash generation.
- Assess whether warrant holders exercise redemption rights and the resulting cash or other obligations.
- Reconcile lease liabilities and cash requirements under ASC 842, noting that prior-period balance-sheet comparisons are not on the same basis.