Full House Resorts, Inc. — Q3 2017 Form 10-Q
Business and period: The company owns or operates five casinos across Mississippi, Colorado, Indiana and Nevada. This unaudited filing covers the three and nine months ended September 30, 2017; comparisons are with the corresponding 2016 periods. Amounts below are in millions unless otherwise noted.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net revenue | $43.7 | $41.3 | $123.5 | $107.8 |
| Operating income | $4.0 | $2.9 | $7.6 | $5.3 |
| Net income (loss) | $0.8 | $0.1 | $(1.3) | $(2.6) |
| Adjusted EBITDA (non-GAAP) | $6.4 | $5.6 | $14.6 | $12.6 |
| Operating cash flow | Not separately stated | Not separately stated | $6.8 | $6.3 |
Q3 operating margin was approximately 9.1% of net revenue, versus 7.0% a year earlier; nine-month operating margin was approximately 6.1%, versus 4.9%. Q3 net margin was approximately 1.8%, compared with 0.3%; the nine-month period remained loss-making. Adjusted EBITDA is a company-defined non-GAAP measure and is not a substitute for GAAP earnings or cash flow.
- Q3 net revenue increased 6.0%; nine-month revenue increased 14.5%. The nine-month comparison includes Bronco Billy’s for the full 2017 period but only from its May 2016 acquisition date in the prior-year period. Excluding Bronco Billy’s, management said nine-month revenue rose 6.1%.
- Q3 operating income rose 37.5%, while net income increased to $0.8 million. For the nine months, the net loss narrowed by $1.3 million year over year.
- Interest expense was $2.7 million for Q3 and $8.1 million year to date; nine-month interest expense increased from $6.7 million, primarily reflecting debt used to acquire Bronco Billy’s in 2016.
- Q3 results included a $0.3 million non-operating warrant fair-value expense. The $0.675 million Silver Slipper parking-garage settlement was recorded as a reduction to SG&A.
Balance sheet, liquidity and debt
At September 30, 2017, cash and equivalents were $22.4 million, down from $27.0 million at year-end 2016. Current assets were $29.7 million and current liabilities $19.9 million. The $2 million revolving facility was undrawn and available, subject to covenants; management estimated about $12 million was needed for day-to-day operations.
Debt principal outstanding was $96.6 million: $41.6 million under the first-lien term loan and $55 million under the second-lien loan. The balance sheet reported $94.9 million of debt net of discounts and issuance costs, including current maturities; capital lease obligations totaled approximately $5.4 million. The first-lien facility carried a variable rate based on LIBOR (minimum 1%) plus a 4.25% margin; the second-lien rate was 13.5% at period-end. The facilities mature in May and November 2019, respectively. Both are secured by substantially all company assets.
Nine-month investing cash use was $9.1 million, including $9.0 million for property and equipment; financing cash use was $2.3 million, principally debt and lease repayments. Cash declined by $4.6 million over the period. The company reported compliance with its debt covenants at September 30, 2017 and said it believed resources would cover operating needs for the next 12 months, while noting refinancing or additional financing might be needed.
Operations, outlook and risks
- Silver Slipper led growth: Q3 net revenue rose 9.6% and property Adjusted EBITDA rose 32.6%; the company cited marketing, promotions and a new restaurant. The Q3 EBITDA margin increased to 18.6% from 15.4%.
- Rising Star Q3 revenue rose 1.2%, but property Adjusted EBITDA fell 3.1%. Its 56-space RV park opened during the quarter.
- Bronco Billy’s Q3 revenue increased 5.8% and property Adjusted EBITDA increased 9.9%. Northern Nevada Q3 revenue rose 7.1%; year-to-date property Adjusted EBITDA fell 26.6%, reflecting Grand Lodge renovation disruption and higher costs.
- Grand Lodge’s approximately $5 million renovation was completed in June 2017. The company also opened Silver Slipper’s pool and beach complex and oyster bar. It expected approximately $0.8 million of investment for the listed projects during the remainder of 2017; no earnings or revenue guidance was provided.
- Planned Rising Star work includes hotel-room renovations and a proposed ferry service, which remains subject to additional approvals. The company also described possible hotel development and reopening a closed casino at Bronco Billy’s, without assurance those projects will proceed or succeed.
- Management cited seasonality, gaming hold variability, severe weather, competition, operating and construction risks, debt and refinancing needs, covenant compliance, access to capital, and regulatory approvals. Hurricanes Harvey and Irma affected customer behavior at Silver Slipper indirectly; exceptional Tahoe snowfall caused road closures and power outages during the first quarter.
- The company settled the Silver Slipper construction-defect litigation for $675,000 and reported no expectation that other ordinary-course legal proceedings would materially affect its financial position or results.
Important facts for investors to verify
- Whether operating cash generation and covenant headroom are sufficient to manage the 2019 debt maturities, particularly given the 13.5% second-lien interest rate.
- How the Grand Lodge renovation, seasonal trends and Northern Nevada recovery affect subsequent-period property results.
- Whether planned capital projects, including Rising Star improvements and the proposed ferry, remain on schedule, within budget and receive required approvals.
- The impact of the $675,000 settlement and other non-recurring items on the sustainability of reported earnings and Adjusted EBITDA.
- Potential dilution and liquidity exposure from lender warrants, including their conditional redemption rights, and from outstanding stock options.