Full House Resorts, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; compared with Q1 2016. Full House owns or operates casino and hospitality properties in Mississippi, Colorado, Indiana and Nevada. Bronco Billy’s, acquired in May 2016, is included in 2017 results but not in the prior-year reported results, affecting comparability. Unless noted, amounts below are in millions.
Financial results
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Gross revenues | $46.657 | $38.063 | +22.6% |
| Promotional allowances | $7.037 | $6.056 | — |
| Net revenues | $39.620 | $32.007 | +23.8% |
| Operating expenses | $37.360 | $30.476 | +22.6% |
| Operating income | $2.260 | $1.531 | +47.6% |
| Operating margin | 5.7% | 4.8% | +0.9 percentage points |
| Interest expense | $2.678 | $1.762 | +52.0% |
| Net loss | $(0.602) | $(0.330) | Loss widened |
| Basic and diluted loss per share | $(0.03) | $(0.02) | — |
| Operating cash flow | $1.507 | $1.855 | Lower |
Adjusted EBITDA, a non-GAAP measure, was $4.594 million versus $3.568 million. Its margin on net revenue was approximately 11.6% versus 11.1%. Management cautions that this measure is not a substitute for GAAP earnings or cash flow.
Business performance and material changes
- Revenue growth primarily reflected Bronco Billy’s, which contributed $5.861 million of net revenue and $0.846 million of Adjusted Property EBITDA. Excluding Bronco Billy’s, consolidated net revenue rose 5.5%.
- Silver Slipper net revenue increased 12.2% to $16.658 million; Adjusted Property EBITDA rose 14.7% to $3.052 million. Hotel occupancy improved to 89.3% from 84.6%.
- Rising Star net revenue was essentially flat at $12.205 million; Adjusted Property EBITDA increased 1.4% to $1.319 million.
- Northern Nevada net revenue declined 0.4% to $4.896 million, while Adjusted Property EBITDA fell 28.0% to $0.552 million. Renovation activity, higher promotional and operating costs, severe snowfall, road closures and power outages were cited as factors.
- Higher interest expense primarily reflected the 2016 refinancing and additional borrowing used largely to acquire Bronco Billy’s. Interest paid in cash was $2.271 million, up from $1.309 million.
Liquidity, debt and capital spending
- Cash and equivalents were $25.402 million at March 31, 2017, down from $27.038 million at year-end. Current assets were $31.316 million and current liabilities $16.737 million.
- Cash from operations of $1.507 million and financing outflows of $0.689 million were more than offset by $2.454 million of investing outflows, principally $2.458 million of property and equipment purchases. Cash declined by $1.636 million during the quarter.
- Debt principal outstanding was $97.750 million: $42.750 million on the First Term Loan and $55.000 million on the Second Term Loan. Balance-sheet debt, net of discounts and issuance costs, was $95.590 million, including $1.688 million current. Capital lease obligations totaled $5.633 million.
- The First Lien facility matures in May 2019; the $55 million Second Lien loan currently matures in November 2019 and bears interest of 12.5%–13.5% (13.5% at the filing’s stated current terms). The $2 million revolver was undrawn and available, subject to covenants. The company reported covenant compliance at quarter-end.
- Management estimated approximately $12 million of cash was needed for day-to-day operations and said it believed resources would be adequate for the next 12 months, while noting uncertainty around operating cash generation and future financing or refinancing.
- Planned property investments include approximately $5 million at Rising Star, $1.5 million of Grand Lodge casino improvements, remaining Stockman’s improvements, and approximately $0.8 million for Silver Slipper projects. Completion, financing and expected returns are not assured.
Outlook, risks and unusual items
- No specific earnings or revenue guidance was provided. Management expected Grand Lodge renovations to finish by June 30, 2017, and described Bronco Billy’s as performing in line with expectations; that market is seasonal and stronger in summer.
- Management said refinancing or additional financing may be needed to support debt obligations, growth and planned investments. Failure to generate sufficient cash or access capital could require reduced or delayed capital spending, asset sales or equity financing.
- Debt facilities are secured by substantially all company assets. The Second Lien bears a high interest rate and has no scheduled quarterly principal amortization; the company also faces covenant-compliance and maturity-refinancing risks.
- Second Lien lender warrants carry redemption rights under specified events, potentially requiring cash payment or issuance of a four-year unsecured note with at least 13.25% interest, or a public share sale.
- A dispute over Silver Slipper’s parking garage repairs—$1.6 million spent by the company—was remanded for trial after an appellate reversal; the company also sued the contractor’s insurer. A trial was expected to be set for late 2017. Management did not expect ordinary-course proceedings to materially affect the company.
- Other risks include seasonality, gaming hold variability, weather and access disruptions, construction and development execution, competition, regulation, and reliance on refinancing and operating cash flow. Management reported effective disclosure controls and no material change in internal control during the quarter.
Important facts for investors to verify
- Whether operating trends at Silver Slipper and the other properties continue, and whether the reported growth is sustainable after accounting for Bronco Billy’s acquisition.
- Whether the company generates enough cash to fund operations, debt service and planned capital projects while maintaining covenant compliance.
- Available refinancing options, costs and timing ahead of the 2019 facility maturities, including the effect of high Second Lien interest expense.
- Progress, final cost and operating benefits of property renovations and development projects; confirm required approvals for the proposed Rising Star ferry.
- Developments in the Silver Slipper construction litigation and any potential financial exposure.