Full House Resorts, Inc. — Q3 2018 Form 10-Q
Business context and period. The company operates five casino properties across Mississippi, Colorado, Indiana and Nevada. This unaudited report covers the three and nine months ended September 30, 2018. In late September, Rising Star began trial ferry service; the Christmas Casino & Inn opened in Cripple Creek on November 1, after the quarter.
Key financial results
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net revenues | $44.0 million | $43.7 million | $123.2 million | $123.5 million |
| Operating income | $3.7 million | $4.0 million | $6.3 million | $7.6 million |
| Net income (loss) | $1.6 million | $0.8 million | ($3.4 million) | ($1.3 million) |
| Adjusted EBITDA | $6.5 million | $6.4 million | $13.9 million | $14.6 million |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $6.4 million | $6.8 million |
Cash flow and liquidity. Nine-month investing cash outflow was $14.2 million, mainly for Rising Star improvements, Bronco Billy’s-area property purchases and expansion design. Financing provided $8.7 million, including equity-offering proceeds. Cash increased $0.9 million from year-end to $20.8 million at September 30. Current assets were $27.7 million and current liabilities $20.8 million. Management estimates $10–12 million of cash is needed for day-to-day operations and believes resources should cover operating requirements for the next 12 months, subject to uncertainties.
Debt and other obligations. The company issued $100 million of senior secured notes due February 2024 to refinance its prior term loans. At September 30, notes principal was $99.25 million, with $95.3 million of long-term debt carrying value including discounts and issuance costs; capital lease obligations totaled about $4.9 million. Notes bear interest at three-month LIBOR, subject to a 1% floor, plus 7%, and require quarterly principal payments of $250,000, with approximately $94 million due at maturity. The company was covenant-compliant at quarter-end. It also recorded a $1.6 million current warrant liability following the refinancing, which triggered potential warrant-holder redemption or registration rights.
Changes and operating performance
- Q3 net revenue rose 0.7%, but operating income fell 6.5%; net income improved to $1.6 million. Lower net interest expense and a favorable warrant fair-value adjustment contributed to the improvement in quarterly earnings.
- Nine-month net revenue was essentially flat, while operating income declined 17.2% and the net loss widened. The company cited first-quarter adverse weather and increased operating costs; the nine-month comparison also includes a $2.7 million debt-extinguishment loss in 2018.
- Adjusted EBITDA was nearly flat in Q3 and down 5.3% for nine months. Q3 segment results varied: Silver Slipper revenue grew 8.9%; Rising Star revenue declined 3.7% but property EBITDA increased 14.1%; Bronco Billy’s property EBITDA fell 17.3%; and Northern Nevada revenue fell 9.9% while property EBITDA increased 9.2%.
- Revenue presentation changed with adoption of ASC 606 on January 1, 2018. Promotional allowances are no longer shown separately, and departmental revenue and expense classifications shifted substantially. The company said the standard had no material ongoing aggregate impact on operating income, net income or cash flows; comparisons of departmental lines should therefore be interpreted carefully.
- March’s registered direct offering of 3.94 million shares generated approximately $11.4 million net proceeds, intended in part for Bronco Billy’s expansion.
Outlook, plans and risks
- Bronco Billy’s Phase One expansion is budgeted at approximately $19 million; about $4.3 million had been invested by the filing date. The company expected to invest another $0.7 million in 2018 and the remainder in 2019, with the parking garage targeted for completion by year-end 2019. Phase Two, including a hotel tower and other amenities, was expected to open in 2020 but depends on financing on acceptable terms and other contingencies.
- The company cited expected operating cash flow, cash and potentially additional financing as sources for obligations and investment. It warned that insufficient cash generation or capital-market access could require reducing, delaying or eliminating capital projects, selling assets or raising equity. It gave no specific earnings or revenue guidance.
- Management identified substantial debt, covenant compliance, financing availability, project execution, competition, weather, labor costs and regulatory approvals as risks. Ferry operations add regulatory, marine-accident, weather and insurance risks.
- Competitors’ suit challenging Cripple Creek approvals was dismissed in October for lack of standing; plaintiffs could appeal through late November. Management did not expect an appeal to delay or prevent the project.
- Hyatt may, beginning January 1, 2019, exercise an option to purchase the company’s Grand Lodge Casino leasehold interest and related operating assets under the agreement’s stated pricing formula. The filing does not indicate whether Hyatt intended to exercise it.
- The company paid $125,000 for options on land in Clovis, New Mexico, relating to a proposal for the state’s potential sixth racing license; the proposal and license award remained contingent.
Investor verification priorities
- Track covenant headroom and leverage calculations against the notes’ progressively tighter maximum leverage limits, as well as the floating-rate interest burden.
- Confirm cash available after operating needs, planned capital spending and any warrant-holder action; assess potential dilution or cash/note settlement of the warrants.
- Test Phase One costs and schedule against the $19 million budget, and verify financing and approvals before relying on Phase Two timing or returns.
- Evaluate underlying casino trends using segment disclosures and account for ASC 606 presentation changes, weather effects, gaming hold variability and promotional activity.
- Monitor ferry service commercial performance and safety/regulatory compliance, and determine whether Hyatt exercises its Grand Lodge option.