Full House Resorts, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. The company owns or operates casino and hospitality properties in Mississippi, Colorado, Indiana and Nevada. Bronco Billy’s, acquired May 13, 2016, is included in results from that date.
Financial performance
- Q2 revenue: Net revenue was $34.8 million, up 13.4% year over year. Management attributed most of the increase to Bronco Billy’s; excluding it, revenue grew 1.7%.
- Six-month revenue: $66.9 million, up 11.8%; excluding Bronco Billy’s, up 5.8%.
- Profitability: Q2 operating income was $0.9 million versus $1.0 million; net loss widened to $2.4 million from $0.4 million. Six-month operating income improved to $2.4 million from $1.0 million, while net loss was $2.7 million versus $2.2 million. Q2 loss per share was $0.13; six-month loss per share was $0.14.
- Margins and non-GAAP measure: Operating margin was approximately 2.4% in Q2 and 3.6% for the six months. Adjusted EBITDA, a non-GAAP measure, was $3.4 million in Q2 versus $2.9 million and $7.0 million for the six months versus $5.1 million.
- Cash flow: Six-month operating cash flow was $1.9 million, investing cash outflow $26.1 million (primarily the acquisition), and financing cash inflow $30.3 million. Cash increased $6.1 million to $20.6 million.
- Liquidity: The company reported $20.6 million cash and the full $2 million revolving facility available, subject to covenant compliance. Management estimated approximately $13 million was needed for day-to-day operations.
- Debt: Gross principal debt was $100 million at June 30: $45 million first-lien and $55 million second-lien. The second lien bears 12.5%–13.5% interest, currently 13.5%; the first-lien rate is based on LIBOR (subject to a 1% floor) plus 3.75%. Capital lease obligations totaled approximately $5.9 million.
Material changes versus prior periods
- The Bronco Billy’s acquisition cost approximately $31.1 million and added $3.6 million revenue and $0.8 million net income from May 13 through June 30. Its reported $1.1 million Adjusted Property EBITDA reflected a favorable gaming-tax reset and seasonal summer strength; management cautioned that the margin was not expected to continue at that level.
- On May 13, the company refinanced and expanded its second-lien term loan by $35 million, primarily to fund the acquisition. Interest expense rose; Q2 also included $0.6 million debt-modification costs and $0.2 million warrant fair-value expense.
- Q2 property results were mixed: Silver Slipper Adjusted Property EBITDA fell 11.1%, Rising Star fell 27.0%, and Northern Nevada fell 8.1% year over year. For the six months, Rising Star and Northern Nevada EBITDA increased, while Silver Slipper declined.
Outlook, risks and unusual items
- No specific earnings or revenue guidance was provided. Management expects to fund debt service and planned investment through operating cash flow, cash, available borrowing, and potential equity financing; it cautioned that cash flow or future borrowing may be insufficient.
- Debt maturities are May 2019 for the first lien and currently November 2019 for the second lien. The first lien requires quarterly principal payments; the second lien has no scheduled quarterly principal payments. The company was covenant-compliant at June 30, but warned future compliance is not assured.
- Second-lien lenders received warrants representing 5% of fully diluted common equity, with a $1.67 exercise price and redemption rights that could require cash repurchase or issuance of an unsecured note under specified events. The filing records an $0.8 million warrant liability.
- Planned investment includes at least $1 million of Rising Star improvements by March 2017, approximately $1.5 million of Grand Lodge capital spending alongside landlord-funded renovations, and a preliminary $1.5 million Stockman’s project. These plans are subject to funding and execution risks.
- On August 15, 2016, the company filed to propose a $5 million rights offering, with CEO Daniel R. Lee as standby purchaser under specified conditions. The filing does not establish that the offering was completed.
- Risks include high debt and interest costs, refinancing and covenant risk, dilution, regional gaming competition, seasonality and weather, leased-property exposure, and reliance on access routes. Management said ordinary-course legal proceedings were not expected to have a material effect; a Silver Slipper parking-garage cost-recovery case had been dismissed and appealed, with a settlement reached with the architect.
Important facts for investors to verify
- Subsequent status, terms and proceeds of the proposed $5 million rights offering, including the CEO’s standby-purchaser commitment.
- Debt-service capacity, covenant headroom, floating-rate exposure, and refinancing plans ahead of the 2019 maturities.
- Whether property-level performance—particularly Silver Slipper and Rising Star—improves enough to support planned capital spending.
- Bronco Billy’s normalized results after the temporary gaming-tax benefit and seasonal summer period.
- Potential cash obligations or dilution associated with warrant redemption rights and the planned equity financing.