Full House Resorts, Inc. — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014. The company owns three casino properties, leases one, and had a casino management contract that expired September 23, 2014.
Financial performance and condition
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net revenue | $32.9 million | $37.4 million | $94.7 million | $113.3 million |
| Operating income (loss) | $2.7 million | $(1.2) million | $(9.1) million | $3.9 million |
| Net income (loss) | $(0.8) million | $(2.2) million | $(10.3) million | $(1.6) million |
| Net loss per share | $(0.04) | $(0.11) | $(0.55) | $(0.09) |
- Q3 net revenue fell 12%; casino revenue declined $5.2 million, partly offset by lower promotional allowances and higher hotel revenue. Nine-month net revenue fell 16%.
- Q3 operating results improved from the prior-year loss, while nine-month operating results turned to a loss, chiefly reflecting a $11.5 million impairment charge in 2014.
- Nine-month operating cash flow was $6.5 million, versus $11.0 million in 2013. Investing cash use was $6.6 million; financing provided $1.1 million. Cash increased $1.1 million from year-end to $16.0 million.
- At September 30, cash was $16.0 million, current assets $23.6 million, and current liabilities $12.3 million. Long-term debt was $59.5 million, with capital lease obligations of about $7.1 million. Stockholders’ equity was $67.7 million.
- First-lien debt carried a 4.75% rate at quarter-end; second-lien debt rate increased to 14.25% in July. The company reported compliance with debt covenants at September 30; it had obtained waivers after exceeding certain leverage ratios at March 31.
Material changes and operating drivers
- Rising Star in the Midwest was the main source of revenue pressure: Q3 segment revenue fell 21%, amid competition from new Ohio gaming venues and lower visitation. Slot coin-in and slot win each declined 26% year over year in Q3.
- Silver Slipper Gulf Coast revenue declined 7% in Q3 amid regional economic weakness and disruption from adjacent hotel construction. Northern Nevada revenue was broadly comparable with Q3 2013.
- Operating expense reductions, including cost controls and lower Indiana gaming taxes, helped offset lower revenue. Indiana tax changes generated $1.2 million of Q3 savings from the lower tax structure, in addition to $0.1 million from free-play tax treatment.
- Rising Star’s 104-room hotel opened in November 2013. Its Q3 occupancy was 78% versus 97% a year earlier; RevPAR was $50 versus $61. Most occupied rooms were complimentary.
Outlook, risks, and unusual items
- No specific full-year earnings or revenue guidance was provided. Management said results are subject to economic conditions, competition, weather, regulation, financing access, and project execution; interim results are not necessarily indicative of full-year results.
- The company recorded a $11.5 million impairment of Rising Star goodwill and gaming license in Q2, following weaker-than-expected results and competition. Management found no additional impairment necessary at September 30, but warned that further charges are possible if projected cash flows are not achieved.
- Q3 included a $1.7 million settlement expense resolving disputes over the terminated proposed Fitz Tunica acquisition. The acquisition agreement was terminated and the dispute settled.
- The Silver Slipper 142-room hotel was budgeted at approximately $17.8 million, excluding capitalized interest, with completion expected in early 2015. At quarter-end, approximately $1.9 million of construction costs remained to be funded; the company expected to draw on a separate $10 million term-loan commitment beginning in Q4 2014.
- Subsequent events: on October 22, the board authorized management to begin a company-sale process. On October 28, dissident stockholders filed a consent solicitation seeking board and bylaw changes; related response costs could be material.
- The company and Keeneland were discussing possible termination of their Kentucky gaming and racetrack arrangements. The Buffalo Thunder management agreement expired as scheduled in September 2014.
Important facts for investors to verify
- Whether casino revenue and visitation stabilize at Rising Star and Silver Slipper, and whether new competition continues to pressure results.
- Progress, final cost, funding, and opening of the Silver Slipper hotel, including availability and terms of the planned loan draw.
- Debt covenant headroom, the higher 14.25% second-lien rate, and the company’s ability to service debt while funding construction.
- Developments in the board-authorized sale process, the dissident-stockholder solicitation, and Keeneland negotiations.
- Whether the $5.6 million deferred tax asset remains realizable and whether further asset impairments become necessary.