Full House Resorts, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014; filed August 6, 2014. The company operates casino properties in the Gulf Coast, Midwest and Northern Nevada, with a separate casino-management business.
Financial results
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net revenue | $31.3 million | $36.7 million | $61.8 million | $75.8 million |
| Operating income (loss) | $(11.6) million | $2.0 million | $(11.7) million | $5.1 million |
| Net income (loss) | $(8.5) million | $(0.04) million | $(9.6) million | $0.5 million |
| Operating margin | (37.1)% | 5.5% | (19.0)% | 6.8% |
| Operating cash flow | Not separately stated | Not separately stated | $2.5 million | $7.1 million |
Revenue is presented net of promotional allowances. Q2 net revenue declined 15%; first-half revenue declined 19%. The decline was led by Rising Star Casino Resort in Indiana, where competition and lower market activity weighed on casino revenue. Management also cited weak regional conditions and adverse first-quarter weather. Operating costs fell 9% in Q2 and 12% for the first half, but did not offset lower revenue and the impairment charge.
- Q2 impairment: $11.5 million, comprising $1.6 million of Rising Star goodwill and $9.9 million of its gaming license. The charge was non-cash and drove the reported operating loss.
- Cash and liquidity: Cash and equivalents were $13.0 million at June 30, down from $14.9 million at year-end 2013. First-half investing cash use was $6.0 million, including property spending and a $1.75 million escrow deposit; financing provided $1.6 million.
- Debt and leases: Long-term debt, net of current portion, was $59.5 million, including $2.0 million drawn on the revolving facility; $3.0 million remained available. Capital-lease obligations totaled about $7.3 million, including $0.7 million current. First-lien debt bore 4.75% at quarter-end; second-lien debt was 13.25% through June 30 and increased to 14.25% under a July amendment.
- Balance sheet: Total assets were $145.4 million and stockholders’ equity was $68.4 million. Current assets were $21.3 million and current liabilities $10.8 million.
Material changes and management commentary
- Midwest segment net revenue fell 24% in Q2 and 28% in the first half, mainly from increased competition affecting Rising Star. The company reported slot coin-in down 25% at Rising Star in Q2 and 28% for the first half year over year.
- The new 104-room Rising Star hotel increased room capacity and hotel revenue, but occupancy and RevPAR were lower year over year. Indiana gaming-tax legislation provided $0.4 million of first-half savings; management said additional relief of about $2.5 million annually began July 1, 2014.
- The 142-room Silver Slipper hotel remained under construction, with completion expected in early 2015 and a budget of about $17.7 million. Management reported slower-than-expected progress due to soil and weather conditions; approximately $3.1 million of future construction funding was identified, with $10.0 million of loan capacity intended for the project subject to agreement terms and covenants.
- The company said it was in compliance with amended debt covenants at June 30. It had exceeded leverage limits at March 31, but lenders waived compliance. Amendments signed July 18 revised covenant terms; the second-lien rate rose by one percentage point.
- Management stated it believed available operating cash flow and external financing would support its current growth plan, while cautioning that financing and expansion were not assured. No formal earnings or revenue guidance was provided.
Risks, contingencies and unusual items
- The proposed $62.0 million Fitz Tunica acquisition was terminated in June after the company said financing was unlikely. Majestic Star disputed the termination and the release of the $1.75 million escrow deposit, later demanded the funds, and asserted alternative grounds for termination. No lawsuit had been filed as of the filing.
- The Buffalo Thunder management agreement was not to be renewed after September 2014; it generated $0.3 million of quarterly management income. The Grand Lodge casino lease runs to August 2018, with no assurance of extension.
- Kentucky instant-racing legality remained subject to court proceedings. A partnership exclusivity arrangement with Keeneland was extended through June 30, 2019, but projects remain subject to authorization, approvals and definitive agreements.
- Key risks cited include regional economic weakness, competition, weather, construction delays and costs, access to capital, gaming regulation and taxation, and possible future asset impairments. The company noted that interim results are not necessarily indicative of full-year results.
Investor verification priorities
- Review Rising Star’s operating trends and the assumptions behind the $11.5 million impairment; management warned further impairment could occur if projected cash flows are not achieved.
- Confirm the status and availability of the $1.75 million Fitz Tunica escrow deposit and any related dispute or claims.
- Track debt-covenant headroom, amended leverage limits, the higher second-lien interest rate, and access to the undrawn $3.0 million revolver and $10.0 million hotel-related term-loan capacity.
- Monitor Silver Slipper hotel construction costs, schedule, funding needs and expected operating contribution.
- Assess whether Indiana tax relief and cost controls can offset continued revenue pressure, and account for the Buffalo Thunder contract expiration.