Business Context and Reporting Period
Company: Full House Resorts, Inc. (FHR)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2011
Business Overview: FHR develops, manages, invests in, and owns gaming-related enterprises. Key operations include Stockman's Casino in Nevada, a consolidated 50% joint venture (GEM) managing FireKeepers Casino in Michigan, and a non-consolidated 50% joint venture (GED) managing Harrington Casino in Delaware. The Company is a smaller reporting company.
Key Financial Metrics
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Total Revenues | $8,344,227 | $8,311,231 |
| Net Income (Consolidated) | $4,214,523 | $4,595,435 |
| Net Income Attributable to Company | $1,607,444 | $2,008,617 |
| Diluted EPS (Attributable to Company) | $0.09 | $0.11 |
| Operating Cash Flow | $5,430,993 | $2,623,917 |
| Cash and Equivalents (End of Period) | $11,398,358 | $12,318,773 |
| Total Debt (Current + Long-term) | $33,000,000 | $0 |
| Total Assets | $92,176,385 | $56,450,786 |
Note: The significant increase in Total Assets and Debt is primarily due to deposits and financing for the Grand Victoria acquisition.
Material Changes vs. Prior Period
- Revenue: Total revenue increased slightly by 0.4% ($0.03 million). This was driven by a 3.3% increase in management fees from the FireKeepers Casino, offset by an 8.2% decline in casino and food/beverage revenues at Stockman's Casino due to lower slot hold percentages and market share.
- Expenses: Operating costs increased 8.5% ($0.3 million), primarily due to a 685.8% surge in project development and acquisition costs ($0.5 million) related to the Grand Victoria acquisition. Selling, general, and administrative expenses decreased 6.3% due to reduced legal fees.
- Debt Structure: The Company incurred $33.0 million in new long-term debt (term loan) on March 31, 2011, to fund the Grand Victoria acquisition. This replaced a previously terminated revolving loan with Nevada State Bank.
- Investing Activities: Net cash used in investing activities was $19.99 million, compared to $4.93 million provided in the prior year, largely due to $19.9 million in deposits for the Grand Victoria acquisition.
Guidance, Outlook, and Risks
- Grand Victoria Acquisition: The acquisition of Grand Victoria Casino & Resort in Rising Sun, Indiana, closed on April 1, 2011, for a purchase price of approximately $43.0 million. Pro forma data suggests the acquisition would have increased Q1 2011 net income attributable to the Company to $2.13 million.
- Contract Expirations: The management agreement for Harrington Casino (Delaware) expires in August 2011, and the Company does not expect to renew it. The FireKeepers (Michigan) agreement expires in August 2016, with no assurance of extension.
- Competition: A new casino opened by the Gun Lake Tribe in February 2011, located one hour from FireKeepers, may impact revenues.
- Tribal Notes Receivable: The Company holds a note receivable from the Nambé Pueblo ($0.7 million face value, $0.45 million fair value). Repayment is contingent on the successful development of a casino project, which is expected to open in Q4 2011. There is no assurance of repayment.
- Interest Rate Risk: The Company entered into an interest rate swap agreement effective April 1, 2011, to hedge $20.0 million of its variable-rate term loan, fixing the rate at 1.9%.
Investor Verification Checklist
- Acquisition Closing: Verify the final purchase price allocation and working capital adjustments for the Grand Victoria acquisition, which were provisional as of March 31, 2011.
- Debt Covenants: Review the financial covenants (leverage ratio, fixed charge coverage, minimum EBITDA) in the new Wells Fargo Credit Agreement to ensure compliance.
- Contract Renewals: Monitor the status of the FireKeepers management contract renewal negotiations prior to the August 2016 expiration and the impact of the non-renewal of the Harrington contract in August 2011.
- Tribal Project Viability: Assess the progress of the Nambé Pueblo casino project and the likelihood of recovering the $0.7 million advance.
- Stockman's Performance: Investigate the causes of the 8.2% revenue decline at Stockman's Casino and the effectiveness of strategies to regain market share.