Business Context and Reporting Period
Company: Full House Resorts, Inc. (FHR)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2010
Business Overview: FHR owns, manages, and invests in gaming-related opportunities. Key assets include Stockman's Casino in Nevada, a 50% consolidated interest in Gaming Entertainment Michigan, LLC (GEM) which manages the FireKeepers Casino, and a 50% equity-method interest in Gaming Entertainment Delaware, LLC (GED). The company is actively pursuing the acquisition of the Grand Victoria Casino & Resort in Indiana.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2010 | Nine Months Ended Sep 30, 2010 |
|---|---|---|
| Total Revenues | $8,636,260 | $25,005,957 |
| Net Income (Consolidated) | $4,960,482 | $13,524,445 |
| Net Income Attributable to Company | $2,236,962 | $5,716,694 |
| Earnings Per Share (Basic/Diluted) | $0.12 | $0.32 |
| Operating Cash Flow | N/A | $12,761,200 |
| Cash and Equivalents (End of Period) | $17,485,006 | $17,485,006 |
| Total Debt | $0 | $0 |
| Revolving Credit Availability | $7,900,000 | $7,900,000 |
Note: Consolidated Net Income includes significant non-controlling interest from the GEM joint venture. Net Income Attributable to the Company reflects the portion retained by FHR shareholders.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 9.0% for the three months and 98% for the nine months ended September 30, 2010, compared to the prior year. This was driven primarily by a $12.9 million increase in management fees from the FireKeepers Casino (GEM), which has been fully operational since August 2009.
- Profitability: Net income attributable to the Company increased 52% for the nine-month period ($5.7M vs. $3.8M). Operating income rose significantly due to the elimination of a $2.1 million "member agreement modification" loss recorded in the third quarter of 2009.
- Debt Reduction: The company repaid all outstanding debt to its joint venture affiliate (RAM) and fully paid down its revolving credit line balance by November 2009. As of September 30, 2010, there was no long-term debt outstanding.
- Asset Recovery: The company received a $5.0 million repayment of a tribal advance from the FireKeepers Development Authority in February 2010, which was previously recorded as a note receivable.
Outlook, Risks, and Unusual Items
Acquisition of Grand Victoria Casino
On September 13, 2010, FHR entered into a definitive agreement to acquire the Grand Victoria Casino & Resort in Indiana for $43.0 million (plus working capital adjustments). The company secured a credit agreement with Wells Fargo for up to $31.3 million in term loans and $4.7 million in revolving credit. Closing is expected in Q1 2011, subject to regulatory approvals.
Unusual Items and Contingencies
- Tribal Notes Receivable: The fair value of notes receivable from tribal governments is estimated using Level 3 inputs. The Nambe Pueblo note was valued at $0.4 million as of September 30, 2010, with an expected opening delay to Q4 2011. The Northern Cheyenne note was written down to zero in 2009 due to impairment.
- IRS Examination: The company is under examination by the IRS for the year ended December 31, 2008. No material adjustments have been proposed as of the filing date.
- Banking Risk: A significant portion of cash ($15.9 million) is held at Nevada State Bank (NSB), a subsidiary of Zions Bancorporation, which received a "D" (weak financial strength) rating from Weiss Ratings in September 2010. However, these deposits are FDIC insured.
Management Commentary
Management attributes strong performance to the FireKeepers Casino management fees. However, they note that Stockman's Casino revenues declined due to economic weakness in northern Nevada. The company expects to fund the Grand Victoria acquisition using approximately $19.0 million of cash on hand and the new credit facility.
Investor Verification Checklist
- Acquisition Closing: Verify the receipt of all necessary gaming regulatory approvals for the Grand Victoria Casino acquisition and the final closing date.
- Tribal Project Viability: Monitor the status of the Nambe Pueblo project financing and the likelihood of the Q4 2011 opening, as repayment of the $0.7 million note is contingent on project success.
- Banking Exposure: Assess the stability of Nevada State Bank and the security of the $15.9 million cash deposit, despite FDIC insurance.
- Non-Controlling Interest: Understand that a significant portion of consolidated net income ($7.8 million for the nine months) is attributable to the non-controlling interest in GEM and does not flow to FHR shareholders.
- Debt Covenants: Confirm continued compliance with the new Wells Fargo credit agreement covenants post-acquisition.