Full House Resorts, Inc. — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011. Financial statements are unaudited. The company acquired Grand Victoria Casino on April 1, 2011, so reported 2011 results include its operations only from that date and are not directly comparable with 2010.
Financial results
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $31.12 million | $8.06 million | $39.47 million | $16.37 million |
| Operating income | $6.83 million | $5.20 million | $12.66 million | $11.23 million |
| Net income attributable to company | $1.40 million | $1.47 million | $3.00 million | $3.48 million |
| Basic earnings per share | $0.08 | $0.08 | $0.17 | $0.19 |
| Operating margin | 21.9% | 64.5% | 32.1% | 68.6% |
Revenue growth primarily reflects Grand Victoria, which contributed $23.2 million of Q2 revenue. Higher operating costs, including the acquired casino’s costs, left company-attributable net income below the comparable reported periods. These reported comparisons are materially affected by the acquisition timing. In unaudited pro forma results assuming Grand Victoria had been acquired January 1, 2010, Q2 2011 revenue was $31.1 million versus $31.8 million in Q2 2010, and net income attributable to the company was $1.4 million versus a $2.2 million loss. For the six months, pro forma revenue was $62.6 million versus $62.7 million and company-attributable net income was $2.8 million versus a $2.5 million loss.
Cash flow and liquidity: Six-month operating cash flow was $11.24 million, compared with $7.69 million in 2010. Investing activities used $20.25 million, including $19.51 million of cash for the Grand Victoria acquisition; financing activities provided $7.25 million. Cash decreased $1.75 million to $11.55 million. The company reported $4.8 million available under its revolving credit line. Current assets were $19.88 million and current liabilities $14.04 million at June 30.
Debt: Long-term debt was $31.7 million, including a $6.6 million current portion; the balance sheet also includes a $350,343 swap liability. The $33 million Wells Fargo term loan financed the acquisition, with a $5 million revolving facility and final maturity in 2016. The loan was secured by substantially all company assets and carries financial covenants. The stated quarterly LIBOR-based loan rate was 7.0%. A $20 million interest-rate swap partially offsets variable-rate exposure, but was not designated as an accounting hedge; the company recorded a $350,343 fair-value loss in Q2.
Business changes and outlook
- Grand Victoria’s April 1 acquisition for approximately $43 million substantially expanded casino operations and drove the reported revenue and asset increase. Total assets rose to $96.78 million from $56.45 million at year-end 2010.
- The company entered a three-year Buffalo Thunder consulting agreement in May, providing a $100,000 monthly base fee plus a performance-based success fee. The arrangement remained subject to National Indian Gaming Commission approval.
- In June, it agreed to lease and acquire operating assets of Grand Lodge Casino at Lake Tahoe, subject to Nevada gaming approvals. The lease calls for $125,000 monthly rent; the asset purchase price was approximately $0.6 million. Management expected approvals in August 2011.
- The Harrington, Delaware management contract was due to expire in August 2011; management did not expect renewal. The FireKeepers, Michigan agreement runs through August 2016, with no assurance of extension. New Michigan casino competition could pressure FireKeepers revenue and fees.
- Management said it expected adequate resources for current growth plans through operating cash flow and external financing, while warning that economic weakness, reduced gaming activity, and limited credit availability could constrain growth. No quantified earnings or revenue guidance was provided.
Risks, contingencies, and unusual items
- The Nambé Pueblo note had a $661,600 stated amount but an estimated fair value of $419,703. Repayment depends on a casino project’s financing and successful operation; management cautioned that repayment could be partial or nil. Funding was expected in Q3 2011 and opening in Q2 2012, but neither was assured.
- Stockman’s goodwill had only about a 3% estimated fair-value cushion over carrying value, based on management assumptions; quarterly impairment review continues.
- Debt covenants include leverage, fixed-charge coverage, and minimum adjusted EBITDA requirements. Borrowing is variable-rate, partly mitigated by the swap; the derivative’s fair-value movements affect earnings.
- Management reported disclosure controls effective at a reasonable-assurance level. Its assessment of Grand Victoria’s internal controls was ongoing, with a conclusion planned for the 2011 annual report.
Investor verification priorities
- Review Grand Victoria’s post-acquisition operating contribution, purchase accounting, and integration costs, separating acquired growth from comparable-property performance.
- Check debt covenant headroom, required amortization, interest costs, and the effect of variable rates and swap valuation.
- Monitor Harrington contract expiry, Buffalo Thunder approval, Grand Lodge gaming approvals and lease economics, and FireKeepers competition and contract term.
- Validate recoverability assumptions for the Nambé note and the relatively narrow Stockman’s goodwill cushion.
- Compare cash flow with acquisition spending and distributions to the noncontrolling joint-venture interest; assess liquidity after scheduled debt payments and planned expansion.