Full House Resorts, Inc. — Q1 2014 Form 10-Q
Business context and period: The filing covers the three months ended March 31, 2014, with comparisons to Q1 2013. Full House operated casino properties in the Midwest, Gulf Coast and Northern Nevada, and earned management fees from a New Mexico gaming contract. Amounts below are in millions unless otherwise indicated.
Financial performance
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Revenue | $30.449 | $39.126 |
| Operating income (loss) | $(0.090) | $3.111 |
| Operating margin | (0.3%) | 8.0% |
| Net income (loss) | $(1.082) | $0.576 |
| Net margin | (3.6%) | 1.5% |
| Cash from operations | $1.814 | $5.299 |
| Cash and equivalents, quarter-end | $14.519 | $24.563 |
- Revenue fell $8.677 million, or 22%, chiefly because casino revenue declined $8.311 million, or 23%.
- Operating expenses decreased 15% to $30.539 million, but the lower costs did not offset the revenue decline. Depreciation and amortization rose to $2.455 million from $2.210 million.
- Interest expense declined to $1.517 million from $1.885 million. The company reported a $0.526 million income tax benefit, versus $0.647 million tax expense a year earlier.
- Operating cash flow was $1.814 million; investing used $3.993 million, including $2.019 million for property and equipment and $1.964 million for deposits and related costs. Financing provided $1.762 million, primarily from a $2.0 million revolving-loan draw.
Balance sheet, liquidity and debt
- At March 31, 2014, current assets were $21.746 million and current liabilities $10.340 million; working capital was $11.406 million and the current ratio was approximately 2.1.
- Long-term debt was $59.5 million, excluding $7.482 million in capital-lease obligations. Cash was $14.519 million. The debt included a $20 million second-lien term loan bearing 13.25% fixed interest; the first-lien debt rate was 4.75% at quarter-end.
- The company drew $2 million on its $5 million revolving facility in March, leaving $3 million undrawn. The draw supported a $1.75 million escrow deposit related to the proposed Fitz Tunica acquisition.
- Full House exceeded the permitted total-leverage and first-lien-leverage ratios under both credit agreements at March 31, but creditors waived compliance for that date. The company cautioned it might not meet covenants at June 30, 2014; failure to obtain further waivers could restrict access to the undrawn $10 million term-loan increase intended to help fund the Silver Slipper hotel.
Changes and operating drivers
- Midwest: Revenue fell 32%, primarily at Rising Star, amid new Ohio-area competition and adverse weather. Rising Star slot coin-in was down 32% and table drop down 30% year over year.
- Gulf Coast: Revenue fell 10%, primarily due to adverse weather at Silver Slipper.
- Northern Nevada: Revenue fell 18%, reflecting poor Lake Tahoe ski conditions and continuing economic weakness.
- Management attributed cost reductions to lower business volume and cost controls. Indiana tax legislation produced $0.2 million of Q1 savings for Rising Star; additional relief of $2.5 million per year may apply beginning July 1, 2014 if the property’s gross gaming revenue is below $75 million for the Indiana fiscal year ending June 30, 2014.
Outlook, material developments and risks
- Full House was building a 142-room Silver Slipper hotel budgeted at approximately $17.7 million, with completion expected in late 2014 or early 2015. Adverse soil and weather conditions slowed progress. The company reported $3.6 million funded through March 31 and expected to fund another $4.1 million in cash before year-end; it planned to use the undrawn $10 million term-loan increase for the balance, subject to covenants and lender terms.
- The company signed a $62 million agreement to acquire Fitz Tunica Casino & Hotel. On May 7, 2014, it advised the seller that financing was unlikely and requested that the agreement be terminated; the filing does not report a completed termination.
- The Pueblo of Pojoaque will not renew the management agreement expiring September 23, 2014. It contributed $0.5 million of management fees in Q1 2014; the company reported $1.7 million for full-year 2013.
- Full House and Keeneland pursued Kentucky instant-racing and potential gaming opportunities, subject to legal, regulatory and definitive-agreement conditions. A court remanded a case for determination of whether instant racing constitutes pari-mutuel wagering permitted under Kentucky law.
- Management cited competition, weather, economic conditions, access to financing, gaming regulation and taxes as risks. It provided no quantified consolidated earnings or revenue guidance and cautioned that Q1 results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether the company remained in compliance with debt covenants after the March 31 waiver, and whether it could access the $10 million term-loan increase for Silver Slipper construction.
- The status and funding outcome of the Fitz Tunica agreement, including the $1.75 million escrow deposit and requested termination.
- Silver Slipper hotel construction costs, schedule and remaining cash requirements, given the reported delays.
- The financial impact of the non-renewal of the Pueblo of Pojoaque contract and any qualifying Indiana gaming-tax relief.
- The Rising Star hotel lease payment is described inconsistently in the filing: one passage states approximately $0.8 million per month, while another states approximately $0.08 million per month. Verify the contractual amount.