NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note A. Organization and Nature of Business
Overview
Empire Resorts, Inc. (“Empire,” and, together with its subsidiaries, the “Company,” “us,” “our” or “we”) was organized as a Delaware corporation on March 19, 1993 and, since that time, has served as a holding company for various subsidiaries engaged in the hospitality and gaming industries.
Our indirect, wholly-owned subsidiary, Montreign Operating Company, LLC, doing business as Resorts World Catskills ("Montreign Operating"), owns and operates Resorts World Catskills, a casino resort (the "Casino"), which is located at the approximately 1,700-acre site of a four-season destination resort (the "Destination Resort") in Sullivan County, New York, approximately 90 miles from New York City. The Destination Resort at which Resorts World Catskills is located also includes a 101-room lifestyle hotel ("The Alder"), adjacent to the Casino. The Alder is owned and operated by Empire Resorts Real Estate II, LLC ("ERREII"), a wholly-owned subsidiary of Montreign Operating. Empire Resorts I, LLC ("ERREI"), which is a wholly-owned subsidiary of Montreign Operating, is developing a golf course (the "Golf Course Project" and together with the Casino and The Alder, the "Development Projects") at the Destination Resort.
On August 21, 2019, Montreign Operating received from the New York State Gaming Commission (the "NYSGC") a license to operate a sports pool at the Casino. The Casino began its retail sportsbook operations upon receipt of such license.
Through our wholly-owned subsidiary, Monticello Raceway Management, Inc. ("MRMI"), we own and operate Monticello Raceway, which began racing operations in 1958 in Monticello, New York, which is proximate to the Casino. Monticello Raceway featured a video gaming machine ("VGM") and harness horseracing facility. VGM operations and food and beverage service at Monticello Raceway ceased on April 23, 2019. We generate racing revenues through pari-mutuel wagering on the running of live harness horse races, the import simulcasting of harness and thoroughbred horse races from racetracks across the country and internationally, and the export simulcasting of our races to offsite pari-mutuel wagering facilities. In a letter dated October 8, 2019, the NYSGC approved MRMI's race dates for the months of November and December 2019.
On June 20, 2019, the New York State legislature approved the creation of a VGM facility in Orange County, New York. In particular, the legislation allows the Company to operate the new VGM facility in Orange County, subject to certain statutory requirements relating to, among other things, employment levels at the Company’s facilities, continued operation of racing at Monticello Raceway, location of the VGM facility within Orange County and entry into a mitigation agreement between the Company and the VGM facility operating at the Yonkers racetrack. The Company will work with local, state and federal agencies and officials to obtain the necessary permits and approvals to designate the site for, and begin construction on, the new VGM facility.
Merger
On August 18, 2019, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”), by and among the Company, Hercules Topco LLC, a Delaware limited liability company (“Parent”), and Hercules Merger Subsidiary, Inc., a Delaware corporation and a wholly-owned subsidiary of Parent (“Merger Sub”), whereby Merger Sub will merge into the Company (the "Merger"), with the Company surviving as a subsidiary of Parent. Parent and Merger Sub are affiliates of Kien Huat Realty III LImited ("Kien Huat") and Genting Malaysia Berhard (“GenM”). The Company has set November 13, 2019 as the date for a special meeting of stockholders (the "Special Meeting"), at which the stockholders will be asked to consider and vote upon a proposal to approve the Merger, among other things. If approved by stockholders at the Special Meeting, and all other conditions to the Merger are satisfied or waived, the Merger is expected to close in the fourth quarter of 2019. As a result of the Merger, the common stock will be delisted from The Nasdaq Stock Market and deregistered under the Exchange Act of 1934, as amended.
Basis for Presentation
The condensed consolidated financial statements and notes as of September 30, 2019 and December 31, 2018 and for the three- and nine-month periods ended September 30, 2019 and September 30, 2018 include the accounts of Empire and its subsidiaries. All intercompany balances and transactions are eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared under the rules and regulations of the Securities and Exchange Commission ("SEC") applicable for interim periods, and therefore do not
include all information necessary for complete financial statements in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”). Our financial statements require the use of estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, as well as the disclosure of contingent liabilities. Actual amounts could differ from those estimates. These condensed consolidated financial statements reflect all adjustments (consisting primarily of normal recurring accruals) which are, in the Company’s opinion, necessary for a fair presentation of financial position, results of operations and cash flows for the interim periods. These condensed consolidated financial statements and notes should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2018. The results of operations for our interim periods may not be necessarily indicative of the results of operations that may be achieved for the entire year.
Liquidity and Capital Resources
Historically, our primary sources of liquidity and capital resources have been cash flow from operations, borrowings from banks and proceeds from the issuance of debt and equity securities, including debt and equity securities issued to Kien Huat Realty III Limited (“Kien Huat”), the Company’s largest stockholder. On July 25, 2019, the Special Committee of the Company’s Board of Directors (the "Board") received a letter from Kien Huat (the “Kien Huat 13D Letter”) indicating that, as of the date of the letter, Kien Huat did not intend to provide further equity or debt financing to the Company beyond its obligations under the 2018 Kien Huat Preferred Stock Commitment Letter (as defined and discussed below) while the Company remains a public company. Subsequently, on August 5, 2019, the Special Committee of the Board received a non-binding proposal letter from Kien Huat and Genting Malaysia Berhad, a public limited liability company incorporated in Malaysia ("Genting Malaysia") and an affiliate of Kien Huat (the "Proposal Letter"). Pursuant to the Proposal Letter, Kien Huat and Genting Malaysia submitted a non-binding proposal to acquire all outstanding equity of the Company not already owned by Kien Huat or its affiliates for $9.74 per share of common stock, with each share of the Company’s Series B Preferred Stock receiving the same consideration on an as-converted basis.
On August 18, 2019, the Company entered into the Merger Agreement with affiliates of Kien Huat and GenM, as a result of which the Company will no longer be a public company. Stockholders will be asked to consider and vote upon a proposal to approve the Merger Agreement at the Special Meeting. If approved by stockholders at the Special Meeting, and all other conditions to the Merger are satisfied or waived, the Merger is expected to close in the fourth quarter of 2019. If the Merger is not consummated within the anticipated time frame, our ability to continue as a going concern will be materially adversely affected.
We are currently generating operating losses as the Casino revenues have not exceeded the costs related to the Casino since its opening in February 2018. We believe that our current cash, cash equivalents, cash generated from operations and the available funding pursuant to the 2018 Kien Huat Preferred Stock Commitment Letter will provide sufficient liquidity to fund our operations, the expected costs of the Golf Course Project and our anticipated debt service requirements into the first quarter 2020. This projection is based on our current expectations regarding cost structure, cash burn rate and operating assumptions. Accordingly, the accompanying consolidated financial statements have been prepared on a basis that contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business and assumes the Company will continue as a going concern.
Our ability to continue as a going concern is dependent on many factors, including our ability to comply with the obligations in our existing debt agreements, to obtain waivers or other relief if we are unable to comply, and/or to be able to repay or refinance our indebtedness as it matures. We were in compliance with, or obtained waivers of, all of the obligations and covenants in our existing debt agreements as of September 30, 2019. Furthermore, we will be in compliance with, or have obtained waivers of, all of the obligations and covenants in our existing debt agreements measured as of September 30, 2019 after making a specified equity contribution in the range of $20 million to $24 million pursuant to the Term Loan Agreement and Revolving Credit Agreement. We can offer no assurance that we will be in compliance with all obligations and covenants measured as of future quarterly periods within the next 12 months or that we will be able to obtain waivers or other relief from the lenders, if necessary.
If the Company determines not to make a specified equity contribution, or interest and principal payments as they become due, unless the lenders under the Term Loan Facility and Revolving Credit Facility waive or eliminate the financial covenants, or otherwise restructure our existing debt agreements, Montreign Operating will be in default under these agreements and the lenders under such agreements can immediately declare all loans due and payable. Furthermore, the Company will be in breach of the Merger Agreement. Any such acceleration of the maturity of Montreign Operating's debt obligations would permit the holders of the Term Loan and certain other lenders and contractual counterparties to terminate and/or accelerate the maturity of obligations due under our other existing debt agreements. If the Merger Agreement is terminated by Parent as a result of a breach of covenants relating to maintaining compliance with the terms of its existing debt obligations, the Company will be required to pay a termination fee of $1.75 million. If the lenders and/or other counterparties demand immediate repayment of all of its obligations, Montreign Operating would likely be unable to pay all such obligations. If the Merger is not consummated, we anticipate that in the near term we will seek to pursue one of the alternatives described above, which may include a restructuring of our existing debt and other arrangements to provide additional liquidity. As part of the various alternatives, we may begin a program to make reductions
in our cost structure. There can be no assurance that any of these efforts will be successful. Each of the foregoing alternatives may have materially adverse effects on our business and on the market price of our securities.
Given our continuing negative cash flows from operations, and in order to meet our expected cash needs for the next 12 months and over the longer term, we will be required to obtain additional liquidity sources or possibly restructure our existing debt and other obligations if the Merger is not consummated. If acceptable terms of a restructuring cannot be accomplished, we may not have enough cash and working capital to fund the operations, and satisfy the obligations of, Montreign Operating beyond the near term, which raises substantial doubt about our ability to continue as a going concern. As a result, we may be required to seek to implement an in-court proceeding under Chapter 11 of the United States Bankruptcy Code (“Bankruptcy Code”) with respect to Montreign Operating and its subsidiaries, which own and operate the Casino, The Alder and the Golf Course Project. If we commence a voluntary Chapter 11 bankruptcy case, we will attempt to make arrangements with new and existing creditors for additional liquidity facilities and the restructuring of Montreign Operating's existing debt terms before presenting these arrangements to the bankruptcy court for approval. An in-court restructuring proceeding would cause a default on our debt with our current lenders. If the Merger is not consummated, and depending on if and when the Special Committee and the Board determine to pursue this course of action, Empire, the parent entity of the Company, could continue operations and satisfy liabilities and commitments in the normal course of business for the next 12 months based on existing sources of financing and liquidity.
Our future operating performance and our ability to service our debt will be subject to future economic conditions and to financial, business and other factors, many of which are beyond our control. See “Risk Factors” in Part II of this Quarterly Report on Form 10-Q and in our Annual Report on Form 10‑K for the fiscal year ended December 31, 2018 for a discussion of the risks related to our liquidity and capital structure.
Note B. Summary of Significant Accounting Policies
Revenue recognition
The Company’s patron transactions primarily consist of gaming wagers, hotel room and food and beverage purchases. The transaction price for gaming wagers is the difference between gaming wins and losses, not the total amount wagered. The transaction price for hotel room and food and beverage purchases is the net amount collected from the patron for such goods and services. Hotel room and food and beverage goods and services have been determined to be separate, stand-alone transactions and the transaction price for such goods or services is recorded as revenue as they are transferred to the patron over the duration of the patron’s stay at the hotel or when the Company provides the food and beverage services. In the case of a hotel stay involving multiple days, the total transaction price of the stay is recognized on a straight-line basis. The Company collects advanced deposits from hotel patrons for future reservations representing obligations of the Company until the room stay is provided to the patron.
Gaming wagers by patrons who are members of our loyalty program represent a performance obligation of the Company. Patrons who are members of our loyalty programs earn loyalty points for gaming wagers. Points awarded under our loyalty programs are given to members based on their gaming play and the promise to provide points to members is required to be accounted for as a separate performance obligation. The Company applies a practical expedient by accounting for gaming wagers on a portfolio basis, as such wagers have similar characteristics and the Company reasonably expects the effects on the financial statements of applying the revenue recognition guidance to the portfolio to not differ materially from that which would result if applying the guidance to each individual patron. For purposes of allocating the transaction price when loyalty points are earned, the Company allocates an amount to the loyalty point liability based on the stand-alone selling price ("SSP") of the points earned, which is determined by the value of a point that can be redeemed for a hotel room or food and beverage services. An amount is allocated to the gaming wager performance obligation using the residual approach as the stand-alone price for wagers is highly variable and no set established price exists for such wagers. The allocated revenue for gaming wagers is recognized when the wagers occur because all such wagers settle immediately. The loyalty point liability amount is deferred and recognized as revenue when the patron redeems the points for a hotel room stay or for food and beverage services and such goods or services are provided to the patron.
Additionally, outside of our loyalty programs and at our discretion, we offer our patrons complimentary goods and services, primarily food and beverage and hotel room stays. Such complimentaries are provided in conjunction with revenue-generating gaming activity and are largely provided to entice contemporaneous and future revenue-generating gaming activities. We allocate a portion of the transaction price for gaming wagers we receive from such patrons to the complimentary goods and services provided to such patrons using the residual approach. This allocation is based on the estimated SSP of the underlying goods and services provided, which are determined based on observed SSP we receive for selling such goods and services.
Food and beverage revenues and room revenues include (i) revenues generated from transactions with patrons for such goods and/or services, (ii) revenues recognized through the redemption of points from our loyalty programs for such goods and/or services, and (iii) revenues generated as a result of providing such goods and/or services on a complimentary basis in conjunction with
gaming activities. Food and beverage revenues and room revenues are recognized when goods are delivered and services are performed. In general, performance obligations associated with these transactions are satisfied at a point-in-time, but may also be satisfied over a period of time, which is typically over the course of a patron’s stay. Advance deposits on rooms are reflected as a performance obligation liability until the goods and/or services are provided to the patron. The Company's performance obligation liabilities are included in “Accrued expenses and other current liabilities” on the condensed consolidated balance sheets.
Racing revenues include revenues earned from pari-mutuel wagering on live harness racing and simulcast signals to and from other tracks. Some elements of racing revenues from Off-Track Betting Corporations are recognized as collected, due to uncertainty of receipt and timing of payments.
Other revenues primarily include commissions received on ATM transactions and cash advances, which are recorded on a net basis as the Company represents the agent in its relationship with the third-party service providers. Other revenues also include the sale of retail goods, which are recognized at the time the goods are delivered to the customer.
Complimentary food and beverage revenues and complimentary room revenues for the three-month and nine-month periods ended September 30, 2019 and 2018, respectively, were as follows:
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Three Months Ended
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Nine Months Ended
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9/30/2019
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9/30/2018
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9/30/2019
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9/30/2018
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(in thousands)
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(in thousands)
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Complimentary food and beverage revenues
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$4,183
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$3,178
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$
|
14,469
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|
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$
|
6,412
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Complimentary room revenues
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1,283
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|
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1,378
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|
|
3,948
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|
|
2,328
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|
The Company’s performance obligation related to its loyalty point obligation is generally completed within one year, as a patron’s loyalty point balance is forfeited after six months of inactivity, as defined in the loyalty programs. The Company’s deferred revenue liability for its loyalty point performance obligations was $3.5 million and $2.2 million at September 30, 2019 and December 31, 2018, respectively. Loyalty points are generally earned and redeemed continuously over time.
Leases
As described below and under "Recent accounting pronouncements," the Company adopted the provisions of new accounting standards and updates as codified in ASC Topic 842 regarding lease liabilities with corresponding right-of-use ("ROU") assets. The Company adopted this guidance as of January 1, 2019 using the modified retrospective approach. The modified retrospective approach provides a method for recording existing leases at adoption and in comparative periods that approximates the results of a full retrospective approach. In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed us to carry forward the historical lease classification.
The adoption of the new standard resulted in recording of operating lease ROU assets and lease liabilities of approximately $65.0 million and $74.7 million, respectively, as of January 1, 2019, with the difference largely due to deferred rents that were reclassified to the operating lease ROU assets. The adoption of the standard did not materially impact our consolidated net earnings and had no impact on cash flows. Leases are described further in Note L.
Cash and cash equivalents
Cash and cash equivalents include cash on hand, demand deposits and certificates of deposit with original maturities of three months or less at acquisition. The Company maintains significant cash balances with financial institutions, which are not covered by the Federal Deposit Insurance Corporation. The Company has not incurred any losses in such accounts and believes it is not exposed to any significant credit risk on cash.
Restricted cash and equivalents
The Company has several types of restricted cash accounts. The restricted cash balances of $1.0 million and $0.4 million at September 30, 2019 and December 31, 2018, respectively, are in accordance with the New York State Gaming Commission (the "NYSGC") regulations. In addition, at September 30, 2019 and December 31, 2018, the Company had restricted cash for Development Projects of $0 and $21.0 million, respectively, remaining from the proceeds of the Term Loan Facility (as defined below) held in the lender-controlled accounts pursuant to the Term Loan Facility. These funds were comprised entirely of cash and cash equivalent balances. In July 2019, the Company certified to its lenders, pursuant to the requirements of the Term Loan Agreement, the completion of the Casino and The Alder during July 2019 and the Company liquidated the lender-controlled bank accounts.
All of these funds were expended during the nine-month period ended September 30, 2019, for final payments of the construction of The Alder.
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same amounts shown in the statement of cash flows:
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September 30, 2019
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December 31, 2018
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September 30, 2018
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(in thousands)
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Cash and cash equivalents
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$28,962
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$28,338
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$18,390
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Restricted cash
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1,011
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|
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373
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|
|
502
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|
Restricted cash for Development Projects
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—
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21,039
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|
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64,178
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Total cash, cash equivalents and restricted cash shown in the statement of cash flows
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$29,973
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$49,750
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$83,070
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Accounts receivable
Accounts receivable, net of allowances, are stated at the amount the Company expects to collect. When required, an allowance for doubtful accounts is recorded based on information on the collectibility of specific accounts. Accounts are considered past due or delinquent based on contractual terms, how recently payments have been received and the Company’s judgment of collectibility. The Company extends credit to certain gaming patrons upon completion of a credit application process. Gaming patrons are expected to repay gaming markers within a predetermined period of time, the Company also settles wagers for other racetracks and is exposed to credit risk. These amounts are included in accounts receivable. Account balances are charged against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company recorded an allowance for doubtful accounts of approximately $0.3 million and $0.2 million at September 30, 2019 and December 31, 2018, respectively. The increase in the allowance for doubtful accounts at September 30, 2019 reflects a higher volume of credit play, as the the Casino increases the Company's customer base.
Capitalized Interest
Interest costs for the Term Loan Facility incurred in connection with the construction of the Development Projects have been capitalized in the cost of the projects. Capitalization ceased for the Casino and The Alder on March 31, 2018 and January 1, 2019, respectively, when the projects were substantially completed. Capitalization will cease for the Golf Course Project when substantially complete or if development activity is suspended for an extended period of time.
The Company capitalized $0.3 million of interest charges during each of the three-month periods ending September 30, 2019 and September 30, 2018, and $0.6 million and $11.7 million for the nine-month periods ended September 30, 2019 and September 30, 2018, respectively.
Debt issuance costs
Debt issuance costs are amortized using the effective interest method over the term of the related debt. The amortization is included within interest expense and is included as a component of the capitalized interest costs.
Long-lived assets and other financial assets
The Company periodically reviews the carrying value of its long-lived assets in relation to historical results, as well as management’s best estimate of future trends, events and overall business climate. If such reviews indicate an issue as to whether the carrying value of such assets may not be recoverable, the Company will then estimate the future cash flows generated by such assets (undiscounted and without interest charges). If such future cash flows are insufficient to recover the carrying amount of the assets, then impairment is triggered and the carrying value of any impaired assets would then be reduced to fair value. Due to certain events and circumstances, including the events further discussed in the Management's Discussion and Analysis of Financial Condition and Results of Operations, the Company performed impairment testing related to its long-lived assets in accordance with ASC 360. Based upon its review, the sum of the estimated undiscounted future cash flows expected to be generated by the long-lived asset groups exceeded the carrying values of those assets through the period ended September 30, 2019. Therefore, the second step of impairment testing under ASC 360 was not required. However, based upon current market conditions and management’s estimates, the carrying value of the Company's long-lived assets may exceed their fair value.
The Company also reviews its financial assets (i.e., non-derivative financial assets) for impairment, if it becomes probable that the commitment will not result in the receipt of proceeds from the issuance of securities.
Other long-term liabilities
The Company has accrued a liability-classified guaranty of approximately $2.0 million and $2.3 million at September 30, 2019 and December 31, 2018, respectively, related to the guaranty liability due under the MHHA Agreement (as defined and discussed in Note I below). The Company has also recorded a derivative liability in the form of a put option of approximately $1.1 million and $0.9 million at September 30, 2019 and December 31, 2018, respectively, relating to the bet365 Common Stock Purchase Agreement (as described and discussed in Note I below).
Common stock - loss per share
The Company computes basic loss per share by dividing net loss applicable to common shares by the weighted-average common shares outstanding for the period. Diluted loss per share reflects the potential dilution of earnings that could occur if securities or contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the loss of the entity. Since the effect of common stock equivalents is anti-dilutive with respect to losses, these common stock equivalents have been excluded from the Company’s computation of loss per common share. Therefore, basic and diluted loss per common share for the three-month and nine-month periods ended September 30, 2019 and 2018 were the same.
The following table shows the approximate number of common stock equivalents outstanding at September 30, 2019 and 2018 that could potentially dilute basic loss per share in the future, but were not included in the calculation of diluted loss per share for the three-month and nine-month periods ended September 30, 2019 and 2018, because their inclusion would have been anti-dilutive to the loss per common share:
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Outstanding at
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September 30,
2019
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September 30,
2018
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Unvested Restricted stock
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19,000
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37,000
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Warrants
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193,000
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193,000
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Restricted stock units ("RSUs")
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406,000
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154,000
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Deferred issuance of vested common stock
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18,000
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—
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Options
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—
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11,000
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Total
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636,000
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395,000
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Interest Rate Cap Agreement
In July 2019, the Company entered into an interest rate cap agreement with Credit Suisse AG, International ("Credit Suisse") to limit its exposure to increases in interest rates on its Term B Loan (as defined below) from July 31, 2019 through July 31, 2020 (the "Interest Rate Cap Agreement"). The Company paid $102,000 for the Interest Rate Cap. The cost of the Interest Rate Cap is amortized over its term as interest expense. The fair value of the Interest Rate Cap was $3,000 at September 30, 2019, and is presented at fair value as"Other assets" on the condensed consolidated balance sheets. The difference between the fair value and amortized cost is recorded as an adjustment to "Accumulated other comprehensive loss."
In February 2017, the Company entered into an Interest Rate Cap agreement with Credit Suisse to limit its exposure to increases in interest rates on its Term B Loan (as defined below) from May 1, 2017 through February 28, 2018 and then for a portion of the balance of its Term B Loan through July 31, 2019. The Company paid $675,000 for the Interest Rate Cap. The cost of the Interest Rate Cap was amortized over its term as interest expense. The fair value of the Interest Rate Cap was $143,000 at December 31, 2018, and was presented at fair value as"Other assets" on the condensed consolidated balance sheets. The difference between the fair value and amortized cost was recorded as an adjustment to "Accumulated other comprehensive loss."
Accumulated Other Comprehensive Loss
As of September 30, 2019 and December 31, 2018, accumulated other comprehensive loss was $0.1 million and $0.2 million, respectively, and consisted solely of the fair value adjustment relating to the Interest Rate Cap.
Derivative Liability and Asset
The Company’s Collaboration Agreement with bet365 along with the related bet365 Common Stock Purchase Agreement (as both agreements are defined and discussed in Note I below) contained an initial put option that met the definition of a derivative instrument and a freestanding contingent forward instrument. The Company classified the initial put option as a long-term liability on its condensed consolidated balance sheet. Also, because, bet365 (as defined below in Note I) has or will be obligated to purchase
shares of the Company’s common stock at a strike price less than the expected equity value once bet365’s Online Sportsbook Services (as defined in Note I below) are approved in New York State, we have classified the freestanding contingent forward instrument as a long-term asset on the condensed consolidated balance sheet. The derivative liability and the contingent forward asset were initially recorded at fair value upon the effective date of the Collaboration Agreement and are remeasured to fair value at each subsequent reporting date. Changes in the fair value of the derivative liability and long-term asset are recognized as a component of "Other income (expense)" on the condensed consolidated statement of operations and comprehensive loss.
Fair value
The Company follows the provisions of ASC 820, “Fair Value Measurement,” issued by the FASB for financial assets and liabilities. This standard defines fair value, provides guidance for measuring fair value, requires certain disclosures and discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow) and the cost approach (cost to replace the service capacity of an asset or replacement cost). The Company chose not to elect the fair value option as prescribed by the FASB for its financial assets and liabilities that had not been previously carried at fair value. The Company’s financial instruments are primarily comprised of current assets, restricted cash and investments, Interest Rate Cap, current liabilities, long-term debt, contingent forward contract, derivative instruments and a guaranty liability. Current assets, investments and current liabilities approximate fair value due to their short-term nature.
In determining fair value, the Company uses quoted prices and observable inputs. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company.
The fair value hierarchy of observable inputs used by the Company is broken down into three levels based on the source of inputs as follows:
- Level 1 - Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities.
- Level 2 - Valuations based on inputs that are observable inputs and quoted prices in active markets for similar assets and liabilities.
- Level 3 - Valuations based on inputs that are unobservable and models that are significant to the overall fair value measurement.
The following table presents the carrying amount, fair values and classification level within the fair value hierarchy of financial instruments measured or disclosed at fair value on a recurring basis:
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September 30, 2019
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December 31, 2018
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Carrying Amount
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Fair Value
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Carrying Amount
|
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Fair Value
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Level of Fair Value Hierarchy
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Assets:
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(in thousands)
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Cash and cash equivalents
|
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$28,962
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$28,962
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$28,338
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$28,338
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Level 1
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Restricted cash
|
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1,011
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|
|
1,011
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|
|
373
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|
|
373
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Level 1
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|
Interest Rate Cap
|
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3
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3
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|
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143
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143
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Level 2
|
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Restricted cash and cash equivalents for Development Projects
|
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—
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—
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21,039
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21,039
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Level 1
|
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Other assets:
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Non-derivative financial asset - Series F Preferred Stock, redeemable
|
|
14,879
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|
|
14,879
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|
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31,122
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|
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31,122
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Level 2
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Contingent forward contract - bet365
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|
529
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|
|
529
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|
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1,865
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1,865
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Level 3
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|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Term B Loan, net of discount
|
|
438,256
|
|
|
438,253
|
|
|
440,803
|
|
|
440,660
|
|
|
Level 2
|
|
Term A Loan
|
|
57,738
|
|
|
57,738
|
|
|
64,750
|
|
|
64,750
|
|
|
Level 2
|
|
Bangkok Bank Loan
|
|
20,000
|
|
|
20,000
|
|
|
20,000
|
|
|
20,000
|
|
|
Level 3
|
|
Revolving Credit Facility
|
|
15,000
|
|
|
15,000
|
|
|
15,000
|
|
|
15,000
|
|
|
Level 2
|
|
Long-term loan, related party, net of debt issuance costs
|
|
34,011
|
|
|
34,011
|
|
|
30,954
|
|
|
30,954
|
|
|
Level 3
|
|
Equipment loans
|
|
9,967
|
|
|
9,967
|
|
|
20,384
|
|
|
20,384
|
|
|
Level 3
|
|
Guaranty liability - MHHA agreement
|
|
2,045
|
|
|
2,045
|
|
|
2,300
|
|
|
2,300
|
|
|
Level 2
|
|
Derivative liability - bet365
|
|
1,088
|
|
|
1,088
|
|
|
879
|
|
|
879
|
|
|
Level 3
|
Valuation of Derivative Liability and Contingent Forward Contract
The fair value of the derivative liabilities and asset recognized in connection with the Collaboration Agreement and the bet365 Common Stock Purchase Agreement (see Note I) was determined based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy. The derivative liability for the initial put option was recorded in "Other long-term liabilities" on the consolidated balance sheets. The contingent forward contract was recorded net of the contingent put option in "Other assets" on the condensed consolidated balance sheets. The fair value of the derivative liabilities and asset was determined using a Monte Carlo simulation valuation approach with the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
|
|
Derivative Liability - bet365
|
|
Contingent forward contract - bet365
|
|
Derivative Liability - bet365
|
|
Contingent forward contract - bet365
|
|
Equity value
|
$21.91
|
|
$21.91
|
|
$29.48
|
|
$29.48
|
|
Strike price
|
$20.00
|
|
$19.29
|
|
$20.00
|
|
$20.00
|
|
Expected term
|
2.58 years
|
|
2.26 years
|
|
3.46 years
|
|
3.13 years
|
|
Volatility
|
66%
|
|
68%
|
|
61%
|
|
62%
|
|
Risk-free rate
|
1.6%
|
|
1.6%
|
|
2.9%
|
|
2.9%
|
|
Dividend yield
|
—
|
|
—
|
|
—
|
|
—
|
The following table provides a roll forward of the aggregate fair values of the Company’s derivative liabilities and asset, for which fair value is determined using Level 3 inputs (in thousands):
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
|
Derivative Liability - bet365
|
|
Contingent forward contract - bet365
|
|
Balance as of December 31, 2018
|
$(879)
|
|
$1,865
|
|
Change in fair value
|
$(209)
|
|
$(1,859)
|
|
Balance as of September 30, 2019
|
$(1,088)
|
|
$6
|
Valuation of Non-Derivative Liability
The fair value of the guaranty liability recognized in connection with the MHHA Agreement (see Note I) was determined based on significant inputs that are observable and quoted prices in active markets for similar liabilities, which represents a Level 2 measurement within the fair value hierarchy. The fair value of the derivative liability was determined using a Black Scholes valuation approach with the following assumptions:
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
|
|
Guaranty Liability - MHHA Horsemen
|
|
Guaranty Liability - MHHA Horsemen
|
|
Equity value
|
$9.63
|
|
$10.13
|
|
Strike price
|
$35.05
|
|
$27.50
|
|
Expected term
|
5.36 years
|
|
6.11 years
|
|
Volatility
|
66%
|
|
68%
|
|
Risk-free rate
|
1.6%
|
|
2.6%
|
|
Dividend yield
|
—
|
|
—
|
Stock-based compensation
The cost of all stock-based awards to employees, including grants of employee restricted stock units, is recognized in the financial statements based on the fair value of the awards at grant date. The fair value of share-based awards is recognized as stock-based compensation expense on a straight-line basis over the requisite service period from the date of grant. As of September 30, 2019, there was approximately $2.3 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Company’s equity compensation plan. That cost is expected to be recognized over a period of 2.5 years. This expected cost does not include the impact of any future stock-based compensation awards.
Income taxes
The Company applies the asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed for differences between the financial statement and tax bases of assets and liabilities that will result in future taxable or deductible amounts, based on enacted tax laws and rates for the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
Intangible Assets
In accordance with ASC 350, Intangibles - Goodwill and Other, the Company amortizes intangible assets over their estimated useful lives unless the Company determines their lives to be indefinite.
The Company paid $51 million to the NYSGC on February 25, 2016 for a gaming facility license (the "Gaming Facility License"). The term of the Gaming Facility License is 10 years and the amortization commenced on the date the Casino opened to the public in February 2018. Beginning in February 2018, the Company recognized amortization on a straight line basis and will continue to amortize approximately $6.3 million annually over the next seven years until the license is up for renewal in 2026. The Company will assess the intangible asset for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired.
Seasonality
The gaming market in the northeastern United States is seasonal in nature. Peak gaming activities occur during the months of May through September.
Segment Reporting
The Company maintains discrete financial information for each of its operating companies, which is used by the Chief Executive Officer (the "CEO") as the basis for allocating resources. Each company has been identified as an operating segment and meets the criteria for aggregation due to similar economic characteristics as all of the companies provide similar gaming and entertainment services and shares similar processes for delivering services. Our companies have a high degree of similarity in the workforces and target similar patron groups. Accordingly, based on these economic and operational similarities and the way the CEO monitors and makes decisions, the Company has concluded that its operating segments may be aggregated and that it has one reportable segment.
Recent accounting pronouncements
In February 2016, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") 2016-02, "Leases (Topic 842)" ("ASU 2016-02"). This ASU requires lessees to recognize most leases on their balance sheets as lease liabilities with corresponding ROU assets. ASU 2016-02 takes effect for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The standard must be adopted using a modified retrospective approach and provides for certain practical expedients. The Company adopted the standard on January 1, 2019 and applied the package of practical expedients available to it upon adoption, which among other alternatives, allows us to carry forward the historical lease classification. The adoption of this standard did not not materially affect our consolidated net income or cash flows. See Note L for further details.
In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments - Credit Losses" (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU modifies the measurement of expected credit losses of certain financial instruments. ASU 2016-13 is effective for annual periods beginning after December 15, 2019 and interim periods within those annual periods. The amendments in this ASU should be applied on a modified retrospective basis to all periods presented. We will adopt the provisions of this ASU in the first quarter of 2020. The Company is still in the process of assessing the impact of the new standard on our consolidated financial statements and related disclosures.
Note C. Prepaid Expenses and Other Assets
The amount of the unreceived New York State gaming tax receivable for MRMI of approximately $3.4 million at December 31, 2018, was included in prepaid expenses and other current assets. This receivable was paid by New York State to the Company in June 2019. Prepaid real estate taxes at September 30, 2019 and December 31, 2018 of $1.9 million and $0.3 million, respectively, primarily include real estate taxes paid for Montreign Operating and MRMI and will be amortized during 2019 on a straight-line basis.
Prepaid expenses and other current assets, as presented on the condensed consolidated balance sheets, are comprised of the following at September 30, 2019 and December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
|
|
|
(in thousands)
|
|
Receivable from New York State
|
|
$0
|
|
$3,422
|
|
Prepaid real estate taxes
|
|
1,909
|
|
|
284
|
|
|
Prepaid insurance
|
|
438
|
|
|
392
|
|
|
Prepaid supplies
|
|
1,526
|
|
|
1,528
|
|
|
Prepaid advertising
|
|
512
|
|
|
23
|
|
|
Prepaid gaming expenses
|
|
659
|
|
|
773
|
|
|
Prepaid maintenance contracts
|
|
742
|
|
|
657
|
|
|
Development escrow and refundable security deposit
|
|
541
|
|
|
572
|
|
|
Prepaid interest - Bangkok Bank Loan
|
|
422
|
|
|
—
|
|
|
Prepaid other
|
|
555
|
|
|
375
|
|
|
Total prepaid expenses and other current assets
|
|
$7,304
|
|
$8,026
|
Note D. Property and Equipment
Property and equipment at September 30, 2019 and December 31, 2018 consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
|
|
(in thousands)
|
|
Land
|
$770
|
|
$770
|
|
Land improvements
|
2,403
|
|
|
2,382
|
|
|
Buildings
|
626,617
|
|
|
622,043
|
|
|
Building improvements
|
108,366
|
|
|
103,621
|
|
|
Furniture, fixtures and equipment
|
10,244
|
|
|
10,954
|
|
|
Construction in Progress
|
2,315
|
|
|
2,784
|
|
|
|
750,715
|
|
|
742,554
|
|
|
Less: Accumulated depreciation
|
(70,765
|
)
|
|
(44,875
|
)
|
|
|
$679,950
|
|
$697,679
|
The $8.2 million increase in property and equipment was primarily due to the reclassification of capitalized Development Projects costs for the Casino and The Alder to buildings, building improvements and furniture, fixtures and equipment during the nine-month period ended September 30, 2019. At September 30, 2019, $20.6 million remains classified as capitalized Development Projects costs, reflecting the ongoing construction of the Golf Course Project.
Depreciation expense was approximately $8.7 million and $7.9 million for the three-month periods ended September 30, 2019 and 2018, respectively, and approximately $26.1 million and $20.3 million for the nine-month periods ended September 30, 2019 and 2018, respectively.
The VGMs at Monticello Raceway were owned by the NYSGC and, accordingly, the Company's condensed consolidated financial statements include neither the cost nor the depreciation of those devices.
Note E. Development Projects Costs
Capitalized Project Development Costs
At September 30, 2019 and December 31, 2018, capitalized Development Projects costs incurred were approximately $20.6 million and $5.7 million, respectively. Total capitalized Development Projects costs at September 30, 2019 consisted of $19.0 million of construction costs, site development, contractor insurance, general conditions, architectural fees and construction manager fees, and approximately $1.6 million of professional service fees including legal and accounting fees. Total capitalized Development Projects costs at December 31, 2018 consisted of $4.2 million of construction costs, site development, contractor insurance, general conditions, architectural fees and construction manager fees, and approximately $1.5 million of professional service fees, including legal and accounting fees. In July 2019, the Company certified to its lenders, pursuant to the requirements of the Term Loan Agreement, the completion of the Casino and The Alder during July 2019.
In September 2018, ERREI entered into a standard contractor agreement for the construction of the Golf Course Project, at a cost of approximately $22.5 million. The Company began construction in September 2018.
Note F. Accrued Expenses and Other Current Liabilities
Accrued Development Projects costs at September 30, 2019 and December 31, 2018 were $7.0 million and $4.9 million, respectively, and were primarily comprised of amounts due to the construction managers for costs incurred for the Development Projects, as well as amounts due to other vendors. The proceeds from the Term Loan Facility were used to pay the accrued Development Projects costs related to the Casino and The Alder.
Accrued expenses and other current liabilities, as presented on the condensed consolidated balance sheets, were comprised of the following at September 30, 2019 and December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
|
|
(in thousands)
|
|
Liability for horseracing purses
|
$1,614
|
|
$868
|
|
Accrued payroll
|
5,642
|
|
|
8,142
|
|
|
Accrued interest expense
|
4,583
|
|
|
5,033
|
|
|
Accrued marketing
|
5,821
|
|
|
5,298
|
|
|
Deferred revenue - loyalty points
|
3,525
|
|
|
2,202
|
|
|
Liability to the NYSGC
|
1,966
|
|
|
2,816
|
|
|
Liability for local progressive jackpot
|
2,504
|
|
|
2,560
|
|
|
Accrued premium game leases
|
533
|
|
|
1,288
|
|
|
Accrued professional fees
|
2,277
|
|
|
2,337
|
|
|
Accrued utilities
|
300
|
|
|
561
|
|
|
Accrued other
|
5,118
|
|
|
2,573
|
|
|
Total accrued expenses and other current liabilities
|
$33,883
|
|
$33,678
|
Note G. Long-Term Debt
Long-term debt, other than related party debt, consisted of the following at September 30, 2019 and December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
|
|
|
(in thousands)
|
|
Term B Loan (net of unamortized discount)
|
|
$438,256
|
|
$440,803
|
|
Term A Loan
|
|
57,738
|
|
|
64,750
|
|
|
Bangkok Bank Loan
|
|
20,000
|
|
|
20,000
|
|
|
Revolving Credit Facility
|
|
15,000
|
|
|
15,000
|
|
|
Equipment Loans
|
|
9,967
|
|
|
20,384
|
|
|
Total long-term debt
|
|
540,961
|
|
|
560,937
|
|
|
Debt issuance costs
|
|
(13,827
|
)
|
|
(17,240
|
)
|
|
Total long-term debt, net
|
|
527,134
|
|
|
543,697
|
|
|
Less: Current portion of long-term debt
|
|
(43,181
|
)
|
|
(48,004
|
)
|
|
Long term-debt, net of current portion
|
|
$483,953
|
|
$495,693
|
Term Loan Facility
At September 30, 2019 and December 31, 2018, Montreign Operating's senior secured term loan facility (the "Term Loan Facility") consisted of $57.7 million and $64.8 million, respectively, outstanding under the Term A loan (the "Term A Loan") and $438.3 million and $440.8 million, respectively, outstanding (net of original issue discount) under the Term B loan (the "Term B Loan"). Pursuant to the Building Term Loan Agreement, (as amended the "Term Loan Agreement"), among Montreign Operating, the lenders from time to time party thereto, and Credit Suisse AG, Cayman Islands Branch (“Credit Suisse”), as administrative agent, the Term A Loan is fully drawn in accordance with the Term Loan Agreement, which required the Company to complete the draw down of the Term A Loan by July 24, 2018. The Term A Loan will mature on January 24, 2022 and the Term B Loan will mature on January 24, 2023. Interest accrues on outstanding borrowings under the Term A Loan at a rate equal to LIBOR plus 5.0% per annum, or an alternate base rate plus 4.0% per annum. At September 30, 2019 and December 31, 2018, the interest rate on the Term A Loan was 7.12% and 7.68%, respectively. Interest accrues on outstanding borrowings under the Term B Loan at a rate equal to LIBOR (with a floor of 1%) plus 8.25% per annum, or an alternate base rate plus 7.25% per annum. At September 30, 2019 and December 31, 2018, the interest rate on the Term B Loan was 10.37% and 10.96%, respectively. In addition, Montreign Operating paid a commitment fee to each Term A Loan lender equal to the undrawn amount of such lender’s commitment multiplied by a rate equal to 5.0% per annum through July 24, 2018.
Since June 30, 2018, the Company has been required to make principal payments under the Term B Loan and the Term A Loan at the end of each calendar quarter. The Company repays 1% of the original principal balance of the Term B Loan each year, in quarterly payments of approximately $1.1 million. From June 30, 2018 through March 31, 2019, the Company repaid 2.5% of the original principal amount of the Term A Loan, in quarterly payments of approximately $1.8 million. Beginning on June 28, 2019 and extending through maturity, the Company will make quarterly installments of approximately $2.6 million on the Term A Loan. The Company repaid approximately $7.0 million and $3.5 million on the Term A Loan and Term B Loan, respectively, in the nine-month period ended September 30, 2019.
The Term Loan Agreement contains representations and warranties, customary events of default, and affirmative, negative and financial covenants. Mandatory prepayments of the Term Loan Facility will be required upon the occurrence of certain events, including sales of certain assets and casualty events. In addition, the Term Loan Agreement restricts Montreign Operating, ERREI and ERREII (together, the "Project Parties") from incurring additional indebtedness except for, among other things, obligations pursuant to hedging agreements required under the Term Loan Agreement, capital lease obligations and purchase money indebtedness (including FF&E financing) in an amount not exceeding $40 million, subordinated indebtedness so long as the proceeds are applied pursuant to the terms of the Term Loan Agreement and other indebtedness not exceeding $10 million. Also, the Project Parties may not make any dividend or other distribution, redeem or otherwise acquire any equity securities or subordinated indebtedness. Moreover, the Project Parties are restricted from entering into advisory, management or consulting agreements with an affiliate of any Project Party, including Empire, except for payments pursuant to tax sharing agreements, distributions in an amount not exceeding 1% of the net revenues of the Project Parties in any fiscal year, repurchase of capital stock of the Company in an amount not exceeding $1 million and required by the NYSGC, and certain available amounts of cash based on the application of financial covenants.
Additional affirmative, negative and financial covenants under the Term Loan Agreement include that the Company maintain compliance with a maximum first lien leverage ratio not to exceed 5.0:1.0, a minimum interest coverage ratio not to fall below 2.0:1.0 and a consolidated capital expenditure covenant not to exceed $10.5 million of eligible expenses in any calendar year. The financial covenants relating to the maximum first lien leverage ratio and the minimum interest coverage ratio were measured beginning in the current quarter ending on June 30, 2019. The Company is allowed to add back pro forma EBITDA in the amount of $108.4 million, $77.5 million and $39.4 million in each of the first three testing quarters, respectively. In addition, the Company has a right to cure any covenant defaults through the use of specified equity contributions during the first three quarters tested for covenant compliance. As of September 30, 2019, the Company was in compliance with all applicable covenant requirements under the Term Loan Facility. In addition, the Company will be in compliance with all applicable covenant requirements measured as of September 30, 2019 under the Term Loan Facility after giving effect to a specified equity contribution in the range of $20 million to $24 million.
The Term Loan Facility is guaranteed by the Project Parties and is secured by security interests in substantially all the real and personal property of the Project Parties and by a pledge of all the membership interests of Montreign Operating held by Montreign Holding Company, LLC ("Montreign Holding"), a wholly-owned subsidiary of Empire.
Obligations under the Term Loan Agreement may be accelerated upon certain customary events of default, including, among others: nonpayment of principal, interest or fees; breach of the affirmative or negative covenants; revocation of a gaming license for seven consecutive business days; and a Change in Control (as such term is defined in the Term Loan Agreement) of Montreign Operating.
Revolving Credit Facility
At September 30, 2019 and December 31, 2018, Montreign Operating's revolving credit facility (the "Revolving Credit Facility") consisted of $15 million of outstanding borrowings. The Revolving Credit Facility provides for loans or other extensions of credit to be made to Montreign Operating in an aggregate principal amount of up to $15 million (including a letter of credit sub-facility of $10 million) pursuant to the terms of the Revolving Credit Agreement, among Montreign Operating, the lenders from time to time party thereto, and Fifth Third Bank, as administrative agent (as amended, the "Revolving Credit Agreement"). The proceeds of the Revolving Credit Facility were used for working capital needs, capital expenditures and other general corporate purposes. The Revolving Credit Facility will mature on January 24, 2022. Interest accrues on outstanding borrowings at a rate equal to LIBOR plus 5.0% per annum, or an alternate base rate plus 4.0% per annum. At September 30, 2019 and December 31, 2018, the interest rate on borrowings under the Revolving Credit Facility was 7.12% and 7.71%, respectively.
The Revolving Credit Facility is guaranteed by the Project Parties and is secured by security interests in substantially all the real and personal property of the Project Parties and by a pledge of all the membership interests of Montreign Operating held by Montreign Holding Company.
The Revolving Credit Facility contains representations and warranties, customary events of default, and affirmative, negative and financial covenants substantially similar to the terms of the Term Loan Agreement. Mandatory prepayments of the Revolving Credit Facility will be required upon the occurrence of certain events, including sales of certain assets, casualty events and the incurrence of certain additional indebtedness, subject to certain exceptions and reinvestment rights. As of September 30, 2019, the Company was in compliance with all applicable covenant requirements under the Term Loan Facility. In addition, the Company will be in compliance with all applicable covenant requirements measured as of September 30, 2019 under the Term Loan Facility after giving effect to a specified equity contribution in the range of $20 million to $24 million.
Bangkok Bank Loan
At September 30, 2019 and December 31, 2018, the Delayed Draw Term Loan, as amended (the "Bangkok Bank Loan") consisted of $20 million of outstanding borrowings pursuant to the Delayed Draw Term Loan Credit Agreement (the “Bangkok Bank Loan Agreement”), among Empire, Bangkok Bank PCL, New York Branch (“Bangkok Bank”), as lender, and MRMI, as guarantor.
The Bangkok Bank Loan will mature on December 28, 2019. Interest accrues on outstanding borrowings under the Bangkok Bank Loan at a rate equal to LIBOR plus 6.25%, or an alternate base rate plus 5.25% per annum. At September 30, 2019 and December 31, 2018, the interest rate on the Bangkok Bank Loan was 8.37% and 8.77%, respectively.
The Bangkok Bank Loan was amended (the "Bangkok Bank Loan Amendment") on June 25, 2018 concurrently with the execution of the Kien Huat Subordinate Loan Agreement (which is defined and discussed in Note H below). The Bangkok Bank Loan Amendment permitted the Company to incur the Kien Huat Subordinate Loan.
The Bangkok Bank Loan is guaranteed by MRMI and is secured by a security interest in Monticello Raceway. The Bangkok Bank Loan Agreement contains customary representations and warranties and affirmative, negative and financial covenants, including representations, warranties and covenants that, among other things, restrict the ability of the Company and MRMI to incur additional debt, incur or permit liens on assets, make investments and acquisitions, consolidate or merge with any other company, engage in certain transactions with affiliates, or make dividends or other distributions. Obligations under the Bangkok Bank Loan Agreement may be accelerated upon certain customary events of default, including, among others, nonpayment of principal, interest or fees, breach of the affirmative or negative covenants, revocation of a gaming license after the expiration of certain cure periods, and a change of control of the Company.
In addition, the Bangkok Bank Loan Agreement contains a financial covenant that restricts the maximum total leverage ratio to four times the adjusted EBITDA of MRMI, which financial covenant is applicable beginning with the fiscal quarter ending December 31, 2018. The Bangkok Bank Loan Amendment excludes the Kien Huat Subordinate Loan from calculations of the Company's maximum total leverage so long as the Kien Huat Subordinate Loan remains subordinate to the Bangkok Bank Loan.
On September 30, 2019, the Company entered into a Limited Waiver and Second Amendment to the Bangkok Bank Loan Agreement (the “Bangkok Bank Loan Second Amendment”) with MRMI and Bangkok Bank. Pursuant to the Bangkok Bank Loan Second Amendment, the parties agreed to waive a potential event of default relating to the total leverage ratio covenant measured as of September 30, 2019. In addition, pursuant to the Bangkok Bank Loan Second Amendment, the covenant concerning mergers and consolidations was amended to specifically permit the Merger. The Company also agreed to prepay all interest due on the Bangkok Bank Loan from October 1, 2019 through December 30, 2019 in the amount of approximately $422,000. Further, the Company agreed to pay an amendment and waiver fee of $5,000 to Bangkok Bank.
Equipment Loans
The Company has entered into several financing agreements related to the purchase of its slot machines, equipment and software for its telephone, hotel and Casino operations. The original amount financed was $31.1 million and the terms of these agreements run between six and 36 months. The balances outstanding at September 30, 2019 and December 31, 2018 totaled approximately $10.0 million and $20.4 million, respectively. The stated interest rates for these loans are between zero and eight percent per annum. The Company has imputed interest on several equipment loans with stated interest rates of 0%, using the Company's cost of funds rate of approximately 10%. The weighted average of the monthly principal repayments is approximately $1.0 million.
The following table lists the annual principal repayments due for the Company's long-term debt as of September 30, 2019:
|
|
|
|
|
|
|
Year ending December 31,
|
Totals
|
|
|
(in thousands)
|
|
2019
|
$27,212
|
|
2020
|
20,691
|
|
|
2021
|
15,815
|
|
|
2022
|
53,613
|
|
|
2023
|
428,543
|
|
|
Totals
|
$545,874
|
Note H. Long-Term Loans, Related Party
Subsidiary Revolving Loan Agreement
On November 30, 2018, Empire entered into a Revolving Loan Agreement (the “Sub Revolving Loan Agreement”) with Montreign Operating. The Sub Revolving Loan Agreement provides for loans (in the aggregate, the “Sub Revolving Loan”) to Montreign Operating in a principal amount of up to $10 million (the “Subsidiary Loan Amount”). Interest accrues on outstanding borrowings at a rate of 7% per annum and is payable beginning on the last day of each calendar quarter beginning on March 31, 2019. Of that interest, 1% is payable in cash and 6% accrues and remains outstanding until paid in full (and continues to bear interest). The Sub Revolving Loan, together with interest accrued and yet unpaid, will be due and payable on April 25, 2023.
The Sub Revolving Loan Agreement contains customary representations and warranties and affirmative covenants, including representations, warranties and covenants on organization, authorization, enforceability and maintenance of existence. The Sub Revolving Loan is secured by a security interest in all personal property of Montreign Operating subject to the limitations and exceptions described in the Sub Revolving Loan Agreement. Obligations under the Sub Revolving Loan Agreement may be accelerated upon certain customary events of default, including, among others: nonpayment of principal, interest or fees; breach of any term, covenant, or agreement under the Sub Revolving Loan Agreement; a bankruptcy proceeding involving Montreign, whether voluntary or involuntary; or the acceleration of any indebtedness in excess of $10 million.
Montreign Operating agreed to indemnify Empire and its officers, partners, members, directors, employees and agents (together, the “Indemnified Parties” and each an “Indemnified Party”) against any and all damages arising out of any negligence or tortious acts or omissions by Montreign Operating or its agents, contractors, servants or employees, any failure by Montreign to comply with the terms of the Sub Revolving Loan Agreement, and any failure by Montreign Operating to comply with the law, except to the extent any such damages result from the gross negligence or willful misconduct of an Indemnified Party.
At September 30, 2019 and December 31, 2018, $10 million was outstanding from Montreign Operating under the Sub Revolving Loan.
Loan Arrangements with Kien Huat Realty III Limited
Kien Huat Subordinate Loan Agreement
On June 25, 2018, Kien Huat and the Company entered into a loan agreement (the “Kien Huat Subordinate Loan Agreement”), providing for loans of up to $30 million (the “Kien Huat Subordinate Loan”). The Kien Huat Subordinate Loan is subordinate to the Bangkok Bank Loan. The proceeds of the Kien Huat Subordinate Loan may be used exclusively to make capital contributions
to Montreign Operating. Montreign may use such funds for marketing and general corporate purposes (including the payment of debt service). All amounts due under the Kien Huat Subordinate Loan will mature on December 28, 2020, which date may be extended for additional one-year periods if the Bangkok Bank Loan is similarly extended or accelerated in the event the Bangkok Bank Loan is accelerated. The maturity of the Kien Huat Subordinate Loan may also be extended for up to one year at the sole discretion of Kien Huat.
At September 30, 2019 and December 31, 2018, $30 million was outstanding under the Kien Huat Subordinate Loan. The Company paid Kien Huat a commitment fee of $300,000 (or 1% of the principal amount) out of the proceeds of the first advance.
The Kien Huat Subordinate Loan bears interest at a rate of 12% per annum, compounded monthly, and is payable at maturity. Prior to the maturity of the Kien Huat Subordinate Loan, interest is not required to be paid in cash and is added to the outstanding principal of the Kien Huat Subordinate Loan and is thereafter be deemed to be part of the principal indebtedness due thereunder upon maturity. The Kien Huat Subordinate Loan may be repaid in full or in part at any time without premium or penalty.
The Kien Huat Subordinate Loan Agreement contains customary representations and warranties and affirmative covenants, including a restriction on the use of the proceeds of the Kien Huat Subordinate Loan as described above. Obligations under the Kien Huat Subordinate Loan Agreement may be accelerated upon certain customary events of default, including among others: nonpayment of principal, interest or fees; breach of the affirmative covenants; and a default in payment of or acceleration of the Bangkok Bank Loan. Additionally, any future amendments to the Bangkok Bank Loan Agreement relating to default provisions thereunder, prepayment provisions or an increase of the maximum principal amount thereunder will be subject to Kien Huat’s prior written consent.
The Company agreed to indemnify and defend Kien Huat and its affiliates from negligent acts or omissions of the Company and its affiliates, any failure of the Company to comply with the terms of the Kien Huat Subordinate Loan Agreement and any failure of the Company to comply with any laws, except to the extent resulting from the gross negligence or willful misconduct of Kien Huat or its affiliates.
Kien Huat Backstop Loan Agreement
Concurrently with and as a condition to the closing of the Bangkok Bank Loan Agreement, on December 28, 2017, Empire and Kien Huat entered into a loan agreement (the "Kien Huat Backstop Loan Agreement"), providing for loans to Empire in an aggregate principal amount of up to $20 million (the "Kien Huat Backstop Loan"). Any amounts borrowed pursuant to the Kien Huat Backstop Loan Agreement will be used exclusively to make payments required under the Bangkok Bank Loan Agreement and will mature on the one-year anniversary of the maturity date of the Bangkok Bank Loan, or such earlier date that the Bangkok Bank Loan is terminated (the "Backstop Maturity Date"). As of September 30, 2019 and December 31, 2018, no amounts had been borrowed under the Kien Huat Backstop Loan.
The Kien Huat Backstop Loan bears interest at a rate of 12% per annum. Prior to the Backstop Maturity Date, interest on any principal amount outstanding under the Kien Huat Backstop Loan will accrue and be added to the outstanding principal of the Kien Huat Backstop Loan on the first business day of each calendar month beginning on January 1, 2018 and will thereafter be deemed to be part of the principal indebtedness. The Kien Huat Backstop Loan, including all interest and any other amounts due under the Kien Huat Backstop Loan, will be payable in cash on the Backstop Maturity Date.
The Kien Huat Backstop Loan Agreement contains representations and warranties and affirmative covenants that are usual and customary, including representations, warranties and covenants that restrict the Company’s use of the proceeds of the Kien Huat Backstop Loan Agreement to pay amounts due and payable under the Bangkok Bank Loan. Obligations under the Kien Huat Backstop Loan Agreement may be accelerated upon certain customary events of default, including among others: nonpayment of principal, interest or fees; and breach of the affirmative covenants.
Note I. Stockholders’ Equity
Common Stock
Restriction on Ownership
Our common stock is transferable only subject to the provisions of Section 303 of the Racing, Pari-Mutuel Wagering and Breeding Law, so long as we hold, directly or indirectly, a license issued by the NYSGC, and may be subject to compliance with the requirements of other laws pertaining to licenses held directly or indirectly by us. The owners of common stock issued by us may be required by regulatory authorities to possess certain qualifications and may be required to dispose of their common stock if the owner does not possess such qualifications.
Restriction on Ability to Pay Dividends
Pursuant to the terms of the Bangkok Bank Loan Agreement, neither Empire nor any of its subsidiaries is permitted to declare or pay any dividends or make other payments to purchase, redeem, retire or otherwise acquire any capital stock of the Company. Such restriction will lapse upon the payment in full of any amounts outstanding under the Bangkok Bank Loan Agreement. Similarly, pursuant to the Merger Agreement, Empire is not permitted to declare or pay any dividends or other distributions on its capital stock or set a record date for such payment, except for cash dividends or distributions from a subsidiary to Empire. Notwithstanding the foregoing, so long as no event of default has occurred, subsidiaries of Empire are permitted to pay dividends to Empire and Empire may pay dividends on the Series B Preferred Stock and for withholding taxes payable in connection with equity compensation programs pursuant to the Bangkok Bank Loan Agreement and the Merger Agreement.
Bet365 Common Stock Purchase Agreement
On November 14, 2018, the Company entered into a sportsbook and digital gaming collaboration agreement (the “Collaboration Agreement”) with Hillside (New York) LLC, an affiliate of bet365 Group Limited (“bet365”). In connection with entering into the Collaboration Agreement, Hillside (New Media Holdings) Limited, an affiliate of bet365 ("bet365 Investor"), and the Company entered into a common stock purchase agreement (the “bet365 Common Stock Purchase Agreement”) pursuant to which bet365 Investor agreed to purchase up to 2.5 million shares of common stock of the Company at a purchase price of $20.00 per share, for an aggregate investment of $50 million.
Upon execution of the bet365 Common Stock Purchase Agreement, the bet365 Investor purchased 1,685,759 shares of common stock. The Company received net proceeds of $29.6 million from the offering.
Pursuant to the bet365 Common Stock Purchase Agreement, the bet365 Investor will be obligated to purchase the remaining 814,241 shares of common stock at $20.00 per share so long as the following closing conditions are met: (i) 30 days have passed following the receipt of approval from the NYSGC of bet365 Investor’s ownership of the Shares and the enactment of laws by New York State allowing the offering of the online sportsbook services by bet365, as outlined in the Collaboration Agreement (the "bet365 Online Sportsbook Services"); (ii) the representations and warranties of the Company are true and correct in all material respects and the Company has complied with its obligations under the bet365 Common Stock Purchase Agreement; (iii) the Collaboration Agreement is in full force and effect and there is no material breach of the Collaboration Agreement by the Company outstanding; (iv) the common stock of the Company continues to be listed on The Nasdaq Stock Market; (v) the Company continues to own 100% of the equity interests in the Casino; and (vi) the Company's Gaming Facility License for the Casino is still valid.
After all gaming taxes have been paid and the parties have recouped their costs and expenses, bet365 may receive a distribution (the “Preferred Distribution”) equal to 50% of the positive difference, if any (the “delta”), between $20 and the value of the Company’s common stock measured on a given date (such date, the “Trigger Date”), multiplied by the number of shares of common stock then held by bet365 Investor. The Trigger Date is 30 days after the Company’s first filing of an annual or quarterly report with the Securities and Exchange Commission after bet365 recoups its costs incurred pursuant to the Collaboration Agreement. The delta will be the positive difference between $20 and the 30-day volume-weighted average price of the Company’s common stock on the Trigger Date. If the Company is no longer a reporting company, or if the Company’s common stock is not listed on a national securities exchange, the delta will be the positive difference between $20 and the fair market value of the Company’s common stock as determined by an investment bank retained by the parties. If a change of control (as such term is defined in the Collaboration Agreement) of the Company occurs before the Trigger Date, the delta will be the positive difference between $20 and the per share value paid by a third party in a change of control transaction. The Preferred Distribution, if any, will be payable on a monthly basis over a period of three years. If bet365 Investor sells any shares of common stock prior to the Trigger Date, the Preferred Distribution will be deemed to be $0.
The Company concluded that the Preferred Distribution (an initial put option) is an embedded derivative liability because the right to receive the Preferred Distribution will not transfer with any shares of common stock sold by bet365 Investor. The fair value of the derivative liability associated with shares already sold to bet365 Investor was $1.1 million and $0.9 million at September 30, 2019 and December 31, 2018, respectively.
The Company also concluded the ability to purchase the remaining shares under the bet365 Common Stock Purchase Agreement is a freestanding contingent forward instrument. The fair value of this instrument was approximately $0.6 million and $1.9 million at September 30, 2019 and December 31, 2018, respectively, net of the derivative liability (contingent put option) of approximately $0.5 million and $0.4 million, respectively, for the right associated with the remaining shares to also receive the Preferred Distribution.
The derivative liability and the contingent forward asset were recorded at fair value upon the effective date of the Collaboration Agreement and are remeasured to fair value at each subsequent reporting date. Changes in the fair value of the derivative liabilities and long-term asset are recognized as a component of "Other income (expense)" in the condensed consolidated statement of operations and comprehensive loss.
Preferred Stock and Dividends
Series F Preferred Stock, redeemable
On February 20, 2019, under the terms of the KH Series F Preferred Stock Commitment, the Company and KH entered into a subscription agreement, pursuant to which KH purchased 200 shares of the Company's Series F Preferred Stock for an aggregate purchase price of $20 million, resulting in proceeds to the Company (after deducting an approximately $200,000 funding fee due to KH) of $19.8 million.
On May 15, 2019, under the terms of the KH Series F Preferred Stock Commitment, the Company and KH entered into a subscription agreement, pursuant to which KH purchased 270 shares of the Company's Series F Preferred Stock for an aggregate purchase price of $27 million, resulting in net proceeds to the Company (after deducting an approximately $270,000 funding fee due to KH) of $26.7 million.
On June 17, 2019, under the terms of the KH Series F Preferred Stock Commitment, the Company and KH entered into a subscription agreement, pursuant to which KH purchased 150 shares of the Company's Series F Preferred Stock for an aggregate purchase price of $15 million, resulting in net proceeds to the Company (after deducting an approximately $150,000 funding fee due to KH) of $14.8 million.
On August 26, 2019, under the terms of the KH Series F Preferred Stock Commitment, the Company and KH entered into a subscription agreement, pursuant to which KH purchased 150 shares of the Company's Series F Preferred Stock for an aggregate purchase price of $15 million, resulting in net proceeds to the Company (after deducting an approximately $150,000 funding fee due to KH) of $14.8 million.
On September 23, 2019, under the terms of the KH Series F Preferred Stock Commitment, the Company and KH entered into a subscription agreement, pursuant to which KH purchased 75 shares of the Company's Series F Preferred Stock for an aggregate purchase price of $7.5 million, resulting in net proceeds to the Company (after deducting an approximately $75,000 funding fee due to KH) of $7.4 million.
Series B Preferred Stock
Quarterly payments in the amount of $32,087 were made on April 2, 2019, July 1, 2019 and October 1, 2019 for the first three quarters of 2019 and quarterly payments in the amount of $32,087 were made on April 2, 2018, July 2, 2018 and October 1, 2018 for the first three quarters of 2018.
Warrants
As of September 30, 2019 and December 31, 2018, respectively, there were outstanding warrants to purchase an aggregate of approximately 133,300 shares of Empire’s common stock at $30.00 per share with an expiration date of May 10, 2020 and warrants to purchase 60,000 shares of common stock at $81.50 per share with an expiration date of March 15, 2025.
On November 1, 2014, MRMI and the Monticello Harness Horsemen’s Association (the “MHHA”) entered into an agreement that governs the conduct of MRMI and MHHA relating to horseracing purse payments, the simulcasting of horse races and certain other payments (the “2014 MHHA Agreement”). Pursuant to the 2014 MHHA Agreement, on March 16, 2018, Empire issued to MHHA 200,000 shares of common stock, and on March 15, 2018, Empire issued to MHHA a warrant to purchase 60,000 shares of common stock at $81.50 per share, the proceeds of any sales of which will provide additional monies for the harness horsemen’s purse account. Under the terms of the 2014 MHHA Agreement, the MHHA may dispose of the common stock beginning six months after receipt the common stock, subject to limitations upon the quantity of common shares disposed at any one time, as prescribed by the MHHA Agreement. The Company also provided a guaranty on the value of the shares provided to MHHA upon the termination of the MHHA Agreement, which is approximately seven years after issuance.
Note J. Concentration
As of September 30, 2019, the Company had one marker receivable which represented more than 10% of the total net outstanding accounts receivable.
As of December 31, 2018, the Company had no receivable which represented more than 10% of the total net outstanding accounts receivable.
Note K. Related Party Transactions
Merger
On August 18, 2019, the Company entered into the Merger Agreement, whereby Merger Sub will merge into the Company, with the Company surviving as a subsidiary of Parent. Parent and Merger Sub are affiliates of Kien Huat and GenM.
In connection with the execution of the Merger Agreement, Kien Huat entered into a voting agreement (the “Voting Agreement”) with the Company pursuant to which Kein Huat has agreed to vote its shares in the Company in favor of the Merger and the adoption of the Merger Agreement, subject to the limitations set forth in the Voting Agreement.
Kien Huat 2018 Preferred Stock Commitment Letter
On November 6, 2018, the Company and Kien Huat entered into a commitment letter, as amended and restated on November 9, 2018 and May 7, 2019 (collectively, the "2018 Kien Huat Preferred Stock Commitment Letter"), pursuant to which Kien Huat committed to provide equity financing in support of the general corporate and working capital requirements of the Company and its subsidiaries. Pursuant to the 2018 Kien Huat Preferred Stock Commitment Letter, Kien Huat agreed to purchase up to $126 million (the "Commitment Amount") of Series F Preferred Stock on the terms set forth in the 2018 Kien Huat Preferred Stock Commitment Letter and the Certificate of Designations of the Series F Preferred Stock, which the Company filed with the Secretary of State of the State of Delaware on November 5, 2018. Kien Huat committed to purchase the Commitment Amount of the Series F Preferred Stock pursuant to the following schedule: (i) up to $12 million no earlier than November 9, 2018; (ii) up to $20 million no earlier than February 15, 2019; (iii) up to $20 million no earlier than May 15, 2019; (iv) up to $15 million no earlier than August 15, 2019; (v) up to $37 million no earlier than November 15, 2019 and (vi) up to $22 million no earlier than March 15, 2020. The Company agreed to use its reasonable efforts to secure third-party financing in an amount equal to the Commitment Amount and the Commitment Amount will be reduced by the amount of any third-party financing raised by the Company. However, any equity financing raised by the Company from any person entering into a commercial agreement relating to online gaming and sports betting at the Casino in an amount up to $29 million will not reduce the Commitment Amount. Kien Huat will be entitled to a funding fee in the amount of 1% of the portion of the Commitment Amount funded by Kien Huat. Unless earlier terminated by mutual agreement, the 2018 Kien Huat Preferred Stock Commitment Letter will terminate upon the earlier of (a) the Company's receipt of third-party financing in the Commitment Amount or (b) April 15, 2020.
On November 13, 2018, in accordance with the 2018 Kien Huat Preferred Stock Commitment Letter, the Company and Kien Huat entered into a subscription agreement to purchase an aggregate 120 shares of Series F Preferred Stock for an aggregate purchase price of $12 million, resulting in net proceeds to the Company (after deducting a $120,000 funding fee due to Kien Huat) of $11.9 million.
On February 20, 2019, in accordance with the 2018 Kien Huat Preferred Stock Commitment Letter, the Company and Kien Huat entered into a subscription agreement to purchase an aggregate 200 shares of Series F Preferred Stock for an aggregate purchase price of $20 million, resulting in net proceeds to the Company (after deducting a $200,000 funding fee due to Kien Huat) of $19.8 million.
On May 7, 2019, the Company and Kien Huat entered into an amendment to the 2018 Kien Huat Preferred Stock Commitment Letter (the "Kien Huat Commitment Letter Amendment") to accelerate the schedule on which Kien Huat will purchase additional shares of Series F Preferred Stock. In particular, pursuant to the Kien Huat Commitment Letter Amendment, Kien Huat agreed as follows: (i) to increase its commitment to purchase up to $20 million no earlier than May 15, 2019 to up to $27 million no earlier than such date; (ii) to accelerate its commitment to purchase up to an incremental $15 million to no earlier than June 17, 2019; and (iii) to maintain its commitment to purchase up to $15 million no earlier than August 15, 2019 and up to $37 million no earlier than November 15, 2019, respectively. Accordingly, Kien Huat accelerated its commitment to purchase up to the full Commitment Amount from March 15, 2020 to November 15, 2019. Other than the acceleration of the schedule pursuant to which Kien Huat would purchase up to the Commitment Amount, all other terms of the 2018 Kien Huat Preferred Stock Commitment Letter remain unchanged.
On May 15, 2019, in accordance with the Kien Huat Commitment Letter Amendment, the Company and Kien Huat entered into a subscription agreement to purchase an aggregate 270 shares of Series F Preferred Stock for an aggregate purchase price of $27 million, resulting in net proceeds to the Company (after deducting an approximately $270,000 funding fee due to Kien Huat) of $26.7 million.
On June 17, 2019, in accordance with the Kien Huat Commitment Letter Amendment, the Company and Kien Huat entered into a subscription agreement to purchase an aggregate 150 shares of Series F Preferred Stock for an aggregate purchase price of $15 million, resulting in net proceeds to the Company (after deducting an approximately $150,000 funding fee due to Kien Huat) of $14.8 million.
On August 26, 2019, in accordance with the Kien Huat Commitment Letter Amendment, the Company and Kien Huat entered into a subscription agreement to purchase an aggregate 150 shares of Series F Preferred Stock for an aggregate purchase price of $15 million, resulting in net proceeds to the Company (after deducting an approximately $150,000 funding fee due to Kien Huat) of $14.8 million.
On August 18, 2019, the Company and Kien Huat entered into an amendment to the 2018 Kien Huat Preferred Stock Commitment Letter (the "Kien Huat Commitment Letter Second Amendment") to accelerate the schedule on which Kien Huat committed to purchase additional shares of Series F Preferred Stock. Pursuant to the Kien Huat Commitment Letter Second Amendment, Kien Huat agreed as follows: (i) to increase its aggregate purchase commitment to up to $151 million from $126 million; (ii) to purchase up to $7.5 million no earlier than September 15, 2019; (iii) to purchase up to $7.5 million no earlier than October 15, 2019; and (iv) to purchase up to $10 million no earlier than February 15, 2020, respectively. Accordingly, Kien Huat extended its commitment to purchase up to the full Commitment Amount from November 15, 2019 to February 15, 2020. Other than the extension of the schedule pursuant to which Kien Huat would purchase up to the Commitment Amount and the increase of the full Commitment Amount to $151 million, all other terms of the 2018 Kien Huat Preferred Stock Commitment Letter remain unchanged.
On September 23, 2019, under the terms of the Kien Huat Commitment Letter Second Amendment, the Company and Kien Huat entered into a subscription agreement, pursuant to which Kien Huat purchased 75 shares of the Company's Series F Preferred Stock for an aggregate purchase price of $7.5 million, resulting in net proceeds to the Company (after deducting an approximately $75,000 funding fee due to Kien Huat) of $7.4 million.
In connection with the execution of the Merger Agreement, the Board and Kien Huat, in its capacity as the Company’s majority stockholder, approved an amendment to the Amended and Restated Certificate of the Designations, Powers and Preferences and Rights of the Series F Preferred Stock, which was filed with the Secretary of State of the State of Delaware on September 30, 2019 (the “Amended Certificate of Designations”). The Amended Certificate of Designations, among other things, increased the amount of authorized Series F Preferred Stock and excluded certain events, including the Merger, from being considered a “Change of Control Transaction”.
RWS License Agreement
On March 31, 2017, Montreign Operating entered into a license agreement (the “RWS License Agreement”) with RW Services Pte Ltd (“RWS”). RWS is an affiliate of Tan Sri Lim Kok Thay, who is a beneficiary of, and controls, Kien Huat. Pursuant to the RWS License Agreement, RWS granted Montreign Operating the non-exclusive, non-transferable, revocable and limited right to use certain “Genting” and “Resorts World” trademarks (the “RWS Licensed Marks”) in connection with the development, marketing, sales, management and operation (the “Permitted Uses”) of the Development Projects. The name of the Casino is “Resorts World Catskills,” and, notwithstanding the foregoing, the use of such name is exclusive to Montreign Operating and may be used in connection with online gaming in addition to the Permitted Uses.
The initial term of the RWS License Agreement will expire on December 31, 2027, and will be extended automatically for additional terms of 12 months each, up to a maximum of 39 additional terms, unless either of the parties provides notice to terminate the RWS License Agreement or upon the mutual written consent of both parties. Beginning on the date on which the Casino opened to the public, Montreign Operating pays to RWS a fee equivalent to a percentage of Net Revenue (as such term is defined in the RWS License Agreement) generated in each calendar year from (i) all activity at the Casino, (ii) each specific use of the RWS Licensed Marks in The Alder or golf course and (iii) each specific use of the name Resorts World Catskills in connection with online gaming. The percentage of Net Revenue payable as the fee is a low single-digit percentage that will increase incrementally between the third year and sixth year of the term of the RWS License Agreement and will remain a low single-digit percentage during the entire term of the RWS License Agreement. The Company incurred an expense of approximately $0.7 million and $0.5 million for the three-month periods ended September 30, 2019 and 2018, respectively, and an expense of approximately $1.7 million and $1.1 million for the nine-month periods ended September 30, 2019 and 2018, respectively, reflecting the fee payable pursuant to the RWS License Agreement.
Gerard Lim, one of the directors of the Company, is also a director of Resorts World Inc. Pte Ltd., the parent company of RWS.
Arrangements with Moelis & Company LLC
2019 Moelis Letter Agreement
On February 15, 2019, the Company and Moelis entered into a letter agreement (the “2019 Moelis Letter Agreement”), pursuant to which Moelis will act as the Company’s financial advisor to review and analyze the Company's historical results, financial projections and business plan, conduct a business and financial analysis of the Company's prospective online gaming and sports betting business, and evaluate the capital structure of the Company and its subsidiaries. Pursuant to the 2019 Moelis Letter Agreement, we paid Moelis a general advisory fee of approximately $350,000 upon execution of the 2019 Moelis Letter Agreement.
Special Committee Letter Agreement
On June 25, 2019, the Special Committee of the Board and Moelis entered into a letter agreement (the "Moelis Special Committee Letter Agreement") pursuant to which Moelis was engaged to act as the Special Committee’s exclusive financial advisor in connection with any potential restructuring, related party acquisition transaction and/or third-party acquisition transaction. In addition, Moelis was engaged as the Company’s non-exclusive placement agent for any capital raising transaction. Moelis will be entitled to receive a cash fee at the consummation of any transaction described above. In addition, Moelis will receive a monthly payment in the amount of $150,000, which aggregate amount will be credited in full against any transaction fees for the first six months and at 50% for the next six months pursuant to the Moelis Special Committee Letter Agreement. Moelis will also be entitled to a fee for any opinion addressing fairness it is required to issue in connection with a transaction contemplated by the Moelis Special Committee Letter Agreement. The Company will reimburse Moelis for expenses incurred in connection with the Moelis Special Committee Letter Agreement. Either the Special Committee or Moelis may terminate the Moelis Special Committee Letter upon written notice; provided, however, Moelis will be entitled to the payment of its fees and expenses in the event a transaction contemplated by the Special Committee Letter Agreement is consummated within 12 months of the termination.
During the three-month period ended September 30, 2019, the Company paid a total of approximately $1.9 million in fees under the Moelis Special Committee Letter Agreement to Moelis, of which $1.0 million was paid for an opinion letter in connection with the proposed Merger.
Gregg Polle, a former director of the Company, was a Managing Director of Moelis until June 2019. Mr. Polle refrained from participating in the discussion of, and abstained from voting on whether to enter into the 2019 Moelis Letter Agreement and the Moelis Special Committee Letter Agreement.
Note L. Commitments and Contingencies
Legal Proceedings
On October 8, 2019 and October 28, 2019, respectively, two putative class action complaints challenging the Merger were filed in New York State Supreme Court, Sullivan County. The first Sullivan County case is captioned David Mullen v. Empire Resorts, Inc. et al., Index No. E2019-2085 (the “Mullen State Court Litigation”). The second Sullivan County case is captioned Julie Milano v. Empire Resorts, Inc. et al., Index No. E2019-2207 (the “Milano Litigation,” and, collectively with the Mullen State Court Litigation, the “Sullivan County Litigations”). The Sullivan County Litigations allege that the members of the Board breached their fiduciary duties in connection with the negotiation and approval of the Merger Agreement, as well as in authorizing the disclosures made in the Company's preliminary proxy statement filed with the SEC on September 24, 2019. The Sullivan County Litigations further allege that each of the Company, Parent, Merger Sub, Kien Huat, and GenM aided and abetted the Board’s alleged breaches of fiduciary duty. On October 28, 2019, the plaintiff in the Mullen State Court Litigation voluntarily dismissed the Mullen State Court Litigation.
On October 15, 2019, October 18, 2019, and October 29, 2019, respectively, three federal complaints challenging the Merger were filed in the United States District Court for the District of Delaware and the United States District Court for Southern District of New York. The Delaware federal case is captioned Adam Franchi v. Empire Resorts, Inc. et al., Case No. 1:19-cv-01947-RGA (the “Franchi Litigation”) and the two New York federal cases are captioned David Mullen v. Empire Resorts, Inc. et al., Case No. 1:19-cv-09632-LAK (the “Mullen Federal Litigation” and Harold Litwin v. Empire Resorts, Inc. et al., Case No. 1:19-cv-10026 (the “Litwin Litigation,” and, collectively with the Franchi Litigation, the Milano Litigation, and the Mullen Federal Litigation, the “Merger Litigations”). In the Franchi Litigation, Mullen Federal Litigation, and Litwin Litigation, each plaintiff asserts claims against the Company and certain members of the Board under Section 14(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 14a-9 promulgated thereunder, as well as Section 20(a) of the Exchange Act. Each plaintiff alleges that the Company’s definitive proxy statement, filed with the SEC on October 11, 2019, was misleading and omitted certain information with respect to the Merger.
Each of the Merger Litigations seeks, among other things, to enjoin the Merger and recover damages, as well as an award of the plaintiffs’ attorneys’ fees and costs of the litigation. The defendants deny all such allegations and believe the Merger Litigations are without merit. Furthermore, the defendants believe that the disclosures in the Preliminary Proxy and the Proxy Statement are adequate under the law. However, to alleviate the costs, risks and uncertainties inherent in litigation and provide additional information to its stockholders, on November 6, 2019, the Company entered into a Memorandum of Understanding (“MOU”) with the plaintiffs of the Milano, Franchi, and Litwin Litigations, pursuant to which such plaintiffs agreed to voluntarily dismiss their respective complaints on or before November 11, 2019, subject to the Company’s filing of certain supplemental disclosures. On November 6, 2019, the Company filed with the SEC a Current Report on Form 8-K, which contained the supplemental disclosures as set forth in the MOU. Accordingly, the Company expects the Milano, Franchi, and Litwin Litigation plaintiffs to voluntarily dismiss their respective complaints on or before November 11, 2019.
With respect to the Mullen Federal Litigation and, if they are not voluntarily dismissed on or before November 11, 2019 in accordance with the MOU, the other Merger Litigations, the defendants plan to defend against all claims stated therein.
The Company is also a party from time to time to various legal actions that arise in the normal course of business. In the opinion of management, the resolution of these other matters will not have a material and adverse effect on our consolidated financial position, results of operations or cash flows.
Leases
The Company primarily leases land, vehicles, slot machines and certain office equipment. The Company determines if an agreement is or contains a lease at inception. Leases with an initial term of 12 months or less are not recorded on the condensed consolidated balance sheets.
ROU assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. ROU assets and liabilities are based on the estimated present value of the lease payments over the lease term and are recognized at the lease commencement date.
Since most of the Company's leases do not provide an implicit rate, we use our estimated incremental borrowing rate in determining the present value of lease payments. The estimated incremental borrowing rate is derived from information available at the lease commencement date.
The Company's lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. A limited number of the Company's lease agreements include rental payments adjusted periodically for inflation. Our lease agreements generally do not contain residual value guarantees or material restrictive covenants.
The following table represents the components of lease expenses for the three-month and nine-month periods ended September 30, 2019:
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Three months ended
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Lease expense
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Classification
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September 30, 2019
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September 30, 2019
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|
|
(in thousands)
|
|
(in thousands)
|
|
Operating lease cost
|
|
Gaming expense or SG&A expense
|
|
$2,971
|
|
$8,658
|
|
|
|
|
|
|
|
|
|
Variable lease cost:
|
|
Gaming expense or SG&A expense
|
|
973
|
|
|
2,043
|
|
|
Net lease cost (1)
|
|
|
|
$3,944
|
|
$10,701
|
(1) Net lease cost does not include short-term leases, none of which are material.
The schedule below lists the Company's lease terms and discount rates as of September 30, 2019:
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
Weighted-average remaining lease term (years)
|
|
|
|
|
|
|
|
Operating leases
|
|
13.00
|
|
|
|
|
|
|
Weighted-average discount rate
|
|
|
|
|
|
|
|
Operating leases
|
|
12.26
|
%
|
Supplemental condensed consolidated balance sheet information related to leases at September 30, 2019 is presented below:
|
|
|
|
|
|
|
|
|
Leases
|
|
Classification
|
|
September 30, 2019
|
|
Assets
|
|
|
|
(in thousands)
|
|
Operating lease ROU assets
|
|
Other assets (non-current)
|
|
$63,000
|
|
|
|
|
|
|
|
Total leased assets
|
|
|
|
$63,000
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
Operating
|
|
Other long-term liabilities
|
|
$74,518
|
|
|
|
|
|
|
|
Total lease liabilities
|
|
|
|
$74,518
|
The Company's lease liability maturities at September 30, 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
Operating
|
|
Period
|
|
Leases
|
|
|
|
(in thousands)
|
|
2019 (remaining of year)
|
|
$2,213
|
|
2020
|
|
8,940
|
|
|
2021
|
|
8,487
|
|
|
2022
|
|
8,400
|
|
|
2023
|
|
8,400
|
|
|
Thereafter
|
|
353,357
|
|
|
Total lease payments
|
|
389,797
|
|
|
Less: Imputed interest
|
|
315,279
|
|
|
Total lease liabilities
|
|
$74,518
|
Supplemental cash flow and other information related to leases for the nine-month period ended September 30, 2019 is presented below:
|
|
|
|
|
|
|
|
|
Nine months ended
|
|
|
|
September 30, 2019
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
(in thousands)
|
|
Operating cash flows from operating leases
|
|
$(144)
|
Note M. Subsequent Events
On October 30, 2019, under the terms of the Kien Huat Commitment Letter Second Amendment, the Company and Kien Huat entered into a subscription agreement, pursuant to which Kien Huat purchased 75 shares of the Company's Series F Preferred Stock for an aggregate purchase price of $7.5 million, resulting in net proceeds to the Company (after deducting an approximately $75,000 funding fee due to Kien Huat) of $7.4 million.
|
|
|
|
|
|
Item 2.
|
Management's Discussion and Analysis of Financial Condition and Results of Operations.
|
The Management’s Discussion and Analysis of the Financial Condition and Results of Operations should be read together with the Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Condensed Consolidated Financial Statements and related notes thereto in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2018.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains statements which constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements generally relate to our strategies, plans and objectives for future operations and are based upon management’s current plans and beliefs or estimates of future results or trends. Forward-looking statements also involve risks and uncertainties, including, but not restricted to, the risks and uncertainties described in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2018 which could cause actual results to differ materially from those contained in any forward-looking statement. Many of these factors are beyond our ability to control or predict.
You should not place undue reliance on any forward-looking statements, which are based on current expectations. Further, forward-looking statements speak only as of the date they are made, and we will not update these forward-looking statements, even if our situation changes in the future. We caution the reader that a number of important factors discussed herein, and in other reports filed with the Securities and Exchange Commission, could affect our actual results and cause actual results to differ materially from those discussed in forward-looking statements.
Overview
Empire was organized as a Delaware corporation on March 19, 1993, and since that time has served as a holding company for various subsidiaries engaged in the hospitality and gaming industries.
Our indirect, wholly-owned subsidiary, Montreign Operating Company, LLC, doing business as Resorts World Catskills ("Montreign Operating"), owns and operates Resorts World Catskills, a casino resort (the "Casino"), which is located at the approximately1,000-acre site of a four-star destination resort (the "Destination Resort") in Sullivan County, New York, approximately 90 miles from New York City. The Destination Resort at which Resorts World Catskills is located also includes a 101-room lifestyle hotel ("The Alder"), adjacent to the Casino. The Alder is owned and operated by Empire Resorts Real Estate II, LLC ("ERREII"), a wholly-owned subsidiary of Montreign Operating. Empire Resorts I, LLC ("ERREI"), which is a wholly-owned subsidiary of Montreign Operating, is developing a golf course (the "Golf Course Project" and, together with the Casino and The Alder, the "Development Projects") at the Destination Resort.
On August 21, 2019, Montreign Operating received from the New York State Gaming Commission (the "NYSGC") a license to operate a sports pool at the Casino. The Casino began its retail sportsbook operations upon receipt of such license.
Through our wholly-owned subsidiary, Monticello Raceway Management, Inc. ("MRMI"), we own and operate Monticello Raceway, which began racing operations in 1958 in Monticello, New York, which is proximate to the Casino. The video gaming machine ("VGM") operations and food and beverage service at Monticello Raceway ceased on April 23, 2019. We generate racing revenues through pari-mutuel wagering on the running of live harness horse races, the import simulcasting of harness and thoroughbred horse races from racetracks across the country and internationally, and the export simulcasting of our races to offsite pari-mutuel wagering facilities. In a letter dated October 8, 2019, the NYSGC approved MRMI's race dates for the months of November and December 2019.
On June 20, 2019, the New York State legislature approved the creation of a video lottery terminal (“VLT”) gaming facility in Orange County, New York. In particular, the legislation allows Empire to operate the new VLT facility in Orange County, subject to certain statutory requirements relating to, among other things, employment levels at the Company’s facilities, continued operation of racing at Monticello Raceway, location of the VLT facility within Orange County and entry into a mitigation agreement between the Company and the VLT facility operating at the Yonkers racetrack. The Company will work with local, state and federal agencies and officials to obtain the necessary permits and approvals to designate the site for, and begin construction on, the new VLT facility.
Merger
On August 18, 2019, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”), by and among the Company, Hercules Topco LLC, a Delaware limited liability company (“Parent”), and Hercules Merger Subsidiary, Inc., a Delaware corporation and a wholly-owned subsidiary of Parent (“Merger Sub”), whereby Merger Sub will merge into the Company (the "Merger"), with the Company surviving as a subsidiary of Parent . Parent and Merger Sub are affiliates of Kien Huat Realty III LImited ("Kien Huat") and Genting Malaysia Berhard (“GenM”). The Company has set November 13, 2019 as the date for a special meeting of stockholders (the "Special Meeting"), at which the stockholders will be asked to consider and vote upon a proposal to approve the Merger, among other things. If approved by stockholders at the Special Meeting, and all other conditions to the Merger are satisfied or waived, the Merger is expected to close in the fourth quarter of 2019. As a result of the Merger, the common stock will be delisted from The Nasdaq Stock Market and deregistered under the Exchange Act of 1934, as amended. Pursuant to the Merger Agreement, at the effective time of the Merger (the “Effective Time”), each issued and outstanding share of the Company’s Common Stock will be converted into the right to receive $9.74 in cash, without interest (the “Common Merger Consideration”), and each issued and outstanding share of the Company’s Series B Preferred Stock will be converted into the right to receive an amount in cash equal to the product of the Common Merger Consideration, multiplied by the number of shares of Common Stock into which such share of Series B Preferred Stock is convertible. In addition, pursuant to the Merger Agreement, at the Effective Time, (i) shares of the Company’s Common Stock or Series F Preferred Stock owned by Kien Huat, GenM or their respective affiliates will remain outstanding, (ii) shares of Common Stock or any series of the Company’s preferred stock owned by the Company or any of its wholly-owned subsidiaries will be canceled and (iii) shares owned by any stockholder who properly exercises appraisal rights under Delaware law will entitle the holder thereof only to such appraisal rights.
In connection with the execution of the Merger Agreement, Kien Huat entered into the Voting Agreement with the Company pursuant to which Kein Huat has agreed to vote its shares in the Company in favor of the Merger and the adoption of the Merger Agreement, subject to the limitations set forth in the Voting Agreement. Under the Voting Agreement, Kien Huat agreed not to transfer any of its shares in the Company, except to certain permitted transferees that agree to join the Voting Agreement. Kien Huat’s obligations under the Voting Agreement will automatically terminate upon the earliest to occur of (i) the mutual agreement of the parties thereto to terminate the Voting Agreement, (ii) the termination of the Merger Agreement in accordance with its terms, or (iii) the Effective Time.
Critical Accounting Policies and Estimates
We make certain judgments and use certain estimates and assumptions when applying accounting principles in the preparation of our consolidated financial statements. The nature of the estimates and assumptions are material due to the levels of subjectivity and judgment necessary to account for highly uncertain factors or the susceptibility of such factors to change.
We believe the current assumptions and other considerations used to estimate amounts reflected in our consolidated financial statements are appropriate. However, if actual experience differs from the assumptions and other considerations used in estimating amounts reflected in our consolidated financial statements, the resulting changes could have a material adverse effect on our consolidated results of operations and, in certain situations, could have a material adverse effect on our consolidated financial condition.
For further information on our critical accounting estimates, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the notes to our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2018. With the exception of the adoption of ASC 842 on January 1, 2019, there have been no material changes to our critical accounting policies and estimates. See Note B to the condensed consolidated financial statements for further information regarding our updated lease accounting policies.
Results of Operations - Three months ended September 30, 2019 compared to three months ended September 30, 2018
The following table highlights the various sources of revenues and expenses for the three months ended September 30, 2019 as compared to the three months ended September 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
September 30, 2019
|
|
September 30, 2018
|
|
Percent Change
|
|
|
(in thousands, except percentages)
|
|
|
|
Gaming revenues
|
$
|
55,264
|
|
|
$
|
48,032
|
|
|
15.1
|
%
|
|
Gaming expenses
|
32,003
|
|
|
36,382
|
|
|
(12.0
|
)%
|
|
|
|
|
|
|
|
|
Racing revenues
|
1,229
|
|
|
1,368
|
|
|
(10.2
|
)%
|
|
Racing expenses
|
2,877
|
|
|
2,223
|
|
|
29.4
|
%
|
|
|
|
|
|
|
|
|
Food and beverage revenues
|
7,351
|
|
|
6,417
|
|
|
14.6
|
%
|
|
Food and beverage expenses
|
6,828
|
|
|
7,526
|
|
|
(9.3
|
)%
|
|
|
|
|
|
|
|
|
Room revenues
|
3,724
|
|
|
2,826
|
|
|
31.8
|
%
|
|
Room expenses
|
2,552
|
|
|
2,662
|
|
|
(4.1
|
)%
|
|
|
|
|
|
|
|
|
Other revenues
|
1,972
|
|
|
1,921
|
|
|
2.7
|
%
|
|
Other expenses
|
21
|
|
|
43
|
|
|
(51.2
|
)%
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
24,515
|
|
|
19,556
|
|
|
25.4
|
%
|
|
|
|
|
|
|
|
|
Development Projects expenses
|
151
|
|
|
452
|
|
|
N.M.
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
10,249
|
|
|
9,441
|
|
|
8.6
|
%
|
|
|
|
|
|
|
|
|
Interest expense
|
16,717
|
|
|
15,932
|
|
|
4.9
|
%
|
Gaming Revenues and Expenses
Gaming revenues increased $7.2 million, or 15.1%, for the three-month period ended September 30, 2019 as compared to the three-month period ended September 30, 2018, from $48.0 million to $55.3 million. The increase in gaming revenues was primarily due to increased customer visits and higher hold percentages in the current period, which generated $74.7 million in gross gaming revenues for the three-month period ended September 30, 2019 as compared to $56.9 million for the three-month period ended September 30, 2018. Monticello Raceway generated no gross gaming revenues for the three-month period ended September 30, 2019 as compared to $8.7 million for the three-month period ended September 30, 2018. The decrease in gaming revenues at Monticello Raceway was due to the closure of the VGM facility on April 23, 2019.
Gaming expenses decreased $4.4 million or 12.0%, for the three-month period ended September 30, 2019 as compared to the three-month period ended September 30, 2018, from $36.4 million to $32.0 million. The reduction in gaming expenses was primarily due to the reduction in payroll expenses of $3.1 million for the three-month period ended September 30, 2019 as compared to the prior year period.
Racing Revenues and Expenses
Racing revenues decreased approximately $0.1 million, or 10.2%, for the three-month period ended September 30, 2019 as compared to the three-month period ended September 30, 2018. The decrease in racing revenues was primarily due to a decrease in racing simulcast revenues as compared to the three-month period ended September 30, 2018. Racing expenses increased $0.7 million, or 29.4%, for the three-month period ended September 30, 2019 as compared to the three-month period ended September 30, 2018, from $2.2 million to $2.9 million. The increase was due to larger purse contributions required by New York State due to the closure of the VGM facility at MRMI.
Food and Beverage Revenues and Expenses
Food and beverage revenues increased approximately $0.9 million, or 14.6%, for the three-month period ended September 30, 2019 as compared to the three-month period ended September 30, 2018, from approximately $6.4 million to $7.4 million due to the increase in customer visits and dollars spent per visit as compared to the prior year period, along with the opening of the Dos Gatos mexican restaurant in January 2019. Food and beverage expenses decreased $0.7 million, or 9.3%, for the three-month period ended September 30, 2018 as compared to the three-month period ended September 30, 2018, from $7.5 million to $6.8 million. The decrease in food and beverage expenses was primarily due to a decrease in payroll costs for the three-month period as compared to the prior period.
Room Revenues and Expenses
Room revenues increased approximately $0.9 million, or 31.8%, for the three-month period ended September 30, 2019 as compared to the three-month period ended September 30, 2018, from approximately $2.8 million to $3.7 million primarily due to the increased occupancy rate in the three-month period ended September 30, 2019 as compared to the three-month period ended September 30, 2018, along with the opening of The Alder in January 2019 . Room expenses decreased $0.1 million, or 4.1%, for the three-month period ended September 30, 2018 as compared to the three-month period ended September 30, 2018, from $2.7 million to $2.6 million. The decrease was primarily due lower labor costs as compared to the prior period, which were partially offset by higher laundry and amenity costs due to the increase in occupancy rates as compared to the prior period.
Other Revenues and Expenses
Other revenues are primarily due to ATM revenues at the Casino, as well as retail sales and spa revenues. Other revenues increased by approximately $0.1 million, or 2.7%, during the three-month period ended September 30, 2019 as compared to the three-month period ended September 30, 2018, from approximately $1.9 million to approximately $2.0 million, primarily due to an increase in ATM revenues along with higher retail store and spa revenues at the Casino. Other expenses decreased by approximately $22,000, during the three-month period ended September 30, 2019 as compared to the three-month period ended September 30, 2018, from approximately $43,000 to $21,000, primarily due to the closure of the VGM facility at Monticello Raceway.
Selling General and Administrative (“SG&A”)
SG&A expenses increased $5.0 million, or 25.4%, for the three-month period ended September 30, 2019 as compared to the three-month period ended September 30, 2018, from $19.6 million to $24.5 million. The increase in SG&A expenses was primarily due to an increase in legal and consulting fees, group insurance expenses, marketing expense and branding fees (due to higher revenues), as compared to the prior three-month period in 2018, which were partially offset by lower payroll expenses in the 2019 period.
Development Projects Expenses
Development Projects expenses decreased by $0.3 million for the three-month period ended September 30, 2019 as compared to the three-month period ended September 30, 2018, from $0.5 million to $0.2 million. The decrease was primarily due to the substantial completion of the Casino and The Alder. Development costs associated with the Casino and The Alder ceased to be capitalized upon the substantial completion of both projects on March 31, 2018 and January 1, 2019, respectively. As of September 30, 2019, the Casino and The Alder are substantially complete and open. The Company is also currently constructing the Golf Course Project. Costs associated with the Golf Course Project are primarily capitalized and are included in "Capitalized Development Projects costs" on the condensed consolidated balance sheets.
Depreciation and amortization
Depreciation and amortization expense increased $0.8 million, or 8.6%, for the three-month period ended September 30, 2019 as compared to the three-month period ended September 30, 2018, from $9.4 million to $10.2 million. The increase in depreciation expense of $0.6 million was primarily driven by the fixed assets placed in service for The Alder, which was completed in December 2018. Amortization of the Gaming Facility License remained unchanged at approximately $1.6 million for both three-month periods ended September 30, 2019 and 2018.
Interest expense
Interest expense increased $0.8 million, or 4.9%, for the three-month period ended September 30, 2019 as compared to the three-month period ended September 30, 2018, from $15.9 million to $16.7 million. The increase in interest expense was primarily due to the higher balances outstanding on the Term Loan Facility and the Term Revolver for the 2019 period as compared to the 2018 period. Montreign Operating paid a commitment fee to each Term A Loan lender equal to the undrawn amount of such lender’s commitment multiplied by a rate equal to 5.0% per annum through July 24, 2018, which was included in interest expense during the three-month period ended September 30, 2018.
Results of Operations - Nine months ended September 30, 2019 compared to nine months ended September 30, 2018
The following table highlights the various sources of revenues and expenses for the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
September 30, 2019
|
|
September 30, 2018
|
|
Percent Change
|
|
|
(in thousands, except percentages)
|
|
|
|
Gaming revenues
|
$
|
145,748
|
|
|
$
|
116,987
|
|
|
24.6
|
%
|
|
Gaming expenses
|
101,850
|
|
|
92,180
|
|
|
10.5
|
%
|
|
|
|
|
|
|
|
|
Racing revenues
|
3,728
|
|
|
3,926
|
|
|
(5.0
|
)%
|
|
Racing expenses
|
7,950
|
|
|
5,948
|
|
|
33.7
|
%
|
|
|
|
|
|
|
|
|
Food and beverage revenues
|
22,611
|
|
|
13,536
|
|
|
67.0
|
%
|
|
Food and beverage expenses
|
22,275
|
|
|
17,123
|
|
|
30.1
|
%
|
|
|
|
|
|
|
|
|
Room revenues
|
9,137
|
|
|
5,284
|
|
|
72.9
|
%
|
|
Room expenses
|
7,631
|
|
|
5,622
|
|
|
35.7
|
%
|
|
|
|
|
|
|
|
|
Other revenues
|
6,004
|
|
|
4,096
|
|
|
46.6
|
%
|
|
Other expenses
|
45
|
|
|
154
|
|
|
(70.8
|
)%
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
64,573
|
|
|
50,121
|
|
|
28.8
|
%
|
|
|
|
|
|
|
|
|
Development Projects expenses
|
254
|
|
|
12,084
|
|
|
N.M.
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
30,804
|
|
|
24,531
|
|
|
25.6
|
%
|
|
|
|
|
|
|
|
|
Interest expense
|
51,217
|
|
|
33,385
|
|
|
53.4
|
%
|
Gaming Revenues and Expenses
Gaming revenues increased $28.8 million, or 24.6%, for the nine-month period ended September 30, 2019 as compared to the nine-month period ended September 30, 2018, from $117.0 million to $145.7 million. The increase in gaming revenues was primarily due to increased customer visits and higher hold percentages in the current period, which generated $194.3 million in gross gaming revenues for the nine-month period ended September 30, 2019 as compared to $131.5 million for the nine-month period ended September 30, 2018. Monticello Raceway generated $26.0 million in gross gaming revenues for the nine-month period ended September 30, 2018 as compared to $6.0 million for the nine-month period ended September 30, 2019. The decrease in gaming revenues at Monticello Raceway was primarily due to the cessation of gaming operations on April 23, 2019.
Gaming expenses increased $9.7 million, or 10.5%, for the nine-month period ended September 30, 2019 as compared to the nine-month period ended September 30, 2018, from $92.2 million to $101.9 million. The increase in gaming expenses was primarily due to the higher revenues generated by the Casino, which caused gaming taxes to increase $5.4 million and payroll expenses to increase $3.3 million over the prior year period.
Racing Revenues and Expenses
Racing revenues decreased approximately $0.2 million, or 5.0%, for the nine-month period ended September 30, 2019 as compared to the nine-month period ended September 30, 2018. The decrease in racing revenues was primarily due to a decrease in racing simulcast revenues as compared to the nine-month period ended September 30, 2018. Racing expenses increased $2.0 million, or 33.7%, for the nine-month period ended September 30, 2019 as compared to the nine-month period ended September 30, 2018, from $5.9 million to $7.9 million. The increase in racing expenses was primarily due to higher purse contributions required by New York State.
Food and Beverage Revenues and Expenses
Food and beverage revenues increased approximately $9.1 million, or 67.0%, for the nine-month period ended September 30, 2019 as compared to the nine-month period ended September 30, 2018, from approximately $13.5 million to $22.6 million due to increased customer visits and dollars spent per visit in the current period as compared to the prior year period, along with increase in revenues from the opening of Dos Gatos restaurant in January 2019 and the phased opening of Casino restaurants during 2018. Food and beverage expenses increased $5.2 million, or 30.1%, for the nine-month period ended September 30, 2018 as compared to the nine-month period ended September 30, 2018, from $17.1 million to $22.3 million. The increase was primarily due to the increase in revenues, which resulted in higher costs for food, beverage and supplies, as well as payroll expense.
Room Revenues and Expenses
Room revenues increased approximately $3.9 million, or 72.9%, for the nine-month period ended September 30, 2019 as compared to the nine-month period ended September 30, 2018, from approximately $5.3 million to $9.1 million primarily due to the increased occupancy rate in the nine-month period ended September 30, 2019 as compared to the nine-month period ended September 30, 2018. Room expenses increased $2.0 million, or 35.7%, for the nine-month period ended September 30, 2018 as compared to the nine-month period ended September 30, 2018, from $5.6 million to $7.6 million. The increase was primarily due to the opening of the Casino hotel on February 8, 2018 and The Alder on January 1, 2019, which resulted in more room availability during the 2019 period along with the attendant additional payroll and benefit expenses for these facilities.
Other Revenues and Expenses
Other revenues primarily include ATM revenues at the Casino, as well as retail sales and spa revenues. Other revenues increased by approximately $1.9 million, or 46.6%, during the nine-month period ended September 30, 2019 as compared to the nine-month period ended September 30, 2018, from approximately $4.1 million to approximately $6.0 million, primarily due to an increase in ATM revenues along with the opening of the retail store and spa at the Casino. Other expenses decreased by approximately $0.1 million, or 70.8%, during the nine-month period ended September 30, 2019 as compared to the nine-month period ended September 30, 2018, from approximately $154,000 to approximately $45,000 due to the closure of the VGM facility at Monticello Raceway.
Selling General and Administrative (“SG&A”)
SG&A expenses increased $14.5 million, or 28.8%, for the nine-month period ended September 30, 2019 as compared to the nine-month period ended September 30, 2018, from $50.1 million to $64.6 million. The increase in SG&A expenses was primarily due to an increase in payroll and benefits due to increased legal and consulting fees, employee count, group insurance expenses, marketing expenses and branding fees (due to increased revenues), as compared to the prior year nine-month period in 2018. SG&A expenses for the nine-month period ended September 30, 2018 included $4.9 million of stock-based expense related to the MHHA Agreement.
Development Projects Expenses
Development Projects expenses decreased by $11.8 million for the nine-month period ended September 30, 2019 as compared to the nine-month period ended September 30, 2018, from $12.1 million to $0.3 million. Development costs associated with the Casino and The Alder ceased to be capitalized upon the substantial completion of both projects on March 31, 2018 and January 1, 2019, respectively. The Company is also currently constructing the Golf Course Project and expensed approximately $0.3 million as Development Projects costs in the current period. Costs associated with the Golf Course Project are primarily capitalized and are included in "Capitalized Development Projects costs" on the condensed consolidated balance sheets.
Depreciation and amortization
Depreciation and amortization expense increased $6.3 million, or 25.6%, for the nine-month period ended September 30, 2019 as compared to the nine-month period ended September 30, 2018, from $24.5 million to $30.8 million. The increase in depreciation expense of $5.7 million or 28.3% was primarily driven by the depreciation of the fixed assets placed in service for the Casino, due to the opening of the property in February 2018 and The Alder which was completed in December 2018. Amortization of the Gaming Facility License increased by approximately $0.5 million, or 12.5%, for the nine-month period ended September 30, 2019 as compared to the nine-month period ended September 30, 2018, from $4.2 million to $4.7 million.
Interest expense
Interest expense increased $17.8 million, or 53.4%, for the nine-month period ended September 30,2019 as compared to the nine-month period ended September 30, 2018, from $33.4 million to $51.2 million. The increase in interest expense was primarily due to the higher balances outstanding on the Term Loan Facility and the Term Revolver for the 2019 period as compared to the 2018 period. Montreign Operating paid an aggregate commitment fee of $1.6 million to the Term A Loan lenders, which is equal to the undrawn amount of the lenders’ commitment multiplied by a rate equal to 5.0% per annum through July 24, 2018, which was included in interest expense during the nine-month period ended September 30, 2018.
Liquidity and Capital Resources
Historically, our primary sources of liquidity and capital resources have been cash flow from operations, borrowings from banks and proceeds from the issuance of debt and equity securities, including debt and equity securities issued to Kien Huat Realty III Limited (“Kien Huat”), the Company’s largest stockholder. On July 25, 2019, the Special Committee of the Company’s Board of Directors (the "Board") received a letter from Kien Huat (the “Kien Huat 13D Letter”) indicating that, as of the date of the letter, Kien Huat did not intend to provide further equity or debt financing to the Company beyond its obligations under the 2018 Kien Huat Preferred Stock Commitment Letter (as defined and discussed below) while the Company remains a public company. Subsequently, on August 5, 2019, the Special Committee of the Board received a non-binding proposal letter from Kien Huat and Genting Malaysia Berhad, a public limited liability company incorporated in Malaysia ("Genting Malaysia") and an affiliate of Kien Huat (the "Proposal Letter"). Pursuant to the Proposal Letter, Kien Huat and Genting Malaysia submitted a non-binding proposal to acquire all outstanding equity of the Company not already owned by Kien Huat or its affiliates for $9.74 per share of common stock, with each share of the Company’s Series B Preferred Stock receiving the same consideration on an as-converted basis.
On August 18, 2019, the Company entered into the Merger Agreement with affiliates of Kien Huat and GenM, as a result of which the Company will no longer be a public company. Stockholders will be asked to consider and vote upon a proposal to approve the Merger Agreement at the Special Meeting. If approved by stockholders at the Special Meeting, and all other conditions to the Merger are satisfied or waived, the Merger is expected to close in the fourth quarter of 2019. If the Merger is not consummated within the anticipated time frame, our ability to continue as a going concern will be materially adversely affected.
We are currently generating operating losses as the Casino revenues have not exceeded the costs related to the Casino since its opening in February 2018. We believe that our current cash, cash equivalents, cash generated from operations and the available funding pursuant to the 2018 Kien Huat Preferred Stock Commitment Letter will provide sufficient liquidity to fund our operations, the expected costs of the Golf Course Project and our anticipated debt service requirements into the first quarter 2020. This projection is based on our current expectations regarding cost structure, cash burn rate and operating assumptions. Accordingly, the accompanying consolidated financial statements have been prepared on a basis that contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business and assumes the Company will continue as a going concern.
Our ability to continue as a going concern is dependent on many factors, including our ability to comply with the obligations in our existing debt agreements, to obtain waivers or other relief if we are unable to comply, and/or to be able to repay or refinance our indebtedness as it matures. We were in compliance with, or obtained waivers of, all of the obligations and covenants in our existing debt agreements as of September 30, 2019. Furthermore, we will be in compliance with, or obtained waivers of, all of the obligations and covenants in our existing debt agreements measured as of September 30, 2019 after making a specified equity contribution in the range of $12 million to $14 million pursuant to the Term Loan Agreement and Revolving Credit Agreement. We can offer no assurance that we will be in compliance with all obligations and covenants measured as of future quarterly periods within the next 12 months or that we will be able to obtain waivers or other relief from the lenders, if necessary.
If the Company determines not to make a specified equity contribution, or interest and principal payments as they become due, unless the lenders under the Term Loan Facility and Revolving Credit Facility waive or eliminate the financial covenants, or otherwise restructure our existing debt agreements, Montreign Operating will be in default under these agreements and the lenders under such agreements can immediately declare all loans due and payable. Furthermore, the Company will be in breach of the Merger Agreement. Any such acceleration of the maturity of Montreign Operating's debt obligations would permit the holders of the Term Loan and certain other lenders and contractual counterparties to terminate and/or accelerate the maturity of obligations due under our other existing debt agreements. If the Merger Agreement is terminated by Parent as a result of a breach of covenants relating to maintaining compliance with the terms of its existing debt obligations, the Company will be required to pay a termination fee of $1.75 million. If the lenders and/or other counterparties demand immediate repayment of all of its obligations, Montreign Operating would likely be unable to pay all such obligations. If the Merger is not consummated, we anticipate that in the near term we will seek to pursue one of the alternatives described above, which may include a restructuring of our existing debt and other arrangements to provide additional liquidity. As part of the various alternatives, we may begin a program to make reductions in our cost structure. There can be no assurance that any of these efforts will be successful. Each of the foregoing alternatives may have materially adverse effects on our business and on the market price of our securities.
Given our continuing negative cash flows from operations, and in order to meet our expected cash needs for the next 12 months and over the longer term, we will be required to obtain additional liquidity sources or possibly restructure our existing debt and other obligations, if the Merger is not consummated. If acceptable terms of a restructuring cannot be accomplished, we may not have enough cash and working capital to fund the operations, and satisfy the obligations of, Montreign Operating beyond the near term, which raises substantial doubt about our ability to continue as a going concern. As a result, we may be required to seek to implement an in-court proceeding under Chapter 11 of the United States Bankruptcy Code (“Bankruptcy Code”) with
respect to Montreign Operating and its subsidiaries, which own and operate the Casino, The Alder and the Golf Course Project. If we commence a voluntary Chapter 11 bankruptcy case, we will attempt to make arrangements with new and existing creditors for additional liquidity facilities and the restructuring of Montreign Operating's existing debt terms before presenting these arrangements to the bankruptcy court for approval. An in-court restructuring proceeding would cause a default on our debt with our current lenders. If the Merger is not consummated, and depending on if and when the Special Committee and the Board determine to pursue this course of action, Empire, the parent entity of the Company, could continue operations and satisfy liabilities and commitments in the normal course of business for the next 12 months based on existing sources of financing and liquidity.
See "Note A" in Part I and “Risk Factors” in Part II of this Quarterly Report on Form 10-Q and in our Annual Report on Form 10‑K for the fiscal year ended December 31, 2018 for a discussion of the risks related to our liquidity and capital structure.
Cash Flows
Net cash used in operating activities was approximately $61.1 million and $42.3 million for the nine-month periods ended September 30, 2019 and 2018, respectively. We are currently generating operating losses as Casino revenues have not yet exceeded the Company's fixed costs related to the Casino. We incurred $12.1 million of Development Projects costs during the nine-month period ended September 30, 2018. The decrease in cash flow for the nine-month period ended September 30, 2019 was primarily due to the impact of the net operating loss for the period along with the seasonal increase in accounts receivable.
The Casino opened to the public in February 2018. For the nine-month period ended September 30, 2019, the winter weather pattern was milder than usual, which resulted in greater customer visits than expected and higher revenues than anticipated. In addition, the Company increased its promotional activity during the 2019 period, which received a favorable response from its customers resulting in higher revenues. Greater frequency of visits to the Casino by patrons has resulted in higher occupancy rates at the Company's hotels and restaurants for the nine-month period ended September 30, 2019 as compared to the nine-month period ended September 30, 2018. As a result, net revenues increased from $143.8 million to $187.2 million for the nine-month periods ended September 30, 2018 and September 30, 2019, respectively.
Net cash used in investing activities was approximately $21.1 million and $20.3 million during the nine-month periods ended September 30, 2019 and 2018, respectively. The increase in net cash used for the nine-month period ended September 30, 2019 as compared to 2018 was due primarily to the purchase of property and equipment and the increase in capitalized Development Costs during the 2019 period. Property and equipment expenditures of $10.6 million and payments for capitalized Development Projects costs of $10.5 million occurred during the 2019 period. The Golf Course Project is the only current ongoing project as of September 30, 2019. During the nine-month period ended September 30, 2018, the Company realized $94.5 million of net proceeds from the redemption of restricted investments for the Development Projects and incurred $148.8 million of capitalized Development Project costs. Also during the nine-month period ended September 30, 2018, the Company received a refund of $35.0 million from cash collateral bonds required to be posted upon construction of the Development Projects.
Net cash provided by financing activities was approximately $62.5 million and $92.6 million during the nine-month periods ended September 30, 2019 and 2018, respectively. During 2019, the Company issued five tranches totaling approximately $83.7 million of redeemable Series F Preferred Stock to Kien Huat. The Company repaid approximately $10.4 million of equipment loans and an additional $10.5 million of Term A and Term B Loans during the nine-month period ended September 30, 2019. At September 30, 2019, the Company had approximately $9.9 million of equipment loans outstanding for the purchase of slot machines, equipment and software for the Casino. Approximately $15.0 million was borrowed under the Revolving Credit Facility (as defined below), $20.0 million was borrowed under the Kien Huat Subordinate Loan, $2.0 million was borrowed under the Bangkok Bank Loan and $70.0 million was borrowed under the Term Loan Facility during the nine-month period ended September 30, 2018. The Company repaid approximately $7.0 million of equipment loans and an additional $5.8 million of Term A and Term B Loans during the nine-month period ended September 30, 2018. During the nine-month period ended September 30, 2018, restricted stock grants of certain executives vested, resulted in $1.0 million of income tax withholding taxes paid by the Company in exchange for the surrender of a portion of the vested shares.
Development Projects Expenditures
The Company expects that upon completion, the Development Projects will have cost approximately $930 million, which includes $766 million of anticipated costs for construction of the Development Projects and contingency, $69 million for interest reserves, $51 million for the Gaming Facility License fee and $44 million of original issue discount and financing and legal fees. The Company substantially completed construction of The Alder on January 1, 2019, under a guaranteed maximum price agreement with its construction manager, which was amended to $35.2 million in December 2018. During the fall of 2018, the Company signed a contractor agreement for the Golf Course Project for a total cost of approximately $22.5 million.
As of September 30, 2019, the Company had incurred an aggregate total of $927.6 million related to the Development Projects, including $764.0 million of capitalized Development Projects costs, of which $699.0 million was reclassified to property and equipment upon the opening of the Casino and The Alder, $68.6 million of interest expense related to bank debt for the Development
Projects, $51.0 million for the Gaming Facility License and $44.0 million of debt issuance costs related to the Development Projects.
Principal Debt Arrangements
Term Loan Facility
On January 24, 2017, Montreign Operating entered into that certain Building Term Loan Agreement (the “Original Term Loan Agreement”), among Montreign Operating, the lenders from time to time party thereto, and Credit Suisse AG, Cayman Islands Branch (“Credit Suisse”), as administrative agent. On May 26, 2017, the parties entered into the first amendment to the Term Loan Agreement and certain ancillary agreements (the “Amended Term Loan Agreement” and, together with the Original Term Loan Agreement, the “Term Loan Agreement”). In the aggregate, the Term Loan Agreement provides Montreign Operating with loans in principal amount of $520 million (the “Term Loan Facility”). The borrowings under the Term Loan Facility were used to fund the costs of the Development Projects.
The Term Loan Agreement provides Montreign Operating with senior secured first lien term loans consisting of $70 million of Term A Loans and $450 million of Term B Loans. The obligations of Montreign Operating under the Term Loan Facility are guaranteed by the Project Parties and are secured by security interests in substantially all of the assets of the Project Parties, as well as by a pledge of the membership interests in Montreign Operating. At September 30, 2019 and December 31, 2018, the interest rate on the Term A Loan was 7.12% and 7.68%, respectively. At September 30, 2019 and December 31, 2018, the interest rate on the Term B Loan was 10.37% and 10.96%, respectively. As of September 30, 2019 and December 31, 2018, approximately $57.7 million and $64.8 million, respectively, was outstanding under the Term A Loan, and approximately, $443.2 million and $446.6 million,respectively, was outstanding under the Term B Loan.
The Term Loan Agreement restricts the Project Parties from incurring additional indebtedness except for, among other things, obligations pursuant to hedging agreements required under the Term Loan Agreement, capital lease obligations and purchase money indebtedness (including FF&E financing) in an amount not exceeding $40 million, subordinated indebtedness so long as the proceeds are applied pursuant to the terms of the Term Loan Agreement and other indebtedness not exceeding $10 million. Also, the Project Parties may not make any dividend or other distribution, redeem or otherwise acquire any equity securities or subordinated indebtedness. Moreover, the Project Parties are restricted from entering into advisory, management or consulting agreements with an affiliate of any Project Party, including Empire, except for payments pursuant to tax sharing agreements, distributions in an amount not exceeding 1% of the net revenues of the Project Parties in any fiscal year, repurchase of capital stock of the Company in an amount not exceeding $1 million and required by the NYSGC, and certain available amounts of cash based on the application of financial covenants.
The Term Loan Agreement contains representations and warranties, customary events of default, and affirmative, negative and financial covenants, including that the Company maintain compliance with a maximum first lien net leverage ratio not to exceed 5.0:1.0, a minimum interest coverage ratio not to exceed 2.0:1.0 and a consolidated capital expenditure covenant not to exceed $10 million of eligible expenses in any calendar year. The financial covenants relating to the maximum first lien leverage ratio and the minimum interest coverage ratio were measured beginning in the current quarter ending on September 30, 2019. The Company is allowed to add back pro forma EBITDA in the amount of $108.4 million, $77.5 million and $39.4 million, respectively, in each of the first three testing quarters, respectively. In addition, the Company has a right to cure any covenant defaults through the use of specified equity contributions during the first three quarters tested for covenant compliance. Additionally, excess cash flow, as such term is defined in the Term Loan Agreement, must be applied towards repayment of the Term Loan Facility commencing with the fiscal year in which the "full opening" of the Casino occurs. As of September 30, 2019, the Company was in compliance with all applicable covenant requirements under the Term Loan Facility. In addition, the Company will be in compliance with all applicable covenant requirements measured as of September 30, 2019 under the Term Loan Facility after giving effect to a specified equity contribution in the range of $20 million to $24 million.
Revolving Credit Facility
At September 30, 2019, Montreign Operating's revolving credit facility (the "Revolving Credit Facility") consisted of $15 million of outstanding borrowings. The Revolving Credit Facility provides for loans or other extensions of credit to be made to Montreign Operating in an aggregate principal amount of up to $15 million (including a letter of credit sub-facility of $10 million) pursuant to the terms of the Revolving Credit Agreement, among Montreign Operating, the lenders from time to time party thereto, and Fifth Third Bank, as administrative agent (as amended, the "Revolving Credit Agreement"). The proceeds of the Revolving Credit Facility may be used for working capital needs, capital expenditures and other general corporate purposes. The Revolving Credit Facility will mature on January 24, 2022. At September 30, 2019, the interest rate on borrowings under the Revolving Credit Facility was 7.12%.
The Revolving Credit Facility is guaranteed by the Project Parties and is secured by security interests in substantially all the real and personal property of the Project Parties and by a pledge of all the membership interests of Montreign Operating held by Montreign Holding.
The Revolving Credit Facility contains representations and warranties, customary events of default, and affirmative, negative and financial covenants substantially similar to the terms of the Term Loan Agreement. Mandatory prepayments of the Revolving Credit Facility will be required upon the occurrence of certain events, including sales of certain assets, casualty events and the incurrence of certain additional indebtedness, subject to certain exceptions and reinvestment rights. As of September 30, 2019, the Company was in compliance with all applicable covenant requirements under the Term Loan Facility. In addition, the Company will be in compliance with all applicable covenant requirements measured as of September 30, 2019 under the Term Loan Facility after giving effect to a specified equity contribution in the range of $12 million to $14 million.
Bangkok Bank Loan
At September 30, 2019, the Delayed Draw Term Loan, as amended (the "Bangkok Bank Loan") consisted of $20 million of outstanding borrowings pursuant to the Delayed Draw Term Loan Credit Agreement (the “Bangkok Bank Loan Agreement”), among Empire, Bangkok Bank PCL, New York Branch (“Bangkok Bank”), as lender, and MRMI, as guarantor.
The Bangkok Bank Loan will mature on December 28, 2019. Interest accrues on outstanding borrowings under the Bangkok Bank Loan at a rate equal to LIBOR plus 6.25%, or an alternate base rate plus 5.25% per annum. At September 30, 2019, the interest rate on the Bangkok Bank Loan was 8.37%. The Bangkok Bank Loan was amended (the "Bangkok Bank Loan Amendment") on June 25, 2018 concurrently with the execution of the Kien Huat Subordinate Loan Agreement (which is defined and discussed in Note H below). The Bangkok Bank Loan Amendment permitted the Company to incur the Kien Huat Subordinate Loan.
On September 30, 2019, the Company entered into a Limited Waiver and Second Amendment to the Bangkok Bank Loan Agreement (the “Bangkok Bank Loan Second Amendment”) with MRMI and Bangkok Bank to amend the Bangkok Bank Loan Agreement. Pursuant to the Bangkok Bank Loan Second Amendment, the parties agreed to waive a potential event of default relating to the total leverage ratio covenant measured as of September 30, 2019. In addition, pursuant to the Bangkok Bank Loan Second Amendment, the covenant concerning mergers and consolidations was amended to specifically permit the Merger. The Company also agreed to prepay all interest due on the Bangkok Bank Loan from October 1, 2019 through December 30, 2019 in the amount of approximately $422,000. Further, the Company agreed to pay an amendment and waiver fee of $5,000 to Bangkok Bank.
The Bangkok Bank Loan is guaranteed by MRMI and is secured by a security interest in Monticello Raceway. The Bangkok Bank Loan Agreement contains customary representations and warranties and affirmative, negative and financial covenants, including representations, warranties and covenants that, among other things, restrict the ability of the Company and MRMI to incur additional debt, incur or permit liens on assets, make investments and acquisitions, consolidate or merge with any other company, engage in certain transactions with affiliates, or make dividends or other distributions. Obligations under the Bangkok Bank Loan Agreement may be accelerated upon certain customary events of default, including, among others, nonpayment of principal, interest or fees, breach of the affirmative or negative covenants, revocation of a gaming license after the expiration of certain cure periods, and a change of control of the Company.
In addition, the Bangkok Bank Loan Agreement contains a financial covenant that restricts the maximum total leverage ratio to four times the adjusted EBITDA of MRMI, which financial covenant is applicable beginning with the fiscal quarter ending December 31, 2018. The Bangkok Bank Loan Amendment excludes the Kien Huat Subordinate Loan from calculations of the Company's maximum total leverage so long as the Kien Huat Subordinate Loan remains subordinate to the Bangkok Bank Loan.
Kien Huat Backstop Loan Agreement
Concurrently with and as a condition to the closing of the Bangkok Bank Loan Agreement, on December 28, 2017, Empire and Kien Huat entered into a loan agreement (the “Kien Huat Backstop Loan Agreement”), providing for loans to Empire in an aggregate principal amount of up to $20 million (the “Kien Huat Backstop Loan”). Any amounts borrowed under the Kien Huat Backstop Loan will be used exclusively to make payments required under the Bangkok Bank Loan Agreement and will mature on the one-year anniversary of the Maturity Date of the Bangkok Bank Loan, or such earlier date that the Bangkok Bank Loan is terminated. As of September 30, 2019, no amounts had been borrowed under the Kien Huat Backstop Loan.
Equipment Loan Agreements
The Company has entered into several long-term financing agreements related to the purchase of its slot machines, equipment and software for the Casino' s hotel, information technology and other operations. The original amount financed was approximately $31.1 million and the terms of these agreements run between six and 36 months. The balances outstanding at September 30, 2019 and December 31, 2018 were approximately $9.9 million and $20.4 million, respectively. The stated interest rates for these loans are between zero and eight percent per annum. The Company has imputed interest on several equipment loans with stated interest rates of 0%, using the Company's cost of funds rate of approximately 10%. The weighted average of the monthly repayments is approximately $1.0 million.
Equity Financings
2018 Kien Huat Preferred Stock Commitment Letter
On November 6, 2018, the Company and Kien Huat entered into a commitment letter, as amended and restated on November 9, 2018 and May 7, 2019 (as amended, the "2018 Kien Huat Preferred Stock Commitment Letter"), pursuant to which Kien Huat committed to provide equity financing in support of the general corporate and working capital requirements of the Company and its subsidiaries. Pursuant to the 2018 Kien Huat Preferred Stock Commitment Letter, Kien Huat agreed to purchase up to $126 million (the "Commitment Amount") of Series F Preferred Stock on the terms set forth in the 2018 Kien Huat Preferred Stock Commitment Letter. Kien Huat committed to purchase the Series F Preferred Stock pursuant to the following schedule: (i) up to $12 million no earlier than November 9, 2018; (ii) up to $20 million no earlier than February 15, 2019; (iii) up to $20 million no earlier than May 15, 2019; (iv) up to $15 million no earlier than August 15, 2019; (v) up to $37 million no earlier than November 15, 2019; and (vi) up to $22 million no earlier than March 15, 2020. In accordance with this schedule, on each of November 13, 2018 and February 20, 2019, the Company and Kien Huat entered into subscription agreements to purchase an aggregate of 320 shares of Series F Preferred Stock for an aggregate purchase price of $32 million, resulting in net proceeds to the Company (after deducting a $300,000 funding fee due to Kien Huat) of $31.7 million.
On May 7, 2019, the Company and Kien Huat entered into the Kien Huat Commitment Letter Amendment to accelerate the schedule on which Kien Huat will purchase additional shares of Series F Preferred Stock. In particular, pursuant to the Kien Huat Commitment Letter Amendment, Kien Huat agreed as follows: (i) to increase its commitment to purchase up to $20 million no earlier than May 15, 2019 to up to $27 million by such date; (ii) to accelerate its commitment to purchase up to an incremental $15 million to no earlier than June 17, 2019; and (iii) to maintain its commitment to purchase up to $15 million by August 15, 2019 and up to $37 million by November 15, 2019, respectively. Accordingly, Kien Huat accelerated its commitment to purchase up to the full Commitment Amount from March 15, 2020 to November 15, 2019. Other than the acceleration of the schedule pursuant to which Kien Huat would purchase up to the Commitment Amount, all other terms of the 2018 Kien Huat Preferred Stock Commitment Letter remain unchanged.
On August 18, 2019, the Company and Kien Huat entered into an amendment to the 2018 Kien Huat Preferred Stock Commitment Letter (the "Kien Huat Commitment Letter Amendment") to accelerate the schedule on which Kien Huat will purchase additional shares of Series F Preferred Stock. In particular, pursuant to the Kien Huat Commitment Letter Amendment, Kien Huat agreed as follows: (i) to increase its commitment to purchase up to $151 million from the $126 million under the previous Kien Huat Commitment Letter Amendment; (ii) to purchase up to $7.5 million no earlier than September 15, 2019; (iii) to purchase up to $7.5 million no earlier than October 15, 2019; and (iv) to purchase up to $10 million no earlier than February 15, 2020, respectively. Accordingly, Kien Huat extended its commitment to purchase up to the full Commitment Amount from November 15, 2019 to February 15, 2020. Other than the extension of the schedule pursuant to which Kien Huat would purchase up to the Commitment Amount and the increase of the full Commitment Amount to $151 million, all other terms of the 2018 Kien Huat Preferred Stock Commitment Letter remain unchanged.
The Company agreed to use its reasonable efforts to secure third-party financing in an amount equal to the Commitment Amount and the Commitment Amount will be reduced by the amount of any third-party financing raised by the Company. However, any equity financing raised by the Company from any person entering into a commercial agreement relating to online gaming and sports betting at the Casino in an amount up to $29 million will not reduce the Commitment Amount. Any future sales to bet365 pursuant to the bet365 Common Stock Purchase Agreement would further reduce the Commitment Amount by such additional amount.
Kien Huat is entitled to a funding fee in the amount of 1% of the portion of the Commitment Amount funded by Kien Huat. Unless earlier terminated by mutual agreement, the 2018 Kien Huat Preferred Stock Commitment Letter will terminate upon the earlier of (a) the Company's receipt of third-party financing in the Commitment Amount or (b) April 15, 2020.
On each of November 13, 2018, February 20, 2019, May 15, 2019, June 17, 2019, August 26, 2019, September 23, 2019 and October 30, 2019, the Company and Kien Huat entered into subscription agreements to purchase an aggregate of 1,040 shares of Series F Preferred Stock for an aggregate purchase price of $104 million, resulting in net proceeds to the Company (after deducting an approximately $1.0 million funding fee due to Kien Huat) of approximately $103.0 million.
bet365 Common Stock Purchase Agreement
On November 14, 2018, the Company entered into a sportsbook and digital gaming collaboration agreement (the “Collaboration Agreement”) with Hillside (New York) LLC, an affiliate of bet365 Group Limited (“bet365”). In connection with entering into the Collaboration Agreement, Hillside (New Media Holdings) Limited, an affiliate of bet365 ("bet365 Investor"), and the Company entered into a common stock purchase agreement (the “bet365 Common Stock Purchase Agreement”) pursuant to which bet365 Investor agreed to purchase up to 2.5 million shares of common stock of the Company at a purchase price of $20.00 per share, for an aggregate investment of $50 million.
In accordance with the bet365 Common Stock Purchase Agreement, the bet365 Investor purchased 1,685,759 shares of common stock upon execution of the bet365 Common Stock Purchase Agreement. The offer and sale of these shares was made pursuant to a shelf registration statement on Form S-3 (File No. 333-214119), which became effective on November 17, 2016, pursuant to a base prospectus dated as of November 17, 2016 contained in such registration statement and a prospectus supplement filed with the Securities and Exchange Commission on November 14, 2018. The Company received net proceeds of $29.6 million from the offering, which are being used for general working capital purposes.
Pursuant to the bet 365 Common Stock Purchase Agreement, bet365 Investor will be obligated to purchase the remaining 814,241 shares of common stock at $20.00 per share so long as the conditions set forth in the bet365 Common Stock Purchase Agreement are met.
After all gaming taxes have been paid and the parties have recouped their costs and expenses, bet365 may receive a distribution (the “Preferred Distribution”) equal to 50% of the positive difference, if any (the “delta”), between $20 and the value of the Company’s common stock measured on a given date (such date, the “Trigger Date”), multiplied by the number of shares of common stock then held by bet365 Investor. The Trigger Date is 30 days after the Company’s first filing of an annual or quarterly report with the Securities and Exchange Commission after bet365 recoups its costs incurred pursuant to the Collaboration Agreement. The delta will be the positive difference between $20 and the 30-day volume-weighted average price of the Company’s common stock on the Trigger Date.
The payment of a Preferred Distribution, if any, will defer and may materially adversely affect the amount of profits the Company receives pursuant to the Collaboration Agreement. If bet365 or bet365 Investor do not obtain and maintain the required licenses, permits and approvals, we may never sell the remaining 814,241 shares pursuant to the bet365 Common Stock Purchase Agreement and we may need to repurchase the shares previously purchased by bet365 Investor.
Other Factors Affecting Liquidity
The Company may also raise additional equity or debt capital or enter into arrangements to secure necessary financing to fund the completion of the Development Projects, to meet obligations under our existing debt agreements or for the general corporate purposes of the Company. We anticipate that in the near term we will seek to pursue one of the alternatives described above, which may include a restructuring of our existing debt and other arrangements to provide additional liquidity. Such arrangements may take the form of loans, strategic agreements, joint ventures or other agreements. The sale of additional equity could result in additional dilution to the Company’s existing stockholders, and financing arrangements may not be available to us, or may not be available in sufficient amounts or on acceptable terms. There can be no assurance that any of these efforts will be successful. Each of the foregoing alternatives may have materially adverse effects on our business and on the market price of our securities.
Our common stock is transferable subject to the provisions of Section 303 of the Racing, Pari-Mutuel Wagering and Breeding Law, so long as we hold directly or indirectly, a racetrack license issued by the NYSGC, and may be subject to compliance with the requirements of other laws pertaining to licenses held directly or indirectly by us. The owners of common stock issued by us may be required by regulatory authorities to possess certain qualifications and may be required to dispose of their common stock if the owner does not possess such qualifications.
Contractual Obligations
The table below lists the payment commitments of the Company as of September 30, 2019.
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Payments due by period
(in thousands)
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Total
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Less than
1 year
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1 – 3
years
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3 – 5
years
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Years 6 - 40
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Casino Lease (a)
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$
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371,999
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$
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7,500
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$
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15,950
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$
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16,200
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$
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332,349
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Golf Course Lease (b)
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7,950
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63
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300
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300
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7,287
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Entertainment Project Lease (c)
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8,171
|
|
|
150
|
|
|
300
|
|
|
300
|
|
|
7,421
|
|
|
Term A Loan (d)
|
65,580
|
|
|
14,621
|
|
|
50,959
|
|
|
—
|
|
|
—
|
|
|
Term B Loan (e)
|
599,495
|
|
|
50,547
|
|
|
100,372
|
|
|
448,576
|
|
|
|
|
|
Equipment Loans (f)
|
9,875
|
|
|
7,824
|
|
|
2,051
|
|
|
—
|
|
|
—
|
|
|
Bangkok Bank Loan (g)
|
20,414
|
|
|
20,414
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Operating leases (h)
|
1,739
|
|
|
1,236
|
|
|
503
|
|
|
—
|
|
|
—
|
|
|
Revolving Credit Facility (i)
|
17,623
|
|
|
1,187
|
|
|
16,436
|
|
|
—
|
|
|
—
|
|
|
Kien Huat Subordinate Loan (j)
|
39,725
|
|
|
—
|
|
|
39,725
|
|
|
—
|
|
|
—
|
|
|
Total
|
$
|
1,142,571
|
|
|
$
|
103,542
|
|
|
$
|
226,596
|
|
|
$
|
465,376
|
|
|
$
|
347,057
|
|
|
|
|
|
(a)
|
Annual fixed rent payments under the Casino Lease are $625,000 per month, escalating every five years by 8% through the end of the lease term.
|
|
|
|
|
(b)
|
Annual fixed rent payments under the Golf Course Lease are as follows: (i) $0 prior to the Golf Course Opening Date; (ii) $150,000 for the first 10 years following the Golf Course Opening Date; and (iii) $250,000 thereafter for the remainder of the term of the Golf Course Lease.
|
|
|
|
|
(c)
|
Annual fixed rent payments under the Alder Lease are as follows: (i) $0 prior to the Alder Opening Date, which occurred on January 1, 2019; (ii) $150,000 for the first 10 years following the Alder Opening Date; and (iii) $250,000 thereafter for the remainder of the term of the Alder Lease.
|
|
|
|
|
(d)
|
The Term A Loan is a variable rate instrument. The payments reflected above include principal amounts and interest payments based on the interest rate at September 30, 2019.
|
|
|
|
|
(e)
|
The Term B Loan is a variable rate instrument. The payments reflected above include principal amounts and interest payments based on the interest rate at September 30, 2019.
|
|
|
|
|
(f)
|
Equipment loan payments primarily for the purchase of slot machines, software and other equipment for the Casino. The repayment period terms are between 24 and 36 months. These amounts include interest payments.
|
|
|
|
|
(g)
|
The Bangkok Bank Loan is a variable rate instrument. The payments reflected above include principal amounts and interest payments based on the interest rate at September 30, 2019.
|
|
|
|
|
(h)
|
Operating lease payments for the short-term lease of slot machines, copiers and other Casino equipment. The lease periods extend from six months to 36 months.
|
|
|
|
|
(i)
|
The Revolving Credit Facility is a variable rate instrument. The payments reflected above include principal amounts and interest payments based on the interest rate at September 30, 2019.
|
|
|
|
|
(j)
|
The Kien Huat Subordinate Note includes accrued cumulative compounded interest and matures on December 20, 2020.
|
Off-balance Sheet Arrangements
None.
