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 opened to the public on February 8, 2018. The Casino is located in Sullivan County, New York approximately 90 miles from New York City. Montreign Operating is the sole holder of a gaming license (a "Gaming Facility License") issued by the New York State Gaming Commission ("NYSGC") in the Hudson Valley-Catskill region, which consists of Columbia, Delaware, Dutchess, Greene, Orange, Sullivan and Ulster counties in New York State.
In addition to the Casino, Empire Resorts Real Estate I, LLC ("ERREI") and Empire Resorts Real Estate II, LLC ("ERREII" and, together with Montreign Operating and ERREI, the "Project Parties"), each of which is a wholly-owned subsidiary of Montreign Operating, are developing an entertainment village (the "Entertainment Project") and a golf course (the "Golf Course Project" and, together with the Casino and the Entertainment Project, the "Development Projects"), respectively, at the site of a four-season destination resort in Sullivan County, New York.
Through our wholly-owned subsidiary, Monticello Raceway Management, Inc. ("MRMI"), we own and operate Monticello Casino and Raceway, which began racing operations in 1958 in Monticello, New York, which is proximate to the Casino. Monticello Casino and Raceway currently features a video gaming machine ("VGM") and harness horseracing facility. We also 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.
Recent Events
The Entertainment Project and Golf Course Project
ERREII has entered into a construction manager agreement with Arc Building Partners, which is a standard construction manager agreement with normal and customary terms, and addresses, among other things, the guaranteed maximum price of approximately
$33 million
for the Entertainment Project, completion commitments and participation by minority-owned and woman-owned business enterprises ("MWBE"). The Entertainment Project will consist of a hotel with approximately
100
hotel rooms, as well as dining, entertainment and retail offerings. Construction of the hotel began in April 2018 and is expected to be open to the public in December 2018.
ERREI anticipates entering into a construction contractor agreement with Heritage Links, which is a standard contractor agreement with normal and customary terms, related to the construction of the Golf Course Project, at a cost of approximately $19.4 million. The Company anticipates construction to begin during the summer of 2018 and anticipates the golf course will be open for play during the summer of 2019.
Sports Betting
The Upstate New York Gaming and Economic Development Act ("Gaming Act") provides, among other things, that sports betting at the gaming facilities shall be unlawful unless there has been a change in federal law authorizing such activity or upon ruling of a court of competent jurisdiction that such activity is lawful. In May 2018, the Supreme Court of the United States decided that the Professional and Amateur Sports Protection Act of 1992, which effectively outlawed sports betting nationwide, was unconstitutional. Therefore, upon the enactment of relevant regulations by the NYSGC, the Company may implement sports betting as part of the gaming experience at the Casino. In addition, the Company may pursue opportunities in online sports gambling and mobile betting upon their legalization in New York State. The Company is in discussions with various industry participants about the operation of a sports book at the Casino and broader collaboration on the implementation of online platforms. We may pursue these opportunities through direct investments, acquisitions, joint venture arrangements and other transactions. We can provide no assurance that we will successfully identify such opportunities or that, if we identify and pursue any of these opportunities, any of them will be consummated.
Basis for Presentation
The condensed consolidated financial statements and notes as of June 30, 2018 and December 31, 2017 and for the three- and six-month periods ended June 30, 2018 and June 30, 2017 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, 2017. 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
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. Historically and prospectively, our primary sources of liquidity and capital resources have been, and will continue to be, cash generated from operations, borrowings from banks and proceeds from the issuance of debt and equity securities. Based on our current level of operations and the continuing ramp-up of amenities at the Casino and expenditures for the Development Projects over the next 12 months, we may need to raise additional debt or equity financing to supplement the cash generated from operations, cash on hand, and the amounts available under our principal debt arrangements, to meet our anticipated debt service requirements, make capital expenditures and satisfy working capital needs for the next 12 months. We cannot be certain that our business will generate sufficient cash flow from operations, that our anticipated earnings from the Casino will be realized, or that future borrowings will be available under our existing debt arrangements or otherwise to enable us to service our indebtedness, make anticipated capital expenditures and satisfy working capital needs. As a result, we may need to raise additional capital or incur additional indebtedness, including from our largest stockholder or by issuing securities from our Shelf Registration Statement (as defined below), which has a current availability of approximately
$333 million
, to finance our plans for growth and general corporate purposes. 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 our Annual Report on Form 10‑K for the fiscal year ended December 31, 2017 for a discussion of the risks related to our liquidity and capital structure.
Note B. Summary of Significant Accounting Policies
Reclassifications
Certain amounts in the accompanying consolidated financial statements for the 2017 period have been reclassified to conform to presentation in the 2018 period, most notably amortization of debt issuance costs has been included within interest expense on the Condensed Consolidated Statement of Operations.
Revenue recognition
As described below, the Company adopted the provisions of new accounting standards and updates as codified in the Accounting Standards Codification (ASC) Topic 606 regarding revenue recognition. The Company adopted this guidance as of January 1, 2018 using the modified retrospective approach. Under the modified retrospective approach, amounts presented as of December 31, 2017 and for the three-month and six-month periods ended June 30, 2017 have not been adjusted to reflect the impact of the ASC Topic 606. This approach does not significantly impact the comparability of the 2018 and 2017 amounts. The promotional allowances recorded in 2017 are no longer presented in 2018 under ASC Topic 606. The adoption of the provisions of ASC 606 resulted in an increase to “Other accrued liabilities” of
$54,000
and “Accumulated deficit” of
$54,000
at January 1, 2018. These increases were exclusively the result of remeasuring the loyalty program liability from a deferred cost model to a deferred revenue model. This change only impacts MRMI, since the Casino did not commence operations until February 8, 2018.
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 as the reservation for total days of stay is non-cancelable by the patron. 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 programs represent two performance obligations 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. Prior to the adoption of ASC 606, we determined our liability for unredeemed points based on the estimated costs of services or merchandise to be provided and estimated redemption rates.
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.
Hospitality Revenues:
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 accrued liabilities” in our unaudited condensed consolidated balance sheets.
Racing Revenues:
Racing revenues include revenue earned from pari-mutuel wagering on live harness racing and simulcast signals to and from other tracks. Some elements of racing revenue from Off-Track Betting Corporations (“OTBs”) are recognized as collected, due to uncertainty of receipt and timing of payments.
Other Revenues:
Other revenues primarily include commissions received on ATM transactions and cash advances, as well as lottery tickets, 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.
Subsequent to the adoption of ASC 606, complimentary food and beverage revenues and room revenues are included in food and beverage revenues, room revenues, and other revenues, with a corresponding decrease to gaming revenues, in the unaudited condensed consolidated statements of operations. See “Recent Accounting Pronouncements” for further information regarding the adoption of ASC 606.
Complimentary food and beverage revenues, and complimentary room revenues for the three-month and six-month periods ended June 30, 2018 and 2017, respectively, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
|
06/30/2018
|
|
06/30/2017
|
|
06/30/2018
|
|
06/30/2017
|
|
|
|
(in thousands)
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Complimentary food and beverage revenues
|
|
$2,218
|
|
$127
|
|
$3,234
|
|
$293
|
|
Complimentary room revenues
|
|
786
|
|
|
—
|
|
|
950
|
|
|
—
|
|
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 liability for its loyalty point performance obligations was
$1.6 million
and
$0.3 million
at June 30, 2018 and December 31, 2017, respectively. Loyalty points are generally earned and redeemed continuously over time.
Cash, cash equivalents and restricted cash
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.
The Company has several types of restricted cash accounts. These restrictions are in accordance with the NYSGC regulations. In addition, at June 30, 2018, the Company had restricted cash of
$29.5 million
from the proceeds of the Term Loan Facility held in the lender-controlled accounts pursuant to the Term Loan Facility.
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 such amounts shown in the statement of cash flows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
December 31, 2017
|
|
June 30, 2017
|
|
December 31, 2016
|
|
|
|
|
(in thousands)
|
|
|
|
|
Cash and cash equivalents
|
|
$16,743
|
|
$10,380
|
|
$6,449
|
|
$11,012
|
|
Restricted cash
|
|
984
|
|
|
693
|
|
|
924
|
|
|
1,078
|
|
|
Restricted cash for Development Projects
|
|
22,414
|
|
|
41,982
|
|
|
51,721
|
|
|
26,384
|
|
|
Total cash, cash equivalents and restricted cash shown in the statement of cash flows
|
|
$40,141
|
|
$53,055
|
|
$59,094
|
|
$38,474
|
Restricted cash and investments for Development Projects
Restricted cash and investments for Development Projects represented the remaining funds from the Term Loan Facility to be utilized for the Development Projects. At June 30, 2018, restricted cash and investments for Development Projects of
$29.5 million
was comprised of cash and cash equivalent balances of approximately
$22.4 million
and short-term investments maturing within one year of approximately
$7.0 million
. At June 30, 2018, short-term investments were comprised of commercial paper of approximately
$3.5 million
and U.S. Treasury notes of
$3.5 million
. At December 31, 2017, restricted cash and investments for Development Projects of
$136.4 million
was comprised of cash and cash equivalent balances of approximately
$41.9 million
and short-term investments maturing within
one year
of approximately
$94.5 million
. At December 31, 2017, short-term investments were comprised of commercial paper of approximately
$59.4 million
and U. S. Treasury notes of approximately
$35.1 million
, all with maturities of less than
one year
. The short-term investments are recorded at amortized cost, which approximates fair value due to their short-term nature.
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. In the normal course of business, the Company settles wagers for other racetracks and is exposed to credit risk. These wagers 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
$130,000
and
$171,000
at June 30, 2018 and December 31, 2017, respectively.
Capitalized Interest
Interest costs incurred in connection with the construction of the Casino and the Development Projects have been capitalized in the cost of the projects. Capitalization will cease when the Casino or the other Development projects are substantially complete or if development activity is suspended for an extended period of time.
The Company capitalized $
$0.3 million
and
$5.9 million
of interest charges during the three-month periods ending June 30, 2018 and June 30, 2017, respectively and
$11.3 million
and
$9.4 million
for the six-month periods ended June 30, 2018 and June 30, 2017, respectively.
Other long-term liabilities
The difference between our cash payments and straight-line rent on our land leases of
$7.5 million
and
$8.3 million
at June 30, 2018 and December 31, 2017, respectively, is included in other long-term liabilities.
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 six-month periods ended June 30, 2018 and and 2017 were the same.
The following table shows the approximate number of common stock equivalents outstanding at June 30, 2018 and 2017 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 six-month periods ended June 30, 2018 and 2017, because their inclusion would have been anti-dilutive to the loss per common share:
|
|
|
|
|
|
|
|
|
|
|
Outstanding at
|
|
|
June 30,
2018
|
|
June 30,
2017
|
|
Unvested Restricted stock
|
73,000
|
|
|
148,000
|
|
|
Warrants
|
193,000
|
|
|
133,000
|
|
|
Restricted stock units ("RSUs")
|
158,000
|
|
|
55,000
|
|
|
Option Matching Rights
|
1,000
|
|
|
6,000
|
|
|
Options
|
12,000
|
|
|
19,000
|
|
|
Total
|
437,000
|
|
|
361,000
|
|
On August 19, 2009, the Company entered into an investment agreement (the "Investment Agreement") with Kien Huat Realty III Limited ("Kien Huat"), the Company's largest stockholder, pursuant to which Kien Huat purchased shares of common stock of the Company during the year ended December 31, 2009. Under the Investment Agreement, if any options or warrants outstanding at the time of the final closing under the Investment Agreement, or the first
200,000
options or warrants granted to directors or officers as of the final closing date under the Investment Agreement, are exercised, Kien Huat has the right to purchase an equal number of additional shares of common stock as are issued upon such exercise at the exercise price for the applicable option or warrant. The Company refers to these rights as the “Option Matching Rights”. The Option Matching Rights outstanding at June 30, 2018 expired in July 2018.
Interest Rate Cap Agreement
In February 2017, the Company entered into an interest rate cap agreement with Credit Suisse AG, International 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 "Interest Rate Cap"). The Company paid
$675,000
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
$282,000
at June 30, 2018 and
$251,000
at December 31, 2017, and is presented at fair value as "Other Assets" on the Condensed Consolidated Balance Sheet. The difference between the fair value and amortized cost is recorded as an adjustment to accumulated other comprehensive loss.
Accumulated Other Comprehensive Loss
As of June 30, 2018 and December 31, 2017, accumulated other comprehensive loss was
$128,000
and
$315,000
, respectively, and consisted solely of the fair value adjustment relating to the Interest Rate Cap.
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 and long-term debt. 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
December 31, 2017
|
|
|
|
|
|
Carrying Amount
|
|
Fair Value
|
|
Carrying Amount
|
|
Fair Value
|
|
Level of Fair Value Hierarchy
|
|
Assets:
|
|
(in thousands)
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$16,743
|
|
$16,743
|
|
$10,380
|
|
$10,380
|
|
Level 1
|
|
Restricted cash
|
|
984
|
|
|
984
|
|
|
693
|
|
|
693
|
|
|
Level 1
|
|
Interest Rate Cap
|
|
282
|
|
|
282
|
|
|
251
|
|
|
251
|
|
|
Level 2
|
|
Restricted cash and investments for Development Projects:
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
22,414
|
|
|
22,414
|
|
|
41,982
|
|
|
41,982
|
|
|
Level 1
|
|
Short-term investments
|
|
7,044
|
|
|
7,026
|
|
|
94,449
|
|
|
94,209
|
|
|
Level 2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Term B Loan, net of discount
|
|
442,474
|
|
|
448,589
|
|
|
443,161
|
|
|
449,749
|
|
|
Level 2
|
|
Term A Loan
|
|
7,250
|
|
|
7,250
|
|
|
—
|
|
|
—
|
|
|
Level 2
|
|
Bangkok Bank Loan
|
|
16,000
|
|
|
16,000
|
|
|
16,000
|
|
|
16,000
|
|
|
Level 3
|
|
Revolving Credit Facility
|
|
15,000
|
|
|
15,000
|
|
|
—
|
|
|
—
|
|
|
Level 2
|
|
Equipment loans
|
|
27,682
|
|
|
27,682
|
|
|
31,095
|
|
|
31,095
|
|
|
Level 3
|
Stock-based compensation
The cost of all share-based awards to employees, including grants of employee stock options and restricted stock, is recognized in the financial statements based on the fair value of the awards at grant date. The fair value of stock option awards is determined using the Black-Scholes valuation model on the date of grant. The fair value of restricted stock awards is equal to the market price
of Empire’s common stock on the date of grant. 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 June 30, 2018, there was approximately
$3.0
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
three 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.
As a condition of the Gaming Facility License, the Company paid a license fee of
$51 million
on February 25, 2016. The term of the Gaming Facility License is
10
years from the date of grant; however, amortization did not commence until the Casino opened to the public in February 2018. Amortization has been recognized on a straight-line basis beginning in February 2018 and will continue 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.
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"), which provides guidance for accounting for leases. Under ASU 2016-02, the Company will be required to recognize the assets and liabilities for the rights and obligations created by leased assets. ASU 2016-02 will take 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. Early adoption is permitted. The Company intends to adopt the standard on January 1, 2019 and apply the package of practical expedients available to it upon adoption. The Company continues to evaluate the effect that ASU 2016-02 will have on consolidated financial statements, but we expect that ASU 2016-02 will have a material effect on the condensed consolidated balance sheets as a result of the recognition of certain leases as right-of-use assets and lease liabilities.
In November 2016, FASB issued ASU 2016-18, "Restricted Cash" Topic 230, which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash and restricted cash equivalents. The Company adopted this standard on January 1, 2018 using the retrospective transition method. The impact of the new standard is that the Company's condensed consolidated statements of cash flows now present the change in a combined amount for both restricted and unrestricted cash and cash equivalents for all periods presented.
Note C. Prepaid Expenses and Other Assets
The Company participated in the New York State Empire Zones real estate tax credit program for over
10
years. Under this program, the Company receives a refund for real estate taxes paid during the year, after the end of New York State's fiscal year. Beginning in 2014, the amount of the tax credit received was reduced by
20%
each year until the tax credit ended for the Company on December 31, 2017. For the year ended December 31, 2017, the Company will receive a
20%
refund for real estate taxes paid, equal to
$270,000
, in the Spring of 2019. The outstanding real estate tax credits are included in prepaid expenses and other current assets on the accompanying condensed consolidated balance sheet at June 30, 2018 and December 31, 2017, and were approximately
$270,000
and
$814,000
, respectively.
The increases in prepaid real estate taxes, advertising, gaming expenses and security deposits are directly related to the opening of the Casino during the current six-month period. Included in prepaid gaming expenses are
$334,000
of supplies, such as playing cards, dice and chips.
Prepaid expenses and other current assets, as presented on the balance sheet, are comprised of the following at June 30, 2018 and December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6/30/2018
|
|
12/31/2017
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
Empire Zones real estate tax credit
|
|
$
|
270
|
|
|
$
|
814
|
|
|
Prepaid real estate taxes
|
|
540
|
|
|
443
|
|
|
Prepaid insurance
|
|
203
|
|
|
327
|
|
|
Prepaid advertising
|
|
92
|
|
|
—
|
|
|
Prepaid gaming expenses
|
|
1,568
|
|
|
74
|
|
|
Development escrow and refundable security deposit
|
|
1,292
|
|
|
780
|
|
|
Prepaid other
|
|
1,653
|
|
|
938
|
|
|
Total prepaid expenses and other current assets
|
|
$
|
5,618
|
|
|
$
|
3,376
|
|
Note D. Property and Equipment
Property and equipment at June 30, 2018 and December 31, 2017 consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6/30/2018
|
|
12/31/2017
|
|
|
(in thousands)
|
|
|
|
|
|
|
Land
|
$
|
770
|
|
|
$
|
770
|
|
|
Land improvements
|
1,759
|
|
|
1,759
|
|
|
Buildings
|
576,938
|
|
|
4,727
|
|
|
Building improvements
|
76,293
|
|
|
29,874
|
|
|
Furniture, fixtures and equipment
|
33,379
|
|
|
5,551
|
|
|
Construction in Progress
|
436
|
|
|
77
|
|
|
|
689,575
|
|
|
42,758
|
|
|
Less: Accumulated depreciation
|
(28,356
|
)
|
|
(15,895
|
)
|
|
|
$
|
661,219
|
|
|
$
|
26,863
|
|
The
$646.8 million
increase in property and equipment was primarily due to the reclassification of capitalized Project Development costs to buildings, building improvements and furniture, fixtures and equipment during the six-month period ended June 30, 2018. At June 30, 2018,
$9.4
million remains classified as capitalized Project Development costs reflecting the ongoing construction of the Development Projects.
Depreciation expense was approximately
$7.8 million
and
$0.4 million
for the three-month periods ended
June 30, 2018
and
2017
, respectively, and approximately
$12.5 million
and
$0.7 million
for the six-month periods ended June 30,2018 and 2017, respectively.
The VGMs at Monticello Casino and Raceway are owned by the NYSGC and, accordingly, the Company's consolidated financial statements include neither the cost nor the depreciation of those devices.
Note E. Development Projects Costs
Capitalized Project Development Costs
At June 30, 2018 and December 31, 2017, total Capitalized Project Development costs incurred were approximately
$9.4 million
and $
566.8 million
, respectively. Total Capitalized Development Project costs at June 30, 2018 consisted of
$8.4 million
of construction costs, site development, contractor insurance, general conditions, architectural fees and construction manager fees, and approximately
$1.0
million of professional service fees including legal and accounting fees. Total Capitalized Project Development costs at December 31, 2017 consisted of
$560.2 million
of construction costs, site development, contractor insurance, general conditions, architectural fees and construction manager fees, and approximately
$6.6 million
of professional service fees, including legal and accounting fees, and is reflected on the balance sheet as Capitalized Development Project costs. The Casino opened for business on February 8, 2018, after receiving an operating certificate from the NYSGC. As a result of the Casino opening for business, Capitalized Project Development costs relating to the Casino of approximately
$630.1 million
were reclassified as property and equipment for the Casino.
Cash Collateral for Deposit Bond
In February 2016 and June 2017, the Company deposited
$15 million
and
$20 million
, respectively, in performance bonds to guarantee the completion of the Development Projects. On December 28, 2017, the Company notified the NYSGC that it had expended
85%
of the Company's required minimum capital investment in the Development Projects. On January 4, 2018, the NYSGC notified the Company that it had confirmed that the Minimum Capital Investment criteria had been met and the funds returned to the Company were deposited into a lender-controlled account for use towards Development Projects expenses.
Note F. Accrued Expenses and Other Current Liabilities
Accrued Development Projects costs at June 30, 2018 and December 31, 2017 were
$37.4 million
and
$71.7 million
, respectively, and were primarily comprised of amounts due to the Casino construction manager for costs incurred for the Development Projects, as well as amounts due to the architect and other vendors. The proceeds from the Term Loan Facility will be used to pay the accrued Development Project costs.
Accrued expenses and other current liabilities, as presented on the condensed consolidated balance sheet, are comprised of the following at June 30, 2018 and December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6/30/2018
|
|
12/31/2017
|
|
|
(in thousands)
|
|
|
|
|
|
|
Liability for horseracing purses
|
$
|
1,449
|
|
|
$
|
886
|
|
|
Accrued payroll
|
4,962
|
|
|
1,715
|
|
|
Deferred revenue - loyalty points
|
1,577
|
|
|
271
|
|
|
Liability to the NYSGC
|
1,662
|
|
|
1,507
|
|
|
Liability for local progressive jackpot
|
2,431
|
|
|
1,110
|
|
|
Accrued premium game leases
|
617
|
|
|
—
|
|
|
Accrued professional fees
|
1,823
|
|
|
744
|
|
|
Accrued interest expense
|
378
|
|
|
14
|
|
|
Accrued utilities
|
656
|
|
|
81
|
|
|
Accrued other
|
5,393
|
|
|
992
|
|
|
Total accrued expenses and other current liabilities
|
$
|
20,948
|
|
|
$
|
7,320
|
|
The increase in deferred revenue - loyalty points at June 30, 2018 of
$1.3
million primarily reflects the increase in deferred revenues due to the increase in loyalty points earned by new customers as a result of the Casino opening. The liability to the NYSGC represents the amounts payable for taxes assessed by the NYSGC from gaming operations at the Company's facilities. The liability for local progressive jackpot represents the liability the Casino and the Monticello Casino and Raceway has incurred for all progressive jackpot games at each period ending date. Accrued premium game leases represent accruals for short-term slot machine leases for certain popular games.
Note G. Long-Term Debt
Long-term debt consisted of the following at June 30, 2018 and December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6/30/2018
|
|
12/31/2017
|
|
|
|
(in thousands)
|
|
Term B Loan (stated amount less unamortized discount)
|
|
$
|
442,474
|
|
|
$
|
443,161
|
|
|
Term A Loan
|
|
7,250
|
|
|
—
|
|
|
Bangkok Bank Loan
|
|
16,000
|
|
|
16,000
|
|
|
Revolving Credit Facility
|
|
15,000
|
|
|
—
|
|
|
Equipment Loans
|
|
27,682
|
|
|
31,095
|
|
|
Total long-term debt
|
|
508,406
|
|
|
490,256
|
|
|
Debt issuance costs
|
|
(19,519
|
)
|
|
(20,520
|
)
|
|
Total long-term debt, net
|
|
488,887
|
|
|
469,736
|
|
|
Less: Current portion of long-term debt
|
|
(26,143
|
)
|
|
(14,588
|
)
|
|
Long term-debt, net of current portion
|
|
$
|
462,744
|
|
|
$
|
455,148
|
|
Term Loan Facility
At June 30, 2018, Montreign Operating's senior secured term loan facility (the "Term Loan Facility") consisted of
$7.3 million
outstanding under the Term A loan (the "Term A Loan") and
$442.5 million
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, Montreign Operating drew down the Term A Loan in the amount of
$9 million
on May 31, 2018. Montreign Operating subsequently drew down the Term A Loan in the amounts of
$8 million
and
$53 million
on July 9, 2018 and July 23, 2018, respectively. 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 June 30, 2018, the interest rate on the Term A Loan was
6.98%
. 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 June 30, 2018, the interest rate on the Term B Loan was
10.34%
. 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.
We are required to make principal payments under the Term B Loan and the Term A Loan at the end of each calendar quarter beginning with the period ended June 30, 2018. The Company will repay
one
percent of the original principal balance of the Term B Loan each year, in quarterly payments of approximately
$1.1 million
. The Company will repay
2.5%
of the original principal amount of the Term A Loan, in quarterly payments of approximately $
1.8 million
for the first year, and quarterly installments of approximately
$2.6 million
thereafter. The Company repaid approximately
$1.8 million
and
$1.1 million
on the Term A Loan and Term B Loan, respectively, in the three-month period ended June 30, 2018.
As a condition to the Term Loan Agreement, the net proceeds from the Term A Loan, Term B Loan and the then-outstanding Kien Huat Montreign Loan, which are discussed below, were deposited into an account controlled by the lenders under the Term Loan Facility.
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.
The Term Loan Facility contains representations and warranties, customary events of default, and affirmative, negative and financial covenants. For example, the Project Parties are restricted from entering into advisory, management or consulting agreements with an affiliate of any of the Project Parties, 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 Facility also includes target dates by which the Casino is required to be opened to the public and by which its development must be fully complete (as such concepts are defined in the Term Loan Agreement).
In addition, the Term Loan Agreement requires us to satisfy certain financial covenants, including a maximum first lien leverage ratio, a minimum interest coverage ratio and a limitation on the maximum permissible capital expenditures by the Project Parties. The financial covenants relating to the maximum first lien leverage ratio and the minimum interest coverage ratio will be measured beginning in the first full fiscal quarter following the "Full Opening Date" of the Casino, which is the date on which at least 95% of all rooms in the hotel are open to the public. The Company anticipates that at least
95%
of the hotel rooms will be ready to be occupied during the fourth quarter of 2018. As of June 30, 2018, the Company was in compliance with all applicable covenant requirements under the Term Loan Facility.
Mandatory prepayments of the Term Loan 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.
Revolving Credit Facility
At June 30, 2018, Montreign Operating's revolving credit facility (the "Revolving Credit Facility") consisted of
$15 million
of outstanding borrowings. The Company borrowed
$2 million
under the Revolving Credit Facility on June 29, 2018. 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. 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 June 30, 2018, the interest rate on borrowings under the Revolving Credit Facility was
7.09%
.
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 June 30, 2018, the Company was in compliance with all applicable covenant requirements under the Term Loan Facility.
Bangkok Bank Loan
At June 30, 2018, the Delayed Draw Term Loan, as amended (the "Bangkok Bank Loan") consisted of
$16 million
of outstanding borrowings and availability of $4 million 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 June 30, 2018, the interest rate on the Bangkok Bank Loan was
8.34%
. In addition, the Company pays a commitment fee to Bangkok Bank equal to the undrawn amount of the Bangkok Bank Loan commitment multiplied by a rate equal to
1.50%
per annum. Such commitment fee is paid on the last business day of each quarter and commenced on March 31, 2018.
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 Casino and 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 (subject to grace periods, as applicable), 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. The Company is in compliance with the covenant requirements as of June 30, 2018.
In addition, the Bangkok Bank Loan Agreement contains a financial covenant that restricts the maximum total leverage ratio of the Company, which financial covenant is applicable beginning with the fiscal quarter ended 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.
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 June 30, 2018 totaled approximately
$27.7 million
. 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 June 30, 2018:
|
|
|
|
|
|
|
Year ending December 31,
|
Totals
|
|
|
(in thousands)
|
|
2018
|
$13,021
|
|
2019
|
36,966
|
|
|
2020
|
10,190
|
|
|
2021
|
6,505
|
|
|
2022
|
19,500
|
|
|
2023
|
428,625
|
|
|
Totals
|
$514,807
|
Note H. Long-Term Loans, Related Party
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. Advances under the Kien Huat Subordinate Loan will be made in four installments as follows: (i)
$5 million
will be advanced no earlier than July 2, 2018; (ii)
$5 million
will be advanced no earlier than July 20, 2018; (iii)
$10 million
will be advanced no earlier than September 4, 2018; and (iv)
$10 million
will be advanced no earlier than September 17, 2018. The only condition to an advance will be the delivery of a request for an advance not less than five business days prior to the date of an advance and that the representations contained in the Kien Huat Subordinate Loan Agreement will be true and correct. On July 5, 2018, the Company borrowed
$5 million
and, on July 31, 2018, the Company borrowed an additional
$5 million
. The Company expects to borrow the two remaining installments of $10 million each on or about the scheduled installment dates of September September 4, 2018 and September 17, 2018, respectively. The Company paid Kien Huat a commitment fee of
$0.3 million
(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 will be payable monthly in arrears. Prior to the maturity of the Kien Huat Subordinate Loan, interest will not be required to be paid in cash and will be added to the outstanding principal of the Kien Huat Subordinate Loan and will 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 (subject to grace periods, as applicable), 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
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
. 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. At June 30, 2018, there were no outstanding borrowings pursuant to the Kien Huat Backstop Loan Agreement.
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 any loans made pursuant to 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 (subject to grace periods, as appropriate), 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. 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.
Preferred Stock and Dividends
The Company paid dividends, required by the terms of the Series B Preferred Stock, during 2017 and 2018 on the following dates: on April 2, 2018 and July 2, 2018, quarterly payments in the amount of
$32,087
were made for the first two quarters of 2018. For the 2017 fiscal year, quarterly payments in the amount of
$32,087
were made on April 3, 2017, July 3, 2017, October 2, 2017 and January 2, 2018.
Note J. Concentration
As of June 30, 2018, the Company had
one
gaming patron who represented
10.8%
of the total net outstanding accounts receivable.
As of December 31, 2017, the Company had
one
debtor, Hawthorne OTB, which represented
13.0%
of the total net outstanding accounts receivable.
Note K. Related Party Transactions
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 Entertainment Project 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 recorded an expense of approximately
$400,000
and
$627,000
for the three-month and six-month periods ended June 30, 2018, respectively, reflecting the fee payable pursuant to the RWS License Agreement.
Moelis Agreement
On August 7, 2018, the Company entered into an engagement agreement (the "Moelis Engagement Agreement") pursuant to which it engaged Moelis & Company LLC ("Moelis") to act as the Company’s exclusive financial advisor in its review of opportunities in online gaming, sports betting and interactive gaming. Pursuant to the Moelis Engagement Agreement, Moelis has also been engaged as exclusive financial advisor with respect to a strategic financing transaction for the Company, if any. Pursuant to the Moelis Engagement Agreement, we will pay Moelis a retainer fee of
$100,000
upon execution. In the event a transaction is consummated, the Moelis Engagement Agreement contemplates additional transaction-based fees would be earned by Moelis.
Gregg Polle, one of the directors of the Company, is a Managing Director of Moelis. Mr. Polle refrained from participating in the discussion of the Moelis Engagement Agreement and abstained from voting on whether to enter into such agreement.
Note L. Commitments and Contingencies
Legal Proceedings
The Company is 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.
Operating Leases
The following table represents the minimum lease payments under the Company's operating leases at June 30, 2018:
|
|
|
|
|
|
|
|
Year ending December 31,
|
Total Payments
|
|
|
(in thousands)
|
|
2018
|
$
|
5,930
|
|
|
2019
|
9,353
|
|
|
2020
|
8,948
|
|
|
2021
|
8,489
|
|
|
2022
|
8,400
|
|
|
2023 to 2056
|
361,886
|
|
|
Total
|
$
|
403,006
|
|
The details of operating lease commitments are described below.
Casino Lease
On December 28, 2015, Montreign Operating entered into a lease (the "Casino Lease") with EPT Concord II, LLC ("EPT") for the lease of the parcel on which the Casino was built (the "Casino Parcel"). The Casino Lease has a term that expires on the earlier of (i) March 31, 2086, and (ii) Montreign Operating giving EPT written notice of its election to terminate the Casino Lease (the “Termination Option”) at least
12
months prior to any one of five Option Dates (as defined below). The option dates (each an "Option Date") under the Casino Lease mean each of the 20th, 30th, 40th, 50th and 60th anniversaries of the commencement of the Casino Lease. Upon Montreign Operating's timely notice of exercise of its Termination Option, the Casino Lease will be automatically terminated effective as of the applicable Option Date.
T
he following table represents the fixed rent payments under the Casino Lease at June 30, 2018:
|
|
|
|
|
|
|
Year ending December 31,
|
Fixed Rent Payments due by Period
|
|
|
(in thousands)
|
|
2018 (1) (2)
|
$4,500
|
|
2019 (2)
|
7,500
|
|
|
2020 (2)
|
7,500
|
|
|
2021 (2)
|
8,000
|
|
|
2022 (2)
|
8,100
|
|
|
2023 to 2056 (2)
|
346,524
|
|
|
|
|
|
(1)
|
From March 1, 2017 through August 31, 2018, fixed rent is
$1 million
per month.
|
|
|
|
|
(2)
|
From September 1, 2018 through the remainder of the term of the Casino Lease, fixed rent will equal
$7.5 million
per year, subject to an
eight
percent escalation every five years ("Base Amount").
|
In addition to the annual fixed rent, beginning September 2018 and through the remainder of the term of the Casino Lease (the “Percentage Rent Period”), Montreign Operating is obligated to pay an annual percentage rent equal to
five
percent of the Eligible Gaming Revenue (as such term is defined in the Casino Lease) in excess of the Base Amount for the Percentage Rent Period. Additionally, the lease is a net lease, and Montreign Operating has an obligation to pay the rent payable under the Casino Lease and other costs related to Montreign Operating's use and operation of the Casino Parcel, including the special district tax assessments allocated to the Casino Parcel, not to exceed the capped dollar amount applicable to the Casino Parcel.
Golf Course Lease
On December 28, 2015, ERREI entered into a sublease (the “Golf Course Lease”) with Adelaar Developer, LLC (the "Destination Resort Developer") for the lease of the Golf Course Parcel. The terms of the Golf Course Lease are substantially similar to the Casino Lease, subject to the material differences described below. Under the Golf Course Lease, there is no percentage rent due.
The following table represents the future fixed rent payments under the Golf Course Lease at June 30, 2018:
|
|
|
|
|
|
|
Year ending December 31,
|
Fixed Rent Payments due by Period
|
|
|
(in thousands)
|
|
|
2018 (1)
|
$0
|
|
2019 (1) (2)
|
125
|
|
|
2020 (2)
|
150
|
|
|
2021 (2)
|
150
|
|
|
2022 (2)
|
150
|
|
|
2023 to 2056 (2) (3)
|
7,675
|
|
|
|
|
|
(1)
|
From the date the Golf Course Lease commenced (the “Golf Course Lease Commencement Date”) and until the date on which the Golf Course opens for business, which is expected to be in Summer of 2019 (the “Golf Course Opening Date”), fixed rent payments will equal
$0
.
|
|
|
|
|
(2)
|
From the Golf Course Opening Date and continuing for the 10 years thereafter, fixed rent will equal
$150,000
per
|
|
|
|
|
(3)
|
From March 2029 through the remainder of the term of the Golf Course Lease, fixed rent will equal
$250,000
per year.
|
The Golf Course Lease is a net lease and ERREI is obligated to pay the rent payable under the Golf Course Lease and other costs related to ERREI's use and operation of the Golf Course Parcel, including the special district tax assessments allocated to the Golf Course Parcel, not to exceed the capped dollar amount applicable to the Golf Course Parcel. This obligation will not be assessed against ERREI prior to 60 months following the Golf Course Lease Commencement Date.
Entertainment Project Lease
On December 28, 2015, ERREII entered into a sublease (the “Entertainment Project Lease”) with the Destination Resort Developer, for the lease of the Entertainment Project Parcel. The terms of the Entertainment Project Lease are substantially similar to the Casino Lease, subject to the material differences described below. Under the Entertainment Project Lease, there is no percentage rent due.
The following table represents the future fixed rent payments under the Entertainment Project Lease at June 30, 2018:
|
|
|
|
|
|
|
Year ending December 31,
|
Fixed Rent Payments due by Period
|
|
|
(in thousands)
|
|
2018 (1) (2)
|
$12
|
|
2019(2)
|
150
|
|
|
2020 (2)
|
150
|
|
|
2021 (2)
|
150
|
|
|
2022 (2)
|
150
|
|
|
2023 to 2056 (2) (3)
|
7,713
|
|
|
|
|
|
(1)
|
From the date the Entertainment Project Lease commenced (the “Entertainment Project Lease Commencement Date”) and until the date on which the Entertainment Project opens for business, which is expected to be December 2018 (the “Entertainment Project Opening Date”), fixed rent payments will equal
$0
.
|
|
|
|
|
(2)
|
From the Entertainment Project Opening Date and continuing for the 10 years thereafter, fixed rent will equal
$150,000
per year.
|
|
|
|
|
(3)
|
From September 2028 through the remainder of the term of the Entertainment Project Lease, fixed rent will equal
$250,000
per year.
|
The Entertainment Project Lease is a net lease and ERREII is obligated to pay the rent payable under the Entertainment Project Lease and other costs related to ERREII's use and operation of the Entertainment Project Parcel, including the special district tax assessments allocated to the Entertainment Project Parcel, not to exceed the capped dollar amount applicable to the Entertainment Project Parcel. This obligation will not be assessed against ERREII prior to 60 months following the Entertainment Project Lease Commencement Date.
Note M. Subsequent Events
On July 5, 2018, the Company borrowed
$5 million
, less a
$0.3 million
commitment fee, under the Kien Huat Subordinate Loan Agreement. On July 31, 2018, the Company borrowed an additional
$5 million
. See Note H for a discussion of the terms of the Kien Huat Subordinate Loan Agreement.
On July 9, 2018 and July 23, 2018, Montreign Operating drew down
$8 million
and
$53 million
, respectively, under the Term A Loan. The July 23, 2018 drawdown was the last in a series of drawdowns on the Term A Loan. The Term A Loans were borrowed at LIBOR plus
5.0%
interest rates under the Term Loan Facility. The total amount drawn down under the Term A Loan prior to the expiration of the borrowing period on July 24, 2018 was
$70 million
. See Note G for a discussion of the terms of the Term Loan Facility.
On August 7, 2018, the Company entered into an engagement agreement (the "Moelis Engagement Agreement") pursuant to which it engaged Moelis & Company LLC ("Moelis") to act as the Company’s exclusive financial advisor in its review of opportunities in online gaming, sports betting and interactive gaming. Pursuant to the Moelis Engagement Agreement, Moelis has also been engaged as exclusive financial advisor with respect to a strategic financing transaction for the Company, if any. Pursuant to the Moelis Engagement Agreement, we will pay Moelis a retainer fee of
$100,000
upon execution. In the event a transaction is consummated, the Moelis Engagement Agreement contemplates additional transaction-based fees would be earned by Moelis.
|
|
|
|
|
|
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, 2017.
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, 2017 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, doing business as Resorts World Catskills, owns and operates Resorts World Catskills, a Casino, which opened to the public on February 8, 2018. The Casino is located in Sullivan County, New York approximately 90 miles from New York City. Montreign Operating is the sole holder of a Gaming Facility License
issued by the NYSGC in the Hudson Valley-Catskill region, which consists of Columbia, Delaware, Dutchess, Greene, Orange, Sullivan and Ulster counties in New York State.
In addition to the Casino, ERREI and ERREII and, together with the Project Parties, each of which is a wholly-owned subsidiary of Montreign Operating, are developing the Development Projects, a four-season destination resort in Sullivan County.
Through our wholly-owned subsidiary, MRMI, we own and operate Monticello Casino and Raceway, which began racing operations in 1958 in Monticello, New York, which is proximate to the Casino. Monticello Casino and Raceway currently features a VGM and harness horseracing facility. We also 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.
Recent Events
The Entertainment Project and Golf Course
ERREII has entered into a construction manager agreement with Arc Building Partners, which is a standard construction manager agreement with normal and customary terms, and addresses, among other things, the guaranteed maximum price of approximately $33 million for the Entertainment Project, completion commitments and MWBE participation. The Entertainment Project will consist of a hotel with approximately 100 hotel rooms, as well as dining, entertainment and retail offerings. Construction of the hotel began in April 2018 and is expected to be open to the public in December 2018.
ERREI anticipates entering into a construction contractor agreement with Heritage Links, which is a standard contractor agreement, with normal and customary terms, related to the construction of the Golf Course Project, at a cost of approximately $19.4 million. The Company anticipates construction to begin during the summer of 2018 and anticipates the golf course will be open for play during the summer of 2019.
Sports Betting
The Gaming Act provides, among other things, that sports betting at the gaming facilities shall be unlawful unless there has been a change in federal law authorizing such activity or upon ruling of a court of competent jurisdiction that such activity is lawful. In May 2018, the Supreme Court of the United States decided that the Professional and Amateur Sports Protection Act of 1992, which effectively outlawed sports betting nationwide, was unconstitutional. Therefore, upon the enactment of relevant regulations by the NYSGC, the Company may implement sports betting as part of the gaming experience at the Casino. In addition, the Company may pursue opportunities in online sports gambling and mobile betting upon their legalization in New York State. The Company is in discussions with various industry participants about the operation of a sports book at the Casino and broader collaboration on the implementation of online platforms. We may pursue these opportunities through direct investments, acquisitions, joint venture arrangements and other transactions. We can provide no assurance that we will successfully identify such opportunities or that, if we identify and pursue any of these opportunities, any of them will be consummated.
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, 2017. With the exception of the adoption of ASC 606 on January 1, 2018, 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 revenue recognition and loyalty program accounting policies.
Results of Operations - Three months ended June 30, 2018 Compared to Three Months ended June 30, 2017
The following table highlights the various sources of revenues and expenses for the three months ended June 30, 2018 as compared to the three months ended June 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
June 30, 2018
|
|
June 30, 2017
|
|
Percent Change
|
|
|
(in thousands, except percentages)
|
|
|
|
Gaming revenues
|
$
|
39,798
|
|
|
$
|
16,230
|
|
|
145.2
|
%
|
|
Gaming expenses
|
34,462
|
|
|
11,817
|
|
|
191.6
|
%
|
|
|
|
|
|
|
|
|
Racing revenues
|
1,194
|
|
|
1,237
|
|
|
(3.5
|
)%
|
|
Racing expenses
|
2,017
|
|
|
1,160
|
|
|
73.9
|
%
|
|
|
|
|
|
|
|
|
Food and beverage revenues
|
4,569
|
|
|
589
|
|
|
675.7
|
%
|
|
Food and beverage expenses
|
6,031
|
|
|
1,029
|
|
|
486.1
|
%
|
|
|
|
|
|
|
|
|
Room revenues
|
1,775
|
|
|
—
|
|
|
n/m
|
|
Room expenses
|
2,103
|
|
|
—
|
|
|
n/m
|
|
|
|
|
|
|
|
|
Other revenues
|
1,800
|
|
|
231
|
|
|
679.2
|
%
|
|
Other expenses
|
49
|
|
|
80
|
|
|
(38.8
|
)%
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
16,949
|
|
|
5,125
|
|
|
230.7
|
%
|
|
|
|
|
|
|
|
|
Development Projects expenses
|
537
|
|
|
4,416
|
|
|
(87.8
|
)%
|
Gaming Revenues and Expenses
Gaming revenues increased $23.6 million, or 145.2%, for the three-month period ended June 30, 2018 as compared to the three-month period ended June 30, 2017, from $16.2 million to $39.8 million. The increase in gaming revenues was primarily due revenues generated by the Casino, which generated $34.5 million in gross gaming revenue. Monticello Casino and Raceway generated $8.4 million in gross gaming revenue for the three-month period ended June 30, 2018 as compared to $16.2 million for the three-month period ended June 30, 2017. The decrease in gaming revenue at Monticello Casino and Raceway was primarily due to a decrease in volume due to the opening of the Casino.
Gaming expenses increased $22.6 million, or 191.6%, for the three-month period ended June 30, 2018 as compared to the three-month period ended June 30, 2017, from $11.8 million to $34.5 million. The increase in gaming expenses was primarily due to expenses generated by the Casino, which includes gaming taxes and payroll expenses, offset by an increase in the commission rate earned by the Company at operations at Monticello Casino and Raceway. The Company's commission rate was increased due to NYSGC regulations that allow for a higher commission that is commensurate with the blended tax rate paid by the Casino.
Racing Revenues and Expenses
Racing revenues decreased approximately $43,000, or 3.5%, for the three-month period ended June 30, 2018 as compared to the three-month period ended June 30, 2017. The decrease in racing revenues is due to a decrease in racing simulcast revenues as compared to the three-month period ended June 30, 2017. Racing expenses increased $0.8 million, or 73.9%, for the three-month period ended June 30, 2018 as compared to the three-month period ended June 30, 2017, from $1.2 million to $2.0 million. The increase is due to larger purse contributions and higher fees required by New York State.
Food and Beverage
Revenues and Expenses
Food and beverage revenues increased approximately $4.0 million, or 675.7%, for the three-month period ended June 30, 2018 as compared to the three-month period ended June 30, 2017, from approximately $0.6 million to $4.6 million due to the opening of the new food venues at the Casino. Food and beverage expenses increased $5.0 million, or 486.1% for the three-month period ended June 30, 2018 as compared to the three-month period ended June 30, 2017, from $1.0 million to $6.0 million. The increase was primarily due to the opening of the Casino and its attendant additional food venues, which increased costs for food, beverage and supplies, as well as payroll expense.
Room Revenues and Expenses
The Casino generated approximately $1.8 million in room revenue for the three-month period ended June 30, 2018 due to the Casino opening. We incurred room expenses of approximately $2.1 million, which is primarily due to payroll and benefit expenses.
Other Revenues and Expenses
Other revenues primarily include income from retail, ATM revenue and commissions from the sale of lottery tickets. Other revenues increased by approximately $1.6 million, or 679.2%, during the three-month period ended June 30, 2018 as compared to the three-month period ended June 30, 2017, from approximately $0.2 million to approximately $1.8 million, primarily due to an increase in ATM revenues and the opening of the retail store and spa at the Casino. Other expenses decreased by approximately $31,000, or 38.8%, during the three-month period ended June 30, 2018 as compared to the three-month period ended June 30, 2017, from approximately $80,000 to approximately $49,000 due to the reduction of staffing at Monticello Casino and Raceway.
Selling General and Administrative (“SG&A”)
SG&A expenses increased $11.8 million, or 230.7%, for the three-month period ended June 30, 2018 as compared to the three-month ended June 30, 2017, from $5.1 million to $16.9 million. The increase in SG&A expenses is primarily due to an increase in payroll and benefits, insurance, marketing and a branding fee, all relating to the Casino.
Development Projects Expenses
Development Projects expenses decreased by $3.9 million, or 87.8% for the three-month period ending June 30, 2018 as compared to the three-month period ended June 30, 2017, from $4.4 million to $0.5 million. The decrease was primarily due to the Casino opening. Costs associated with the Casino will cease to be capitalized upon the complete opening of the Casino. At June 30, 2018, the Casino is open, however the penthouse suites at the Casino are still under construction and are expected to be complete in December 2018. The Company is also currently building the Entertainment Project. See Recent Events above for further details.
Results of Operations - Six months ended June 30, 2018 Compared to Six Months ended June 30, 2017
The following table highlights the various sources of revenues and expenses for the six months ended June 30, 2018 as compared to the six months ended June 30, 2017 (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
June 30, 2018
|
|
June 30, 2017
|
|
Percent Change
|
|
|
(in thousands, except percentages)
|
|
|
|
Gaming revenues
|
$
|
68,325
|
|
|
$
|
29,123
|
|
|
134.6
|
%
|
|
Gaming expenses
|
55,810
|
|
|
21,645
|
|
|
157.8
|
%
|
|
|
|
|
|
|
|
|
Racing revenues
|
2,558
|
|
|
2,723
|
|
|
(6.1
|
)%
|
|
Racing expenses
|
3,725
|
|
|
2,459
|
|
|
51.5
|
%
|
|
|
|
|
|
|
|
|
Food and beverage revenues
|
7,141
|
|
|
1,098
|
|
|
550.4
|
%
|
|
Food and beverage expenses
|
9,582
|
|
|
2,038
|
|
|
370.2
|
%
|
|
|
|
|
|
|
|
|
Room revenues
|
2,459
|
|
|
—
|
|
|
n/m
|
|
Room expenses
|
2,960
|
|
|
—
|
|
|
n/m
|
|
|
|
|
|
|
|
|
Other revenues
|
2,175
|
|
|
464
|
|
|
368.8
|
%
|
|
Other expenses
|
111
|
|
|
161
|
|
|
(31.1
|
)%
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
25,033
|
|
|
9,428
|
|
|
165.5
|
%
|
|
|
|
|
|
|
|
|
Development Projects expenses
|
11,632
|
|
|
8,685
|
|
|
33.9
|
%
|
Gaming Revenues and Expenses
Gaming revenues increased $39.2 million, or 134.6%, for the six-month period ended June 30, 2018 as compared to the six-month period ended June 30, 2017, from $29.1 million to $68.3 million. The increase in gaming revenues was primarily due to the opening of the Casino in February 2018, which generated $55.0 million in gross gaming revenue. Monticello Casino and Raceway generated $17.5 million in gross gaming revenue for the six-month period ended June 30, 2018 as compared to $29.1 million for the six-month period ended June 30, 2017. The decrease in gaming revenue at Monticello Casino and Raceway was primarily due to a decrease in volume due to the opening of the Casino, as well as unfavorable weather during the first quarter.
Gaming expenses increased $34.2 million, or 157.8%, for the six-month period ended June 30, 2018 as compared to the six-month period ended June 30, 2017, from $21.6 million to $55.8 million. The increase in gaming expenses was primarily due to the Casino opening, which includes gaming taxes and payroll expenses, offset by an increase in the commission rate earned by the Company at operations at Monticello Casino and Raceway. The Company's commission rate was increased due to NYSGC regulations that allow for a higher commission that is commensurate with the blended tax rate paid by the Casino.
Racing Revenues and Expenses
Racing revenues decreased approximately $0.2 million, or 6.1%, for the six-month period ended June 30, 2018 as compared to the six-month period ended June 30, 2017, from $2.7 million to $2.6 million. The decrease in racing revenues is due to a decrease in racing simulcast revenues as compared to the six-month period ended June 30, 2017. Racing expenses increased $1.3 million, or 51.5%, for the six-month period ended June 30, 2018 as compared to the three-month period ended June 30, 2017, from $2.5 million to $3.7 million. The increase is due to larger purse contributions and higher fees required by New York State.
Food and Beverage
Revenues and Expenses
Food and beverage revenues increased approximately $6.0 million, or 550.4%, for the six-month period ended June 30, 2018 as compared to the six-month period ended June 30, 2017, from approximately $1.1 million to $7.1 million due to the opening of the new food venues at the Casino. Food and beverage expenses increased $7.5 million, or 370.2% for the six-month period ended June 30, 2018 as compared to the six-month period ended June 30, 2017, from $2.0 million to $9.6 million. The increase was primarily due to the opening of the Casino and its additional food venues, which increased costs for food, beverage and supplies, as well as payroll related expenses.
Room Revenues and Expenses
The Casino generated approximately $2.5 million in room revenue for the six-month period ended June 30, 2018 due to the Casino opening. We incurred room expenses of approximately $3.0 million, which is primarily due to payroll and benefit expenses relating to the Casino opening.
Other Revenues and Expenses
Other revenues primarily include income from retail, ATM revenue and commissions from the sale of lottery tickets. Other revenues increased by approximately $1.7 million, or 368.8%, during the six-month period ended June 30, 2018 as compared to the six-month period ended June 30, 2017, from approximately $0.5 million to approximately $2.2 million, primarily due to an increase in ATM revenues and the opening of the retail store and spa at the Casino. Other expenses decreased by approximately $50,000, or 31.1%, during the six-month period ended June 30, 2018 as compared to the six-month period ended June 30, 2017, from approximately $161,000 to approximately $111,000 due to the reduction of staffing at Monticello Casino and Raceway.
Selling General and Administrative (“SG&A”)
SG&A expenses increased $15.6 million, or 165.5%, for the six-month period ended June 30, 2018 as compared to the six-month period ended June 30, 2017, from $9.4 million to $25.0 million. The increase in SG&A expenses is primarily due to an increase in payroll and benefits, insurance, marketing and a branding fee, all relating to the Casino opening.
Development Projects Expenses
Development Projects expenses increased by $2.9 million or 33.9% for the six-month period ending June 30, 2018 as compared to the six-month period ended June 30, 2017, from $8.7 million to $11.6 million. The increase was primarily due to increased payroll and benefits for Casino employees and management staffing prior to Casino opening, as well as marketing and advertising expenses in preparation for the Casino opening. Costs associated with the Casino will cease to be capitalized upon the complete opening of the Casino, which is expected to occur in December 2018.
Liquidity and Capital Resources
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. Historically and prospectively, our primary sources of liquidity and capital resources have been, and will continue to be, cash generated from operations, borrowings from banks and proceeds from the issuance of debt and equity securities. Based on our current level of operations and the continuing ramp-up of amenities at the Casino and the expenditures for the Development Projects over the next 12 months, we may need to raise additional debt or equity financing to supplement the cash generated from operations, cash on hand, and the amounts available under our principal debt arrangements, to meet our anticipated debt service requirements, make capital expenditures and satisfy working capital needs for the next 12 months. We cannot be certain that our business will generate sufficient cash flow from operations, that our anticipated earnings from the Casino will be realized, or that future borrowings will be available under our existing debt arrangements or otherwise to enable us to service our indebtedness or to make anticipated capital expenditures. As a result, we may need to raise additional capital or incur additional indebtedness, including from our largest stockholder or by issuing securities from our Shelf Registration Statement (as defined below), which has a current availability of approximately $333 million, to finance our plans for growth and general corporate purposes. 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 our Annual Report on Form 10‑K for the fiscal year ended December 31, 2017 for a discussion of the risks related to our liquidity and capital structure.
Cash Flows
Net cash used in operating activities was approximately $27.6 million during the six-month period ended June 30, 2018. Cash used in operating activities was $15.7 million during the six-month period ended June 30, 2017. We continue to generate net losses due to the expenses we incurred related to the Casino and the Development Projects prior to the opening of the Casino. We incurred $11.6 million and $8.7 million of Development Projects costs during the six-month periods ended June 30, 2018 and 2017, respectively. Our operating cash flows during the six-month period ended June 30, 2017 were negatively impacted by severe weather during the period resulting in a reduction in revenues. The decrease in cash flow for the six-month period ended June 30, 2018 was primarily due to the impact of the net loss for the period along with the increase in accounts receivable and prepaid expenses associated with the Casino opening. Cash flows for the current year may not be indicative of future results due to the timing of the Casino opening, a lack of full amenities and delayed marketing expenditures for the Casino.
The Casino opened to the public in February 2018 with limited amenities. While additional amenities have been added to the Casino during the three-month period ended June 30, 2018, the Entertainment Project is expected to be completed in December 2018 and the Golf Course is expected to open in June 2019. Moreover, Resorts World Catskills opened during the winter season, which is historically a season of lower visitation to casinos. As a result, the Company’s expenditures on marketing the Casino were low during the six-month period ended June 30, 2018. The Company expects to deploy the proceeds of the Kien Huat Subordinate Loan in the current fiscal quarter. We expect that the additional marketing activity during the summer season when visitations to gaming facilities are historically higher will positively impact the operations at the Casino.
Net cash used in investing activities was approximately $1.3 million and $414.7 million during the six-month periods ended June 30, 2018 and 2017, respectively. The decrease in net cash used for the six-month period ended June 30, 2018 as compared to 2017 was due primarily to the reduction in investments of unused loan proceeds in 2018. The Company incurred $123.2 million of costs for the Capitalized Development Projects during the six-month period ended June 30, 2018. Development Projects costs were funded by $122.4 million of lender-controlled accounts for Development Projects costs. At June 30, 2018, our total assets included approximately $29.5 million of remaining net proceeds available from the Term Loan Facility, which are presented on the condensed consolidated balance sheet as a non-current asset (restricted cash and investments for Development Projects). The proceeds of the Term Loan Facility may be used solely to pay for costs relating to the Development Projects. During the six-month period ended June 30, 2017, the Company invested $275.8 million of proceeds from the Term Loan Facility in restricted investments for the Development Projects and incurred $117.2 million of Capitalized Development Project costs.
Net cash provided by financing activities was approximately $16.0 million and $451.1 million during the six-month periods ended June 30, 2018 and 2017, respectively. Approximately $15.0 million was borrowed under the Revolving Credit Facility and the Company borrowed an additional $9.0 million of Term A Loans during the six-month period ended June 30, 2018. The Company repaid $3.4 million of equipment loans and an additional $2.9 million of Term A and Term B Loans during the six-month period ended June 30, 2018. At June 30, 2018, the Company had $27.7 million of equipment loans outstanding for the purchase of slot machines, equipment and software for the Casino. During the six-month period ended June 30, 2018, restricted stock grants of certain executives vested, resulting in $1.5 million of income tax withholding taxes paid by the Company in exchange for the surrender of a portion of the vested shares. Approximately $441.9 million of net proceeds were borrowed pursuant to the Term
Loan Facility and an additional $32.0 million was borrowed pursuant to the then-outstanding Kien Huat Montreign Loan during the six-month period ended June 30, 2017.
Development Projects Expenditures
The Company expects the Development Projects will cost approximately $925 million, which includes $762 million of anticipated costs for construction of the Development Projects and contingency, $68 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 began construction of the Entertainment Project in March 2018, after signing a guaranteed maximum price agreement of $32.7 million with its construction manager. The Company anticipates that it will sign a construction management agreement for the Golf Course within the next several weeks and that the total cost of the Golf Course will be approximately $21 million.
As of June 30, 2018, the Company had incurred an aggregate total of $791.9 million related to the Development Projects. This included $656.7 million of capitalized Development Projects costs, of which $630.1 million was reclassified to property and equipment upon the opening of the Casino, $53.3 million of interest expense related to bank debt for the Development Projects, $51.0 million for the Gaming Facility License and $30.9 million of debt issuance costs related to the Development Projects. The Company expects the $29.5 million of net proceeds from the Term Loan Facility held in the lender-controlled accounts at June 30, 2018 along with the $61.0 million of Term A Loan availability at June 30, 2018 is sufficient to meet the expected cost of completing the Development Projects.
The costs associated with the Development Projects may increase due to risks inherent in the design and development of such projects and their construction. The Development Projects could experience changes to plans and specifications, even after the opening of such facilities, delays and significant cost increases, labor disputes or work stoppages, poor performance or nonperformance by any third party on which we rely, or other unanticipated circumstances or cost increases. The occurrence of any of these development and construction risks could increase the total costs of the Development Projects or delay or prevent the construction or opening or otherwise affect the design and features of the Development Projects. All of these circumstances could materially adversely affect our financial condition and cause us to require additional funding, generated from our operations or external sources, to complete the construction of the Development Projects.
Principal Debt Arrangements
Term Loan Facility
At June 30, 2018, the Term Loan Facility consisted of
$7.25 million
borrowings outstanding under the Term A Loan and
$442.5 million
outstanding (net of original issue discount) under the Term B Loan. Pursuant to the Term Loan Agreement, Montreign Operating drew down the Term A Loan in the amount of $9 million on May 31, 2018. Montreign Operating subsequently drew down the Term A Loan in the amounts of $8 million and $53 million on June 9, 2018 and July 23, 2018, respectively. At June 30, 2018, the interest rate on the Term A Loan was 6.98% and the interest rate on the Term B Loan was 10.34%. The proceeds of the Term Loan Facility are held in a lender-controlled account and may be used solely to pay the expenses of the Development Projects. The Company is currently repaying
one
percent of the original principal balance of the Term B Loan each year in quarterly payments of approximately
$1.1 million
, which began in June 2018. The Company will repay
2.5%
of the original original principal amount of all Term A Loan Commitments on the Loan Closing Date, in quarterly payments of approximately $
1.8 million
for the first year, which began in June 2018 and quarterly payments of approximately $2.6 million thereafter. The Company repaid $1.8 million and $1.1 million on the Term A Loan and Term B Loan, respectively, in the three-month period ended June 30, 2018.
The Term Loan Facility contains representations and warranties, customary events of default, and affirmative, negative and financial covenants. For example, the Project Parties are restricted from entering into advisory, management or consulting agreements with an affiliate of any Project Parties, 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 further requires the Project Parties to satisfy certain financial covenants, including a maximum first lien leverage ratio, a minimum interest coverage ratio and mandatory prepayments from excess cash flow. The Project Parties are also prohibited from incurring, subject to certain adjustments, in excess of $10.5 million in capital expenditures (on a consolidated basis) in any fiscal year, which limit is not applicable to expenses related to the Casino and Entertainment Project and up to $25 million related to the Golf Course Project. The financial covenants relating to the maximum first lien leverage ratio and the minimum interest coverage ratio will be measured beginning in the first full fiscal quarter following the "Full Opening Date" of the Casino, which is the date on which at least 95% of all rooms in the Casino hotel are open to the public. The financial covenant relating to mandatory prepayments will be measured beginning in the first fiscal year in which the Full Opening Date occurs. The Company currently expects that at least 95% of all hotel rooms at the Casino will be open to the public during the
fourth quarter of 2018. At June 30, 2018, the Company was in compliance with all applicable covenant requirements under the Term Loan Facility. The “Full Opening Date” of the Casino is expected to occur in the fourth quarter of fiscal 2018.
Our affiliates may, from time to time, seek to purchase our outstanding Term B Loan through cash purchases in open market purchases, privately negotiated transactions or otherwise. We will evaluate any such transactions in light of then-existing market conditions, taking into account our current liquidity, prospects for future access to capital and contractual restrictions. The amounts involved may be material.
Revolving Credit Facility
At June 30, 2018, the Revolving Credit Facility consisted of
$15 million
of outstanding borrowings. The Company borrowed $2.0 million under the Revolving Credit Facility on June 29, 2018. At June 30, 2018, the interest rate on borrowings under the Revolving Credit Facility was 7.09%. 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 contains representations and warranties, customary events of default, and affirmative, negative and financial covenants substantially similar to the terms of the Term Loan Facility. At June 30, 2018, the Company was in compliance with all applicable covenant requirements under the Term Loan Facility.
Bangkok Bank Loan
At June 30, 2018, the Bangkok Bank Loan consisted of
$16 million
of outstanding borrowings. At June 30, 2018, the interest rate on the Bangkok Bank Loan was 8.34%. The Company also pays a commitment fee to Bangkok Bank equal to the undrawn amount of the Bangkok Bank Loan multiplied by a rate equal to
1.50%
per annum. Such commitment fee was payable on the last business day of each quarter beginning on March 31, 2018. The Bangkok Bank Loan Agreement contains customary representations and warranties and affirmative covenants, negative covenants and financial covenants that, among other things, restrict the ability of Empire 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. 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. At June 30, 2018, the Company was in compliance with the covenant requirements of the Bangkok Bank 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 June 30, 2018 totaled approximately $27.7 million. 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.
Kien Huat Subordinate Loan Agreement
On June 25, 2018, Kien Huat and the Company entered into the Kien Huat Subordinate Loan Agreement, providing for loans of up to $30 million. On July 5, 2018, the Company borrowed
$5 million
, less a
$0.3 million
commitment fee, and, on July 31, 2018, the Company borrowed an additional
$5 million
. The Company expects to borrow the two remaining installments of $10 million each on or about the scheduled installment dates of September September 4, 2018 and September 17, 2018, respectively. 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).
The Kien Huat Subordinate Loan bears interest at a rate of 12% per annum, compounded monthly, and will be payable monthly in arrears. Prior to the maturity of the Kien Huat Subordinate Loan, interest will not be required to be paid in cash and will be added to the outstanding principal of the Kien Huat Subordinate Loan and will 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 (subject to grace periods,
as applicable), 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.
Other Factors Affecting Liquidity
The Company may 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 the Term Loan Facility or for the general corporate purposes of the Company. 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.
On October 14, 2016, we filed a universal shelf registration statement on Form S-3 (the "Shelf Registration Statement") covering the offer and sale of $250 million of our securities. The Shelf Registration Statement, which also carried over $83.8 million of our securities registered on an expiring shelf registration statement that remained unsold, was declared effective on November 17, 2016. As of August 7, 2018, we had up to approximately $333.0 million available for future issuances under the Shelf Registration Statement. Unless otherwise indicated in a prospectus supplement, the Company expects the net proceeds from the sale of securities will be used to support the Development Projects, capital expenditures, working capital and for other general corporate purposes, including servicing debt obligations. The Company may also use a portion of the net proceeds to acquire or invest in businesses, products and technologies that are complementary to our business.
From time to time, we may pursue various strategic business opportunities. These opportunities may include proposed development and/or management of, investment in or ownership of additional gaming operations through direct investments, acquisitions, joint venture arrangements and other transactions. We are not currently exploring such opportunities. We can provide no assurance that we will successfully identify such opportunities or that, if we identify and pursue any of these opportunities, any of them will be consummated.
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 June 30, 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Less than
1 year
|
|
1 – 3
years
|
|
3 – 5
years
|
|
Years 6 - 40
|
|
Casino Lease (a)
|
$
|
382,124
|
|
|
$
|
8,250
|
|
|
$
|
15,200
|
|
|
$
|
16,200
|
|
|
$
|
342,474
|
|
|
Golf Course Lease (b)
|
8,250
|
|
|
—
|
|
|
300
|
|
|
300
|
|
|
7,650
|
|
|
Entertainment Project Lease (c)
|
8,325
|
|
|
87
|
|
|
300
|
|
|
300
|
|
|
7,638
|
|
|
Term B Loan (d)
|
448,875
|
|
|
4,500
|
|
|
9,000
|
|
|
9,000
|
|
|
426,375
|
|
|
Term A Loan (e)
|
7,250
|
|
|
7,250
|
|
|
—
|
|
|
|
|
|
—
|
|
|
Equipment Loans (f)
|
27,682
|
|
|
15,583
|
|
|
12,099
|
|
|
—
|
|
|
—
|
|
|
Bangkok Bank Loan (g)
|
16,000
|
|
|
—
|
|
|
16,000
|
|
|
—
|
|
|
—
|
|
|
Operating leases (h)
|
4,307
|
|
|
2,389
|
|
|
1,918
|
|
|
—
|
|
|
—
|
|
|
Revolving Credit Facility (i)
|
15,000
|
|
|
—
|
|
|
—
|
|
|
15,000
|
|
|
—
|
|
|
Total
|
$
|
917,813
|
|
|
$
|
38,059
|
|
|
$
|
54,817
|
|
|
$
|
40,800
|
|
|
$
|
784,137
|
|
|
|
|
|
(a)
|
Annual fixed rent payments under the Casino Lease are as follows: (i) beginning March 2017 through August 2018 payments of $1 million per month; (ii) beginning September 2018 payments of $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 date the golf course opens for business to the public (the “Golf Course Opening Date”), which is expected to be in the Summer of 2019; (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 Entertainment Project Lease are as follows: (i) $0 prior to the date any portion of Entertainment Project first opens for business to the public (the “EP Opening Date”), which is expected to be in December 2018; (ii) $150,000 for the first 10 years following the EP Opening Date; and (iii) $250,000 thereafter for the remainder of the term of the Entertainment Project Lease.
|
|
|
|
|
(d)
|
The Term B Loan is a variable rate instrument. Accordingly, the payments reflected above include only principal amounts.
|
|
|
|
|
(e)
|
The Term A Loan is a variable rate instrument. Accordingly, the payments reflected above include only principal amounts.
|
|
|
|
|
(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 exclude interest payments.
|
|
|
|
|
(g)
|
The Bangkok Bank Loan is a variable rate instrument. Accordingly, the payments reflected above include only principal amounts.
|
|
|
|
|
(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. Accordingly, the payments reflected above include only principal amounts.
|
Off-balance Sheet Arrangements
None.