NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A. Organization and Nature of Business
Basis for Presentation
Empire Resorts, Inc. (“Empire,” and, together with its subsidiaries, the “Company,” “us,” “our” or “we”) was organized as a Delaware corporation on March 19, 1993, and since that time has served as a holding company for various subsidiaries engaged in the hospitality and gaming industries.
Our indirect, wholly-owned subsidiary, Montreign Operating Company, LLC, doing business as Resorts World Catskills ("Montreign Operating"), owns and operates Resorts World Catskills, a casino resort (the "Casino"), which is located at the approximately 1,700-acre site of a four-season destination resort ("Destination Resort") in Sullivan County, New York, approximately 90 miles from New York City. The Destination Resort in which Resorts World Catskills is located also includes a 101-room lifestyle hotel ("The Alder"), adjacent to the Casino. The Alder is owned and operated by Empire Resorts Real Estate II, LLC ("ERREII"), a wholly-owned subsidiary of Montreign Operating. Empire Resorts I, LLC ("ERREI"), which is a wholly-owned subsidiary of Montreign Operating, is developing a golf course (the "Golf Course" and, together with the Casino and The Alder, the "Development Projects") at the Destination Resort.
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. The Company recently announced that VGM operations and food and beverage service at Monticello Casino and Raceway will cease on or about April 23, 2019. 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 its races to offsite pari-mutuel wagering facilities.
The gaming market in the northeastern United States is seasonal in nature. Peak gaming activities occur during the months of May through September. Although winter weather may affect our patrons' ability to reach our facilities, we expect that the availability of the overnight accommodations at the Casino and The Alder will mitigate the adverse affects of winter weather on our gaming operations.
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 flow from operations, borrowings from banks and proceeds from the issuance of debt and equity securities. The Company anticipates that its current cash and cash generated from operations, as well as the remaining net proceeds of the Term Loan Facility and equity financing available under the 2018 Kien Huat Preferred Stock Commitment Letter, which are discussed in Note I, will be sufficient to meet our working capital requirements, the expected costs of the Development Projects and our anticipated debt service requirements for the next 12 months. 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” of this Annual Report on Form 10‑K for a discussion of the risks related to our liquidity and capital structure.
Note B. Summary of Significant Accounting Policies
Principles of consolidation
The consolidated financial statements include Empire’s accounts and their wholly-owned subsidiaries. All inter-company balances and transactions are eliminated in consolidation.
Estimates and assumptions
The preparation of financial statements in conformity with generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from estimates.
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 years ended December 31, 2017 and 2016 have not been adjusted to reflect the impact of the ASC Topic 606. This approach does not significantly impact the comparability of the 2018, 2017 and 2016 amounts. The promotional allowances recorded in 2017 and 2016 are no longer presented separately in 2018 under ASC Topic 606. The adoption of the provisions of ASC 606 resulted in an increase of
$54,000
to both “Accrued expenses and other current liabilities” and “Accumulated deficit” 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. 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.
Food and beverage revenues, and room revenues include (i) revenues generated from transactions with patrons for such goods and/or services, (ii) revenues recognized through the redemption of points from our loyalty programs for such goods and/
or services, and (iii) revenues generated as a result of providing such goods and/or services on a complimentary basis in conjunction with gaming activities. Food and beverage revenues and room revenues are recognized when goods are delivered and services are performed. In general, performance obligations associated with these transactions are satisfied at a point-in-time, but may also be satisfied over a period of time, which is typically over the course of a patron’s stay. Advance deposits on rooms are reflected as a performance obligation liability until the goods and/or services are provided to the patron. The Company's performance obligation liabilities are included in “Accrued expenses and other current liabilities” in our consolidated balance sheets.
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 are recognized as collected, due to uncertainty of receipt and timing of payments.
Other revenues primarily include commissions received on ATM transactions and cash advances, 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 condensed consolidated statements of operations.
Complimentary food and beverage revenues, and complimentary room revenues for the years ended December 31, 2018 and 2017, respectively, were as follows:
|
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|
|
|
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|
|
|
|
Year ended December 31,
|
|
|
|
|
2018
|
|
2017
|
|
|
|
|
(in thousands)
|
|
Complimentary food and beverage revenues
|
|
|
$10,837
|
|
$1,000
|
|
Complimentary room revenues
|
|
|
3,455
|
|
|
—
|
|
The Company’s performance obligation related to its loyalty point obligation is generally completed within one year, as a patron’s loyalty point balance is forfeited after six months of inactivity, as defined in the loyalty programs. The Company’s deferred revenue liability under ASC 606 was approximately
$2.1 million
at December 31, 2018. The Company's liability for its loyalty point performance obligations was
$1.5 million
at December 31, 2017. Loyalty points are generally earned and redeemed continuously over time.
The retail value amounts included in promotional allowances for the years ended December 31, 2017 and 2016 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2017
|
|
2016
|
|
|
(in thousands)
|
|
Food and beverage
|
$1,000
|
|
$1,486
|
|
Non-subsidized free play
|
2,718
|
|
|
978
|
|
|
Players Club awards
|
324
|
|
|
383
|
|
|
Total retail value of promotional allowances
|
$4,042
|
|
$2,847
|
The estimated cost of providing complimentary food, beverages and other items for the years ended December 31, 2017, and 2016 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2017
|
|
2016
|
|
|
(in thousands)
|
|
Food and beverage
|
$1,750
|
|
$2,080
|
|
Non-subsidized free play
|
1,603
|
|
|
577
|
|
|
Players Club awards
|
324
|
|
|
383
|
|
|
Total cost of promotional allowances
|
$3,677
|
|
$3,040
|
Cash and cash equivalents
Cash and cash equivalents include cash on hand, demand deposits and certificates of deposit with original maturities of three months or less at acquisition. The Company maintains significant cash balances with financial institutions, which are not covered by the Federal Deposit Insurance Corporation. The Company has not incurred any losses in such accounts and believes it is not exposed to any significant credit risk on cash.
Restricted cash and cash equivalents
The Company has several types of restricted cash accounts. These restrictions are in accordance with the NYSGC regulations. In addition, at December 31, 2018, the Company had restricted cash and cash equivalents of
$21 million
from the proceeds of the Term Loan Facility (as defined below) 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:
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|
|
|
|
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|
|
|
|
|
|
|
|
December 31, 2018
|
|
December 31, 2017
|
|
December 31, 2016
|
|
|
|
(in thousands)
|
|
Cash and cash equivalents
|
|
$28,338
|
|
$10,380
|
|
$11,012
|
|
Restricted cash
|
|
373
|
|
|
693
|
|
|
1,078
|
|
|
Restricted cash and cash equivalents for Development Projects
|
|
21,039
|
|
|
41,982
|
|
|
26,384
|
|
|
Total cash, cash equivalents and restricted cash shown in the statement of cash flows
|
|
$49,750
|
|
$53,055
|
|
$38,474
|
The Company has
three
types of restricted cash accounts.
Approximately
$223,000
of cash is held in reserve in accordance with NYSGC regulations as of December 31, 2018 as listed below. The Company granted the NYSGC a security interest in the segregated cash account used to deposit NYSGC’s share of net win in accordance with the NYSGC Rules and Regulations. Under New York State Racing, Pari-Mutuel Wagering and Breeding Law, MRMI is obliged to withhold a certain percentage of certain types of racing and pari-mutuel wagers towards the establishment of a pool of money, the use of which is restricted to the funding of approved capital improvements. Periodically during the year, MRMI petitions the NYSGC to certify that the noted expenditures are eligible for reimbursement from the capital improvement fund. The balance in this account was approximately
$18,000
and
$25,000
at December 31, 2018 and 2017, respectively. In April 2005, the New York law governing VGM operations was modified to provide an increase in the revenues retained by the VGM operator. A portion of that increase was designated as a reimbursement of marketing expenses incurred by the VGM operator. The amount of revenues directed toward this reimbursement is deposited in a bank account under the control of the NYSGC and the VGM operator. The funds are transferred from this account to the VGM operator upon the approval by NYSGC officials of the reimbursement requests submitted by the VGM operator. The balance in this account was approximately
$205,000
and
$343,000
at December 31, 2018 and 2017, respectively.
In addition to the NYSGC restricted cash balances listed above, the Company established an account to segregate amounts collected and payable to Monticello Harness Horsemen’s Association (the “MHHA”) and pursuant to its contract. The balance in this account was approximately
$150,000
and
$324,000
at December 31, 2018 and 2017, respectively.
Restricted cash, cash equivalents and investments for Development Projects
Restricted cash and cash equivalents for Development Projects represented the remaining funds from the Term Loan Facility to be utilized for the Development Projects. At December 31, 2018, restricted cash and cash equivalents for Development Projects of
$21.0
million was comprised entirely of cash and cash equivalent balances. At December 31, 2017, restricted cash, cash equivalents and investments for Development Projects balance of
$136.4 million
was comprised of cash balances of approximately
$11.2 million
, cash equivalents of approximately
$30.7 million
and short-term investments maturing within one year of approximately
$94.5 million
. At December 31, 2017, short-term marketable securities 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 marketable securities 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 collectability 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 collectability. The Company extends credit to certain gaming patrons upon completion of a credit application process. Gaming patrons are expected to repay gaming markers within a predetermined period of time, the Company also settles wagers for other racetracks and is exposed to credit risk. These amounts are included in accounts receivable. Account balances are charged against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company recorded an allowance for doubtful accounts of approximately
$150,000
and
$171,000
, as of December 31, 2018 and 2017, respectively.
Property and equipment
Property and equipment is stated at cost less accumulated depreciation. The Company provides for depreciation on property and equipment used by applying the straight-line method over the following estimated useful lives:
|
|
|
|
|
|
Assets
|
Estimated
Useful
Lives
|
|
Vehicles
|
5-10 years
|
|
Furniture, fixtures and equipment
|
5-10 years
|
|
Land improvements
|
5-20 years
|
|
Building improvements
|
5-40 years
|
|
Buildings
|
40 years
|
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 ceased for the Casino when it was substantially complete. Capitalization will cease for the other Development Projects substantially complete or if development activity is suspended for an extended period of time.
The Company capitalized
$12.3 million
and
$29.1 million
of interest charges for the year ended December 31, 2018 and 2017, respectively. The Company did not recognize any capitalized interest charges for the fiscal year ended December 31, 2016.
Debt issuance costs
Debt issuance costs are amortized using the effective interest method over the term of the related debt. The amortization is included within interest expense and is included as a component of the capitalized interest costs.
Impairment of long-lived assets and other financial assets
The Company periodically reviews the carrying value of its long-lived assets in relation to historical results, as well as management’s best estimate of future trends, events and overall business climate. If such reviews indicate an issue as to whether the carrying value of such assets may not be recoverable, the Company will then estimate the future cash flows generated by such assets (undiscounted and without interest charges). If such future cash flows are insufficient to recover the carrying amount of the assets, then impairment is triggered and the carrying value of any impaired assets would then be reduced to fair value.
The Company also reviews its financial assets (i.e. non-derivative financial assets) for impairment, if it becomes probable that the commitment will not result in the receipt of proceeds from the issuance of securities.
Other long-term liabilities
The difference between our cash payments and straight-line rent on our land leases of
$8.1 million
and
$8.3 million
at December 31, 2018 and 2017, respectively, is included in other long-term liabilities. In addition, the Company has accrued a liability-classified guaranty of approximately
$2.3 million
related to compensation due the Horsemen under the MHHA Agreement. At December 31, 2018, the Company has also recorded a derivative liability in the form of a put option of approximately
$0.9 million
, related to the bet365 equity transaction.
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 years ended December 31, 2018, 2017 and 2016 were the same.
The following table shows the approximate number of common stock equivalents outstanding at December 31, 2018, 2017 and 2016 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 years ended December 31, 2018, 2017 and 2016, because their inclusion would have been anti-dilutive:
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|
|
|
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|
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|
|
|
|
Outstanding at December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
|
Unvested Restricted stock
|
37,000
|
|
|
139,000
|
|
|
216,000
|
|
|
Warrants
|
193,000
|
|
|
133,000
|
|
|
133,000
|
|
|
Restricted stock units ("RSUs")
|
196,000
|
|
|
73,000
|
|
|
—
|
|
|
Option Matching Rights
|
—
|
|
|
3,000
|
|
|
21,000
|
|
|
Options
|
—
|
|
|
13,000
|
|
|
34,000
|
|
|
Total
|
426,000
|
|
|
361,000
|
|
|
404,000
|
|
On August 19, 2009, the Company entered into an investment agreement (the "2009 Investment Agreement") with Kien Huat, 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 2009 Investment Agreement, or the first
200,000
options or warrants granted to directors or officers as of the final closing date under the 2009 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.” On January 24, 2018, Kien Huat exercised its option to purchase
1,666
shares of common stock due to an option exercise. The last remaining Option Matching Rights 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
$0.7 million
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
$143,000
and
$251,000
at December 31, 2018 and 2017, respectively, and is presented at fair value as "Other Assets" on the 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 December 31, 2018 and 2017, accumulated other comprehensive loss of
$0.2 million
and
$0.3 million
, respectively consisted solely of the fair value adjustment relating to the Interest Rate Cap.
Derivative Liability and Asset
The Company’s Collaboration Agreement with bet365 (see Note I) along with the related Common Stock Purchase Agreement contained an initial put option that met the definition of a derivative instrument and a freestanding contingent forward instrument. The Company classified the initial put option as a long-term liability on its consolidated balance sheet. Also, because, bet365 has or will be obligated to purchase shares of the Company’s common stock at a strike price less than the expected equity value once bet365’s Online Sportsbook Services is approved in New York State, we have classified the freestanding contingent forward instrument as a long-term asset in the Consolidated Balance Sheet. The derivative liability and the contingent forward asset were initially recorded at fair value upon the effective date of the Collaboration Agreement and will be subsequently remeasured to fair value at each reporting date. Changes in the fair value of the derivative liability and long-term asset will be recognized as a component of "other income (expense), net" in the consolidated statement of operations.
Fair Value of Financial Assets and Liabilities
The Company follows the provisions of ASC 820, “Fair Value Measurement,” issued by the FASB for financial assets and liabilities. This standard defines fair value, provides guidance for measuring fair value, requires certain disclosures and discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow) and the cost approach (cost to replace the service capacity of an asset or replacement cost). The Company chose not to elect the fair value option as prescribed by the FASB for its financial assets and liabilities that had not been previously carried at fair value. The Company’s financial instruments are primarily comprised of current assets, restricted cash and investments, Interest Rate Cap, current liabilities, long-term debt, contingent forward contracts, derivative instruments,and a guaranty liability. Current assets, investments and current liabilities approximate fair value due to their short-term nature.
In determining fair value, the Company uses quoted prices and observable inputs. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company.
The fair value hierarchy of observable inputs used by the Company is broken down into three levels based on the source of inputs as follows:
- Level 1 - Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities.
- Level 2 - Valuations based on inputs that are observable inputs and quoted prices in active markets for similar assets and liabilities.
- Level 3 - Valuations based on inputs that are unobservable and models that are significant to the overall fair value measurement.
The following table presents the carrying amount, fair values and classification level within the fair value hierarchy of financial instruments measured or disclosed at fair value on a recurring basis:
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
December 31, 2017
|
|
|
|
|
|
Carrying Amount
|
|
Fair Value
|
|
Carrying Amount
|
|
Fair Value
|
|
Level of Fair Value Hierarchy
|
|
Assets:
|
|
(in thousands)
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$28,338
|
|
$28,338
|
|
$10,380
|
|
$10,380
|
|
Level 1
|
|
Restricted cash
|
|
373
|
|
|
373
|
|
|
693
|
|
|
693
|
|
|
Level 1
|
|
Interest Rate Cap
|
|
143
|
|
|
143
|
|
|
251
|
|
|
251
|
|
|
Level 2
|
|
Restricted cash, cash equivalents and investments for Development Projects:
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
21,039
|
|
|
21,039
|
|
|
41,982
|
|
|
41,982
|
|
|
Level 1
|
|
Short-term investments
|
|
—
|
|
|
—
|
|
|
94,449
|
|
|
94,209
|
|
|
Level 2
|
|
Other assets:
|
|
|
|
|
|
|
|
|
|
|
|
Non-derivative financial asset - Series F Preferred Stock, redeemable
|
|
31,122
|
|
|
31,122
|
|
|
—
|
|
|
—
|
|
|
Level 2
|
|
Contingent forward contract - bet365
|
|
1,865
|
|
|
1,865
|
|
|
—
|
|
|
—
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Term B Loan, net of discount
|
|
440,803
|
|
|
440,660
|
|
|
443,161
|
|
|
449,749
|
|
|
Level 2
|
|
Term A Loan
|
|
64,750
|
|
|
64,750
|
|
|
—
|
|
|
—
|
|
|
Level 2
|
|
Bangkok Bank Loan
|
|
20,000
|
|
|
20,000
|
|
|
16,000
|
|
|
16,000
|
|
|
Level 3
|
|
Revolving Credit Facility
|
|
15,000
|
|
|
15,000
|
|
|
—
|
|
|
—
|
|
|
Level 2
|
|
Long-term loan, related party, net of debt issuance costs
|
|
30,954
|
|
|
30,954
|
|
|
—
|
|
|
—
|
|
|
Level 3
|
|
Equipment loans
|
|
20,384
|
|
|
20,384
|
|
|
31,095
|
|
|
31,095
|
|
|
Level 3
|
|
Guaranty liability - MHHA agreement
|
|
2,300
|
|
|
2,300
|
|
|
—
|
|
—
|
|
|
|
Level 2
|
|
Derivative liability - bet365
|
|
879
|
|
|
879
|
|
|
—
|
|
|
—
|
|
|
Level 3
|
The fair value of cash and cash equivalents and restricted cash are based on the fair values of identical assets in active markets. The Company used a third party to complete the valuation of its Interest Rate Cap, which is considered a Level 2 asset and is measured at fair value on a recurring basis using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows for the Interest Rate Cap. At December 31, 2017, the estimated fair value of the Company's investments in marketable securities was
$94.2 million
and the carrying value was approximately
$94.5 million
. At December 31, 2018 and 2017, the estimated fair value of the Company's outstanding Term B Loan was approximately
$440.7 million
and
$449.7
million and the carrying value before unamortized discounts was approximately
$446.6 million
and
$450.0 million
, respectively. The fair value of the Bangkok Bank Loan, the related party loan and the equipment loans approximate carrying value, due to the short-term nature of these agreements. The fair value of the non-derivative financial assets - Series F Preferred Stock, redeemable was valued using a Black Scholes put option model.
Valuation of Derivative Liability and Contingent Forward Contract
The fair value of the derivative liabilities and asset recognized in connection with the Company’s Collaboration Agreement with bet365 (see Note I) was determined based on significant inputs not observable in the market, which represents a Level 3 measurement within the fair value hierarchy. The derivative liability for the initial put option was recorded in "Other long-term liabilities" on the consolidated balance sheet. The contingent forward contract was recorded net of the contingent put option in "Other assets" on the consolidated balance sheet. The fair value of the derivative liabilities and asset was determined using a Monte Carlo simulation valuation approach with the following assumptions:
|
|
|
|
|
|
|
|
|
|
Derivative Liability - bet365
|
|
Contingent forward contract - bet365
|
|
|
Equity value
|
$29.48
|
|
$29.48
|
|
|
Strike price
|
$20.00
|
|
$20.00
|
|
|
Expected term
|
3.46 years
|
|
3.13 years
|
|
|
Volatility
|
61%
|
|
62%
|
|
|
Risk-free rate
|
2.9%
|
|
2.9%
|
|
|
Dividend yield
|
—%
|
|
—%
|
|
The following table provides a roll forward of the aggregate fair values of the Company’s derivative liabilities and asset, for which fair value is determined using Level 3 inputs (in thousands):
|
|
|
|
|
|
|
|
|
|
Derivative Liability - bet365
|
|
Contingent forward contract -bet365
|
|
|
Balance as of December 31, 2017
|
$0
|
|
$0
|
|
|
Initial fair value of derivative (liability) asset in connection with Collaboration Agreement
|
$(879)
|
|
$1,865
|
|
|
Change in fair value
|
$0
|
|
$0
|
|
|
Balance as of December 31, 2018
|
$(879)
|
|
$1,865
|
|
Valuation of Non-Derivative Liability
The fair value of the guaranty liability recognized in connection with the Company’s agreement with MHHA (see Note J) was determined based on significant inputs that are observable and quoted prices in active markets for similar liabilities, which represents a Level 2 measurement within the fair value hierarchy. The fair value of the derivative liability was determined using a Black Scholes valuation approach with the following assumptions:
|
|
|
|
|
|
|
Guaranty Liability - MHHA Horsemen
|
|
Equity value
|
$10.13
|
|
Strike price
|
$27.50
|
|
Expected term
|
6.11 years
|
|
Volatility
|
68%
|
|
Risk-free rate
|
2.6%
|
|
Dividend yield
|
—%
|
During the years ended December 31, 2018, 2017, and 2016, there were no transfers between Level 1, Level 2 and Level 3.
Advertising
The Company records in selling, general and administrative expense the costs of general advertising, promotion and marketing programs at the time those costs are incurred. Advertising expense was approximately
$11.0 million
,
$1.4
million and
$1.1 million
for the years ended December 31, 2018, 2017 and 2016, respectively.
Stock-based compensation
The cost of all share-based awards to employees, including grants of restricted stock and restricted stock units, is recognized in the financial statements based on the fair value of the awards at grant date. 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 December 31, 2018, there was approximately
$2.2
million of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Company’s equity compensation plan. That cost is expected to be recognized over a period of
2.5
years. This expected cost does not include the impact of any future stock-based compensation awards.
Income taxes
The Company applies the asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed for differences between the financial statement and tax bases of assets and liabilities that will result in future taxable or deductible amounts, based on enacted tax laws and rates for the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
Intangible Assets
In accordance with ASC 350, Intangibles - Goodwill and Other, the Company amortizes intangible assets over their estimated useful lives unless the Company determines their lives to be indefinite.
The Company paid
$51 million
to the NYSGC on February 25, 2016 for its Gaming Facility License. The term of the Gaming Facility License is
10
years and the amortization commenced on the date the Casino opened to the public in February 2018. Beginning in February 2018, the Company recognized amortization of
$5.8 million
on a straight line basis and will continue amortize approximately
$6.3 million
annually over the next
seven
years until the license is up for renewal in 2026. The Company will assess the intangible asset for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired.
Segment Reporting
The Company maintains discrete financial information for each of its operating companies, which is used by the Chief Executive Officer (the "CEO") as the basis for allocating resources. Each company has been identified as an operating segment and meets the criteria for aggregation due to similar economic characteristics as all of the companies provide similar resort services and shares similar processes for delivering services. Our companies have a high degree of similarity in the workforces and target similar patron groups. Accordingly, based on these economic and operational similarities and the way the CEO monitors and makes decisions, the Company has concluded that its operating segments may be aggregated and that it has one reportable segment.
Recent accounting pronouncements
In February 2016, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") 2016-02, "Leases (Topic 842)" ("ASU 2016-02"). "). This ASU will require lessees to recognize most leases on their balance sheets as lease liabilities with corresponding right-of-use (“ROU”) 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 adopted the standard on January 1, 2019 and will apply the package of practical expedients available to it upon adoption. The Company expects that the most significant impact on our consolidated balance sheets will be the recognition of ROU assets and lease liabilities for operating leases that exist at the date of adoption, with the most material of such leases being ground leases.
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 until December 31, 2017. Under this program, the Company received 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 at December 31, 2017. During the year ended December 31, 2018, the Company received refunds for real estate taxes paid of approximately
$0.8 million
for the years ended December 31, 2016 and 2017. The amounts of the unreceived real estate tax credits and state income tax receivables were included in prepaid expenses and other current assets on the accompanying consolidated balance sheet at December 31, 2018 and 2017, and were approximately
$3.4 million
and
$0.8 million
, respectively.
Prepaid supplies is comprised of
$0.6 million
of uniforms,
$0.4 million
of linens and
$0.4 million
of gaming chips. Included in prepaid gaming expenses are
$0.6 million
of annual slot machine and table gaming license fees at the Casino, which are amortized to expense on a straight-line basis.
Prepaid expenses and other current assets, as presented on the balance sheet are comprised of the following at December 31, 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
12/31/2018
|
|
12/31/2017
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
Receivable from New York State
|
|
$3,422
|
|
$814
|
|
Prepaid real estate taxes
|
|
284
|
|
|
443
|
|
|
Prepaid insurance
|
|
392
|
|
|
327
|
|
|
Prepaid advertising
|
|
23
|
|
|
—
|
|
|
Prepaid supplies
|
|
1,528
|
|
|
—
|
|
|
Prepaid gaming expenses
|
|
773
|
|
|
74
|
|
|
Prepaid maintenance contracts
|
|
657
|
|
|
476
|
|
|
Development escrow and refundable security deposit
|
|
572
|
|
|
780
|
|
|
Prepaid other
|
|
375
|
|
|
462
|
|
|
Total prepaid expenses and other current assets
|
|
$8,026
|
|
$3,376
|
Note D. Property and Equipment
Property and equipment are comprised of the following at December 31, 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
|
12/31/2018
|
|
12/31/2017
|
|
|
(in thousands)
|
|
|
|
|
|
|
Land
|
$770
|
|
$770
|
|
Land improvements
|
2,382
|
|
|
1,759
|
|
|
Buildings
|
622,043
|
|
|
4,727
|
|
|
Building improvements
|
103,621
|
|
|
29,874
|
|
|
Furniture, fixtures and equipment
|
10,954
|
|
|
5,551
|
|
|
Construction in Progress
|
2,784
|
|
|
77
|
|
|
|
742,554
|
|
|
42,758
|
|
|
Less: Accumulated depreciation
|
(44,875
|
)
|
|
(15,895
|
)
|
|
|
$697,679
|
|
$26,863
|
The
$699.8 million
increase in gross 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 year ended December 31, 2018. Construction of the Casino and The Alder was substantially completed on January 1, 2019. At December 31, 2018, $
5.7 million
remains classified as capitalized Project Development costs reflecting the ongoing construction of the Golf Course Project and The Alder.
Depreciation expense was approximately
$29.0 million
,
$1.5 million
and
$1.3 million
for years ended December 31, 2018, 2017 and 2016, respectively.
The VGMs at MRMI 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 December 31, 2018 and 2017, total Capitalized Project Development costs incurred were approximately $
5.7 million
and
$566.8 million
, respectively. Total Capitalized Development Project costs at December 31, 2018 consisted of
$4.2 million
of construction costs, site development, contractor insurance, general conditions, architectural fees, construction manager fees, and approximately
$1.5 million
of professional service fees such as legal fees 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, construction manager fees, and approximately
$6.6 million
of professional service fees such legal and accounting fees and is reflected on the balance sheet as Capitalized Development Project costs. The full opening of the Casino and The Alder occurred on January 1, 2019.
In September 2018, ERREI entered into a standard contractor agreement for the construction of the Golf Course Project, at a cost of approximately
$21.2 million
. The Company began construction in September 2018 and anticipates the Golf Course will be open for play during Summer 2019.
In fiscal 2018, total Development Projects costs incurred were approximately
$150.2 million
, of which
$137.6 million
was capitalized and
$12.6 million
was expensed. Development Project expenses consisted of $
10.4 million
of land lease costs,
$0.4 million
of real estate taxes,
$0.5 million
of insurance expense,
$0.3 million
in consultants and other professional service fees,
$0.2 million
in legal fees and
$1.2 million
of pre-opening expenses, including salary and related benefits as well as marketing expenses.
In 2017, total Development Projects costs incurred were approximately
$392.2 million
, of which
$370.7 million
was capitalized and
$21.6 million
was expensed. Development Project costs consisted of
$10.7 million
of land lease costs and rents,
$4.9 million
of salary and related benefits,
$2.0 million
of bank charges,
$0.9 million
of marketing expenses,
$0.6 million
of real estate taxes,
$0.6 million
of insurance expense,
$0.6 million
in consultants and other professional service fees,
$0.3 million
in legal fees and approximately
$0.5 million
of pre-opening expenses, including travel, relocation, recruiting and other start-up costs.
In 2016, Development Project costs consisted of
$10.4 million
of land lease costs and rents,
$0.4 million
of real estate taxes,
$0.5 million
of insurance expense,
$0.3 million
in consultants and other professional service fees,
$0.2 million
in legal fees and approximately
$1.2 million
of pre-opening expenses, including salary and related benefits, as well as marketing expenses.
Cash Collateral for Deposit Bond
In February 2016 and June 2017, the Company deposited
$15 million
and
$20 million
, respectively, in performance bonds to guaranty 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 which would trigger the return of the deposited funds to the Company. On January 4, 2018, the NYSGC confirmed that the Company met such minimum capital investment criteria as required by the Gaming Act and
$35 million
was returned to the Company and deposited into a lender-controlled account for use towards the expenses of the Development Projects.
Restricted Cash, Cash Equivalents and Investments for Development Projects
At December 31, 2018,
$20.1 million
of restricted cash and cash equivalents for Development Projects represented the remaining funds from the Term Loan Facility to be utilized for the Development Projects. At December 31, 2017,
$136.4 million
of restricted cash, cash equivalents and investments for Development Projects represented the remaining funds from the Term Loan Facility to be utilized for the Development Projects. This consisted of cash and cash equivalents totaling
$41.9 million
and short-term marketable securities totaling
$94.5 million
, which were comprised of commercial paper and U. S. Treasury Notes with maturities of less than one year.
Note F. Accrued Expenses and Other Current Liabilities
Accrued Development Projects costs at December 31, 2018 and 2017 were
$4.9 million
and
$71.7 million
, respectively, and were primarily comprised of amounts due to the construction managers for costs incurred for the Development Projects, as well as amounts due to the architect and other vendors. The proceeds from the Term Loan Facility were used to pay the accrued Development Project costs.
Accrued expenses and other current liabilities, as presented on the balance sheet are comprised of the following at December 31, 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
|
12/31/2018
|
|
12/31/2017
|
|
|
(in thousands)
|
|
|
|
|
|
|
Liability for horseracing purses
|
$868
|
|
$886
|
|
Accrued payroll
|
8,142
|
|
|
1,715
|
|
|
Accrued marketing
|
5,298
|
|
|
52
|
|
|
Accrued interest expense
|
5,033
|
|
|
14
|
|
|
Accrued redeemable points and deferred revenues
|
2,202
|
|
|
271
|
|
|
Liability to NYSGC
|
2,816
|
|
|
1,507
|
|
|
Liability for local progressive jackpot
|
2,560
|
|
|
1,110
|
|
|
Accrued premium game leases
|
1,288
|
|
|
—
|
|
|
Accrued professional fees
|
2,337
|
|
|
744
|
|
|
Federal tax withholding payable
|
561
|
|
|
81
|
|
|
Accrued other
|
2,573
|
|
|
940
|
|
|
Total accrued expenses and other current liabilities
|
$33,678
|
|
$7,320
|
Note G. Long-Term Debt
Long-term debt, other than related party debt, consisted of the following at December 31, 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
12/31/2018
|
|
12/31/2017
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
Term B Loan (net of unamortized discount)
|
|
$440,803
|
|
$443,161
|
|
Term A Loan
|
|
64,750
|
|
|
—
|
|
|
Bangkok Bank Loan
|
|
20,000
|
|
|
16,000
|
|
|
Revolving Credit Facility
|
|
15,000
|
|
|
—
|
|
|
Equipment loans
|
|
20,384
|
|
|
31,095
|
|
|
Total long-term debt
|
|
560,937
|
|
|
490,256
|
|
|
Debt issuance costs
|
|
(17,240
|
)
|
|
(20,520
|
)
|
|
Total long-term debt, net
|
|
543,697
|
|
|
469,736
|
|
|
Less: Current portion of long-term debt
|
|
(48,004
|
)
|
|
(14,588
|
)
|
|
Long-term debt, net of current portion
|
|
$495,693
|
|
$455,148
|
Term Loan Agreement
On January 24, 2017 (the "Closing Date"), Montreign Operating entered into the Building Term Loan Agreement (the “Original Term Loan Agreement”), among Montreign Operating, the lenders from time to time party thereto, and Credit Suisse AG, Cayman Islands Branch (“Credit Suisse”), as administrative agent. On May 26, 2017, the parties entered into the first amendment to the Term Loan Agreement and certain ancillary agreements (the “Amended Term Loan Agreement” and, together with the Original Term Loan Agreement, the “Term Loan Agreement”). The Amended Term Loan Agreement increased the aggregate principal amount of the Term B Loan issued under the Original Term Loan Agreement by
$35 million
on substantially the same terms and conditions as the Original Term Loan Agreement, which terms are discussed below. In the aggregate, the Term Loan Agreement provided Montreign Operating with loans in principal amount of
$520 million
(the “Term Loan Facility”). All of the borrowings under the Term Loan Agreement were used to fund the costs of the Development Projects.
The Term Loan Facility consists of
$70 million
of Term A loans (the “Term A Loan”) and
$450 million
of Term B loans (the “Term B Loan”). The Term B Loan made pursuant to the Original Term Loan Agreement was priced at
98.12%
of the principal amount and borrowed in full on January 24, 2017. The incremental
$35 million
principal amount of the Term B Loan made pursuant to the Amended Term Loan Agreement was priced at
99.75%
of the principal amount and borrowed in full on May 26, 2017. The unamortized discount that has been netted against the outstanding Term B Loan balance was
$5.8 million
and
$6.8 million
at December 31, 2018 and 2017, respectively. In addition, the Term A Loan is fully drawn in accordance with the Term Loan Agreement, which required Montreign Operating 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.
As required by the Term Loan Agreement, proceeds of the Term Loan Facility were used to pay fees and expenses related to the financing and fund various lender-controlled accounts. The Company further funded these lender-controlled accounts with approximately
$9.9 million
in December 2017 pursuant to the Term Loan Agreement from the proceeds of the Bangkok Bank Loan, which is discussed below. On March 1, 2018 and March 23, 2018, the Company contributed approximately
$2.7 million
and
$0.9 million
, respectively, to an interest reserve fund under the Term Loan Agreement. These contributions reflect the additional interest to be paid on the Term Loan Facility as a result of the Company's deferral of the completion of 15 VIP suites at the Casino from March 1, 2018 to March 23, 2018 and a further deferral to March 30, 2018. Additionally, in May 2018, the Company contributed approximately
$0.5 million
to the lender controlled accounts as a result of the payment for additional construction change orders. All funds held in these lender-controlled accounts are used to pay the expenses of the Development Projects. In order to access the funds held in these lender-controlled accounts, Montreign Operating was required to satisfy the applicable disbursement conditions set forth in the Term Loan Agreement and ancillary agreements, such as providing evidence that the withdrawn funds are used for permitted purposes in connection with the Development Projects.
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. Interest accrues on outstanding borrowings under the Term B Loan at a rate equal to LIBOR (with a LIBOR floor of
1%
) plus
8.25%
per annum, or an alternate base rate plus
7.25%
per annum. At December 31,
2018, the interest rate on the Term A Loan was
7.68%
and the interest rate on the Term B Loan was
10.96%
. 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
2.5%
per annum for the period from the Closing Date through March 24, 2018 and
5.0%
per annum thereafter until July 24, 2018, when the Term A Loan was drawn in full.
The Company is making principal payments under the Term A Loan and the Term B Loan at the end of each calendar quarter, which repayment began June 30, 2018. The Company repays
1%
of the original principal balance of the Term B Loan each year, in quarterly payments of approximately
$1.1 million
. The Company currently repays
2.5%
of the original principal amount of the Term A Loan, in quarterly payments of approximately
$1.8 million
, through the quarter ending March 31, 2019, and quarterly installments of approximately
$2.6 million
thereafter. The Company repaid approximately
$5.3 million
and
$3.4 million
on the Term A Loan and Term B Loan, respectively, during the year ended December 31, 2018. As of December 31, 2018 and 2017,
$440.8 million
and
$443.2 million
principal was outstanding (net of original issue discount) under the Term B Loan, respectively, and
$64.8
million and
no
principal amount was outstanding under the Term A Loan, respectively.
In the event that the Term B Loan is prepaid or repaid in whole or in part for any reason other than as a result of scheduled amortization and certain other exceptions, Montreign Operating is required to pay prepayment premiums based on a make-whole provision if the prepayment occurs between the Closing Date (but excluding) and the 30th-month anniversary following the Closing Date, a
2%
premium if the prepayment occurs between the 30th Month and (but excluding) the 42nd-month anniversary of the Closing Date and a
1%
premium if the prepayment occurs between the 42nd Month and (but excluding) the 54th-month anniversary of the Closing Date.
The Term Loan Agreement contains representations and warranties, customary events of default, and affirmative, negative and financial covenants. Mandatory prepayments of the Term Loan Facility will be required upon the occurrence of certain events, including sales of certain assets and casualty events. In addition, the Term Loan Agreement restricts the Project Parties (as defined below) from incurring additional indebtedness except for, among other things, obligations pursuant to hedging agreements required under the Term Loan Agreement, capital lease obligations and purchase money indebtedness (including FF&E financing) in an amount not exceeding
$40 million
, subordinated indebtedness so long as the proceeds are applied pursuant to the terms of the Term Loan Agreement and other indebtedness not exceeding
$10 million
. Also, the Project Parties may not make any dividend or other distribution, redeem or otherwise acquire any equity securities or subordinated indebtedness. Moreover, the Project Parties are restricted from entering into advisory, management or consulting agreements with an affiliate of any Project Party, including Empire, except for payments pursuant to tax sharing agreements, distributions in an amount not exceeding
1%
of the net revenues of the Project Parties in any fiscal year, repurchase of capital stock of the Company in an amount not exceeding
$1 million
and required by the NYSGC, and certain available amounts of cash based on the application of financial covenants.
Additional affirmative, negative and financial covenants under the Term Loan Agreement include that the Company maintain compliance with a maximum first lien leverage ratio not to exceed
5
.00:1.00, a minimum interest coverage ratio not to fall below
2
.00:1.00 and a consolidated capital expenditure covenant not to exceed
$10.5 million
of eligible expenses in any calendar year. In addition, the Company is allowed to add back pro forma EBITDA in the amount of
$108.4 million
, $
77.5 million
and
$39.4 million
in each of the first three testing quarters, respectively. 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 (June 30, 2019), which is the date on which at least
95%
of all rooms in the hotel are open to the public. This occurred on January 1, 2019. As of December 31, 2018, the Company was in compliance with all applicable covenant requirements under the Term Loan Facility.
The Term Loan Facility is guaranteed by Montreign Operating, ERREI and ERREII (together, the "Project Parties") and is secured by security interests in substantially all the real and personal property of the Project Parties and by a pledge of all the membership interests of Montreign Operating held by Montreign Holding Company, LLC ("Montreign Holding"), a wholly-owned subsidiary of Empire.
Obligations under the Term Loan Agreement may be accelerated upon certain customary events of default (subject to grace periods, as appropriate), including, among others: nonpayment of principal, interest or fees, breach of the affirmative or negative covenants, revocation of a gaming license for seven consecutive business days, and a Change in Control (as such term is defined in the Term Loan Agreement) of Montreign Operating.
Revolving Credit Agreement
On January 24, 2017, Montreign Operating entered into a Revolving Credit Agreement (as amended, the “Revolving Credit Agreement”) among Montreign Operating, the lenders from time to time party thereto, and Fifth Third Bank, as administrative
agent. The Revolving Credit Agreement 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
) (the “Revolving Credit Facility”), the proceeds of which may be used for working capital needs, capital expenditures and other general corporate purposes following the opening of specified Casino amenities to the public. Concurrently with the Term Loan Amendment, on May 24, 2017, Montreign Operating amended the Revolving Credit Agreement to, among other things, permit Montreign Operating to increase the aggregate principal amount of the Term B Loan under the Term Loan Amendment. On December 7, 2017, Montreign Operating entered into a Second Amendment to the Revolving Credit Agreement (the "Second Revolving Credit Amendment"). The Second Revolving Credit Amendment enables Montreign Operating to borrow up to
$15 million
(but not obtain a letter of credit) under the Revolving Credit Facility with a narrowed scope of amenities at the opening of the Casino, subject to the receipt of NYSGC approval to open the Casino to the public. On February 5, 2018, Montreign Operating received a certificate from the NYSGC to commence gaming operations at the Casino. The Revolving Credit Facility will mature on January 24, 2022.
At December 31, 2018 and 2017,
$15.0 million
and
$0
, respectively, had been drawn down on the Revolving Credit Facility. More specifically, the Company drew
$9.0 million
on January 23, 2018,
$4.0 million
on February 9, 2018 and
$2.0 million
on June 29, 2018. 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 December 31, 2018, the interest rate on borrowings under the Revolving Credit Facility was
7.71%
.
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, the incurrence of certain additional indebtedness, subject to certain exceptions and reinvestment rights. As of December 31, 2018, the Company was in compliance with all applicable covenant requirements under the Term Loan Facility.
Obligations under the Revolving Credit 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, breach of the affirmative or negative covenants, revocation of a gaming license for seven consecutive business days, and a Change in Control (as such term is defined in the Term Loan Agreement) of Montreign Operating.
Bangkok Bank Loan Agreement
On December 28, 2017, the Company entered into a Delayed Draw Term Loan Credit Agreement (the “Bangkok Bank Loan Agreement”), with Bangkok Bank PCL, New York Branch (“Bangkok Bank”), as lender, and MRMI, as guarantor. The Bangkok Bank Loan Agreement provides for loans to be made to the Company in an aggregate principal amount of up to
$20 million
(the “Bangkok Bank Loan”). The Bangkok Bank Loan Agreement 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 Company borrowed
$16 million
at the closing of the Bangkok Bank Loan. Of this amount, the Company contributed approximately
$9.9 million
to Montreign Operating pursuant to the terms of the Term Loan Agreement, as discussed above. On August 30, 2018, the Company borrowed
$2 million
and, on November 7, 2018, the Company borrowed the remaining
$2 million
under the Bank of Bangkok Loan. At December 31, 2018, the Bank of Bangkok loan was fully drawn.
The Bangkok Bank Loan matures on December 28, 2019. The maturity of the Bangkok Bank Loan may be extended in the sole discretion of Bangkok Bank for additional one-year periods with other terms and conditions to be agreed by the Company and Bangkok Bank. Any such extension of the Bangkok Bank Loan maturity will be subject to a
1%
extension fee.
Interest accrues on outstanding borrowings under the Bangkok Bank Loan Agreement at a rate equal to LIBOR plus
6.25%
, or an alternate base rate plus
5.25%
per annum. In addition, the Company paid 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 was paid on the last business day of each quarter beginning on March 31, 2018. The Bangkok Bank Loan may be prepaid in whole or in part without premium or penalty, subject to the payment of a
2.0%
prepayment fee. At December 31, 2018, the interest rate on borrowings under the Bangkok Bank Loan was
8.77%
.
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 covenants, negative
covenants 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 terms as of December 31, 2018.
In addition, the Bangkok Bank Loan Agreement contains a financial covenant that restricts the maximum total leverage ratio to four times the adjusted EBITDA of MRMI, which financial covenant is applicable beginning with the fiscal quarter ending December 31, 2018. The Bangkok Bank Loan Amendment excludes the Kien Huat Subordinate Loan from calculations of the Company's maximum total leverage so long as the Kien Huat Subordinate Loan remains subordinate to the Bangkok Bank Loan. The Company is in compliance with the covenant requirements as of December 31, 2018.
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 amount financed was
$31.1 million
and the terms of these agreements run between
six
and
36
months. The balances outstanding at December 31, 2018 and 2017, was
$20.4 million
and
$31.1 million
, respectively. The stated interest rates for these loans are between
zero
and
eight
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
.
The following table lists the annual principal repayments due for the Company's long term debt, other than Related Party Debt, as of December 31, 2018:
|
|
|
|
|
|
|
Year ending December 31,
|
Totals
|
|
|
(in thousands)
|
|
2019
|
$48,004
|
|
2020
|
20,690
|
|
|
2021
|
15,815
|
|
|
2022
|
53,625
|
|
|
2023
|
428,625
|
|
|
Totals
|
$566,759
|
Note H. Long-Term Loans, Related Party
Subsidiary Revolving Loan Agreement
On November 30, 2018, Empire entered into a Revolving Loan Agreement (the “Sub Revolving Loan Agreement”) with Montreign Operating. The Sub Revolving Loan Agreement provides for loans (in the aggregate, the “Sub Revolving Loan”) to Montreign Operating in an aggregate principal amount of up to
$10 million
(the “Subsidiary Loan Amount”). Interest will accrue on outstanding borrowings at a rate of
7%
per annum and will be payable beginning on the last day of each calendar quarter beginning on March 31, 2019. Of that interest,
1%
will be payable in cash and
6%
will accrue and remain outstanding until paid in full (and continue to bear interest). The Sub Revolving Loan, together with interest accrued and yet unpaid, will be due and payable on April 25, 2023.
As a condition to each advance under the Sub Revolving Loan, (i) Montreign Operating is required to deliver a written request for an advance three days before the date on which the advance is made; (ii) after giving effect to the advance, the principal amount outstanding will not exceed the Loan Amount, and (iii) no event of default will have occurred and be continuing, or would occur after giving effect to the advance, on the date of the advance request.
The Sub Revolving Loan Agreement contains customary representations and warranties and affirmative covenants, including representations, warranties and covenants on organization, authorization, enforceability and maintenance of existence. The Sub
Revolving Loan is secured by a security interest in all personal property of Montreign Operating subject to the limitations and exceptions described in the Sub Revolving Loan Agreement. Obligations under the Sub Revolving Loan Agreement may be accelerated upon certain customary events of default, including, among others: nonpayment of principal, interest or fees; breach of any term, covenant, or agreement under the Sub Revolving Loan Agreement; a bankruptcy proceeding involving Montreign, whether voluntary or involuntary; or the acceleration of any indebtedness in excess of
$10 million
.
Montreign Operating agreed to indemnify Empire and its officers, partners, members, directors, employees and agents (together, the “Indemnified Parties” and each an “Indemnified Party”) against any and all damages arising out of any negligence or tortious acts or omissions by Montreign Operating or its agents, contractors, servants or employees, any failure by Montreign to comply with the terms of the Sub Revolving Loan Agreement, and any failure by Montreign Operating to comply with the law, except to the extent any such damages result from the gross negligence or willful misconduct of an Indemnified Party.
On November 30, 2018 and December 7, 2018, the Company advanced an aggregate of
$10 million
to Montreign Operating pursuant to a request for advance under the Sub Revolving Loan.
Loan Arrangements with Kien Huat Realty III Limited
Kien Huat Subordinate Loan Agreement
On June 25, 2018, Kien Huat and Empire 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 Operating 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.
On July 5, 2018, the Company borrowed
$5 million
, and on July 31, 2018, the Company borrowed
$5 million
. The Company also borrowed an additional
$10 million
on each of September 11, 2018 and October 16, 2018. The Company paid Kien Huat a commitment fee of
$300,000
(or
1%
of the principal amount) out of the proceeds of the first advance. At December 31, 2018,
$30 million
was outstanding under the Kien Huat Subordinate Loan.
The Kien Huat Subordinate Loan bears interest at a rate of
12%
per annum, compounded monthly, and will be payable at maturity. 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
Concurrently with and as a condition to the closing of the Bangkok Bank Loan Agreement, on December 28, 2017, Empire and Kien Huat entered into a loan agreement (the “Kien Huat Backstop Loan Agreement”), providing for loans to Empire in an aggregate principal amount of up to
$20 million
(the “Kien Huat Backstop Loan”). Any amounts borrowed under the Kien Huat Backstop Loan will be used exclusively to make payments required under the Bangkok Bank Loan Agreement and will mature on the one-year anniversary of the Maturity Date of the Bangkok Bank Loan, or such earlier date that the Bangkok Bank Loan is terminated (the “Backstop Maturity Date”). As of December 31, 2018,
no
amounts had been borrowed under the Kien Huat Backstop Loan.
The Kien Huat Backstop Loan bears interest at a rate of
12%
per annum. Prior to the Backstop Maturity Date, interest on any principal amount outstanding under the Kien Huat Backstop Loan will accrue and be added to the outstanding principal of the Kien Huat Backstop Loan on the first business day of each calendar month beginning on January 1, 2018 and will thereafter be deemed to be part of the principal indebtedness. The Kien Huat Backstop Loan, including all interest and any other amounts due under the Kien Huat Backstop Loan, will be payable in cash on the Backstop Maturity Date. Kien Huat was paid a commitment fee of
$200,000
on December 28, 2017.
The Kien Huat Backstop Loan Agreement contains representations and warranties and affirmative covenants that are usual and customary, including representations, warranties and covenants that restrict the Company’s use of the proceeds of the Kien Huat Backstop Loan 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.
Kien Huat Montreign Loan Agreement and Kien Huat Note Exchange Agreement
On January 24, 2017, Montreign Holding entered into a loan agreement (the "Kien Huat Montreign Loan Agreement"). Pursuant to the Kien Huat Montreign Loan Agreement, Montreign Holding obtained from Kien Huat a loan in the principal amount of
$32.3 million
(the "Kien Huat Montreign Loan"). The net proceeds of the Kien Huat Montreign Loan were used as a capital contribution to Montreign Operating for use towards the expenses of the Development Projects. The obligations of Montreign Holding under the Kien Huat Montreign Loan Agreement were secured by a pledge of all the membership interests in Montreign Holding.
Concurrently with and as a condition to the closing of the Bangkok Bank Loan Agreement, on December 28, 2017, Empire, Montreign Holding, and Kien Huat entered into a Note Exchange Agreement (the “Kien Huat Note Exchange Agreement”). The Kien Huat Note Exchange Agreement provides for the issuance of
1,379,873
shares of common stock Kien Huat in full satisfaction of the Kien Huat Montreign Loan. In connection with the satisfaction in full of the Kien Huat Montreign Loan pursuant to the Kien Huat Note Exchange Agreement, Empire's pledge of its membership interests in Montreign Holding was released.
Kien Huat Construction Loan Agreement
On October 13, 2016, Montreign Operating and Kien Huat entered into a loan agreement (the "Kien Huat Construction Loan Agreement"). Pursuant to the Kien Huat Construction Loan Agreement, Kien Huat agreed to make available to Montreign Operating up to an aggregate of
$50 million
of loans to pay the expenses of the Casino while the debt financing for the Development Projects was being finalized. In connection with the closing of the Term Loan Facility and the Kien Huat Montreign Loan, on January 24, 2017, the Kien Huat Construction Loan Agreement expired pursuant to its terms without being utilized by Montreign Operating. Montreign Operating paid Kien Huat a commitment fee of
$500,000
upon execution of the Kien Huat Construction Loan. The commitment fee was capitalized and was included in "Other Assets" at December 31, 2016. It was charged to "Interest Expense" on the Consolidated Statement of Operations on January 24, 2017, upon the issuance of the Kien Huat Montreign Loan Agreement.
Conversion of 2010 Kien Huat Note
On November 17, 2010, Empire entered into a loan agreement (the "2010 Kien Huat Loan Agreement") with Kien Huat pursuant to which Empire issued a convertible promissory note (the "2010 Kien Huat Note") in the original principal amount of
$35 million
, of which
$17.4 million
was outstanding as of December 31, 2015. On February 17, 2016, upon consummation of the January 2016 Rights Offering (as defined and discussed in Note I), the 2010 Kien Huat Note was converted into
1,332,058
shares of common stock in accordance with the terms of the 2010 Kien Huat Loan Agreement.
The Company recognized approximately
$0.2 million
in interest expense associated with the 2010 Kien Huat Note during the year ended December 31, 2016.
Note I. Stockholders’ Equity
Authorized Capital
On November 1, 2016, Empire filed the Second Amended and Restated Certificate of Incorporation (the "Restated Charter”) with the Secretary of State of the State of Delaware. Pursuant to Restated Charter, Empire’s authorized capital stock consists of
155 million
shares, of which
150 million
shares are common stock and
five million
shares are preferred stock.
Common Stock
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.
January 2016 Rights Offering
On January 4, 2016, we commenced a rights offering (the "January 2016 Rights Offering") of transferable subscription rights to holders of record of our common stock and Series B Preferred Stock as of January 4, 2016 to purchase up to
20,138,888
shares of our common stock. In connection with the January 2016 Rights Offering, on December 31, 2015, the Company and Kien Huat entered into a standby purchase agreement (the "January 2016 Standby Purchase Agreement"). Pursuant to the January 2016 Standby Purchase Agreement, Kien Huat agreed to (i) exercise its basic subscription rights to acquire approximately
$30 million
of our common stock within
10
days of the commencement of the January 2016 Rights Offering with a closing proximate thereto and (ii) to exercise the remainder of its basic subscription rights prior to the expiration date of the January 2016 Rights Offering. In addition, Kien Huat agreed it would exercise all rights not otherwise exercised by the other holders in the January 2016 Rights Offering in an aggregate amount not to exceed
$290 million
.
The January 2016 Rights Offering closed on February 17, 2016. The Company issued a total of
20,138,888
shares of common stock for aggregate gross proceeds of approximately
$290 million
. This includes
176,086
shares issued to holders upon exercise of their basic subscription and over-subscription rights and
13,136,817
shares issued to Kien Huat upon exercise of its basic subscription rights. Kien Huat also acquired the remaining
6,825,985
shares not sold in the January 2016 Rights Offering pursuant to the January 2016 Standby Purchase Agreement. The net proceeds of the January 2016 Rights Offering were approximately
$286.0 million
, which were used (i) to pay the pre-opening expenses relating to the construction of the Casino, (ii) to redeem the outstanding shares of the Series E Preferred Stock in accordance with the terms of the Settlement Agreement on March 7, 2016 and (iii) for the working capital needs of the Company. Pursuant to the January 2016 Standby Purchase Agreement, we paid Kien Huat a commitment fee of
$1.5
million which is equal to
0.5%
of the maximum amount of the January 2016 Rights Offering, and reimbursed Kien Huat for expenses in the amount of
$50,000
.
Bet365 Common Stock Purchase Agreement
On November 14, 2018, the Company entered into a sportsbook and digital gaming collaboration agreement (the “Collaboration Agreement”) with Hillside (New York) LLC, an affiliate of bet365 Group Limited (“bet365”). In connection with entering into the Collaboration Agreement, Hillside (New Media Holdings) Limited, an affiliate of bet365 ("bet365 Investor"), and the Company entered into a common stock purchase agreement (the “bet365 Common Stock Purchase Agreement”) pursuant to which bet365 Investor agreed to purchase up to
2.5 million
shares of common stock of the Company at a purchase price of
$20.00
per share, for an aggregate investment of
$50 million
.
Upon execution of the bet365 Common Stock Purchase Agreement, the bet365 Investor purchased
1,685,759
shares of common stock. The offer and sale of these shares was made pursuant to a shelf registration statement on Form S-3 (File No. 333-214119), which became effective on November 17, 2016, pursuant to a base prospectus dated as of November 17, 2016 contained in such registration statement and a prospectus supplement filed with the Securities and Exchange Commission on November 14, 2018. The Company received net proceeds of
$29.6 million
from the offering.
Pursuant to the bet 365 Common Stock Purchase Agreement, the bet365 Investor will be obligated to purchase the remaining
814,241
shares of common stock at
$20.00
per share so long as the following closing conditions are met: (i) 30 days have passed following the receipt of approval from the NYSGC of bet365 Investor’s ownership of the Shares and the enactment of laws by New York State allowing the offering of the bet365 Online Sportsbook Services; (ii) the representations and warranties of the Company are true and correct in all material respects and the Company has complied with its obligations under the bet365 Common Stock Purchase Agreement; (iii) the Collaboration Agreement is in full force and effect and there is no material breach
of the Collaboration Agreement by the Company outstanding; (iv) the common stock of the Company continues to be listed on The Nasdaq Stock Market; (v) the Company continues to own
100%
of the equity interests in the Casino; and (vi) the Gaming Facility License is still valid.
After all gaming taxes have been paid and the parties have recouped their costs and expenses, bet365 may receive a distribution (the “Preferred Distribution”) equal to
50%
of the positive difference, if any (the “delta”), between
$20
and the value of the Company’s common stock measured on a given date (such date, the “Trigger Date”), multiplied by the number of shares of common stock then held by bet365 Investor. The Trigger Date is 30 days after the Company’s first filing of an annual or quarterly report with the Securities and Exchange Commission after bet365 recoups its costs incurred pursuant to the Collaboration Agreement. The delta will be the positive difference between
$20
and the 30-day volume-weighted average price of the Company’s common stock on the Trigger Date. If the Company is no longer a reporting company, or if the Company’s common stock is not listed on a national securities exchange, the delta will be the positive difference between
$20
and the fair market value of the Company’s common stock as determined by an investment bank retained by the parties. If a change of control (as such term is defined in the Collaboration Agreement) of the Company occurs before the Trigger Date, the delta will be the positive difference between
$20
and the per share value paid by a third party in a change of control transaction. The Preferred Distribution, if any, will be payable on a monthly basis over a period of
three
years. If bet365 Investor sells any shares of common stock prior to the Trigger Date, the Preferred Distribution will be deemed to be
$0
.
The Company concluded that the Preferred Distribution (an initial put option) is an embedded derivative liability because the right to receive the Preferred Distribution will not transfer with any shares of common stock sold by the bet365 Investor. The fair value of the derivative liability associated with shares already sold to the investor was
$0.9 million
at December 31, 2018.
The Company also concluded the ability to purchase the remaining shares under the bet365 Common Stock Purchase Agreement is a freestanding contingent forward instrument. The fair value of this instrument was approximately
$1.9 million
at December 31, 2018, net of the derivative liability (contingent put option) of approximately
$0.4 million
for the right associated with the remaining shares to also receive the Preferred Distribution.
The derivative liability and the contingent forward asset were recorded at fair value upon the effective date of the Collaboration Agreement and will be subsequently remeasured to fair value at each reporting date. Changes in the fair value of the derivative liabilities and long-term asset will be recognized as a component of "other income (expense), net" in the consolidated statement of operations.
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
Series F Preferred Stock, redeemable
On November 6, 2018, the Company and Kien Huat entered into a letter agreement (as amended and restated on November 9, 2018, the "KH 2018 Preferred Stock Commitment Letter") pursuant to which Kien Huat committed to provide additional equity financing in support of the general corporate and working capital requirements of the Company and its subsidiaries. Pursuant to the KH 2018 Preferred Stock Commitment Letter, Kien Huat agreed to purchase up to
$126 million
(the "Commitment Amount") of Series F Preferred Stock on the terms set forth in the KH 2018 Preferred Stock Commitment Letter and in accordance with the terms of the Certificate of Designations, Preferences and Rights of the Series F Preferred Stock, which the Company filed with the Secretary of State of the State of Delaware on November 5, 2018 and amended and restated on November 9, 2018 (as amended and restated, the “Series F Certificate of Designation”). Kien Huat committed to purchase the Commitment Amount of the Series F Preferred Stock pursuant to the following schedule: (i) up to
$12 million
no earlier than November 9, 2018, (ii) up to
$20 million
no earlier than February 15, 2019, (iii) up to
$20 million
no earlier than May 15, 2019, (iv) up to
$15 million
no earlier than August 15, 2019, (v) up to
$37 million
no earlier than November 15, 2019 and (vi) up to
$22 million
no earlier than March 15, 2020. The Company agreed to use its reasonable efforts to secure third-party financing in an amount equal to the Commitment Amount, and the Commitment Amount will be reduced by the amount of any third-party financing raised by the Company. However, any equity financing raised by the Company from any person entering into a commercial agreement relating to online gaming and sports
betting at the Casino in an amount up to
$29 million
will not reduce the Commitment Amount. Kien Huat will be entitled to a funding fee in the amount of
1%
of the portion of the Commitment Amount funded by Kien Huat. Unless earlier terminated by mutual agreement, the KH 2018 Preferred Stock Commitment Letter will terminate upon the earlier of (a) the Company's receipt of third-party financing in the Commitment Amount or (b) April 15, 2020. The Company has recorded the fair value of this commitment as a non-derivative financial asset in the amount of
$31.1 million
on the consolidated balance sheet in "Other Assets" and "Paid in Capital" at December 31, 2018. The Company is amortizing this asset into equity as the commitment is drawn.
On November 13, 2018, under the terms of the KH Series F Preferred Stock Commitment, the Company and KH entered into a subscription agreement, pursuant to which KH purchased
120
shares of the Company's Series F Preferred Stock for an aggregate purchase price of
$12 million
and net proceeds to the Company (after deducting approximately
$120,000
funding fee due to KH) of
$11.9 million
.
Series B Preferred Stock
The Company’s Series B Preferred Stock has voting rights of
0.054
votes per share and each share is convertible into
0.054
shares of common stock. It has a liquidation value of
$29
per share and is entitled to annual cumulative dividends of
$2.90
per share payable quarterly in cash. The Company has the right to pay the dividends on an annual basis by issuing shares of its common stock at the rate of
$3.77
per share. The value of common shares issued as payment is based upon the average closing price for the common shares for the
20
trading days preceding January 30 of the year following that for which the dividends are due. At December 31, 2018 and 2017, there were
44,258
shares of Series B Preferred Shares outstanding.
The Board authorized the cash payment of the Series B Preferred Stock dividends on March 8, 2016. Quarterly payments in the amount of
$32,087
were made on April 2, 2018, July 2, 2018, October 1, 2018 and January 2, 2019 for the 2018 period. Quarterly payments in the amount of
$32,087
were made on April 3, 2017, July 3, 2017, October 2, 2017 and January 2, 2018 for the 2017 period.
Bryanston Settlement Agreement
Effective as of June 30, 2013, the Company and its affiliates consummated the closing of a Settlement Agreement and Release (as amended, the “Bryanston Settlement Agreement”) with Bryanston Group, Inc. and its affiliates (the “Bryanston Parties”). Pursuant to ASC 480, the Series E Preferred Stock held by the Bryanston Parties became contractually redeemable subject to the terms and conditions of the Bryanston Settlement Agreement and was recorded as a liability on the December 31, 2015 balance sheet.
On March 7, 2016, the Company redeemed the outstanding Series E Preferred Stock held by the Bryanston Group for approximately
$30.7 million
pursuant to the terms of the Settlement Agreement. Because the event that caused the entire liability to become due occurred during 2016, the liability was recorded pursuant to the payment terms in place at December 31, 2015.
Note J. Warrants, Restricted Stock, Restricted Stock Units, Options and Option Matching Rights
Warrants
As of December 31, 2018, there are outstanding warrants to purchase an aggregate of approximately
133,300
shares of Empire’s common stock at
$30.00
per share with an expiration date of May 10, 2020 and warrants to purchase
60,000
shares of common stock at
$81.50
per share with an expiration date of March 15, 2025.
On November 1, 2014, MRMI and the Monticello Harness Horsemen’s Association (the “MHHA”) entered into an agreement that governs the conduct of MRMI and MHHA relating to horseracing purse payments, the simulcasting of horse races and certain other payments (the “2014 MHHA Agreement”). Pursuant to the 2014 MHHA Agreement, on March 16, 2018, Empire issued to MHHA
200,000
shares of common stock, and on March 15, 2018, Empire issued to MHHA a warrant to purchase
60,000
shares of common stock at
$81.50
per share, the proceeds of any sales of which will provide additional monies for the harness horsemen’s purse account. Under the terms of the 2014 MHHA Agreement, the MHHA may dispose of the common stock beginning six months after receipt the common stock, subject to limitations upon the quantity of common shares disposed at any one time, as prescribed by the MHHA Agreement. The Company also provided a guaranty on the value of the shares provided to MHHA upon the termination of the MHHA Agreement, which is approximately seven years after issuance.
Restricted Stock, Restricted Stock Units and Options
Second Amended and Restated 2005 Equity Incentive Plan
In May 2015, the Company's Second Amended and Restated 2005 Equity Incentive Plan expired. Options to purchase approximately 13,300 shares of common stock were outstanding as of December 31, 2017 under the 2005 Equity Incentive Plan. During the year ended December 31, 2018 approximately 1,700 shares were exercised and approximately 11,60 shares were forfeited. There were no options outstanding at December 31, 2018.
In 2018, 2017 and 2016, the Company received approximately
$25,000
,
$16,000
and
$54,000
, respectively, in proceeds from shares of common stock issued as a result of the exercise of stock options. No options were granted under the 2005 Equity Incentive Plan in 2015.
The following table reflects stock option activity in 2018, 2017 and 2016:
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|
|
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|
|
|
|
|
|
|
|
Number of
shares
|
|
Range of exercise
prices per share
|
|
Weighted
average exercise
price per share
|
|
Weighted
average remaining
contractual life (years)
|
|
Options outstanding at December 31, 2015
|
56,600
|
|
|
$7.95 - $131.10
|
|
|
$
|
48.50
|
|
|
2.61
|
|
|
Options exercised in 2016
|
(18,000
|
)
|
|
$7.95-$9.90
|
|
|
|
|
|
|
Forfeited in 2016
|
(5,000
|
)
|
|
$14.85 -$82.95
|
|
|
|
|
|
|
Options outstanding at December 31, 2016
|
33,600
|
|
|
$7.95 - $131.10
|
|
|
$
|
68.92
|
|
|
1.11
|
|
|
Options exercised in 2017
|
(2,000
|
)
|
|
$7.95
|
|
|
|
|
|
Forfeited in 2017
|
(18,300
|
)
|
|
$14.85 -$131.10
|
|
|
|
|
|
|
Options outstanding at December 31, 2017
|
13,300
|
|
|
$15.00 - $40.05
|
|
|
$
|
26.03
|
|
|
0.74
|
|
|
Options exercised in 2018
|
(1,700
|
)
|
|
$15.00
|
|
|
|
|
|
Forfeited in 2018
|
(11,600
|
)
|
|
$24.75 -$40.05
|
|
|
|
|
|
|
Options outstanding at December 31, 2018
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
2015 Equity Incentive Plan
In September 2015, our Board approved, and in November 2015, our stockholders approved the Company's 2015 Equity Incentive Plan (the "2015 Equity Incentive Plan"). The 2015 Equity Incentive Plan provides for an aggregate of
2,600,707
shares of common stock to be available for Awards. At December 31, 2018, a total of
2,280,701
shares were available for future issuance under the 2015 Equity Incentive Plan.
Stock-based compensation expense was approximately
$7.2 million
,
$2.8
million and
$2.7
million for the years ended December 31, 2018, 2017 and 2016, respectively. Stock based compensation expense for the 2015 Equity Plan was approximately
$1.9 million
in fiscal 2018 and stock based compensation expense related to the 2014 MHHA Agreement was approximately
$5.3 million
. As of December 31, 2018, there was approximately
$2.2
million of total unrecognized compensation cost related to non-vested share-based compensation awards granted under the 2015 Equity Incentive Plans. That cost is expected to be recognized over the remaining vesting period of
2.5
years. This expected cost does not include the impact of any future stock-based compensation awards.
The following table reflects restricted stock and restricted stock unit activity in 2018, 2017 and 2016:
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|
|
|
|
|
|
|
|
|
|
|
Number of Restricted Shares
|
|
Number of Restricted Stock Units
|
|
Outstanding at December 31, 2015
|
|
137,000
|
|
|
—
|
|
|
Grants in 2016
|
|
105,000
|
|
|
—
|
|
|
Vested in 2016
|
|
(22,000
|
)
|
|
—
|
|
|
Forfeited in 2016
|
|
(4,000
|
)
|
|
—
|
|
|
Outstanding at December 31, 2016
|
|
216,000
|
|
|
—
|
|
|
Grants in 2017
|
|
1,000
|
|
|
74,500
|
|
|
Vested in 2017
|
|
(55,000
|
)
|
|
—
|
|
|
Forfeited in 2017
|
|
(22,000
|
)
|
|
(1,600
|
)
|
|
Outstanding at December 31, 2017
|
|
140,000
|
|
|
72,900
|
|
|
Grants in 2018
|
|
—
|
|
|
161,200
|
|
|
Vested in 2018
|
|
(56,500
|
)
|
|
(18,600
|
)
|
|
Forfeited in 2018
|
|
(46,000
|
)
|
|
(20,000
|
)
|
|
Outstanding at December 31, 2018
|
|
37,500
|
|
|
195,500
|
|
Option Matching Rights
On August 19, 2009, the Company entered into an investment agreement (the "2009 Investment Agreement") with Kien Huat, pursuant to which Kien Huat purchased shares of common stock of the Company during the year ended December 31, 2009. Under the 2009 Investment Agreement, if any options or warrants outstanding at the time of the final closing under the 2009 Investment Agreement, or the first
200,000
granted to directors or officers as of the final closing date under the 2009 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”.
Pursuant to the terms of the 2009 Investment Agreement, the Company is required to provide notice (an “Option Exercise Notice”) of any exercise within
five
business days, after which notice is received, Kien Huat is required to notify the Company of whether it decides to exercise such Option Matching Rights within
10
business days. The Company did not provide such notice to Kien Huat pursuant to the 2009 Investment Agreement. On December 31, 2015, the Company and Kien Huat entered into a letter agreement (the “OMR Letter Agreement”) pursuant to which the parties agreed that, as a result of the Company’s failure to provide the Option Exercise Notice, Kien Huat’s right to elect to purchase an equal number of shares had not yet vested and would inure to Kien Huat’s benefit only upon the Company’s delivery of such Option Exercise Notice. To fulfill the Company’s obligations pursuant to the 2009 Investment Agreement pursuant to the OMR Letter Agreement, the Company provided the Option Exercise Notice as of December 31, 2015 for approximately
204,706
shares of common stock as required by the Investment Agreement. Kien Huat had
10
business days following the date on which the Company’s Chief Compliance Officer provides written notice that Kien Huat is no longer unable to exercise the Option Matching Rights pursuant to the Company’s Insider Trading Policy (the “Effective Date Notice”) to elect whether to exercise such Option Matching Rights.
On February 17, 2016, the Company provided the Effective Date Notice to Kien Huat regarding Kien Huat's election to exercise its Option Matching Rights. On February 17, 2016, Kien Huat declined to exercise the Option Matching Rights to purchase
204,706
shares of common stock. At December 31, 2017, there were approximately
3,000
Option Matching Rights outstanding with various exercise prices and expiration dates through July 2018. On January 24, 2018, Kien Huat elected to exercise its Option Matching Rights for
1,666
shares of the Company's common stock, after a former officer exercised his stock option which was due to expire on January 15, 2018. The Option Matching Rights were exercised at a price of
$14.95
per share. The last remaining Option Matching Rights expired in July 2018.
Note K. Concentration
As of December 31, 2018, the Company had no receivable which represented more than
10%
of the total net outstanding accounts receivable.
As of December 31, 2017, the Company had
one
debtor that consisted of greater than 10% of accounts receivable. Hawthorne OTB represented
13.0%
of the total net outstanding racing- related accounts receivable.
Note L. Employee Benefit Plans
Empire 401(k) Plan
Our eligible employees may participate in a Company-sponsored 401(k) benefit plan (the “Plan”). The Company established the Plan to provide employees with the opportunity to accumulate pre-tax assets, and to provide employer contributions for eligible employees for their retirement and other needs. It is intended to be administered in accordance with all applicable federal laws and regulations. The Plan covers substantially all employees not otherwise covered by plans resulting from collective bargaining agreements. The Plan permits employees to defer a portion of their compensation as a pre-tax deferral up to statutory maximums. Effective July 2016 through December 31, 2018 (the "401(k) Plan"), the Company made a matching contribution for eligible salaried employees as follows:
50%
matching contribution for an employee contribution of up to
4%
of compensation. Pursuant to the 401(k) Plan, eligible employees were
100%
vested in the portion of their accounts derived from the Company’s matching contributions. Matching contributions for the years ended December 31, 2018, 2017 and 2016 were approximately
$1.4
million,
$0.2 million
and
$0.1 million
, respectively. As of December 31, 2018, the Plan had approximately
1,000
participants.
Note M. Income Taxes
The Tax Cuts and Jobs Act (the "2017 Tax Act") was signed into law on December 22, 2017. The major components of the 2017 Tax Act, were effective January 1, 2018 and significantly revised the U.S. corporate income tax by, among other things, lowering the statutory corporate tax rate from
35%
to
21%
, eliminating certain deductions and introducing new tax regimes. The 2017 Tax Act also enhanced and extended through 2026 the option to claim accelerated depreciation deductions on qualified property. In response to U.S. tax reform, the Staff of the U.S. Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 (“SAB No. 118”) to provide guidance to registrants in applying ASC Topic 740 in connection with U.S. tax reform. SAB No. 118 provides that in the period of enactment, the income tax effects of U.S. tax reform may be reported as a provisional amount based on a reasonable estimate (to the extent a reasonable estimate can be determined), which would be subject to adjustment during a “measurement period.” The measurement period begins in the reporting period of the U.S. tax reform’s enactment and ends when a registrant has obtained, prepared and analyzed the information that was needed in order to complete the accounting requirements under ASC Topic 740. The primary impact of the 2017 Tax Act was the remeasurement of the Company’s deferred tax assets, based upon the new U.S. statutory corporate tax rate of
21%
and the required change to the related valuation allowance. Due to the Company’s operating losses and full valuation allowance, the 2017 Tax Act did not materially impact the 2018 and 2017 operating results or income tax expense. As of December 31, 2018, the Company has finalized its analysis of the Act and determined that due to limitations on interest expense and net operating loss carryforwards, a
$0.1 million
deferred tax liability was recorded.
Empire and all of its subsidiaries file a consolidated income tax return. At December 31, 2018 and 2017, the estimated deferred income tax assets and liability were comprised of the following:
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|
|
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|
|
|
|
|
|
12/31/2018
|
|
12/31/2017
|
|
|
(in thousands)
|
|
Deferred tax assets:
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|
|
|
|
Net operating loss carryforwards
|
$87,181
|
|
$40,502
|
|
Stock—based compensation
|
1,911
|
|
|
2,097
|
|
|
Development costs
|
619
|
|
|
27,213
|
|
|
Deferred interest
|
11,494
|
|
|
—
|
|
|
Deferred compensation
|
590
|
|
|
68
|
|
|
Depreciation
|
5,604
|
|
|
376
|
|
|
Other
|
907
|
|
|
952
|
|
|
|
108,306
|
|
|
71,208
|
|
|
Deferred tax liability:
|
|
|
|
|
Depreciation
|
(2,037
|
)
|
|
—
|
|
|
Net deferred tax assets
|
106,269
|
|
|
71,208
|
|
|
Valuation allowance
|
(106,378
|
)
|
|
(71,208
|
)
|
|
Deferred tax liability, net
|
$
|
(109
|
)
|
|
$
|
—
|
|
The valuation allowance increased approximately $
35.2 million
during the year ended
December 31, 2018
, primarily due to the increase in the net loss in 2018. The valuation allowance decreased approximately
$17.7
million during the year ended December 31, 2017, primarily due to the impact of the remeasurement of the net deferred tax assets, based upon the new U.S. statutory corporate tax rate of
21%
, offset by current year activity which increased the net deferred tax assets prior to their remeasurement for the new tax rate. Of the
$354.2 million
in net operating loss carryforwards, approximately
$278.0 million
is readily available as of December 31, 2018.
There are limits on the Company’s ability to use its current net operating loss carryforwards, potentially increasing the future tax liability of the Company if it were to generate taxable income. As of December 31, 2018, the Company had federal net operating loss carryforwards of approximately
$152.1 million
that expire between 2019 and 2037, approximately
$249.1 million
of New York State net operating loss carryforwards that expire between 2019 and 2038 and approximately
$202.1 million
of federal net operating losses that are subject to an unlimited carryforward due to the enactment of the 2017 Tax Act. The 2004 merger of the Company’s operations with Catskills Development LLC and the investment by Kien Huat in 2009 will limit the amount usable in any year of its net operating losses due to the change in control of the Company within the meaning of the tax laws such that approximately
$55.1 million
of the limited federal net operating losses may expire unused prior to the 2019 through 2037 expiration.
The Company is in the process of completing a tax cost segregation study related to the construction of Resorts World Catskills. Individual deferred tax items that directly or indirectly relate to tax depreciation, including net operating loss carryforwards, development costs, depreciation and the corresponding valuation allowance, have been estimated based on currently available tax information. The estimation of these individual deferred items has no material impact to the total deferred taxes reflected on the December 31, 2018 balance sheet or the December 31, 2018 tax expense. The Company expects to complete the study during 2019, as part of its filing of its 2019 Federal and New York State income tax returns.
The following is a reconciliation of the federal statutory tax rate to the Company’s effective tax rate:
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|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
December 31,
|
|
|
2018
|
|
2017
|
|
2016
|
|
Tax provision at federal statutory tax rate
|
21.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
|
Non-deductible interest
|
—
|
%
|
|
—
|
%
|
|
(0.3
|
)%
|
|
Permanent items
|
(0.3
|
)%
|
|
(3.1
|
)%
|
|
(3.5
|
)%
|
|
Tax reform
|
(0.1
|
)%
|
|
—
|
%
|
|
—
|
%
|
|
Change in valuation allowance
|
(20.7
|
)%
|
|
(31.9
|
)%
|
|
(31.2
|
)%
|
|
Effective tax rate
|
(0.1
|
)%
|
|
—
|
%
|
|
—
|
%
|
As of December 31, 2018, the Company does not have any uncertain tax positions. As a result, there are no unrecognized tax benefits as of December 31, 2018. If the Company was to incur any interest and penalties in connection with income tax deficiencies, the Company would classify interest within interest expense and classify penalties as selling, general and administrative expenses within the consolidated statement of operations.
The Company files tax returns in the U.S. federal jurisdiction, as well as in New York and Delaware. All of its federal and state tax filings as of December 31, 2017 have been timely filed. The Company is subject to U.S. federal or New York State income tax examinations by tax authorities for years after 2015 and 2014. During the periods open to examination, the Company has net operating loss and tax credit carryforwards that have attributes from closed periods. Since these net operating loss and tax credit carryforwards may be utilized in future periods, they remain subject to examination.
Note N. Related Party Transactions
Moelis Agreements
2018 Moelis Letter Agreement
On August 7, 2018, the Company entered into an engagement agreement (the "2018 Moelis Letter 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 2018 Moelis Letter Agreement, Moelis was engaged as exclusive financial advisor with respect to a strategic financing transaction for the Company, if any. Pursuant to the 2018 Moelis Letter Agreement, we paid Moelis a retainer fee of
$100,000
upon execution of the agreement. In the event a transaction were to be consummated, the 2018 Moelis Letter Agreement contemplated additional transaction-based fees would be earned by Moelis. On November 9, 2018, the Company and Moelis entered into an amendment (the “2018 Moelis Letter Agreement Amendment”) to the 2018 Moelis Letter Agreement. Pursuant to the 2018 Moelis Letter Agreement Amendment, the parties agreed no fee would be payable to Moelis in connection with any equity investment in connection with a strategic agreement relating to sports betting. In addition, pursuant to the 2018 Moelis Letter Agreement Amendment, the fee payable to Moelis with respect to the Collaboration Agreement was increased from
$3 million
to
$4 million
. In November 2018, the Company paid approximately
$4.1 million
to Moelis upon the consummation of the Collaboration Agreement to pay fees and expenses due. These fees were recorded as an adjustment to the proceeds of the common stock issued to bet365 (see Note I).
Moelis-Montreign Letter Agreement
In March 2017, Montreign Operating entered into an engagement agreement with Moelis (the "Moelis-Montreign Letter Agreement") pursuant to which it engaged Moelis to act as exclusive financial advisor to Montreign Operating. Pursuant to the Moelis-Montreign Letter Agreement, Moelis was entitled to an advisory fee of
$100,000
, which was paid upon execution, and the reimbursement of expenses up to
$75,000
. The Moelis-Montreign Letter Agreement expired on its terms on December 31, 2017.
On May 16, 2017, Moelis and the Company entered into a letter agreement reinstating and amending the 2013 Moelis Letter Agreement (as defined below) (the "Updated Moelis-Montreign Letter Agreement"). Pursuant to the Updated Moelis-Montreign Letter Agreement, Moelis was engaged to act as non-exclusive financial advisor to the Company in connection with certain debt and equity financing and corporate transactions the Company may undertake. The Updated Moelis-Montreign Letter Agreement described the fees due to Moelis for each transaction in which the Company engaged. If the Company engaged in a covered transaction at any time within 12 months of the termination of the Updated Moelis-Montreign Letter Agreement for any reason
other than for cause by the Company, Moelis was entitled to receive a transaction fee according to the schedule provided therein. The Updated Moelis Letter Agreement expired on its terms on December 31, 2017.
On May 26, 2017, in connection with the closing of the first amendment to the Term Loan Agreement, Moelis was paid approximately
$178,000
for financial advisory services pursuant to the Updated Moelis-Montreign Letter Agreement.
2013 Moelis Letter Agreement
On December 9, 2013, the Company executed a letter agreement (the "2013 Moelis Letter Agreement") pursuant to which it engaged Moelis to act as its financial advisor in connection with the Casino. Pursuant to the 2013 Moelis Letter Agreement, we agreed to pay Moelis a retainer fee in the aggregate amount of approximately
$250,000
, of which approximately
$150,000
was payable upon execution and
$100,000
of which was paid within 90 days after execution. In the event a financing was consummated, the 2013 Moelis Letter Agreement contemplated additional transaction-based fees would be earned by Moelis.
At the close of the January 2016 Rights Offering, Moelis was paid approximately
$2.1 million
for financial advisory services in connection with the Casino pursuant to the 2013 Moelis Letter Agreement. These fees were included in "S,G&A Expense " on the Consolidated Statement of Operations for the year ended December 31, 2016.
On January 24, 2017, in connection with the closing of the Term Loan Facility and the Revolving Credit Facility, Moelis was paid approximately
$2.5 million
for financial advisory services pursuant to the 2013 Moelis Letter Agreement. These fees were capitalized and included in "Debt Issuance Costs" which were netted against the Term Loan Facility on the consolidated balance sheet at December 31, 2017. The fees are included in "Interest Expense " on the consolidated statement of operations and are being amortized over the life of the Term Loan Facility.
Gregg Polle, a director of the Company, is a Managing Director of Moelis. Mr. Polle refrained from participating in the discussion of, and the determination of whether to enter into, each agreement.
Agreements with Kien Huat and Related Parties
2018 Kien Huat Preferred Stock Commitment Letter
On November 6, 2018, the Company and Kien Huat entered into a commitment letter (as amended and restated on November 9, 2018, the "2018 Kien Huat Preferred Stock Commitment Letter"), pursuant to which Kien Huat committed to provide equity financing in support of the general corporate and working capital requirements of the Company and its subsidiaries. Pursuant to the 2018 Kien Huat Preferred Stock Commitment Letter, Kien Huat agreed to purchase up to
$126 million
(the "Commitment Amount") of Series F Preferred Stock on the terms set forth in the 2018 Kien Huat Preferred Stock Commitment Letter. Kien Huat committed to purchase the Series F Preferred Stock pursuant to the following schedule: (i) up to
$12 million
no earlier than November 9, 2018; (ii) up to
$20 million
no earlier than February 15, 2019; (iii) up to
$20 million
no earlier than May 15, 2019; (iv) up to
$15 million
no earlier than August 15, 2019; (v) up to
$37 million
no earlier than November 15, 2019; and (vi) up to
$22 million
no earlier than March 15, 2020. The Company agreed to use its reasonable efforts to secure third-party financing in an amount equal to the Commitment Amount and the Commitment Amount will be reduced by the amount of any third-party financing raised by the Company. However, any equity financing raised by the Company from any person entering into a commercial agreement relating to online gaming and sports betting at the Casino in an amount up to
$29 million
will not reduce the Commitment Amount. Kien Huat will be entitled to a funding fee in the amount of
1%
of the portion of the Commitment Amount funded by Kien Huat. Unless earlier terminated by mutual agreement, the 2018 Kien Huat Preferred Stock Commitment Letter will terminate upon the earlier of (a) the Company's receipt of third-party financing in the Commitment Amount or (b) April 15, 2020.
On each of November 13, 2018 and February 20, 2019, in accordance with the 2018 Kien Huat Preferred Stock Commitment Letter, the Company and Kien Huat entered into subscription agreements to purchase an aggregate
320
shares of Series F Preferred Stock for an aggregate purchase price of
$32 million
and net proceeds to the Company (after deducting a
$0.3 million
funding fee due to Kien Huat) of
$31.7 million
.
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 right to use the RWS
Licensed Marks may be assigned or sub-licensed only in certain limited circumstances. However, any use of the RWS Licensed Marks for a purpose other than the Permitted Uses will require the prior written consent of RWS. 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 on-line 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. Montreign Operating’s rights and obligations under the RWS License Agreement are subject to and governed by the rules and regulations applicable to Montreign Operating’s gaming operations at the Casino, and the fiduciary obligations of the boards of directors of Montreign Operating and Empire, as well as the fiduciary obligations of Kien Huat. Beginning on the date on which the Casino opened to the public, Montreign Operating pays to RWS a fee equivalent to a percentage of Net Revenue (as such term is defined in the RWS License Agreement) generated in each calendar year from (i) all activity at the Casino, (ii) each specific use of the RWS Licensed Marks in The Alder or Golf Course and (iii) each specific use of the name Resorts World Catskills in connection with online gaming. The percentage of Net Revenue payable as the fee is a low single digit percentage that will increase incrementally between the third year and sixth year of the term of the RWS License Agreement and will remain a low single digit percentage during the entire term of the RWS License Agreement. The Company incurred an expense of approximately
$1.5 million
for the year ended December 31, 2018, reflecting the fee payable pursuant to the RWS License Agreement of which
$0.9
million was payable at December 31, 2018.
During the term of the RWS License Agreement, Montreign Operating may participate in the Genting Rewards Alliance loyalty program (the “Alliance”), which will provide central marketing and cross-promotion opportunities for the Development Projects with other members of the Alliance. Montreign Operating’s participation in the Alliance is subject to the provisions of a separate agreement, which is currently being negotiated by the parties.
Mr. Lim, our Director, is also a director of Resorts World Inc. Pte Ltd., the parent company of RWS.
Kien Huat Letter Agreement
On February 17, 2016, Kien Huat and the Company entered into a letter agreement (the "Kien Huat Letter Agreement") pursuant to which, during the period commencing on February 17, 2016 and ending on the earlier of (i) the
three
-year anniversary of the closing of the January 2016 Rights Offering and (ii) the
one
-year anniversary of the opening of the Casino, Kien Huat has agreed not to take certain actions with respect to the Company. In particular, during such time period, Kien Huat has agreed not to, and to cause the Kien Huat Parties not to, take certain actions in furtherance of a “going-private” transaction (as such term is defined in the Kien Huat Letter Agreement) involving the Company unless such transaction is subject to the approval of (x) holders of a majority of the votes represented by the common stock, Series B Preferred Stock and any other capital stock of the Company entitled to vote together with the common stock in the election of the Board (other than any such capital stock owned by any Kien Huat Parties) and (x) either (A) a majority of disinterested members of the Board or (y) a committee of the Board composed of disinterested members of the Board. In addition, during such period, the Company and Kien Huat have agreed to cooperate to ensure that, to the greatest extent possible, the Board includes no fewer than
three
independent directors (the definition of independence as determined under the standards of The Nasdaq Stock Market or any other securities exchange on which the common stock of the Company is then listed).
On December 28, 2017, the Company and Kien Huat amended the Kien Huat Letter Agreement to extend by one year Kien Huat’s obligation not to engage in a going-private transaction with the Company without the prior approval of the majority of the Company’s minority shareholders and a majority of the disinterested directors of the Company. As a result of the amendment, such restriction now covers a period ending on February 8, 2020. Other than this one-year extension, all other terms of the Kien Huat Letter Agreement remain unchanged.
2015 Kien Huat Commitment Letter
To support the Company's financing needs for the Development Projects, Kien Huat entered into a series of commitment letters with the Company, which was last amended on September 22, 2015 (as amended, the "2015 Kien Huat Commitment Letter"). Pursuant to the 2015 Kien Huat Commitment Letter, Kien Huat committed to an equity investment in the Company in the aggregate amount of
$375 million
in support of the Development Projects, the redemption of the Series E Preferred Stock and for working capital purposes. Kien Huat invested an aggregate of
$340 million
of such commitment pursuant to the standby purchase agreements relating to rights offerings conducted by the Company in 2015 and 2016. Kien Huat also agreed to participate in, and backstop, a follow-on rights offering on the same terms and conditions and at the same subscription price as the rights offering conducted by the Company in 2016, in an amount not to exceed
$35 million
(the "Follow-On Rights Offering").
In connection with the Kien Huat Note Exchange Agreement (as defined and discussed in Note H above), on December 28, 2017, the Company and Kien Huat further amended the 2015 Kien Huat Commitment Letter (the "2015 Kien Huat Commitment Amendment"). Pursuant to the 2015 Kien Huat Commitment Amendment, Kien Huat’s obligation to participate in, and backstop the Follow-On Rights Offering was terminated. Other than the termination of such follow-on standby purchase commitment, all other terms of the 2015 Kien Huat Commitment Letter remain unchanged.
Kien Huat Investment Agreement
On August 19, 2009, the Company entered into the 2009 Investment Agreement with Kien Huat, pursuant to which we issued
6,901,208
shares of common stock, representing just under
50%
of our voting power at the time. Under the terms of the 2009 Investment Agreement, Kien Huat is entitled to recommend three directors whom we are required to cause to be elected or appointed to our Board, subject to the satisfaction of all legal and governance requirements regarding service as a member of our Board and to the reasonable approval of the Governance Committee of the Board of Directors. In 2017, Kien Huat recommended Messrs. Pearlman, Eller and Lim for appointment to the Board of Directors pursuant to the 2009 Investment Agreement. Kien Huat will continue to be entitled to recommend three nominees for directors for so long as it owns at least
24%
of our voting power outstanding at such time, after which the number of directors whom Kien Huat will be entitled to designate for election or appointment to the Board of Directors will be reduced proportionally to Kien Huat’s percentage of ownership. Under the 2009 Investment Agreement, for so long as Kien Huat is entitled to designate nominees for directors to the Board, among other things, Kien Huat will have the right to nominate one of its nominees elected to serve as a director to serve as the Chairman of the Board, and Mr. Pearlman has been appointed to serve as Executive Chairman of the Board pursuant to Kien Huat’s recommendation. Until such time as Kien Huat ceases to own capital stock with at least
30%
of our voting power outstanding at such time, the Board of Directors will be prohibited under the terms of the 2009 Investment Agreement from taking certain actions relating to fundamental transactions involving us and our subsidiaries and certain other matters without the affirmative vote of the directors nominated by Kien Huat.
Registration Rights
Pursuant to the terms of the 2009 Investment Agreement, on August 19, 2009, the Company entered into a Registration Rights Agreement with the Kien Huat (the “Registration Rights Agreement”). The Registration Rights Agreement provides, among other things, that Kien Huat may require that the Company file one or more “resale” registration statements, registering under the Securities Act of 1933, as amended, the offer and sale of all of the common stock issued or to be issued to Kien Huat pursuant to the 2009 Investment Agreement as well as any shares acquired by way of a share dividend or share split or in connection with a combination of such shares, recapitalization, merger, consolidation or other reorganization with respect to such shares. In addition, pursuant to the 2015 Kien Huat Commitment Letter, the Company agreed to register for resale all of the shares of common stock held by Kien Huat. On February 23, 2016, the Company filed a registration statement on Form S-3 (No. 333-309662) (the "Resale Registration Statement") registering for resale all of the shares of common stock held by Kien Huat. On August 7, 2018, the Company filed a Request to Withdraw the Resale Registration Statement. No securities were sold under the Resale Registration Statement.
Note O. Commitments and Contingencies
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:
|
|
|
|
|
|
|
Year ending December 31,
|
Total Payments
|
|
|
(in thousands)
|
|
2019
|
$10,382
|
|
2020
|
9,026
|
|
|
2021
|
8,503
|
|
|
2022
|
8,400
|
|
|
2023
|
8,400
|
|
|
2024 to 2056
|
353,449
|
|
|
Total
|
$398,160
|
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 for the lease of the parcel on which the Casino is being 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 December 31, 2018:
|
|
|
|
|
|
|
Year ending December 31,
|
Fixed Rent Payments due by Period
|
|
|
(in thousands)
|
|
2019 (1)
|
$7,500
|
|
2020 (1)
|
7,500
|
|
|
2021 (1)
|
8,000
|
|
|
2022 (1)
|
8,100
|
|
|
2023 (1)
|
8,100
|
|
|
2024 to 2056 (1)
|
$338,424
|
|
|
|
|
(1)
|
From September 1, 2018 through the remainder of the term of the Casino Lease, fixed rent equals
$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 the 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 December 31, 2018:
|
|
|
|
|
|
|
Year ending December 31,
|
Fixed Rent Payments due by Period
|
|
|
(in thousands)
|
|
2019 (1) (2)
|
$63
|
|
2020 (2)
|
150
|
|
|
2021 (2)
|
150
|
|
|
2022 (2)
|
150
|
|
|
2023 (2)
|
150
|
|
|
2024 to 2056 (2) (3)
|
$7,483
|
|
|
|
|
(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 2019 (the “Golf Course Opening Date”), fixed rent payments is
$0
.
|
|
|
|
|
(2)
|
From the Golf Course Opening Date and continuing for the
10
years thereafter, fixed rent will equal
$150,000
per year.
|
|
|
|
|
(3)
|
From August 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.
The Alder Lease
On December 28, 2015, ERREII entered into a sublease (the “Alder Lease”) with the Destination Resort Developer, for the lease of the Alder Parcel. The terms of the Alder Lease are substantially similar to the Casino Lease, subject to the material differences described below. Under the Alder Lease, there is
no
percentage rent due.
The following table represents the future fixed rent payments under the Alder Lease at December 31, 2018:
|
|
|
|
|
|
|
Year ending December 31,
|
Fixed Rent Payments due by Period
|
|
|
(in thousands)
|
|
2019 (1) (2)
|
$150
|
|
2020 (2)
|
150
|
|
|
2021 (2)
|
150
|
|
|
2022 (2)
|
150
|
|
|
2023 (2)
|
150
|
|
|
2024 to 2056 (2) (3)
|
$7,542
|
|
|
|
|
(1)
|
From the date the Alder Lease commenced (the “Alder Lease Commencement Date”) and until the date on which The Alder opened for business, which was January 1, 2019 (the “Alder Opening Date”), fixed rent payments were
$0
.
|
|
|
|
|
(2)
|
From the Alder Opening Date and continuing for the
10
years thereafter, fixed rent will equal
$150,000
per year.
|
|
|
|
|
(3)
|
From January 2029 through the remainder of the term of the Alder Lease, fixed rent will equal
$250,000
per year.
|
The Alder Lease is a net lease and ERREII is obligated to pay the rent payable under the Alder Lease and other costs related to ERREII's use and operation of the Alder Parcel, including the special district tax assessments allocated to the Alder Parcel, not
to exceed the capped dollar amount applicable to the Alder Parcel. This obligation will not be assessed against ERREII prior to 60 months following the Alder Lease Commencement Date.
Purchase Option Agreement
On December 28, 2015, Montreign Operating and EPR entered into a Purchase Option Agreement (the “Purchase Option Agreement”), pursuant to which EPR granted to Montreign Operating the option (the “Purchase Option”) to purchase all, but not fewer than all, of the Development Project Parcels for a purchase price of
$175 million
, (
$200 million
after the sixth anniversary of the date the license was awarded, less a credit of up to
$25 million
for certain previous payments made by the Project Parties. The Purchase Option commenced on December 28, 2015 and will expire on the earlier to occur of (i) the natural expiration of the term of the Casino Lease and (ii)
90
days following the earlier termination of the Casino Lease, if otherwise terminated in accordance with its terms (the “Purchase Option Period”).
Under the Purchase Option Agreement, EPR also granted to Montreign Operating the option (the “Resort Project Purchase Option”) to purchase not less than all of the balance of the EPR Property, excluding the Development Project Parcels and the Waterpark (the “Resort Property”) for an additional fee. The Resort Project Purchase Option may be exercised only simultaneously with or after the exercise of the Purchase Option. The Resort Project Purchase Option commenced on December 28, 2015 and will expire on the earlier to occur of (a) the expiration of the Purchase Option Period or (b) March 1, 2026.
Under the Purchase Option Agreement, EPR also granted to Montreign a right of first offer (“ROFO”) with respect to all or any portion of the Resort Property. Under the terms of the ROFO, if EPR makes an offer to or rejects an offer made by Montreign Operating, then EPR will be precluded for a period of six months from transferring the designated portion of the Resort Property at a price and on terms which are on the whole substantially equivalent to or worse than those proposed or accepted by Montreign Operating. The ROFO commenced on December 28, 2015 and will continue in full force and effect until EPR has sold, leased, licensed or otherwise transferred all of the Resort Property.
Note P. Summarized Quarterly Data (Unaudited)
On March 12, 2019, the Company's management concluded that its previously filed interim consolidated financial statements as of and for the quarterly periods ended March 31, 2018, June 30, 2018 and September 30, 2018 (“Restated Quarters”) should no longer be relied upon.
For the year ended December 31, 2018, the Company reviewed certain technical accounting guidance during its year-end review process related to the accounting for stock granted and an associated guaranty obligation with MHHA in February 2018. Based on this review, the Company concluded that the previously recorded accounting treatment recorded in the first quarter of 2018 was not appropriate. As a result, the Company determined that the previously issued quarterly financial statements for the quarterly periods ending March 31, June 30, and September 30, 2018 should be restated to properly reflect the accounting for this transaction for these periods.
On November 1, 2014, MRMI, a wholly-owned subsidiary of Empire and the MHHA entered into an agreement that governs the conduct of MRMI and MHHA relating to horseracing purse payments, the simulcasting of horse races and certain other payments (the "2014 MHHA Agreement"). Pursuant to the 2014 MHHA Agreement and that certain Securities Acquisition Agreement, dated March 3, 2014, between Empire and MHHA (the “MHHA SAA”), on March 16, 2018, Empire issued to MHHA
200,000
shares of common stock (the "MHHA Shares"), and on March 15, 2018, Empire issued to MHHA a warrant to purchase
60,000
shares of common stock at
$81.50
per share (the “MHHA Warrants”). The funds generated from the sale of the MHHA Shares or the sale of any shares acquired by MHHA upon the exercise of the MHHA Warrants will be deposited into a purse account for the benefit of MHHA and its members. If, on February 8, 2025, the value of any MHHA Shares previously sold by MHHA and the fair market value of any MHHA Shares not sold by MHHA by February 8, 2025 is less than
$5.5 million
, then the Company agreed to deposit into the special purse account an amount equal to the difference between
$5.5 million
and the value of the shares of common stock sold by MHHA and not sold by MHHA.
Upon satisfaction of the conditions contained in the 2014 MHHA Agreement and the MHHA SPA, the Company issued the MHHA Shares and the MHHA Warrants on March 16, 2018 and March 15, 2018, respectively. On the date of issuance, the Company determined that the MHHA Shares had a fair value of
$4.7 million
, which had been recorded as a long-term asset, net of
$1.4 million
which was previously expensed through March 2018. In preparing its audited financial statements for the year ended December 31, 2018, the Audit Committee and management of the Company determined that based on further review of applicable technical accounting literature, the value of the MHHA Shares should be recognized as an expense upon issuance and the associated fair value of the guaranty liability of
$5.5 million
should be recognized as a liability-classified guaranty.
The restatement of the Company's consolidated financial statements for the Restated Quarters is set forth below in the tabular presentation.
The effect of the restatement to relevant financial line items included on the previously issued unaudited interim consolidated financial statements for the quarterly period ended March 31, 2018 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Balance Sheet
|
|
|
|
At March 31, 2018
|
|
|
|
|
|
As Reported
|
|
Adjustments
|
|
As Restated
|
|
Assets
|
|
|
|
($ in thousands)
|
|
|
|
Total current assets
|
|
$39,458
|
|
—
|
|
|
$39,458
|
|
Other assets
|
|
3,592
|
|
|
(3,358
|
)
|
|
234
|
|
|
Total assets
|
|
$818,552
|
|
$(3,358)
|
|
$815,194
|
|
Liabilities and Stockholders’ equity
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
Total current liabilities
|
|
$93,299
|
|
—
|
|
|
$93,299
|
|
Other long-term liabilities
|
|
7,905
|
|
|
1,964
|
|
|
9,869
|
|
|
Total liabilities
|
|
564,251
|
|
|
1,964
|
|
|
566,215
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
Accumulated deficit
|
|
(322,029
|
)
|
|
(5,322
|
)
|
|
(327,351
|
)
|
|
Total stockholders’ equity
|
|
254,301
|
|
|
(5,322
|
)
|
|
248,979
|
|
|
Total liabilities and stockholders’ equity
|
|
$818,552
|
|
$(3,358)
|
|
$815,194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statement of Operations and Comprehensive Loss
|
|
For the three months ended March 31, 2018
|
|
|
|
As Reported
|
|
Adjustments
|
|
As Restated
|
|
|
|
|
|
($ in thousands)
|
|
|
|
Net revenues:
|
|
$33,522
|
|
—
|
|
|
$33,522
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
8,084
|
|
|
5,097
|
|
|
13,181
|
|
|
Total costs and expenses
|
|
52,413
|
|
|
5,097
|
|
|
57,510
|
|
|
Loss from operations
|
|
(18,891
|
)
|
|
(5,097
|
)
|
|
(23,988
|
)
|
|
Other income (expense)
|
|
—
|
|
|
(225
|
)
|
|
(225
|
)
|
|
Loss before income taxes
|
|
(20,911
|
)
|
|
(5,322
|
)
|
|
(26,233
|
)
|
|
Net loss
|
|
(20,911
|
)
|
|
(5,322
|
)
|
|
(26,233
|
)
|
|
Net loss applicable to common stockholders
|
|
$(20,943)
|
|
$(5,322)
|
|
$(26,265)
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
|
|
|
|
|
Basic
|
|
32,538
|
|
|
—
|
|
|
32,538
|
|
|
Diluted
|
|
32,538
|
|
|
—
|
|
|
32,538
|
|
|
Loss per common share
|
|
|
|
|
|
|
|
Basic
|
|
$(0.64)
|
|
$(0.16)
|
|
$(0.81)
|
|
Diluted
|
|
$(0.64)
|
|
$(0.16)
|
|
$(0.81)
|
|
|
|
|
|
|
|
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
Net loss
|
|
$(20,911)
|
|
$(5,322)
|
|
$(26,233)
|
|
Unrealized income on Interest Rate Cap
|
|
115
|
|
|
—
|
|
|
115
|
|
|
Comprehensive loss
|
|
$(20,796)
|
|
$(5,322)
|
|
$(26,118)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statement of Cash Flows
|
For the three months ended March 31, 2018
|
|
|
As Reported
|
|
Adjustments
|
|
As Restated
|
|
|
|
|
($ in thousands)
|
|
|
|
Cash flows provided by (used in) operating activities:
|
|
|
|
|
|
|
Net loss
|
$(20,911)
|
|
$(5,322)
|
|
$(26,233)
|
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
Stock-based compensation
|
697
|
|
|
5,097
|
|
|
5,794
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
Accrued expenses and other liabilities
|
10,174
|
|
|
225
|
|
|
10,399
|
|
|
Net cash used in operating activities
|
1,866
|
|
|
—
|
|
|
1,866
|
|
|
Net cash used in investing activities
|
(1,201
|
)
|
|
—
|
|
|
(1,201
|
)
|
|
Cash flows provided by (used in) financing activities:
|
|
|
|
|
|
|
Net cash provided by financing activities
|
10,923
|
|
|
—
|
|
|
10,923
|
|
|
Net increase/(decrease) in cash, cash equivalents and restricted cash
|
11,588
|
|
|
—
|
|
|
11,588
|
|
|
Cash, cash equivalents and restricted cash, beginning of year
|
53,055
|
|
|
—
|
|
|
53,055
|
|
|
Cash, cash equivalents and restricted cash, end of year
|
$64,643
|
|
$—
|
|
$64,643
|
The effect of the restatement to relevant financial line items included on the previously issued unaudited interim consolidated financial statements for the quarterly period ended June 30, 2018 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Balance Sheet
|
|
|
|
At June 30, 2018
|
|
|
|
|
|
As Reported
|
|
Adjustments
|
|
As Restated
|
|
|
|
|
|
($ in thousands)
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
Total current assets
|
|
$29,828
|
|
—
|
|
|
$29,828
|
|
Other assets
|
|
3,471
|
|
|
(3,189
|
)
|
|
282
|
|
|
Total assets
|
|
$781,715
|
|
$(3,189)
|
|
$778,526
|
|
Liabilities and Stockholders’ equity
|
|
|
|
|
|
|
|
Total current liabilities
|
|
$93,817
|
|
—
|
|
|
$93,817
|
|
Other long-term liabilities
|
|
7,540
|
|
|
1,832
|
|
|
9,372
|
|
|
Total liabilities
|
|
564,101
|
|
|
1,832
|
|
|
565,933
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
|
|
Accumulated deficit
|
|
(359,357
|
)
|
|
(5,021
|
)
|
|
(364,378
|
)
|
|
Total stockholders’ equity
|
|
217,614
|
|
|
(5,021
|
)
|
|
212,593
|
|
|
Total liabilities and stockholders’ equity
|
|
$781,715
|
|
$(3,189)
|
|
$778,526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statement of Operations and Comprehensive Loss
|
|
For the three months ended June 30, 2018
|
|
|
|
As Reported
|
|
Adjustments
|
|
As Restated
|
|
|
|
|
|
($ in thousands)
|
|
|
|
Net revenues:
|
|
$49,136
|
|
—
|
|
|
$49,136
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
16,949
|
|
|
(169
|
)
|
|
16,780
|
|
|
Total costs and expenses
|
|
71,530
|
|
|
(169
|
)
|
|
71,361
|
|
|
Loss from operations
|
|
(22,394
|
)
|
|
169
|
|
|
(22,225
|
)
|
|
Other income (expense)
|
|
—
|
|
|
132
|
|
|
132
|
|
|
Loss before income taxes
|
|
(37,298
|
)
|
|
301
|
|
|
(36,997
|
)
|
|
Net loss
|
|
(37,298
|
)
|
|
301
|
|
|
(36,997
|
)
|
|
Net loss applicable to common stockholders
|
|
$(37,330)
|
|
$301
|
|
$(37,029)
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
|
|
|
|
|
Basic
|
|
32,663
|
|
|
—
|
|
|
32,663
|
|
|
Diluted
|
|
32,663
|
|
|
—
|
|
|
32,663
|
|
|
Loss per common share
|
|
|
|
|
|
|
|
Basic
|
|
$(1.14)
|
|
$0.01
|
|
$(1.13)
|
|
Diluted
|
|
$(1.14)
|
|
$0.01
|
|
$(1.13)
|
|
|
|
|
|
|
|
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
Net loss
|
|
$(37,298)
|
|
$301
|
|
$(36,997)
|
|
Unrealized income on Interest Rate Cap
|
|
72
|
|
|
—
|
|
|
72
|
|
|
Comprehensive loss
|
|
$(37,226)
|
|
$301
|
|
$(36,925)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statement of Operations and Comprehensive Loss
|
|
For the six months ended June 30, 2018
|
|
|
|
As Reported
|
|
Adjustments
|
|
As Restated
|
|
|
|
|
|
($ in thousands)
|
|
|
|
Net revenues:
|
|
$82,658
|
|
—
|
|
|
$82,658
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
25,033
|
|
|
4,928
|
|
|
29,961
|
|
|
Total costs and expenses
|
|
123,943
|
|
|
4,928
|
|
|
128,871
|
|
|
Loss from operations
|
|
(41,285
|
)
|
|
(4,928
|
)
|
|
(46,213
|
)
|
|
Other income (expense)
|
|
—
|
|
|
(93
|
)
|
|
(93
|
)
|
|
Loss before income taxes
|
|
(58,209
|
)
|
|
(5,021
|
)
|
|
(63,230
|
)
|
|
Net loss
|
|
(58,209
|
)
|
|
(5,021
|
)
|
|
(63,230
|
)
|
|
Net loss applicable to common stockholders
|
|
$(58,273)
|
|
$(5,021)
|
|
$(63,294)
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
|
|
|
|
|
Basic
|
|
32,601
|
|
|
—
|
|
|
32,601
|
|
|
Diluted
|
|
32,601
|
|
|
—
|
|
|
32,601
|
|
|
Loss per common share
|
|
|
|
|
|
|
|
Basic
|
|
$(1.79)
|
|
$(0.15)
|
|
$(1.94)
|
|
Diluted
|
|
$(1.79)
|
|
$(0.15)
|
|
$(1.94)
|
|
|
|
|
|
|
|
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
Net loss
|
|
$(58,209)
|
|
$(5,021)
|
|
$(63,230)
|
|
Unrealized income (loss) on Interest Rate Cap
|
|
$187
|
|
—
|
|
|
$187
|
|
Comprehensive loss
|
|
$(58,022)
|
|
$(5,021)
|
|
$(63,043)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statement of Cash Flows
|
For the six months ended June 30, 2018
|
|
|
As Reported
|
|
Adjustments
|
|
As Restated
|
|
|
|
|
($ in thousands)
|
|
|
|
Cash flows provided by (used in) operating activities:
|
|
|
|
|
|
|
Net loss
|
$(58,209)
|
|
$(5,021)
|
|
$(63,230)
|
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
Stock-based compensation
|
1,449
|
|
|
4,928
|
|
|
6,377
|
|
|
Accrued expenses and other liabilities
|
12,996
|
|
|
93
|
|
|
13,089
|
|
|
Net cash used in operating activities
|
(27,624
|
)
|
|
—
|
|
|
(27,624
|
)
|
|
Cash flows provided by (used in) investing activities:
|
|
|
|
|
|
|
Net cash used in investing activities
|
(1,257
|
)
|
|
—
|
|
|
(1,257
|
)
|
|
Cash flows provided by (used in) financing activities:
|
|
|
|
|
|
|
Net cash provided by financing activities
|
15,967
|
|
|
—
|
|
|
15,967
|
|
|
Net increase/(decrease) in cash, cash equivalents and restricted cash
|
(12,914
|
)
|
|
—
|
|
|
(12,914
|
)
|
|
Cash, cash equivalents and restricted cash, beginning of year
|
53,055
|
|
|
—
|
|
|
53,055
|
|
|
Cash, cash equivalents and restricted cash, end of year
|
$40,141
|
|
—
|
|
$40,141
|
The effect of the restatement to relevant financial line items included on the previously issued unaudited interim consolidated financial statements for the quarterly period ended September 30, 2018 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Balance Sheet
|
|
|
|
At September 30, 2018
|
|
|
|
|
|
As Reported
|
|
Adjustments
|
|
As Restated
|
|
|
|
|
|
($ in thousands)
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
Total current assets
|
|
$37,772
|
|
—
|
|
|
$37,772
|
|
Other assets
|
|
3,307
|
|
|
(3,020
|
)
|
|
287
|
|
|
Total assets
|
|
$831,332
|
|
$(3,020)
|
|
$828,312
|
|
Liabilities and Stockholders’ equity
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
Total current liabilities
|
|
$100,199
|
|
—
|
|
|
$100,199
|
|
Other long-term liabilities
|
|
7,555
|
|
|
2,177
|
|
|
9,732
|
|
|
Total liabilities
|
|
646,463
|
|
|
2,177
|
|
|
648,640
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
Accumulated deficit
|
|
(393,105
|
)
|
|
(5,197
|
)
|
|
(398,302
|
)
|
|
Total stockholders’ equity
|
|
184,869
|
|
|
(5,197
|
)
|
|
179,672
|
|
|
Total liabilities and stockholders’ equity
|
|
$831,332
|
|
$(3,020)
|
|
$828,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statement of Operations and Comprehensive Loss
|
Three months ended September 30, 2018
|
|
|
As Reported
|
|
Adjustments
|
|
As Restated
|
|
|
|
|
($ in thousands)
|
|
|
|
Net revenues:
|
$59,948
|
|
—
|
|
|
$59,948
|
|
Costs and expenses:
|
|
|
|
|
|
|
Selling, general and administrative
|
19,754
|
|
|
(169
|
)
|
|
19,585
|
|
|
Total costs and expenses
|
77,838
|
|
|
(169
|
)
|
|
77,669
|
|
|
Loss from operations
|
(17,890
|
)
|
|
169
|
|
|
(17,721
|
)
|
|
Other income (expense)
|
—
|
|
|
(345
|
)
|
|
(345
|
)
|
|
Loss before income taxes
|
(33,716
|
)
|
|
(176
|
)
|
|
(33,892
|
)
|
|
Net loss
|
(33,716
|
)
|
|
(176
|
)
|
|
(33,892
|
)
|
|
Net loss applicable to common stockholders
|
$(33,748)
|
|
$(176)
|
|
$(33,924)
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
|
|
|
|
Basic
|
32,689
|
|
|
—
|
|
|
32,689
|
|
|
Diluted
|
32,689
|
|
|
—
|
|
|
32,689
|
|
|
Loss per common share
|
|
|
|
|
|
|
Basic
|
$(1.03)
|
|
$(0.01)
|
|
$(1.04)
|
|
Diluted
|
$(1.03)
|
|
$(0.01)
|
|
$(1.04)
|
|
|
|
|
|
|
|
|
Comprehensive loss:
|
|
|
|
|
|
|
Net loss
|
$(33,716)
|
|
$(176)
|
|
$(33,892)
|
|
Unrealized income on Interest Rate Cap
|
39
|
|
|
—
|
|
|
39
|
|
|
Comprehensive loss
|
$
|
(33,677
|
)
|
|
$
|
(176
|
)
|
|
$
|
(33,853
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statement of Operations and Comprehensive Loss
|
Nine months ended September 30, 2018
|
|
|
|
As Reported
|
|
Adjustments
|
|
As Restated
|
|
|
|
|
|
($ in thousands)
|
|
|
|
|
Net revenues
|
$142,606
|
|
$0
|
|
$142,606
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
Selling, general and administrative
|
44,787
|
|
|
4,759
|
|
|
49,546
|
|
|
|
Total costs and expenses
|
201,781
|
|
|
4,759
|
|
|
206,540
|
|
|
|
Loss from operations
|
(59,175
|
)
|
|
(4,759
|
)
|
|
(63,934
|
)
|
|
|
Other income (expense)
|
—
|
|
|
(438
|
)
|
|
(438
|
)
|
|
|
Loss before income taxes
|
(91,925
|
)
|
|
(5,197
|
)
|
|
(97,122
|
)
|
|
|
Income tax benefit
|
—
|
|
|
—
|
|
|
—
|
|
|
|
Net loss
|
(91,925
|
)
|
|
(5,197
|
)
|
|
(97,122
|
)
|
|
|
Dividends on preferred stock
|
(96
|
)
|
|
—
|
|
|
(96
|
)
|
|
|
Net loss applicable to common stockholders
|
$(92,021)
|
|
$(5,197)
|
|
$(97,218)
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
|
|
|
|
|
Basic
|
32,653
|
|
|
—
|
|
|
32,653
|
|
|
|
Diluted
|
32,653
|
|
|
—
|
|
|
32,653
|
|
|
|
Loss per common share
|
|
|
|
|
|
|
|
Basic
|
$(2.82)
|
|
$(0.16)
|
|
$(2.98)
|
|
|
Diluted
|
$(2.82)
|
|
$(0.16)
|
|
$(2.98)
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
Net loss
|
$(91,925)
|
|
$(5,197)
|
|
$(97,122)
|
|
|
Unrealized income on Interest Rate Cap
|
226
|
|
|
—
|
|
|
226
|
|
|
|
Comprehensive loss
|
$
|
(91,699
|
)
|
|
$
|
(5,197
|
)
|
|
$
|
(96,896
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statement of Cash Flows
|
For the nine months ended September 30, 2018
|
|
|
As Reported
|
|
Adjustments
|
|
As Restated
|
|
|
|
|
($ in thousands)
|
|
|
|
Cash flows provided by (used in) operating activities:
|
|
|
|
|
|
|
Net loss
|
$(91,925)
|
|
$(5,197)
|
|
$(97,122)
|
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
Stock-based compensation
|
2,042
|
|
|
4,759
|
|
|
6,801
|
|
|
Accrued expenses and other liabilities
|
26,087
|
|
|
438
|
|
|
26,525
|
|
|
Net cash used in operating activities
|
(42,335
|
)
|
|
—
|
|
|
(42,335
|
)
|
|
Cash flows provided by (used in) investing activities:
|
|
|
|
|
|
|
Net cash used in investing activities
|
(20,252
|
)
|
|
—
|
|
|
(20,252
|
)
|
|
Cash flows provided by (used in) financing activities:
|
|
|
|
|
|
|
Net cash provided by financing activities
|
92,602
|
|
|
—
|
|
|
92,602
|
|
|
Net increase/(decrease) in cash, cash equivalents and restricted cash
|
30,015
|
|
|
—
|
|
|
30,015
|
|
|
Cash, cash equivalents and restricted cash, beginning of year
|
53,055
|
|
|
—
|
|
|
53,055
|
|
|
Cash, cash equivalents and restricted cash, end of year
|
$83,070
|
|
$—
|
|
$83,070
|
The following table summarizes the quarterly results of operations for the year ended December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarter
|
|
|
|
Quarter 1
|
|
Quarter 2
|
|
Quarter 3
|
|
Quarter 4
|
|
2017
|
|
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$14,769
|
|
$17,186
|
|
$18,713
|
|
$15,183
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
(6,356
|
)
|
|
(6,830
|
)
|
|
(6,844
|
)
|
|
(9,887
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
(11,451
|
)
|
|
(11,916
|
)
|
|
(10,872
|
)
|
|
(12,105
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share, basic
|
|
$(0.37)
|
|
$(0.39)
|
|
$(0.35)
|
|
$(0.39)
|
|
Loss per common share, diluted
|
|
$(0.37)
|
|
$(0.39)
|
|
$(0.35)
|
|
$(0.39)
|
|
|
|
|
|
|
|
|
|
|
Note Q. Subsequent Events
MRMI Operations
On January 22, 2019, management of the Company notified employees of MRMI concerning the Company’s plans to cease VGM operations and food and beverage service at Monticello Casino and Raceway. The Company anticipates operations to cease on or about April 23, 2019.
Series F Preferred Stock Subscription
On February 20, 2019, pursuant to the KH 2018 Preferred Stock Commitment Letter, the Company and Kien Huat entered into a subscription agreement, pursuant to which Kien Huat purchased
200
shares of Series F Preferred Stock for an consideration of $
20 million
and net proceeds to the Company (after deducting a
$200,000
funding fee due to Kien Huat) of
$19.8 million
.
2019 Moelis Letter Agreement
On February 15, 2019, the Company and Moelis entered into a letter agreement (the “2019 Moelis Letter Agreement”), pursuant to which Moelis will act as the Company’s financial advisor to review and analyze the Company's historical results, financial projections and business plan, conduct a business and financial analysis of the Company's prospective online gaming and sports betting business, and evaluate the capital structure of the Company and/or its subsidiaries. Pursuant to the 2019 Moelis Letter Agreement, we paid Moelis a general advisory fee of approximately
$350,000
upon execution of the agreement.