UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

FORM 10-Q

 

 

 

For the quarterly period ended March 31, 2020

OR

 

 

For the transition period from                     to

Commission file number 033-80655

 

 

MOHEGAN TRIBAL GAMING AUTHORITY

(Exact name of registrant as specified in its charter)

 

 

 

(860) 862-8000

(Registrant’s telephone number, including area code)

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☐    No  ☒*

* The registrant is a voluntary filer of reports required to be filed by certain companies under Sections 13 or 15(d) of the Securities Exchange Act of 1934. Upon filing this report, the registrant will have filed all reports that would have been required during the preceding 12 months had it been subject to such filing requirements.

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ☐    No  ☒

 

 

 

 

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EXPLANATORY NOTE

The registrant relied on the Securities and Exchange Commission’s Order under Section 36 of the Securities Exchange Act of 1934, as amended, Modifying Exemptions From the Reporting and Proxy Delivery Requirements for Public Companies dated March 25, 2020 (Release No. 34-88465) (the “Order”) to delay the filing of this Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020 (“Form 10-Q”) due to circumstances related to COVID-19. The duration and severity of the COVID-19 pandemic has impacted the registrant's operations, and disruptions and changes to the registrant’s business caused by COVID-19 have required the performance of additional analyses relating to COVID-19’s potential impact on the registrant’s condensed consolidated financial statements, including impairment of intangible assets and other analyses. In addition, suspension of in-person operations by the registrant’s internal team and its professional advisors whose input is required to complete the Form 10-Q, as well as reduced staffing by the registrant, all as a result of the COVID-19 pandemic, have limited support from the registrant’s remaining staff and its professional advisors. All of these disruptions, in turn, delayed the registrant’s ability to complete the procedures and analyses necessary for filing the Form 10-Q without unreasonable effort and expense. In order to be compliant with the Order, the registrant would have been required to file this Form 10-Q on or before June 29, 2020. For substantially the same reasons described above, the registrant was unable to file this Form 10-Q without unreasonable effort and expense, on or before such date.

 

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MOHEGAN TRIBAL GAMING AUTHORITY

INDEX TO FORM 10-Q

 

 

 

 

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

 

MOHEGAN TRIBAL GAMING AUTHORITY

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands) (unaudited)

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

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MOHEGAN TRIBAL GAMING AUTHORITY

CONDENSED CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS

(in thousands) (unaudited)

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

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MOHEGAN TRIBAL GAMING AUTHORITY

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN CAPITAL

(in thousands) (unaudited)

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

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MOHEGAN TRIBAL GAMING AUTHORITY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands) (unaudited)

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

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MOHEGAN TRIBAL GAMING AUTHORITY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

NOTE 1—ORGANIZATION AND BASIS OF PRESENTATION:

Organization

The Mohegan Tribe of Indians of Connecticut (the “Mohegan Tribe”) established the Mohegan Tribal Gaming Authority in July 1995 with the exclusive authority to conduct and regulate gaming activities for the Mohegan Tribe on tribal lands and the non-exclusive authority to conduct such activities elsewhere. The Mohegan Tribe is a sovereign Indian nation with independent legal jurisdiction over its people and land. Like other sovereign governments, the Mohegan Tribe and its entities, including the Mohegan Tribal Gaming Authority, are generally not subject to federal, state or local income taxes. However, MGE Niagara Entertainment Inc. (“MGE Niagara”), a wholly-owned subsidiary, is subject to tax in Ontario, Canada, and certain non-tribal entities are subject to state or local income taxes in the United States. The Mohegan Tribal Gaming Authority d/b/a Mohegan Gaming & Entertainment (the “Company”) is primarily engaged in the ownership, operation and development of integrated entertainment facilities both domestically and internationally, including Mohegan Sun, a gaming and entertainment complex located on an approximately 196-acre site in Uncasville, Connecticut, and Mohegan Sun Pocono, a gaming and entertainment facility located on an approximately 400-acre site in Plains Township, Pennsylvania.

In September 2018, MGE Niagara was selected by the Ontario Lottery and Gaming Corporation (the “OLG”) to be the service provider for the Niagara Fallsview Casino Resort, Casino Niagara and the 5,000-seat Niagara Falls Entertainment Centre, all in Niagara Falls, Canada (collectively, the “MGE Niagara Resorts”). On June 11, 2019 (the “Closing Date”), MGE Niagara completed the acquisition of the MGE Niagara Resorts (the “Acquisition”) and assumed the day-to-day operations of the properties under the terms of a 21-year Casino Operating and Services Agreement (the “COSA”) with the OLG.

The Company also (i) owns 100% of Salishan-Mohegan, LLC (“Salishan-Mohegan”), which developed and currently manages ilani Casino Resort in Clark County, Washington, a gaming and entertainment facility owned by the federally-recognized Cowlitz Indian Tribe and the Cowlitz Tribal Gaming Authority, (ii) holds the development rights to any future development at ilani Casino Resort through Salishan-Mohegan Development Company, LLC, a majority-owned subsidiary of Salishan-Mohegan, (iii) manages Resorts Casino Hotel in Atlantic City, New Jersey and owns 10% of the casino’s holding company and its subsidiaries, including those conducting or licensing online gaming and retail sports wagering in New Jersey, (iv) manages Paragon Casino Resort in Marksville, Louisiana and (v) owns 100% of Inspire Integrated Resort Co., Ltd. and MGA Korea, LLC, which were formed to develop and construct an integrated resort and casino project to be located adjacent to the Incheon International Airport in South Korea.

Impact of the COVID-19 Pandemic and Company Response

In March 2020, the World Health Organization declared the outbreak of COVID-19 a global pandemic and the United States federal government declared it a national emergency. The spread of COVID-19 has affected most segments of the global economy, including the Company’s operations. On March 18, 2020, the Company announced the temporary suspension of operations at its North American owned, operated and managed properties to ensure the health and safety of its employees, guests and the surrounding communities in which the Company operates, consistent with directives from various government bodies. As of March 31, 2020, these properties remained closed.

The following properties subsequently reopened as follows: (i) Paragon Casino Resort on May 20, 2020, (ii) ilani Casino Resort on May 28, 2020, (iii) Mohegan Sun on June 1, 2020, (iv) Mohegan Sun Pocono on June 22, 2020 and (v) Resorts Casino Hotel on July 2, 2020. As of the date of the filing of this Quarterly Report on Form 10-Q, the MGE Niagara Resorts remain temporarily closed. Like other integrated resort operators, these business disruptions have had a material adverse impact on the Company’s financial condition, results of operations and cash flows.

 

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MOHEGAN TRIBAL GAMING AUTHORITY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

While some of the Company's properties have reopened, it cannot predict when its remaining closed properties will be able to reopen or the conditions upon which additional reopenings may occur. In addition, while the Company has experienced some level of continued business disruption since the reopening of its properties, it expects this disruption to gradually dissipate, and remains confident in its ability to mitigate the impact of any such disruption through expense management. The impact of COVID-19 on the Company's operations through the date of the filing of this Quarterly Report on Form 10-Q has been significant, though the full extent of the impact will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of COVID-19 or a resurgence, the manner in which the Company’s guests, suppliers and other third parties respond to COVID-19, including perception of safety and health measures taken by the Company, new information which may emerge concerning its severity and the actions to contain it or treat its impact, as well as general economic conditions and consumer confidence. Accordingly, the Company cannot reasonably estimate the extent to which COVID-19 will further impact its future financial condition, results of operations and cash flows.

In response to COVID-19, the Company completed a series of transactions to ensure maximum financial flexibility, including (i) on March 13, 2020, it drew the remaining balance of its senior secured revolving credit facility, in the amount of approximately $125 million and (ii) on August 28, 2020, it entered into an amendment to its Senior Secured Credit Facilities which, among other things, waived non-compliance with certain of its financial covenants through June 30, 2020 and modified the financial covenants applicable to periods subsequent to June 30, 2020 (refer to Note 8).

The Company also took various actions to reduce costs in an effort to mitigate the operating and financial impact of COVID-19, including (i) furloughing approximately 98% of its workforce immediately following the closure of its properties, of which approximately 50% remain furloughed as of the date of the filing of this Quarterly Report on Form 10-Q; (ii) enacting meaningful compensation reductions to its remaining property and corporate personnel, including executive leadership, during the closure period; (iii) obtaining relief from certain threshold payments otherwise due to the OLG for the duration of the closure of the MGE Niagara Resorts, to be followed by a phased-in approach to such payments thereafter; (iv) obtaining a three month forbearance of gaming tax payments due to Connecticut and Pennsylvania; (v) deferring rental payments due under certain of MGE Niagara's lease agreements; and (vi) executing other substantial reductions in operating expenses, capital expenditures and overall costs.

The Company could experience other potential adverse impacts as a result of COVID-19, including, but not limited to, charges from further adjustments to the carrying value of its intangible assets, as well as other long-lived asset impairment charges. Actual results may differ materially from the Company’s current estimates as the scope of COVID-19 evolves, depending largely, but not exclusively, on the duration and extent of the Company’s business disruptions.

If the Company is unable to (i) execute its business plan (ii) sufficiently offset declines in revenues with appropriate cost reductions or (iii) execute certain cost containment initiatives, it may not have sufficient liquidity to meet its existing debt obligations, distributions to the Mohegan Tribe, capital expenditures and working capital requirements. In addition, the Company may not be able to satisfy its financial covenants under the senior secured credit facilities. In such event, the Company would need to seek additional sources of liquidity and obtain waivers or amendments under the senior secured credit facilities; however, it can provide no assurance that it would be able to obtain such liquidity and waivers or amendments. If the Company is unable to obtain such liquidity and waivers or amendments, it would be in default under the senior secured credit facilities, which may result in cross-defaults under its other outstanding indebtedness. If such defaults or cross-defaults were to occur, it would allow the Company's lenders to exercise their rights and remedies as defined under their respective agreements, including their right to accelerate the repayment of outstanding indebtedness. If such acceleration were to occur, the Company can provide no assurance that it would be able to obtain the financing necessary to repay such accelerated indebtedness.

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MOHEGAN TRIBAL GAMING AUTHORITY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information and with instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In accordance with Rule 10-01, the accompanying unaudited condensed consolidated financial statements do not include all of the information and footnotes required by US GAAP for complete consolidated financial statements. The accompanying year-end condensed consolidated balance sheet was derived from audited financial statements, but does not include all disclosures required by US GAAP. All adjustments, including normal recurring accruals and adjustments, necessary for a fair statement of the Company's operating results for the interim period, have been included.

The Company’s results for the three months and six months ended March 31, 2020 are not indicative of operating results expected for the entire fiscal year, particularly given the impact of COVID-19 as discussed above.

The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2019. The preparation of financial statements in conformity with US GAAP requires the Company to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses and related disclosures of contingent assets and liabilities.

Revenue Disaggregation

The Company is primarily engaged in the ownership, operation and development of integrated entertainment facilities both domestically and internationally. The Company’s current wholly-owned operations are focused within Connecticut and Pennsylvania. The Company also currently manages other gaming facilities elsewhere within the United States and Canada. The Company generates revenues by providing the following types of goods and services: gaming, food and beverage, hotel, retail, entertainment and other and management and development.

Revenue disaggregation by geographic location and revenue type for the three months ended March 31, 2020 was as follows (in thousands):

 

 

Revenue disaggregation by geographic location and revenue type for the three months ended March 31, 2019 was as follows (in thousands):

 

 

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MOHEGAN TRIBAL GAMING AUTHORITY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

Revenue disaggregation by geographic location and revenue type for the six months ended March 31, 2020 was as follows (in thousands):

 

 

Revenue disaggregation by geographic location and revenue type for the six months ended March 31, 2019 was as follows (in thousands):

 

 

Contract and Contract-related Assets

As of March 31, 2020 and September 30, 2019, contract assets related to the COSA totaled $121.0 million and $53.2 million, respectively.

Contract and Contract-related Liabilities

A difference may exist between the timing of cash receipts from patrons and the recognition of revenues, resulting in a contract or contract-related liability. In general, the Company has three types of such liabilities: (1) outstanding gaming chips and slot tickets liability, which represents amounts owed in exchange for outstanding gaming chips and slot tickets held by patrons; (2) loyalty points deferred revenue liability and (3) patron advances and other liability, which primarily represents funds deposited in advance by patrons for gaming and advance payments by patrons for goods and services such as advance ticket sales, deposits on rooms and convention space and gift card purchases. These liabilities are generally expected to be recognized as revenues within one year and are recorded within other current liabilities.

The following table summarizes these liabilities (in thousands):

 

 

As of March 31, 2020 and September 30, 2019, customer contract liabilities related to Mohegan Sun Pocono's revenue sharing agreement with Unibet Interactive Inc. totaled $17.4 million and $18.0 million, respectively, and were primarily recorded within other long-term liabilities.

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MOHEGAN TRIBAL GAMING AUTHORITY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

Other Intangible Assets

Other intangible assets consist primarily of Mohegan Sun's trademark and Mohegan Sun Pocono's various gaming licenses. These intangible assets all have indefinite lives. Intangible assets with indefinite lives are assessed at least annually for impairment by comparing their fair value to their carrying value. However, these intangible assets may be assessed more frequently for impairment if events or changes in circumstances, such as declines in revenues, earnings and cash flows, or material adverse changes in business climate, indicate that their carrying value may be impaired.

During the second quarter of its fiscal 2020, the Company identified an indicator of impairment on Mohegan Sun Pocono's intangible assets due to COVID-19. As a result, the Company revised its cash flow projections to reflect the current business climate, including the uncertainty surrounding the nature, timing and extent of reopening Mohegan Sun Pocono. The estimated fair value of these intangible assets was determined by using discounted cash flow models, which utilized Level 3 inputs. The primary unobservable input utilized in estimating the fair value of these intangible assets was the discount rate, which was 10.5%. As a result of this interim assessment, the Company recorded an impairment charge related to Mohegan Sun Pocono’s intangible assets of $126.6 million in the second quarter of its fiscal 2020.

The evaluation of intangible assets for impairment requires the use of estimates about future cash flows. Such estimates are, by their nature, subjective. Actual results may differ materially from the Company’s estimates and could result in impairment charges in the future.

Other intangible assets, net, consisted of the following (in thousands):

 

 

Fair Value of Financial Instruments

The Company applies the following fair value hierarchy, which prioritizes the inputs utilized to measure fair value into three levels:

The Company's assessment of the significance of a particular input requires judgment and may affect the valuation of financial assets and liabilities and their placement within the fair value hierarchy.

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MOHEGAN TRIBAL GAMING AUTHORITY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

The carrying amount of cash and cash equivalents, restricted cash and cash equivalents, receivables and trade payables approximates fair value. The estimated fair values of the Company's long-term debt were as follows (in thousands):

 

 

Earth Hotel Tower

On January 21, 2020, the Company, through a wholly-owned subsidiary, purchased a 45% interest in Mohegan Hotel Holding, LLC, the indirect owner of the Earth Hotel Tower, in exchange for $15.8 million, which the Company believes represented the fair market value of the investment. A portion of the consideration paid, totaling $5.0 million, was advanced to Mohegan Hotel Holding, LLC in fiscal 2019.

NOTE 2—NEW ACCOUNTING STANDARDS:

The following accounting standard was adopted during the three months and six months ended March 31, 2020:

ASU 2016-02

In February 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”), which requires, among other things, lessees to recognize a right-of-use (“ROU”) asset and a lease liability for leases with terms in excess of 12 months and the disclosure of information about leasing arrangements. In July 2018, the FASB issued ASU No. 2018-11, “Leases (Topic 842): Targeted Improvements” and ASU No. 2018-10, “Codification Improvements to Topic 842, Leases”, which clarify various aspects of ASU 2016-02.

Effective October 1, 2019, the Company adopted ASU 2016-02 under a modified retrospective transition approach. Accordingly, comparative information as of September 30, 2019 and for the three months and six months ended March 31, 2019 has not been restated and continues to be reported under accounting standards in effect for those periods. The Company elected the package of practical expedients included in ASU 2016-02, which allowed it to: (i) not reassess whether any expired or existing contracts contain leases, (ii) not reassess the lease classification for any expired or existing leases and (iii) not reassess the initial direct costs for existing leases. The Company also made an accounting policy election to not recognize leases with an initial term of 12 months or less on its balance sheet. In addition, the Company elected to not separate lease and non-lease components for all significant classes of underlying assets for which the Company is the lessee. For instances in which the Company is the lessor, and the class of underlying asset represents retail space, the Company accounts for both the lease and non-lease components as a single lease component. In all other instances, non-lease components are accounted for separately in accordance with applicable guidance, most commonly ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”.

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MOHEGAN TRIBAL GAMING AUTHORITY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

As of October 1, 2019, the adoption of ASU 2016-02 resulted in the recognition of ROU operating lease assets of  $359.2 million and related ROU operating lease liabilities of $366.8 million, as well as the derecognition of a previously recognized build-to-suit asset and related liability of $90.3 million. The difference between the ROU operating lease assets and liabilities reflects the reclassification of historical prepaid and deferred rent balances. The adoption of ASU 2016-02 did not impact the Company's retained earnings or the Company’s compliance with its financial covenants under its current debt agreements.

The following accounting standards will be adopted in future reporting periods:

ASU 2016-13

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurements of Credit Losses on Financial Instruments” (“ASU 2016-13”), which sets forth a current expected credit loss model which requires a company to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable supportable forecasts. This model replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost and applies to some off-balance sheet credit exposures. ASU 2016-13 is effective for annual reporting periods beginning after December 15, 2019, including interim periods within those annual reporting periods, and must be applied through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The Company is currently evaluating the impact ASU 2016-13 will have on its financial statements, but does not expect its adoption to have a material impact.

ASU 2018-13

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”), which adds, amends and removes certain disclosure requirements related to fair value measurements. ASU 2018-13 requires enhanced disclosures on valuation techniques and inputs that a reporting entity uses to determine its measures of fair value, including judgments and assumptions that the entity makes and the uncertainties in the fair value measurements as of the reporting date. ASU 2018-13 is effective for annual reporting periods beginning after December 15, 2019. Certain amended or eliminated disclosure requirements may be adopted earlier, while certain additional disclosure requirements can be adopted on its effective date. In addition, certain changes required by this new standard require retrospective adoption, while other changes must be adopted prospectively. The Company is currently evaluating the impact ASU 2018-13 will have on its financial statement disclosures.

ASU 2019-12

In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” (“ASU 2019-12”), which simplifies various aspects related to the accounting for income taxes. This new standard removes certain exceptions to the general principles in ASU 2019-12 and clarifies and amends existing guidance to improve consistent application. ASU 2019-12 is effective for annual reporting periods beginning after December 15, 2020. The Company is currently evaluating the impact ASU 2019-12 will have on its financial statements, but does not expect its adoption to have a material impact.

NOTE 3—LEASES:

The Company determines if a contract is, or contains, a lease at its inception or at the time of any modification. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Control over the use of the identified asset requires that the lessee has both: (i) the right to obtain substantially all of the economic benefits from the use of the asset and (ii) the right to direct the use of the asset.

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MOHEGAN TRIBAL GAMING AUTHORITY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

ROU operating and finance lease assets and liabilities are recognized on the respective lease commencement date based on the present value of future lease payments over the expected lease term. An expected lease term includes any option to extend or terminate the lease if it is reasonably certain that the Company will exercise such option. The Company utilizes the incremental borrowing rate (“IBR”) applicable to the lease as determined at the lease commencement date to calculate the present value of future lease payments. The applicable IBR is determined based on the treasury group to which the leasing entity belongs and that group’s estimated interest rate for collateralized borrowings over a similar term as the future lease payments. Upon adoption of ASU 2016-02, the Company utilized IBRs as of October 1, 2019 to determine the present value of the remaining lease payments for operating leases that commenced prior to that date. Operating lease expense for fixed lease payments is recognized on a straight-line basis over the expected lease term. ROU finance lease assets are recorded within property and equipment, net and are amortized on a straight-line basis over the related lease term. As of March 31, 2020, ROU finance lease assets totaled $28.7 million.

Lessee

The Company leases real estate and equipment under various operating and finance lease agreements. Lease terms range from approximately one month to 50 years and do not contain any material residual value guarantees or restrictive covenants. Rental payments under these lease agreements are fixed and/or variable based on periodic adjustments for inflation, performance, usage or appraised land values. Variable components of lease payments are not included in the calculation of ROU assets and liabilities.

The Company’s lease arrangements contain both lease and non-lease components. For instances in which the Company is a lessee, the Company accounts for both lease and non-lease components as a single lease component for substantially all classes of underlying assets (primarily real estate and equipment). Leases with an expected or initial term of 12 months or less are not recorded on the Company’s balance sheet and the related lease expenses are recognized on a straight-line basis over the expected lease term.

Information related to weighted average lease terms and discount rates is as follows:

 

 

The components of lease expense are as follows (in thousands):

 

 

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MOHEGAN TRIBAL GAMING AUTHORITY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

Supplemental cash flow information related to lease liabilities is as follows (in thousands):

 

 

Maturities of ROU lease obligations are as follows (in thousands):

 

 

In connection with the acquisition of the MGE Niagara Resorts, the Company committed to enter into a lease agreement with a third-party to lease the Niagara Falls Entertainment Centre following the completion of its construction. Prior to the adoption of ASU 2016-02, the Company was deemed, for accounting purposes only, to be the owner of this construction project, despite not being the legal owner. Accordingly, the Company capitalized $90.3 million as of September 30, 2019 as a build-to-suit asset within property and equipment, net and recorded a corresponding build-to-suit liability. In connection with the adoption of ASU 2016-02, the Company derecognized the build-to-suit asset and liability in their entirety.

Lessor

The Company leases space at its facilities to third parties. Lease terms for these non-cancelable operating leases range from approximately one month to 17 years. Rental income under these lease agreements is fixed and/or variable based on percentage of tenant sales or periodic adjustments for inflation. Rental income is recorded within hotel and retail, entertainment and other revenues. For instances in which the Company is the lessor, and the class of underlying asset represents retail space, the Company accounts for both the lease and non-lease components, such as common area maintenance and tenant services, as a single lease component. In all other instances, non-lease components are accounted for separately in accordance with applicable guidance, most commonly ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”.

Lease income consists of the following (in thousands):

 

 

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MOHEGAN TRIBAL GAMING AUTHORITY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

Future fixed rental income that the Company expects to earn under non-cancelable operating leases, exclusive of amounts under contingent escalated rent clauses, is as follows (in thousands):

 

 

The portions of Mohegan Sun, including the Sky Hotel Tower and the Earth Expo & Convention Center, and Mohegan Sun Pocono that are leased to third parties under operating leases are recorded within property and equipment, net as follows (in thousands):

 

 

As of September 30, 2019, information pertaining to the Company’s leases, as accounted for under prior accounting standards, was as follows:

Capital Leases

Minimum future capital lease payments were as follows (in thousands):

 

 

Operating Leases

Minimum future rental income that the Company expected to earn under non-cancelable leases was as follows (in thousands):

 

 

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MOHEGAN TRIBAL GAMING AUTHORITY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

Minimum future rental payments that the Company expected to incur under non-cancelable leases and subleases was as follows (in thousands):

 

 

NOTE 4—MGE NIAGARA RESORTS:

In September 2018, MGE Niagara was selected by the OLG to be the service provider for the MGE Niagara Resorts. Following its selection, MGE Niagara entered into a Transition and Asset Purchase Agreement with the OLG and the Ontario Gaming Assets Corporation. Pursuant to the terms of this agreement, MGE Niagara agreed to acquire certain assets associated with the MGE Niagara Resorts and to perform certain transition activities in order to facilitate the transition of the operational responsibilities from the previous operator to MGE Niagara.

On the Closing Date, MGE Niagara completed the Acquisition, assumed the day-to-day operations of the properties under the terms of the COSA and engaged in a series of transactions related thereto, including: (i) a lease agreement with the OLG to lease the Fallsview Casino Resort and related administrative office space, (ii) a lease agreement with a third-party investor to lease Casino Niagara and related license agreements to operate an adjacent parking lot and the right for patrons to use an adjacent parking garage and (iii) a commitment to enter into a lease agreement with a third-party to lease the Niagara Falls Entertainment Centre on a date after the completion of its construction, which occurred on June 5, 2020.

As of the Closing Date, the purchase price of the Acquisition was approximately 96 million Canadian dollars (approximately $72 million), net of cash acquired of approximately 57 million Canadian dollars (approximately $43 million). During the six months ended March 31, 2020, the Company recorded adjustments to the purchase price of the Acquisition totaling 2.2 million Canadian dollars ($1.7 million), net of cash acquired of approximately 518,000 Canadian dollars (approximately $390,000).

The below unaudited pro forma financial information was prepared as if the Acquisition, the financing to fund the Acquisition and the lease transactions had occurred on October 1, 2018. Unaudited pro forma financial information does not necessarily represent results that may occur in the future. The following unaudited pro forma financial information includes historical financial results of the MGE Niagara Resorts prior to the Acquisition, adjusted to include the Company's share of revenues earned under the COSA which are recorded on a net basis, along with other adjustments directly attributable to the Acquisition, including interest expense and depreciation (in thousands, unaudited):

 

 

As a result of the temporary suspension of operations that stemmed from Regulation 82/20, the Emergency Management and Civil Protection Act mandated the closure of all places of non-essential business in Ontario. In collaboration with the OLG, the following has been temporarily agreed to for a defined period, subject to further extension(s) on mutual agreement: (i) the continuation of the service provider base fixed fee payments as required by the COSA and (ii) the temporary suspension of the payment of the portion of gaming revenues that represents the threshold, such that threshold payments do not apply during the casino closure period while there are no gaming revenues. MGE Niagara has also agreed with the OLG to work on a graduated and commercially reasonable phase-in of threshold payments to accommodate the extended business ramp

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MOHEGAN TRIBAL GAMING AUTHORITY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

up periods once health concerns are curtailed and approvals are obtained to reopen the MGE Niagara Resorts. In addition, in collaboration and cooperation with the OLG, MGE Niagara will work on a casino restart plan to effect the safe, orderly, efficient and commercially reasonable restart of the MGE Niagara Resorts’ operations at the end of the extended casino closure periods. Additionally, MGE Niagara was granted a deferral of rental payments due under certain of its lease agreements.

NOTE 5—LONG-TERM DEBT:

Long-term debt consisted of the following (in thousands):

 

 

Senior Secured Credit Facilities - Non-cash Transactions

On March 31, 2020 and 2019, the bank that administers the Company's debt service payments for its Senior Secured Credit Facilities made required principal payments on behalf of the Company totaling $10.5 million and $13.3 million, respectively, but did not accordingly debit the Company's bank account for these payments. As of March 31, 2020 and 2019, the Company reflected these non-cash transactions as reductions to current portion of long-term debt and corresponding increases to other current liabilities. On the respective following banking days, the bank withdrew the payments from the Company's bank account, resulting in reductions to the Company's cash and cash equivalents and other current liabilities.

Debt Covenant Compliance

On August 28, 2020, the Company entered into an amendment to its Senior Secured Credit Facilities which, among other things, waived non-compliance with certain of its financial covenants through June 30, 2020 and modified the financial covenants applicable to periods subsequent to June 30, 2020 (refer to Note 8).

As of March 31, 2020, MGE Niagara was in compliance with its financial covenants. During the period subsequent to March 31, 2020, MGE Niagara entered into a series of amendments to the MGE Niagara Resorts Credit Facilities which, among other things, provided MGE Niagara with relief from certain covenants relating to the closure of its facilities due to COVID-19 (refer to Note 8).

NOTE 6—SEGMENT REPORTING:

The Company, either directly or through subsidiaries, operates Mohegan Sun, along with its other Connecticut operations (the “Connecticut Facilities”), Mohegan Sun Pocono, along with its other Pennsylvania operations (the “Pennsylvania Facilities”) and the MGE Niagara Resorts. The Company assumed the day-to-day operations of the MGE Niagara Resorts on June 11, 2019. Certain other properties that are managed or under development by the Company, which were previously included within the Company's corporate functions, are now identified as the management, development and other reportable segment.

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MOHEGAN TRIBAL GAMING AUTHORITY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

The Company's chief operating decision maker currently reviews and assesses the performance and operating results and determines the proper allocation of resources to the Connecticut Facilities, the Pennsylvania Facilities, the MGE Niagara Resorts and the properties managed or under development on a separate basis. Accordingly, the Company now has four separate reportable segments: (i) Mohegan Sun, which includes the operations of the Connecticut Facilities, (ii) Mohegan Sun Pocono, which includes the operations of the Pennsylvania Facilities, (iii) the MGE Niagara Resorts and (iv) management, development and other. The Company's corporate functions, along with any inter-segment activities are disclosed separately in the following segment disclosures to reconcile to consolidated results. The following management, development and other and corporate segment disclosures for the three months and six months ended March 31, 2019 have been restated to conform to fiscal 2020 presentation.

 

 

NOTE 7—COMMITMENTS AND CONTINGENCIES:

The Company is a defendant in various claims and legal actions resulting from its normal course of business, primarily relating to personal injuries to patrons and damages to patrons' personal assets. The Company estimates litigation claims expense and accrues for such liabilities based upon historical experience. In management's opinion, the aggregate liability, if any, arising from such legal actions will not have a material impact on the Company's financial position, results of operations or cash flows.

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MOHEGAN TRIBAL GAMING AUTHORITY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

NOTE 8—SUBSEQUENT EVENTS:

Niagara Falls Entertainment Centre Lease Agreement

On June 5, 2020, MGE Niagara received notice from the landlord of the Niagara Falls Entertainment Centre that construction of the facility had reached substantial completion. Accordingly, pursuant to the terms of the acquisition of the MGE Niagara Resorts, MGE Niagara entered into a lease agreement to lease the facility commencing on August 19, 2020. The lease agreement requires MGE Niagara to make monthly payments of approximately 0.9 million Canadian dollars (approximately $0.6 million as of March 31, 2020) until the end of the lease term on March 31, 2040. This lease is expected to be classified as an operating lease.

Amendment to Senior Secured Credit Facilities

On August 28, 2020, the Company entered into a fourth amendment to its Credit Agreement with certain of its lenders (the “Fourth Amendment”). Pursuant to the Fourth Amendment, the Company will, during the period beginning on August 28, 2020, and ending upon achievement of certain financial ratios specified in the Fourth Amendment (such period, the “Financial Covenant Restricted Period”), be subject to, among other things, (i) a minimum liquidity covenant that requires cash and cash equivalents and availability under its revolving credit facility to be at least $70 million as of the last day of each calendar month, (ii) a covenant that requires the Company be in pro forma compliance with such liquidity covenant in order to make any interest payment on the Company’s 7.875% Senior Notes due 2024, and (iii) certain additional reporting covenants.

The Fourth Amendment also waives the Company’s obligation to comply with its financial covenants for the fiscal quarters ending March 31, 2020 and June 30, 2020, and modifies the financial covenants applicable during the Financial Covenant Restricted Period to provide the Company with greater flexibility in light of the impact of the COVID-19 pandemic on its business, in particular during the March 2020 through May 2020 period, all as set forth in the Fourth Amendment.

In addition, the Fourth Amendment provides that, commencing on August 24, 2020: (i) loans under the term loan A facility will bear interest at either an adjusted LIBOR rate or a base rate, in each case, plus an applicable margin equal to 6.125% per annum for adjusted LIBOR rate loans and 5.125% per annum for base rate loans, and (ii) loans under the term loan B facility will bear interest at either an adjusted LIBOR rate or a base rate, in each case, plus an applicable margin equal to 6.375% per annum for adjusted LIBOR rate loans and 5.375% per annum for base rate loans, provided that the applicable rate for loans under the term loan B facility are subject to certain ratings-based step downs and “most-favored-nation” protections as set forth in the Fourth Amendment.  The Fourth Amendment also provides for a 1.00% per annum LIBOR floor applicable to adjusted LIBOR rate loans under the term loan A facility and 0.75% per annum LIBOR floor applicable to adjusted LIBOR rate loans under the revolving credit facility.  Lastly, the Fourth Amendment (i) carves out COVID-19 related effects from certain terms of the Credit Agreement, and (ii) makes certain other changes to the covenants and other provisions of the Credit Agreement.

Substantially concurrently with the entry into the Fourth Amendment, Mohegan Tribe made a $20 million cash contribution to the Company, consisting of (i) a $15 million contribution and (ii) a $5 million subordinated loan maturing on October 16, 2024 and bearing interest in-kind at 10% per annum.

The summary of certain terms of the Fourth Amendment set forth above is qualified by reference to the full text of the Fourth Amendment, which is filed as Exhibit 10.3 to this Form 10-Q and incorporated herein by reference. Reference is also made to the full text of the Credit Agreement, which is filed as Exhibit 10.11 to MGE’s Annual Report on Form 10-K for the fiscal year ended September 30, 2019 filed with the Securities and Exchange Commission on December 20, 2019 and incorporated herein by reference.

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MOHEGAN TRIBAL GAMING AUTHORITY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

 

Amendments and Waivers with Respect to MGE Niagara Resorts Credit Facilities

On March 16, 2020, the OLG directed the MGE Niagara Resorts to close due to the ongoing COVID-19 pandemic. On May 15, 2020, MGE Niagara entered into a Limited Waiver (the “Limited Waiver”) with respect to the MGE Niagara Resorts Credit Facilities. The Limited Waiver, among other things, (a) waived the occurrence of an event of default that would have been caused under the MGE Niagara Resorts Credit Facilities due to the closure of the MGE Niagara Resorts for a period of 60 consecutive days or more, and (b) extended the waiver period through June 15, 2020 (the “Initial Waiver Period”). In exchange for the waivers granted under the Limited Waiver, MGE Niagara agreed not to make any request for advances under the MGE Niagara Resorts Credit Facilities during the Initial Waiver Period.

Because the MGE Niagara Resorts were required to continue to remain closed as directed by the OLG through the Initial Waiver Period, MGE Niagara entered into an Amended and Restated Limited Waiver (the “Amended and Restated Limited Waiver”) on June 15, 2020 which, among other things, extended the Initial Waiver Period to July 15, 2020 (the “Extended Waiver Period”).

On June 30, 2020, MGE Niagara entered a Second Amended and Restated Limited Waiver (the “Second Waiver”) which, among other things, (a) waived anticipated breaches of certain financial covenants under the MGE Niagara Resorts Credit Facilities as a result of the closure of the MGE Niagara Resorts until July 31, 2020 (the “Covenant Waiver”), (b) waived the requirement for MGE Niagara to deliver a compliance certificate under the MGE Niagara Resorts Credit Facilities for the fiscal quarter ending June 30, 2020 (the “Certificate Waiver”) and (c) extended the Extended Waiver Period to July 31, 2020 (the “Second Extended Waiver Period”). In connection with the Second Waiver, MGE Niagara agreed, among other things, during the Second Extended Waiver Period, to: (a) continue not to make any request for advances under the MGE Niagara Resorts Credit Facilities; (b) an increase in the Applicable Margin (as defined in the MGE Niagara Resorts Credit Facilities) to pricing level 4, a 50 basis point increase over pricing level 3; and (c) not make certain Distributions (as defined in the MGE Niagara Resorts Credit Facilities).

On July 31, 2020, MGE Niagara entered a Third Amended and Restated Limited Waiver (the “Third Waiver”) which, among other things, extended (a) the Covenant Waiver, (b) the Certificate Waiver and (c) the Second Extended Waiver Period to September 30, 2020 (the “Third Extended Waiver Period”). In connection with the Third Waiver, MGE Niagara agreed, among other things, during the Third Extended Waiver Period, to: (a) continue not to make any request for advances under the MGE Niagara Resorts Credit Facilities; (b) replace the Applicable Margin schedule in the MGE Niagara Resorts Credit Facilities, which replacement schedule adds a new pricing level 5 increasing the Applicable Margin by 100 basis points over pricing level 4, and apply pricing level 5 as the current Applicable Margin; (c) require MGE Niagara to maintain minimum liquidity of $15 million; (d) deliver to the Administrative Agent a weekly liquidity report; and (e) refrain from making certain Distributions. MGE also agreed to pay to the lenders an extension fee equal to 10 basis points.

The summary of certain terms of each of the Limited Waiver, the Amended and Restated Limited Waiver, the Second Waiver, and the Third Waiver set forth above is qualified by reference to the full text of each of the Limited Waiver, the Amended and Restated Limited Waiver, the Second Waiver and the Third Waiver, which are filed as Exhibit 10.4, 10.5, 10.6, and 10.7, respectively, to this Form 10-Q and incorporated herein by reference. Reference is also made to the full text of the Credit Agreement, dated June 10, 2019, among MGE Niagara Entertainment Inc., the lenders named therein, Bank of Montreal, as administrative agent, and the other parties thereto, which is filed as Exhibit 10.1 to MGE’s Form 8-K filed with the Securities and Exchange Commission on June 14, 2019 and incorporated herein by reference.

 

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Some information included in this Quarterly Report on Form 10-Q and other materials filed by us with the Securities and Exchange Commission, or the SEC, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements include information relating to business development activities, as well as capital spending, financing sources, the effects of regulation, including gaming and tax regulation and increased competition. These statements can sometimes be identified by our use of forward-looking words such as “may,” “will,” “anticipate,” “estimate,” “expect” or “intend” and similar expressions. Such forward-looking information involves important risks and uncertainties that could significantly affect anticipated future results, and accordingly, such results may differ materially from those expressed in any forward-looking statements made by us or on our behalf. These risks and uncertainties include, but are not limited to, those relating to the following:

Additional information concerning potential factors that could affect our financial results is included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2019, as well as our other reports and filings with the SEC. The forward-looking statements included in this Quarterly Report on Form 10-Q are made only as of the date of this report. We do not undertake any obligation to update or supplement any forward-looking statements to reflect subsequent events or circumstances, except as required by law. We cannot assure you that projected results or events will be achieved or will occur.

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The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and the related notes beginning on page 3 of this Quarterly Report on Form 10-Q.

Overview

Our Company

We were established in July 1995 by the Mohegan Tribe, a federally-recognized Indian tribe with an approximately 595-acre reservation situated in southeastern Connecticut, adjacent to Uncasville, Connecticut. Under the Indian Gaming Regulatory Act of 1988, federally-recognized Indian tribes are permitted to conduct full-scale casino gaming operations on tribal lands, subject to, among other things, the negotiation of a compact with the affected state. The Mohegan Tribe and the State of Connecticut entered into such a compact, the Mohegan Compact, which was approved by the United States Secretary of the Interior. We were established as an instrumentality of the Mohegan Tribe, with the exclusive authority to conduct and regulate gaming activities for the Mohegan Tribe on tribal lands and the non-exclusive authority to conduct such activities elsewhere. We are governed and overseen by a nine-member Management Board, whose members also comprise the Mohegan Tribal Council, the governing body of the Mohegan Tribe. Any change in the composition of the Mohegan Tribal Council results in a corresponding change in our Management Board.

We are primarily engaged in the ownership, operation and development of integrated entertainment facilities, both domestically and internationally, including: (i) Mohegan Sun in Uncasville, Connecticut, (ii) Mohegan Sun Pocono in Plains Township, Pennsylvania, (iii) Niagara Fallsview Casino Resort, Casino Niagara and the 5,000-seat Niagara Falls Entertainment Centre, all in Niagara Falls, Canada (collectively, the “MGE Niagara Resorts”), (iv) Resorts Casino Hotel in Atlantic City, New Jersey, (v) ilani Casino Resort in Clark County, Washington, (vi) Paragon Casino Resort in Marksville, Louisiana and (vii) Project Inspire, a first-of-its-kind, multi-billion dollar integrated resort and casino under construction at Incheon International Airport in South Korea.

Impact of the COVID-19 Pandemic and Our Response

In March 2020, the World Health Organization declared the outbreak of COVID-19 a global pandemic and the United States federal government declared it a national emergency. The spread of COVID-19 has affected most segments of the global economy, including our operations. On March 18, 2020, we announced the temporary suspension of operations at our North American owned, operated and managed properties to ensure the health and safety of our employees, guests and the surrounding communities in which we operate, consistent with directives from various government bodies. As of March 31, 2020, these properties remained closed.

The following properties subsequently reopened as follows: (i) Paragon Casino Resort on May 20, 2020, (ii) ilani Casino Resort on May 28, 2020, (iii) Mohegan Sun on June 1, 2020, (iv) Mohegan Sun Pocono on June 22, 2020 and (v) Resorts Casino Hotel on July 2, 2020. As of the date of the filing of this Quarterly Report on Form 10-Q, the MGE Niagara Resorts remain temporarily closed. Like other integrated resort operators, these business disruptions have had a material adverse impact on our financial condition, results of operations and cash flows.

While some of our properties have reopened, we cannot predict when our remaining closed properties will be able to reopen or the conditions upon which additional reopenings may occur. In addition, while we have experienced some level of continued business disruption, we expect that this disruption will gradually dissipate, and we remain confident in our ability to mitigate the impact of any such disruption through expense management. The impact of COVID-19 on our operations through the date of the filing of this Quarterly Report on Form 10-Q has been significant, though the full extent of the impact will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of COVID-19 or a resurgence, the manner in which our guests, suppliers and other third parties respond to COVID-19, including perception of safety and health measures taken by us, new information which may emerge concerning its severity and the actions to contain it or treat its impact, as well as general economic condition and consumer confidence. Accordingly, we cannot reasonably estimate the extent to which COVID-19 will further impact our future financial condition, results of operations and cash flows.

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In response to COVID-19, we completed a series of transactions to ensure maximum financial flexibility, including (i) on March 13, 2020, we drew the remaining balance of our senior secured revolving credit facility, in the amount of approximately $125 million and (ii) on August 28, 2020, we entered into an amendment to our Senior Secured Credit Facilities which, among other things, waived non-compliance with certain of our financial covenants through June 30, 2020 (refer to Note 8).

We also took various actions to reduce costs in an effort to mitigate the operating and financial impact of COVID-19, including (i) furloughing approximately 98% of our workforce immediately following the closure of our properties, of which approximately 50% remain furloughed as of the date of the filing of this Quarterly Report on Form 10-Q; (ii) enacting meaningful compensation reductions to our remaining property and corporate personnel, including executive leadership, during the closure period; (iii) obtaining relief from certain threshold payments otherwise due to the OLG for the duration of the closure of the MGE Niagara Resorts, to be followed by a phased-in approach to such payments thereafter; (iv) obtaining a three month forbearance of gaming tax payments due to Connecticut and Pennsylvania; (v) deferring rental payments due under certain of MGE Niagara's lease agreements; and (vi) executing other substantial reductions in operating expenses, capital expenditures and overall costs.

We could experience other potential adverse impacts as a result of COVID-19, including, but not limited to, charges from further adjustments to the carrying value of our intangible assets, as well as other long-lived asset impairment charges. Actual results may differ materially from our current estimates as the scope of COVID-19 evolves, depending largely, but not exclusively, on the duration and extent of our business disruptions.

If we are unable to (i) execute our business plan (ii) sufficiently offset declines in revenues with appropriate cost reductions or (iii) execute certain cost containment initiatives, we may not have sufficient liquidity to meet our existing debt obligations, distributions to the Mohegan Tribe, capital expenditures and working capital requirements. In addition, we may not be able to satisfy our financial covenants under the senior secured credit facilities. In such event, we would need to seek additional sources of liquidity and obtain waivers or amendments under the senior secured credit facilities; however, we can provide no assurance that we would be able to obtain such liquidity and waivers or amendments. If we were unable to obtain such liquidity and waivers or amendments, we would be in default under the senior secured credit facilities, which may result in cross-defaults under our other outstanding indebtedness. If such defaults or cross-defaults were to occur, it would allow our lenders to exercise their rights and remedies as defined under their respective agreements, including their right to accelerate the repayment of outstanding indebtedness. If such acceleration were to occur, we can provide no assurance that we would be able to obtain the financing necessary to repay such accelerated indebtedness.

Results of Operations

We, either directly or through subsidiaries, operate Mohegan Sun, along with our other Connecticut operations (the “Connecticut Facilities”), Mohegan Sun Pocono, along with our other Pennsylvania operations (the “Pennsylvania Facilities”) and the MGE Niagara Resorts. We assumed the day-to-day operations of the MGE Niagara Resorts on June 11, 2019. Certain other properties that are managed or under development, which were previously included within our corporate functions, are now identified as the management, development and other reportable segment.

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Our chief operating decision maker currently reviews and assesses the performance and operating results and determines the proper allocation of resources to the Connecticut Facilities, the Pennsylvania Facilities, the MGE Niagara Resorts and the properties managed or under development on a separate basis. Accordingly, we now have four separate reportable segments: (i) Mohegan Sun, which includes the operations of the Connecticut Facilities, (ii) Mohegan Sun Pocono, which includes the operations of the Pennsylvania Facilities, (iii) the MGE Niagara Resorts and (iv) management, development and other. Our corporate functions, along with any inter-segment activities are disclosed separately in the following segment disclosures to reconcile to consolidated results. The following management, development and other and corporate segment disclosures for the three months and six months ended March 31, 2019 have been restated to conform to fiscal 2020 presentation.

 

 

The most significant factors and trends that impacted our operating and financial performance were as follows:

Mohegan Sun

Revenues

Net revenues declined by $56.1 million, or 23.5%, to $182.3 million for the three months ended March 31, 2020 compared to $238.4 million in the same period in the prior year. Net revenues declined by $65.5 million, or 13.3%, to $425.6 million for the six months ended March 31, 2020 compared to $491.1 million in the same period in the prior year. The declines in net revenues were principally due to the temporary closure of Mohegan Sun, effective March 18, 2020, following the outbreak of COVID-19. Certain portions of Mohegan Sun reopened to the public on June 1, 2020.

Operating Costs and Expenses

Operating costs and expenses decreased by $55.4 million, or 25.4%, to $163.1 million for the three months ended March 31, 2020 compared to $218.5 million in the same period in the prior year. Operating costs and expenses decreased by $65.7 million, or 15.4%, to $361.4 million for the six months ended March 31, 2020 compared to $427.1 million in the same period in the prior year. These reductions primarily reflected lower overall operating costs and expenses commensurate with the declines in net revenues, combined with various cost saving and expense management initiatives to mitigate the operating and financial impact of COVID-19.

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Mohegan Sun Pocono

Revenues

Net revenues declined by $8.1 million, or 13.2%, to $53.1 million for the three months ended March 31, 2020 compared to $61.2 million in the same period in the prior year. Net revenues declined by $6.9 million, or 5.7%, to $115.1 million for the six months ended March 31, 2020 compared to $122.0 million in the same period in the prior year. The declines in net revenues were principally due to the temporary closure of Mohegan Sun Pocono, effective March 18, 2020, following the outbreak of COVID-19. Certain portions of Mohegan Sun Pocono reopened to the public on June 22, 2020.

Operating Costs and Expenses

Operating costs and expenses increased by $121.6 million, or 229.4%, to $174.6 million for the three months ended March 31, 2020 compared to $53.0 million in the same period in the prior year. Operating costs and expenses increased by $122.2 million, or 114.6%, to $228.8 million for the six months ended March 31, 2020 compared to $106.6 million in the same period in the prior year. The increases in operating costs and expenses were driven by a $126.6 million impairment charge related to Mohegan Sun Pocono’s various gaming licenses. These intangible assets are not subject to amortization, but are assessed at least annually for impairment by comparing their fair value to their carrying value. However, these intangible assets may be assessed more frequently for impairment if events or changes in circumstances, such as declines in revenues, earnings and cash flows, or material adverse changes in business climate, indicate that their carrying value may be impaired. During the three months ended March 31, 2020, we identified an indicator of impairment on Mohegan Sun Pocono's intangible assets due to COVID-19. As a result, we revised our cash flow projections to reflect the current business climate, including the uncertainty surrounding the nature, timing and extent of reopening Mohegan Sun Pocono. The estimated fair value of these intangible assets was determined by using discounted cash flow models, which utilized Level 3 inputs. The primary unobservable input utilized in estimating the fair value of these intangible assets was the discount rate, which was 10.5%. As a result of this interim assessment, we recorded the impairment charge. The impairment charge was partially offset by lower overall operating costs and expenses commensurate with the declines in net revenues, combined with various cost saving and expense management initiatives to mitigate the operating and financial impact of COVID-19.

MGE Niagara Resorts

Revenues

Net revenues totaled $71.3 million for the three months ended March 31, 2020. Net revenues totaled $156.3 million for the six months ended March 31, 2020. We assumed the day-to-day operations of the MGE Niagara Resorts on June 11, 2019. These results reflect the temporary closure of the MGE Niagara Resorts, effective March 18, 2020, following the outbreak of COVID-19. As of the date of the filing of this Quarterly Report on Form 10-Q, the MGE Niagara Resorts remain temporarily closed.

Operating Costs and Expenses

Operating costs and expenses totaled $70.3 million for the three months ended March 31, 2020. Operating costs and expenses totaled $156.6 million for the six months ended March 31, 2020. We assumed the day-to-day operations of the MGE Niagara Resorts on June 11, 2019. These results reflect reduced overall operating costs and expenses due to the temporary closure of the MGE Niagara Resorts, combined with various cost saving and expense management initiatives to mitigate the operating and financial impact of COVID-19.

Management, Development and Other

Revenues

Net revenues increased by $0.7 million, or 9.0%, to $8.5 million for the three months ended March 31, 2020 compared to $7.8 million in the same period in the prior year. Net revenues increased by $4.0 million, or 29.6%, to $17.5 million for the six months ended March 31, 2020 compared to $13.5 million in the same period in the prior year. These results primarily reflected higher management fees from ilani Casino Resort driven principally by continued improvement in performance at the property prior to the outbreak of COVID-19.

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Operating Costs and Expenses

Operating costs and expenses increased by $0.8 million, or 11.3%, to $7.9 million for the three months ended March 31, 2020 compared to $7.1 million in the same period in the prior year. Operating costs and expenses increased by $4.6 million, or 34.8%, to $17.8 million for the six months ended March 31, 2020 compared to $13.2 million in the same period in the prior year. The increases in operating costs and expenses were driven by higher pre-opening costs and expenses associated with Project Inspire and higher development costs and expenses associated with our other domestic and international diversification initiatives.

Corporate

Revenues

Net revenues declined by $0.2 million, or 66.7%, to $0.1 million for the three months ended March 31, 2020 compared to $0.3 million in the same period in the prior year. Net revenues declined by $0.5 million, or 71.4%, to $0.2 million for the six months ended March 31, 2020 compared to $0.7 million in the same period in the prior year. These results were primarily driven by lower revenues generated by our “Play 4 Fun” on-line gaming platform.

Operating Costs and Expenses

Operating costs and expenses declined by $1.3 million, or 18.8%, to $5.6 million for the three months ended March 31, 2020 compared to $6.9 million in the same period in the prior year. Operating costs and expenses declined by $2.0 million, or 13.5%, to $12.8 million for the six months ended March 31, 2020 compared to $14.8 million in the same period in the prior year. These reductions primarily reflected various cost saving and expense management initiatives to mitigate the operating and financial impact of COVID-19.

Other Expenses

Other expenses declined by $1.5 million, or 4.4%, to $32.9 million for the three months ended March 31, 2020 compared to $34.4 million in the same period in the prior year. Other expenses increased by $1.1 million, or 1.6%, to $68.1 million for the six months ended March 31, 2020 compared to $67.0 million in the same period in the prior year. Other expenses are comprised primarily of interest expense, net of capitalized interest. Interest expense, net of capitalized interest declined by $4.1 million, or 11.7%, to $31.0 million for the three months ended March 31, 2020 compared to $35.1 million in the same period in the prior year. Interest expense, net of capitalized interest declined by $4.7 million, or 6.6%, to $66.4 million for the six months ended March 31, 2020 compared to $71.1 million in the same period in the prior year. The reductions in interest expense, net of capitalized interest were due to the capitalization of interest related to Project Inspire. Weighted average outstanding debt was $2.06 billion and $2.05 billion for the three months and six months ended March 31, 2020, respectively, compared to $1.88 billion and $1.92 billion for the three months and six months ended March 31, 2019, respectively. Weighted average interest rate was 7.0% for the three months and six months ended March 31, 2020 compared to 7.5% and 7.4% for the three months and six months ended March 31, 2019, respectively.

Seasonality

The gaming markets in the Northeastern United States and Niagara Falls, Canada, are seasonal in nature, with peak gaming activities often occurring during the months of May through August. Accordingly, our operating results for the three months and six months ended March 31, 2020 are not necessarily indicative of operating results for other interim periods or an entire fiscal year.

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Liquidity and Capital Resources

Impact of the COVID-19 Pandemic and Our Response

On March 18, 2020, we announced the temporary suspension of operations at our owned, operated and managed properties to ensure the health and safety of our employees, guests and the surrounding communities in which we operate. As of March 31, 2020, our properties remained closed. The following properties subsequently reopened as follows: (i) Paragon Casino Resort on May 20, 2020, (ii) ilani Casino Resort on May 28, 2020, (iii) Mohegan Sun on June 1, 2020, (iv) Mohegan Sun Pocono on June 22, 2020 and (v) Resorts Casino Hotel on July 2, 2020. As of the date of the filing of this Quarterly Report on Form 10-Q, the MGE Niagara Resorts remain temporarily closed. These business disruptions have had a material adverse impact on our financial condition, results of operations and cash flows.

In response to COVID-19, we completed a series of transactions to ensure maximum financial flexibility, including (i) on March 13, 2020, we drew the remaining balance of our senior secured revolving credit facility, in the amount of approximately $125 million and (ii) on August 28, 2020, we entered into an amendment to our Senior Secured Credit Facilities which, among other things, waived non-compliance with certain of our financial covenants through June 30, 2020 (refer to Note 8).

We also took various actions to reduce costs in an effort to mitigate the operating and financial impact of COVID-19, including (i) furloughing approximately 98% of our workforce immediately following the closure of our properties, of which approximately 50% remain furloughed as of the date of the filing of this Quarterly Report on Form 10-Q; (ii) enacting meaningful compensation reductions to our remaining property and corporate personnel, including executive leadership, during the closure period; (iii) obtaining relief from certain threshold payments otherwise due to the OLG for the duration of the closure of the MGE Niagara Resorts, to be followed by a phased-in approach to such payments thereafter; (iv) obtaining a three month forbearance of gaming tax payments due to Connecticut and Pennsylvania; (v) deferring rental payments due under certain of MGE Niagara's lease agreements; and (vi) executing other substantial reductions in operating expenses, capital expenditures and overall costs.

Liquidity

As of March 31, 2020 and September 30, 2019, we held cash and cash equivalents of $184.9 million and $130.1 million, respectively, of which the MGE Niagara Resorts held $22.7 million and $53.5 million, respectively. Inclusive of letters of credit, which reduce borrowing availability, we had $0.8 million of borrowing capacity under our senior secured revolving facility and line of credit as of March 31, 2020. As a result of the cash based nature of our business, operating cash flow levels tend to follow trends in our operating income, excluding the effects of non-cash charges, such as depreciation and amortization and impairment charges.

Cash used in operating activities totaled $16.9 million for the six months ended March 31, 2020 compared to cash provided by operating activities of $144.1 million in the same period in the prior year. These results primarily reflected the impact of an approximately $72 million payment received in the same period in the prior year from the Cowlitz Tribal Gaming Authority related to accrued interest on funds previously advanced for the Cowlitz Project, combined with additional working capital requirements associated with the MGE Niagara Resorts. Operating cash flows were also negatively impacted by the temporary closure of our properties due to COVID-19.

Cash used in investing activities totaled $68.2 million for the six months ended March 31, 2020 compared to $5.5 million in the same period in the prior year. The increase in cash used in investing activities primarily reflected the impact of an approximately $32 million payment received in the same period in the prior year from the Cowlitz Tribal Gaming Authority related to funds previously advanced for the Cowlitz Project. The increase in cash used in investing activities also reflected higher capital expenditures.

Cash provided by financing activities totaled $104.6 million for the six months ended March 31, 2020 compared to cash used in financing activities of $76.7 million in the same period in the prior year. The increase in cash provided by financing activities for the six months ended March 31, 2020 was primarily driven by a $171.5 million increase in borrowings. As previously indicated, in response to COVID-19 and to maintain maximum financial flexibility, on March 13, 2020, we drew the remaining balance of our senior secured revolving credit facility, in the amount of approximately $125 million. The

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remaining borrowings were for general corporate purposes, including working capital requirements associated with the MGE Niagara Resorts.

Amendment to Senior Secured Credit Facilities

On August 28, 2020, the Company entered into an amendment to its Senior Secured Credit Facilities, which, among other things, waived non-compliance with certain of its financial covenants through June 30, 2020 and modified the financial covenants applicable to periods subsequent to June 30, 2020 (refer to Note 8), as described in the tables below.

The Company shall not permit the minimum Fixed Charge Coverage Ratio (as defined under the Senior Secured Credit Facilities) to be less than:

 

 

 

The Company shall not permit the maximum Total Leverage Ratio (as defined under the Senior Secured Credit Facilities) to be greater than:

 

 

 

The Company shall not permit the maximum Senior Secured Leverage Ratio covenant (as defined under the Senior Secured Credit Facilities) to be greater than:

 

 

 

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Amendments and Waivers with Respect to MGE Niagara Resorts Credit Facilities

On March 16, 2020, the OLG directed the MGE Niagara Resorts to close due to the ongoing COVID-19 pandemic. On May 15, 2020, MGE Niagara entered into a Limited Waiver with respect to the MGE Niagara Resorts Credit Facilities. The Limited Waiver, among other things, (a) waived the occurrence of an event of default that would have been caused under the MGE Niagara Resorts Credit Facilities due to the closure of the MGE Niagara Resorts for a period of 60 consecutive days or more, and (b) extended the waiver period through June 15, 2020 (the “Initial Waiver Period”). In exchange for the waivers granted under the Limited Waiver, MGE Niagara agreed not to make any request for advances under the MGE Niagara Resorts Credit Facilities during the Initial Waiver Period.

Because the MGE Niagara Resorts were required to continue to remain closed as directed by the OLG through the Initial Waiver Period, MGE Niagara entered into an Amended and Restated Limited Waiver on June 15, 2020 which, among other things, extended the Initial Waiver Period to July 15, 2020 (the “Extended Waiver Period”).

On June 30, 2020, MGE Niagara entered a Second Amended and Restated Limited Waiver (the “Second Waiver”) which, among other things, (a) waived anticipated breaches of certain financial covenants under the MGE Niagara Resorts Credit Facilities as a result of the closure of the MGE Niagara Resorts until July 31, 2020 (the “Covenant Waiver”), (b) waived the requirement for MGE Niagara to deliver a compliance certificate under the MGE Niagara Resorts Credit Facilities for the fiscal quarter ending June 30, 2020 (the “Certificate Waiver”) and (c) extended the Extended Waiver Period to July 31, 2020 (the “Second Extended Waiver Period”). In connection with the Second Waiver, MGE Niagara agreed, among other things, during the Second Extended Waiver Period, to: (a) continue not to make any request for advances under the MGE Niagara Resorts Credit Facilities; (b) an increase in the Applicable Margin (as defined in the MGE Niagara Resorts Credit Facilities) to pricing level 4, a 50 basis point increase over pricing level 3; and (c) not make certain Distributions (as defined in the MGE Niagara Resorts Credit Facilities).

On July 31, 2020, MGE Niagara entered a Third Amended and Restated Limited Waiver (the “Third Waiver”) which, among other things, extended (a) the Covenant Waiver, (b) the Certificate Waiver and (c) the Second Extended Waiver Period to September 30, 2020 (the “Third Extended Waiver Period”). In connection with the Third Waiver, MGE Niagara agreed, among other things, during the Third Extended Waiver Period, to: (a) continue not to make any request for advances under the MGE Niagara Resorts Credit Facilities; (b) replace the Applicable Margin schedule in the MGE Niagara Resorts Credit Facilities, which replacement schedule adds a new pricing level 5 increasing the Applicable Margin by 100 basis points over pricing level 4, and apply pricing level 5 as the current Applicable Margin; (c) require MGE Niagara to maintain minimum liquidity of $15 million; (d) deliver to the Administrative Agent a weekly liquidity report; and (e) refrain from making certain Distributions. MGE also agreed to pay to the lenders an extension fee equal to 10 basis points.

Sufficiency of Resources

We believe that existing cash balances, financing arrangements, the Mohegan Tribe’s recent investment in connection with the Fourth Amendment (refer to Note 8), and operating cash flows, which should benefit from our various actions to reduce costs and encouraging business trends at our reopened properties, will provide us with sufficient resources to meet our existing debt obligations, distributions to the Mohegan Tribe, capital expenditures and working capital requirements, including threshold payments relating to the MGE Niagara Resorts, for at least the next twelve months; however, we can provide no assurance in this regard.

Critical Accounting Policies and Estimates

There has been no material change from the critical accounting policies and estimates previously disclosed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2019.

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Other Intangible Assets

Other intangible assets include Mohegan Sun Pocono's various gaming licenses. These intangible assets all have indefinite lives. Intangible assets with indefinite lives are assessed at least annually for impairment by comparing their fair value to their carrying value. However, these intangible assets may be assessed more frequently for impairment if events or changes in circumstances, such as declines in revenues, earnings and cash flows, or material adverse changes in the business climate, indicate that their carrying value may be impaired.

During our second quarter of fiscal 2020, we identified an indicator of impairment on Mohegan Sun Pocono's intangible assets due to COVID-19.

As a result, we revised our cash flow projections to reflect the current business climate, including the uncertainty surrounding the nature, timing and extent of reopening Mohegan Sun Pocono. The estimated fair value of these intangible assets was determined by using discounted cash flow models, which utilized Level 3 inputs. The primary unobservable input utilized in estimating the fair value of these intangible assets was the discount rate, which was 10.5%. As a result of this interim assessment, we recorded an impairment charge related to Mohegan Sun Pocono’s intangible assets of $126.6 million in our second quarter of fiscal 2020.

The evaluation of intangible assets for impairment requires the use of estimates about future cash flows. Such estimates are, by their nature, subjective. Actual results may differ materially from our estimates and could result in impairment charges in the future.

As of March 31, 2020, following the aforementioned impairment charge, Mohegan Sun Pocono's intangible assets totaled $171.9 million, which we believe reflects their estimated fair value. The decline in gaming revenues, a higher weighted average cost of capital utilized for the cash flow valuation and lower operating income growth rates have all lowered the estimated fair value of these intangible assets. Further deterioration in these assumptions could result in the carrying value of these intangible assets exceeding their estimated fair value in the future. In the event that the carrying value of these intangible assets exceeds their fair value in a future period, these intangible assets would be impaired and subject to additional non-cash write-downs, which could have a material adverse impact on our financial condition.

A 1% reduction in the estimated revenue growth rate would decrease the fair value of Mohegan Sun Pocono’s intangible assets by approximately $19.9 million and a 1% increase in the discount rate would decrease the fair value of Mohegan Sun Pocono’s intangible assets by approximately $19.6 million.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Market risk is the risk of loss arising from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates and commodity prices. As of March 31, 2020, our primary exposure to market risk was interest rate risk associated with our credit facilities which accrued interest on the basis of base rate, Eurodollar rate and Bankers’ Acceptance rate formulas, plus applicable rates, as defined under the credit facilities. Based on our variable rate outstanding debt as of March 31, 2020, a 100 basis point change in average interest rate would impact annual interest expense by approximately $15.0 million.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2020. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the Securities and Exchange Commission. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company's management, including its principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosures. Management recognizes that controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Based on an evaluation of our disclosure controls and procedures as of September 30, 2019, and due to a material weakness in our internal control over financial reporting relating to our goodwill and other intangible assets impairment analysis review control, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were not effective.

Notwithstanding this material weakness, our management, including our Chief Executive Officer and Chief Financial Officer, has concluded that our financial statements included in this Quarterly Report on Form 10-Q present fairly, in all material respects, our financial position, results of operations and cash flows for the periods presented in accordance with accounting principles generally accepted in the United States of America.

Changes in Internal Control Over Financial Reporting

There have been no other changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, that occurred during the quarter ended March 31, 2020, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting, other than the material weakness discussed above. In making our assessment of changes in internal control over financial reporting, we have excluded the MGE Niagara Resorts, which was acquired on June 11, 2019.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

There has been no material change from the legal proceedings previously disclosed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2019.

Item 1A. Risk Factors

There has been no material change from the risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2019, except for the following:

The effect of the COVID-19 pandemic on our operations has had a material adverse impact on our businesses, results of operations, liquidity and financial condition, and we expect that it will continue to do so.

In March 2020, the World Health Organization declared the outbreak of COVID-19 a global pandemic and the United States federal government declared it a national emergency. The spread of COVID-19 has affected most segments of the global economy, including our operations. On March 18, 2020, we announced the temporary suspension of operations at our North American owned, operated and managed properties to ensure the health and safety of our employees, guests and the surrounding communities in which we operate, consistent with directives from various government bodies. . While almost all of our properties have reopened, we cannot predict when our remaining closed properties will be able to reopen or the conditions upon which additional reopenings may occur, and we expect that business disruptions relating to COVID-19 will continue even after all of our owned, operated and managed properties are reopened. The extent to which COVID-19 further impacts our operations will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of COVID-19 or a resurgence, the manner in which our guests, suppliers and other third parties respond to COVID-19, including perception of safety and health measures taken by us, new information which may emerge concerning its severity and the actions to contain it or treat its impact, as well as general economic conditions and consumer confidence.

COVID-19 is a widespread health crisis that could continue to adversely affect our results of operations. Given the uncertainty around the extent and timing of the potential future spread or mitigation of COVID-19 and around the imposition or relaxation of protective measures, we cannot reasonably estimate the extent to which COVID-19 will impact our future financial condition, results of operations and cash flows.

Item 5. Other Information

(a) The information set forth under the caption “Amendment to Senior Secured Credit Facilities” within Note 8 to the Company’s condensed consolidated financial statements set forth in Part I, Item 1 of this Quarterly Report on Form 10-Q is incorporated herein by reference.

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Item 6. Exhibits

 

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Mohegan Tribal Gaming Authority has duly caused this Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

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