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Item 2. Management’s Discussion and Analysis

2023-05-08 compared with 2022-11-04 · 72 added, 124 removed, 115 unchanged (63% of the section changed)

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(v) our beliefs regarding the quality of our properties as key factors in Monarch's long-term success;

(vi) our expectations and beliefs concerning the expansion project at the Monarch Black Hawk (the "Monarch Black Hawk Expansion");

(vii) our expectations and intentions regarding the expenses, defenses and outcomes of the lawsuits filed by the construction project general contractor against us and our counterclaims against the contractor;

(vi) our expectations and beliefs concerning the completed expansion of the Monarch Black Hawk (the "Monarch Black Hawk Expansion");

(viii) our expectations regarding our business prospects, strategies, estimates and outlook;

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Important factors that could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements include, among others, the following:

● adverse impacts of COVID-19 and its variants on our business, financial condition, operating results, access to capital markets, and on short-term and long-term travel, leisure and discretionary spending habits and practices of our guests;

● actions by government officials at the federal, state or local level, including, without limitation, temporary or extended shutdowns, travel restrictions, social distancing, shelter-in-place orders, and mask mandates in connection with COVID-19;

● adverse impacts of COVID-19 , its variants any other contagious diseases or viruses on our business, financial condition, operating results, access to capital markets, and on short-term and long-term travel, leisure and discretionary spending habits and practices of our guests;

● our ability to maintain strong relationships with our regulators, employees, lenders, suppliers, insurance carriers, customers and other stakeholders;

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● a delay in or failure of the changes in guest visitation, entertainment choices and spending patterns, including a decrease in overall long-term demand;

● potentially uninsurable liability exposure to customers and staff should they become (or allege that they have become) infected with COVID-19 while at one of our resorts;

● unwillingness of employees to report to work due to the adverse effects of COVID-19, including any spikes in cases, or to otherwise conduct work under any revised work environment protocols;

● potentially uninsurable liability exposure to customers and staff should they become (or allege that they have become) infected with COVID-19 or any other contagious disease or virus while at one of our resorts;

● unwillingness of employees to report to work due to the adverse effects of COVID-19 or any other contagious diseases or viruses , or to otherwise conduct work under any revised work environment protocols;

● unwillingness of our employees to obtain the COVID-19 vaccination or any boosters;

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● our ongoing disputes over costs of and responsibility for delays, construction defects and other construction related matters with our Monarch Black Hawk general contractor, PCL Construction Services, Inc.

(“PCL”), including, as previously reported, the litigations against us by such contractor and our filing of affirmative defenses and extensive counterclaims against PCL;

(“PCL”), including, as previously reported, the litigations against us by such contractor and our filing of affirmative defenses, extensive counterclaims and a separate lawsuit against PCL;

● our potential need to post bonds or other forms of surety to support our legal remedies;

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● risks related to record heat conditions, drought conditions and fires in the Western United States;

● risks related to possible flooding due to snow melt from the heavier than average snowfall in the Western United States;

● general market and economic conditions, including but not limited to, the effects of local and national economic, housing and energy conditions on the economy in general and on the gaming and lodging industries in particular;

● the impact of rising interest rates and our ability to refinance debt as it matures at commercially reasonable rates or at all;

● fluctuations in interest rates, including the impact of any discontinuance, modification or other reform of LIBOR, or the establishment of alternative reference rates;

● our dependence on two resorts;

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Our hands-on management style focuses on customer services and cost efficiencies.

Our business strategy is to maximize revenues, operating income and cash flow primarily through our casino, food and beverage, and hotel operations.

We continuously upgrade our property and invest in technology.

Reno remains a healthy local-oriented market.

We are experiencing the effect of increased costs which, combined with continued aggressive marketing programs by our competitors, have applied upward pressure on Atlantis’ operations.

We remain confident that our operating strategies will allow Atlantis to grow revenue as our market share continues to expand.

With quality gaming, hotel and dining products, we believe the Atlantis is well positioned to benefit from future macro and local economic growth, as well as endure possible adverse macro-economic conditions.

We continuously upgrade our property.

With quality gaming, hotel and dining products, we believe the Atlantis is well positioned to benefit from future macro and local economic growth.

Reno remains a healthy local-oriented market, but at the same time a very competitive market.

The market’s employment growth is broad based and we expect this positive indicator will support the continued strength of our business at Atlantis.

At the same time, the tight employment environment, with the local unemployment rate below the national average, has created labor challenges, including wage inflation, which we continue to actively manage.

We expect this to be a recurring trend for the market and Atlantis in the years ahead.

The increase in the labor costs and the increase in price inflation, combined with continued aggressive marketing programs by our competitors, has applied upward pressure on Atlantis’ operating costs and is lowering our profit margins.

Monarch Black Hawk:

Since the acquisition of Monarch Black Hawk in April 2012, our focus has been to maximize casino and food and beverage revenues while upgrading the existing facility and working on the major expansion.

In August 2015, we completed the redesign and upgrade of the original Monarch Black Hawk property.

In November 2016, we opened for guest use a new nine-story parking structure with approximately 1,350 spaces and additional valet parking, with total property capacity of approximately 1,500 spaces.

In the first quarter of 2022, we completed our masterplan expansion, transforming the property into a full-scale casino resort, which includes a 23-story hotel with spa and pool at the top floor, expanded casino floor, poker room, sportsbook lounge, keno counter, five dining options and ten bars.

Although we are currently experiencing the pressure of increased costs and, due to the property’s location, labor shortage, we believe we have a long runway to fully unlock the property’s potential.

Through its superior product and service, the property is positioned to attract and retain the upper segment of the market and grow incremental revenue and profit.

Monarch Black Hawk is the first property encountered by visitors arriving from Denver and other major population centers via Colorado State Highway 119.

The Denver metro economy remains strong with higher than the national average per capita personal income.

At the beginning of 2022, we completed the master planned renovation and expansion, transforming the property into a world-class resort.

Monarch Black Hawk is positioned to leverage the expanded operation, the elimination of betting limits and new game types in Black Hawk, Colorado, as well as to benefit from the growing state-wide online and retail sports betting.

Monarch Black Hawk also is experiencing labor challenges, resulting from the distance to the staffing filter markets of Golden, Colorado and the Denver Metro area and low unemployment in those markets.

We continue to attract high value players from across Colorado’s Front Range, who had previously traveled to other markets, such as Las Vegas, for a high-end casino entertainment experience.

We believe that the quality of our expanded product and exceptional guest service will meet the demand of the high-end segment of the market and will grow revenue and accelerate market share.

KEY PERFORMANCE INDICATORS

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RESULTS OF OPERATIONS

Impact of COVID-19

Monarch’s comparison of operating results for the reported periods were impacted by COVID-19.

During the first few months of the nine-month period ended September 30, 2021, we continued to operate under government-imposed capacity restrictions on our operations and various COVID-19 safety protocols.

We were continually adjusting our operations to the restrictions in occupancy and social distancing requirements.

At the same time, in the second and third quarters of 2021, both Atlantis and Black Hawk revenues benefited from COVID-19 related pent-up demand.

The convention business at Atlantis was adversely affected by the state-mandated gathering limits.

The demand for convention bookings has slightly improved, but continues to be lower than prior to the state-mandated closures.

We continue to evaluate the nature and extent of the COVID-19 impact to our business, results of operations, and financial condition.

Monarch Casino Resort Spa Black Hawk expansion

Our financial results for the three and nine months ended September 30, 2022 benefited from the phased opening of operations at our newly transformed Monarch Black Hawk, which opening started in the fourth quarter of 2020.

The new hotel, including a spa and pool on the top floor, was fully operational by the end of the second quarter of 2021.

In May 2021, we opened our new poker room.

In December 2021, we opened our sportsbook lounge, and in February 2022, our new specialty restaurant.

In the first nine months of 2022 compared to the same period in 2021, the average daily number of slot machines had increased by approximately 177, the average daily table games had increased by approximately 19 and the average daily available rooms had increased by approximately 105.

In addition, the property’s table games revenue in the current period benefited from the elimination of betting limits and additional table games variety, effective May 2021.

Comparison of Operating Results for the Three-Month Periods Ended September 30, 2022 and 2021

For the three months ended September 30, 2022, our net income totaled $27.5 million, or $1.41 per diluted share, compared to net income of $22.3 million, or $1.15 per diluted share for the same period in 2021, reflecting a 23.2% and 22.6% increase in net income and diluted earnings per share, respectively.

Net revenues in the three months ended September 30, 2022, totaled $133.7 million, an increase of $22.1 million, or 19.8%, compared to the three months ended September 30, 2021.

Income from operations for the three months ended September 30, 2022, totaled $36.4 million compared to income from operations of $29.0 million for the same period in 2021.

Casino revenue increased 20.3% in the third quarter of 2022 compared to the third quarter of 2021.

The increase in casino revenue was driven primarily by the increase in gaming devices with the complete opening of our expanded casino in Black Hawk and higher guest spend per visit at both properties.

Casino operating expense as a percentage of casino revenue decreased to 33.1% for the three months ended September 30, 2022, compared to 33.3% for the three months ended September 30, 2021, primarily due to the increase in gaming revenue.

Food and beverage revenue for the third quarter of 2022 increased 20.6% compared to the third quarter of 2021 due to a 7.6% increase in food and beverage covers, combined with an increase in food and beverage revenue per cover of 12.1%.

The increase in covers is primarily a result of the opening of a new restaurant at Monarch Black Hawk in early 2022 as well as increase in buffet covers at both properties.

Food and beverage operating expense as a percentage of food and beverage revenue decreased in the third quarter of 2022 to 72.4% compared to 77.6% for the same quarter in 2021 primarily due to our ongoing efforts to align menu prices with increased commodity prices and labor costs.

Hotel revenue increased 19.9% in the third quarter of 2022 compared to the same quarter of 2021 primarily as a result of an increase in ADR of $23.63 ($177.74 in the third quarter of 2022 and $154.11 in the third quarter of 2021).

Hotel occupancy was 86.8% during the current year period compared to 83.4% during the third quarter of 2021.

RevPAR was $170.14 and $142.39 for the three months ended September 30, 2022 and 2021, respectively.

Hotel operating expense as a percentage of hotel revenue decreased to 34.2% in the third quarter of 2022 compared to 38.5% for the comparable prior year period primarily as a result of the increase in ADR and the ramp-up in hotel operations at Monarch Black Hawk.

Other revenue increased 7.5% in the third quarter of 2022 compared to the same prior year period primarily due to the ramp-up of the spa operation at Monarch Black Hawk and increase in commission revenue.

SG&A expense increased to $25.7 million in the third quarter of 2022 from $21.7 million in the third quarter of 2021 driven primarily by increases in labor expense, utility expenses and advertising expense at Monarch Black Hawk.

As a percentage of net revenue, SG&A expense decreased to 19.2% in the third quarter of 2022 compared to 19.4% in the same period in 2021.

Depreciation and amortization expense increased to $11.2 million for the three months ended September 30, 2022, compared to $9.4 million for the same prior year period, due to new assets placed into service with the ongoing renovation at Atlantis.

During the third quarter of 2022 and 2021, we recognized $2.8 million and $1.5 million, respectively, in professional service fees relating to our construction litigation.

Comparison of Operating Results for the Three-Month Periods Ended March 31, 2023 and 2022

For the three months ended March 31, 2023, our net income totaled $17.7 million, or $0.90 per diluted share, compared to net income of $18.1 million, or $0.92 per diluted share for the same period in 2022, reflecting a 2.5% and 2.2% decrease in net income and diluted earnings per share, respectively.

The decrease in net income was impacted by the effective tax rate, which varies based on the amount of excess tax benefit on stock compensation.

Net revenues in the three months ended March 31, 2023, totaled $116.6 million, an increase of $8.3 million, or 7.7%, compared to the three months ended March 31, 2022.

Income from operations for the three months ended March 31, 2023, totaled $23.2 million compared to income from operations of $21.3 million for the same period in 2022.

Casino revenue increased 6.5% in the first quarter of 2023 compared to the first quarter of 2022.

The increase in casino revenue was driven primarily by the increase in gaming volume in Black Hawk.

Casino operating expense as a percentage of casino revenue increased to 37.7% for the three months ended March 31, 2023, compared to 35.6% for the three months ended March 31, 2022, primarily due to the increase in labor expense.

Food and beverage revenue for the first quarter of 2023 increased 12.6% compared to the first quarter of 2022 due to a 1.2% increase in food and beverage covers, combined with an increase in food and beverage revenue per cover of 11.2%.

The increase in covers is primarily a result of the opening of a new restaurant at Monarch Black Hawk in early 2022 as well as increase in buffet and casual dining restaurants covers at both properties.

Food and beverage operating expense as a percentage of food and beverage revenue decreased in the first quarter of 2023 to 74.8% compared to 79.6% for the same quarter in 2022 primarily due to an increase in average check and improved cost management.

Hotel revenue increased 1.8% in the first quarter of 2023 compared to the same quarter of 2022 primarily as a result of an increase in hotel occupancy to 82.2% during the current year period compared to 76.5% during the first quarter of 2022, partially offset by a decrease in ADR by $9.65 ($161.08 in the first quarter of 2023 and $170.73 in the first quarter of 2022).

RevPAR was $146.58 and $142.78 for the three months ended March 31, 2023 and 2022, respectively.

Hotel operating expense as a percentage of hotel revenue increased to 41.3% in the first quarter of 2023 compared to 38.0% for the comparable prior year period primarily as a result of the decrease in ADR and an increase in labor expense.

Other revenue increased 16.5% in the first quarter of 2023 compared to the same prior year period primarily due to the increased demands of Spa services at both properties.

SG&A expense increased to $25.1 million in the first quarter of 2023 from $24.2 million in the first quarter of 2022 driven primarily by increases in utility expense and repair and maintenance expense.

As a percentage of net revenue, SG&A expense decreased to 21.5% in the first quarter of 2023 compared to 22.3% in the same period in 2022.

Depreciation and amortization expense increased to $11.3 million for the three months ended March 31, 2023, compared to $10.5 million for the same prior year period, due to new assets placed into service with the ongoing renovation at Atlantis.

During the first quarter of 2023, we recognized $0.5 million and $1.3 million, respectively, in professional service fees relating to our construction litigation.

These expenses are included in Other operating items, net in the Consolidated Statements of Income.

In the third quarter of 2022 we expensed $0.5 million of interest and amortized $0.4 million in deferred loan costs.

In the third quarter of 2021, we expensed $0.5 million of interest and amortized $0.4 million in deferred loan costs.

See further discussion of our Amended Credit Facility in the LIQUIDITY AND CAPITAL RESOURCES section below.

Comparison of Operating Results for the Nine-Month Periods Ended September 30, 2022 and 2021

For the nine months ended September 30, 2022, we had a net income of $65.0 million, or $3.33 per diluted share, compared to net income of $48.6 million, or $2.51 per diluted share for the same period in 2021, reflecting a 33.8% and 32.7% increase in net income and diluted earnings per share, respectively.

Net revenues in the nine months ended September 30, 2022, totaled $357.3 million, an increase of 25.7%, compared to the nine months ended September 30, 2021.

Income from operations for the nine months ended September 30, 2022 totaled $83.4 million compared to $64.1 million income from operations for the same period in 2021.

Casino revenue increased 20.8% in the first nine months of 2022 compared to the first nine months of 2021 and was driven by an increase in gaming devices with the opening of the expanded casino in Monarch Black Hawk and an increase in guest spend per visit at both properties.

Casino operating expense as a percentage of casino revenue increased to 34.9% for the nine months ended September 30, 2022 compared to 31.6% for the nine months ended September 30, 2021 primarily as a result of an increase in promotional allowances.

Food and beverage revenue for the first nine months of 2022 increased 33.5% compared to the 2021 same period due to a 22.4% increase in food and beverage covers combined with a 9.0% increase in food and beverage revenue per cover.

Food and beverage operating expense as a percentage of food and beverage revenue decreased in the first nine months of 2022 to 76.1% from 80.5% for the same period in 2021 primarily as a result of our effort to align menu prices with increased commodity prices and labor cost.

Hotel revenue increased 35.9% in the first nine months of 2022 compared to the first nine months of 2021 primarily due to increase in available rooms with the opening of the new hotel at Monarch Black Hawk, as well as increase in ADR.

ADR increased by $40.11, from $138.04 in the first nine months of 2021 to $178.15 in the first nine months of 2022.

Hotel occupancy for the first nine months of 2022 was 81.7% compared to 78.6% during the same period of 2021.

REVPAR was $159.08 for the first nine months of 2022 and $119.18 for the first nine months of 2021.

Hotel operating expense as a percentage of hotel revenue decreased to 35.3% in the first nine months of 2022 compared to 40.8% for the comparable prior year period primarily as a result of the higher ADR.

Other revenue increased 17.8% in the first nine months of 2022 compared to the same prior year period primarily due to the ramp-up of the spa operation at Monarch Black Hawk and increase in commission revenue.

SG&A expense increased to $72.9 million in the first nine months of 2022 from $62.2 million in the first nine months of 2021 primarily due to the increase in labor expense, utility expense and sales and marketing expense.

As a percentage of net revenue, SG&A expense decreased to 20.4% in the first nine months of 2022 compared to 21.9% in the same period in 2021.

Depreciation and amortization expense increased to $32.2 million for the nine months ended September 30, 2022 compared to $28.3 million for the same prior year period, due to new assets placed into service with the opening of our hotel tower and expanded casino at Monarch Black Hawk and renovation projects at Atlantis.

During the first nine months of 2022, we recognized $6.5 million in professional service fees relating to our construction litigation.

During the first nine months of 2021, we recognized $3.0 million of professional service fees relating to our construction litigation, $0.1 million in equipment, supplies and employee testing expenses directly attributable to the pandemic for reopening of the properties and incremental to normal operations, $0.1 million loss on disposal of assets, $0.3 million of litigation proceeds and $0.1 million of insurance claims proceeds.

During the first nine months of 2022, we expensed $1.1 million of interest and amortized $1.1 million in deferred loan costs.

During the first nine months of 2021, we expensed $3.2 million of interest and amortized $0.6 million in deferred loan costs.

In the first quarter of 2023 we recognized $0.5 million of interest expense, $0.3 million in deferred loan costs amortization expense and $0.3 million in interest income.

In the first quarter of 2022, we expensed $0.3 million of interest and amortized $0.4 million in deferred loan costs.

See further discussion of our Amended Credit Facility in the LIQUIDITY AND CAPITAL RESOURCES section below.

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We seek to continually upgrade and maintain our facilities in order to present a fresh, high quality product to our guests.

Cash paid for capital expenditures for the nine-month periods ended September 30, 2022 and 2021 totaled $40.5 million and $21.7 million, respectively.

During the nine-month period ended September 30, 2022 our capital expenditures related primarily to the redesign and upgrade of hotel rooms in the original tower at Atlantis, the new upscale retail shop at Atlantis and the acquisition of gaming and other equipment to upgrade and replace existing equipment at Atlantis and Monarch Black Hawk.

During the nine-month period ended September 30, 2021 our capital expenditures related primarily to the following:

the transformation of part of the legacy Monarch Black Hawk building into a specialty restaurant, sportsbook lounge and bar, and additional casino space;

complete renovation of the high-end suites on the top floors of the hotel tower at Atlantis;

and the acquisition of gaming and other equipment to upgrade and replace existing equipment at Atlantis and Monarch Black Hawk.

Capital expenditures during each of the first nine months of 2022 and 2021 were funded from operating cash flows.

Monarch Black Hawk Expansion

In 2013, we began work to convert the Monarch Black Hawk into a full-scale casino resort spa.

The multi-phased expansion of the Monarch Casino Resort Spa Black Hawk involved construction of a new parking structure beginning in 2016, demolition of the original parking structure in 2017, construction of a new hotel tower and casino expansion and redesign and upgrade of a part of the legacy facility, which were completed in February 2022.

In the fourth quarter of 2020, we began the phased opening of our new hotel tower and casino expansion, which increased the casino space and added a 23-story hotel tower with 516 guest rooms and suites, banquet and meeting room space, a retail store, a concierge lounge, an upscale spa and pool facility located on the top floor of the tower, three new restaurants, and additional bars and lounges.

In 2021, we added a poker room, a keno counter, a sportsbook, sports lounge and bar, as well as additional slot machines in the legacy facility.

In February 2022, we completed the Monarch Black Hawk expansion with the opening of a new specialty restaurant.

We are confident that the quality of our expanded product and exceptional guest service will meet the demand of the high-end segment of the market and will derive accelerated market share and revenue growth.

Cash paid for capital expenditures for the three-month periods ended March 31, 2023 and 2022 totaled $15.2 million and $22.1 million, respectively.

During the three-month period ended March 31, 2023, our capital expenditures related primarily to the redesign and upgrade of hotel rooms in the second tower at Atlantis, re-carpeting the casino floor at Atlantis and the acquisition of gaming, and other equipment to upgrade and replace existing equipment at Atlantis and Monarch Black Hawk.

During the three-month period ended March 31, 2022 our capital expenditures related primarily to the redesign and upgrade of hotel rooms in the first tower at Atlantis, the completion of the transformation of part of the Monarch Black Hawk legacy facility, and the acquisition of gaming and other equipment to upgrade and replace existing equipment at Atlantis and Monarch Black Hawk.

Capital expenditures during each of the first three months of 2023 and 2022 were funded from operating cash flows.

LIQUIDITY AND CAPITAL RESOURCES

Our principal sources of liquidity have been cash provided by operations and, for capital expansion projects, borrowings available under our Amended Credit Facility.

For the nine months ended September 30, 2022, net cash provided by operating activities totaled $106.2 million, compared to net cash provided by operating activities of $96.3 million in the same prior year period.

This increase was primarily a result of increases in net income, and depreciation expense, offset by an increase in working capital.

Net cash used in investing activities totaled $40.5 million and $21.7 million during the nine months ended September 30, 2022 and 2021, respectively.

Net cash used in investing activities during the first nine months of 2022 consisted primarily of cash used for the redesign and upgrade of hotel rooms in the original tower at Atlantis, the new upscale retail shop at Atlantis and for acquisition of gaming and other equipment at both properties.

Net cash used in investing activities during the first nine months of 2021 consisted primarily of cash used for the transformation of part of the Monarch Black Hawk legacy facility, complete renovation of the high-end suites on the top floors of the hotel tower at Atlantis and for acquisition of gaming and other equipment at both properties.

Net cash used in financing activities in the first nine months of 2022 totaled $66.0 million and consisted of $63.0 million in principal payments on the credit facility and $6.5 million cash used for the purchase of Company stock under the Repurchase Plan partially, offset by $3.5 million of net proceeds from stock options exercise.

Net cash used in financing activities in the first nine months of 2021 totaled $69.9 million and consisted of $74.5 million principal payments on the credit facility partially offset by $4.6 million proceeds from the stock options exercise.

For the three months ended March 31, 2023, net cash provided by operating activities totaled $61.5 million, compared to net cash provided by operating activities of $35.4 million in the same prior year period.

This increase was primarily a result of the decrease in income tax receivable as a result of receipt of an income tax refund.

Net cash used in investing activities totaled $15.2 million and $22.1 million during the three months ended March 31, 2023 and 2022, respectively.

Net cash used in investing activities during the first three months of 2023 consisted primarily of cash used for the redesign and upgrade of hotel rooms in the second tower at Atlantis, re-carpeting the casino floor at Atlantis, and the acquisition of gaming and other equipment at both properties.

Net cash used in investing activities during the first three months of 2022 consisted primarily of cash used for the redesign and upgrade of hotel rooms in the first tower at Atlantis, the completion of the transformation of part of the Monarch Black Hawk legacy facility, and for acquisition of gaming and other equipment at both properties.

Net cash used in financing activities in the first three months of 2023 totaled $50.7 million and consisted of $95.6 million used for payment of dividends, offset by $44.0 million of borrowings under the credit facility, net of the payments to the credit facility and $0.9 million of net proceeds from stock options exercise.

Net cash used in financing activities in the first three months of 2022 totaled $13.8 million and consisted of $10.0 million in principal payments on the credit facility and $6.5 million cash used for purchase of Company stock under the Repurchase Plan partially offset by $2.7 million of net proceeds from stock options exercise.

Amended Credit Facility

On September 3, 2020, we entered into the Fourth Amended and Restated Credit Agreement with Wells Fargo Bank, N.A., as administrative agent and certain banks (the “Fourth Amended Credit Facility”).

On April 30, 2021, we entered into an amendment to the Fourth Amended Credit Facility (defined above and hereafter, inclusive of all amendments, as the “Amended Credit Facility”).

The maturity date of the Amended Credit Facility is September 3, 2023.

The Amended Credit Facility increased the aggregate principal amount of the credit facilities to $270 million.

The $270 million Amended Credit Facility consists of a $200 million term loan (“Term Loan Facility”) and a $70 million revolving credit facility (“Revolving Credit Facility”), together with an option to increase the facility by up to an additional $75 million Revolving Credit Facility.

As of September 30, 2022, we had an outstanding principal balance of $27 million under the Term Loan Facility, a $0.6 million letter of credit and no borrowings under the Revolving Credit Facility;

$69.4 million remained available for borrowing.

The entire outstanding principal balance is due in the next twelve months.

We are required to make quarterly principal payments under the Term Loan Facility on each Term Loan Installment Date, commencing on December 31, 2020, in an amount equal to (x) the percentage set forth opposite the applicable period during which such Term Loan Installment Date occurs (i.e., 1.25% for the period from December 31, 2020 to September 30, 2021, and 2.50% for the period from December 31, 2021 and thereafter) multiplied by (y) $200 million.

Commencing with the delivery of the compliance certificate for fiscal year 2022, we may be required to prepay borrowings under the Amended Credit Facility using excess cash flows for each fiscal year, depending on the Company’s leverage ratio.

Borrowings are secured by liens on substantially all of our real and personal property.

In addition to other customary covenants for a facility of this nature, as of September 30, 2022, we are required to maintain a Total Leverage Ratio (as defined in the Amended Credit Facility) of no more than 4.0:1 and Fixed Charge Coverage Ratio (as defined in the Amended Credit Facility) of at least 1.15:1.

As of September 30, 2022, our Total Leverage Ratio and Fixed Charge Coverage Ratio were 0.2:1 and 3.8:1, respectively.

As of September 30, 2022, the interest rate under the Amended Credit Facility is LIBOR plus a margin ranging from 1.00% to 2.00%, or a base rate (as defined in the Amended Credit Facility) plus a margin ranging from 0.00% to 1.00%, or the Prime Rate.

The applicable margins vary depending on the Company’s leverage ratio.

Commitment fees are equal to the daily average unused revolving commitment multiplied by the commitment fee percentage, ranging from 0.175% to 0.325%, based on our leverage ratio.

As of September 30, 2022, the interest rate on the Term Loan Facility was 4.12%, or LIBOR plus a 1.00% margin.

On the terms and subject to some conditions, we may, at any time before the maturity date, request an increase of the Revolving Credit Facility, provided that each such increase is equal to $15 million or an integral multiple of $1 million in excess and, after giving effect to the requested increase, the aggregate amount of the increases in the total revolving loan commitment shall not exceed $75 million.

We may prepay borrowings under the Amended Credit Facility revolving loan without penalty (subject to certain conditions and certain charges applicable to the prepayment of LIBOR borrowings prior to the end of the applicable interest period).

Once reduced or cancelled, the Revolving Credit Facility may not be increased or reinstated without the prior written consent of all lenders.

During the first nine months of 2022, we made $48 million in optional prepayments on the Term Loan Facility in addition to a $15 million in mandatory payments.

As of September 30, 2022, $26.2 million, representing $27.0 million outstanding loan amount under the Amended Credit Facility, net of $0.8 million unamortized debt issuance costs, is presented in the Current liabilities section of the Company’s consolidated balance sheet as “Current maturities of long-term debt”.

We believe that our anticipated operating cash flow and the $69.4 million available under our Amended Credit Facility as of September 30, 2022 will be sufficient to sustain operations for the twelve months from filing of Form 10-Q for the quarter ended September 30, 2022 and fulfill our capital expenditure plans.

However, spikes in COVID-19 cases or new variants thereof, other contagious diseases or viruses, or financial, economic, competitive, regulatory, and other factors, many of which are beyond our control, could negatively impact our operations.

If we are unable to generate sufficient cash flow in the upcoming months or if our cash needs exceed our borrowing capacity under the Amended Credit Facility, we could be required to adopt one or more alternatives, such as reducing, delaying or eliminating planned capital expenditures, selling assets, restructuring debt or issuing additional equity.

On February 1, 2023, we entered into the Fifth Amended and Restated Credit Agreement with Wells Fargo Bank, N.A., as administrative agent.

The Fifth Amended Credit Facility (the “Amended Credit Facility”) amends and restates the Company’s Fourth Amended and Restated Credit Agreement, which consisted of:

a $200 million term loan and a $70 million revolving line of credit.

On February 1, 2023, there was no outstanding balance under the term loan of the Fourth Amended and Restated Credit Agreement.

The Amended Credit Facility does not contain a term loan.

The Amended Credit Facility increases the aggregate principal amount of the revolving line of credit from $70 million to $100 million, with an option to increase it by another $100 million within the first six months.

The maturity date of the Amended Credit Facility is January 1, 2025.

As of March 31, 2023, we had an outstanding principal balance of $51 million under the Amended Credit Facility.

In addition to other customary covenants for a facility of this nature, as of March 31, 2023, we were required to maintain a Total Leverage Ratio (as defined in the Amended Credit Facility) of no more than 2.5:1 and Fixed Charge Coverage Ratio (as defined in the Amended Credit Facility) of at least 1.1:1.

As of March 31, 2023, our Total Leverage Ratio and Fixed Charge Coverage Ratio were 0.3:1 and 6.7:1, respectively.

The interest rate under the Amended Credit Facility is SOFR (the Secured Overnight Financing Rate) plus a margin ranging from 1.00% to 1.50%, or a base rate (as defined in the Amended Credit Facility) plus a margin ranging from 0.00% to 0.50%.

The applicable margins will vary depending on the Company’s leverage ratio.

In addition, SOFR-based loans will incur a 0.10% credit adjustment spread due to the conversion from LIBOR to SOFR as the new benchmark rate.

As of March 31, 2023, the interest rate was 5.9%, or SOFR plus a 1.00% margin.

The Company’s obligations under the Amended Credit Facility are secured by substantially all of the Company’s assets.

We believe that our anticipated operating cash flow and the $48.4 million available under our Amended Credit Facility as of March 31, 2023 will be sufficient to sustain operations for the twelve months from the filing of this Form 10-Q for the quarter ended March 31, 2023 and fulfill our capital expenditure plans.

However financial, economic, competitive, regulatory, and other factors, many of which are beyond our control, could negatively impact our operations.

If we are unable to generate sufficient cash flow in the upcoming months or if our cash needs exceed our borrowing capacity under the Amended Credit Facility, including our option to increase the credit facility by an additional $100 million, we could be required to adopt one or more alternatives, such as reducing, delaying or eliminating planned capital expenditures, selling assets, restructuring debt or issuing additional equity.

For a discussion regarding our material commitments for capital expenditures, see the CAPITAL SPENDING AND DEVELOPMENT section above.

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What changed 10-Q

Item 2. Management’s Discussion and Analysis