PRIVILEGED & CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION
MEMORANDUM
CALDERWOOD & HARKNESS LLP 300 South Fourth Street, Suite 2800 Las Vegas, NV 89101
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I. Executive Summary
This memorandum analyzes whether the proposed mezzanine financing from Pinnacle Bridge Capital Partners, LP (together with its affiliated fund vehicle, "Pinnacle Bridge") and the associated issuance of equity warrants to Pinnacle Bridge triggers regulatory suitability or licensing requirements under Nevada gaming law. In addition, this memorandum addresses whether parallel considerations arise under the gaming regulatory frameworks of Arizona and New Mexico, in which Redstone Gaming Corp. ("RGC" or the "Company") also holds active gaming licenses.
RGC is a Nevada corporation, publicly traded on the Nasdaq Global Select Market under the ticker symbol "RDGM," and holds active gaming licenses issued by the Nevada Gaming Control Board ("NGCB") (License No. NGC-2019-00847), the Arizona Department of Gaming, and the New Mexico Gaming Control Board. The Company's gaming operations span digital wagering through its subsidiary Redstone Digital Wagering, LLC ("RDW") and tribal gaming management through its subsidiary Redstone Tribal Management, Inc. ("RTM"). As a registered publicly traded gaming company holding licenses in three jurisdictions, RGC is subject to overlapping regulatory regimes, each of which imposes disclosure, suitability, and licensing obligations on persons and entities that acquire significant financial interests in the Company or its subsidiaries.
The proposed transaction involves the issuance by RGC of a $35,000,000 subordinated mezzanine term note (the "Mezzanine Note") to Pinnacle Bridge Mezzanine Opportunities Fund IV, LP, a Delaware limited partnership managed by Pinnacle Bridge Capital Management, LLC (the "General Partner"). As an equity kicker, RGC would issue warrants (the "Warrants") to purchase 1,650,000 shares of RGC common stock, representing approximately 3.00% of RGC's fully diluted equity based on approximately 55,000,000 shares currently outstanding.
Our primary conclusion is as follows: The 3.00% warrant coverage falls below the 5% beneficial ownership threshold that would trigger a mandatory finding-of-suitability determination under Nevada Revised Statutes ("NRS") Chapter 463 and the regulations promulgated by the NGCB. Accordingly, Pinnacle Bridge and its principals — Victor Hargrove (Managing Partner) and Danielle Okonkwo (Head of Credit Investments) — are not currently required to undergo suitability review, submit Key Employee & Lender disclosure forms, or obtain any finding of suitability from the Nevada Gaming Commission (the "Commission") in connection with the proposed financing.
However, we flag an important caveat. The Mezzanine Note includes a 3.00% per annum paid-in-kind ("PIK") interest component that compounds quarterly over the five-year term of the note. While PIK accrual does not directly increase the number of warrant shares, the compounding effect on the outstanding note balance, when considered in conjunction with (a) anti-dilution adjustment provisions contained in the draft warrant agreement, (b) the possibility of share repurchases by RGC that would reduce the total outstanding share count, and (c) any renegotiation of the warrant coverage formula, creates a meaningful risk that the effective beneficial ownership percentage attributable to Pinnacle Bridge could cross the 5% threshold during the term of the financing. This risk is analyzed in detail in Section V below, and specific recommendations are provided to mitigate the risk of inadvertent threshold creep.
The balance of this memorandum is organized as follows: Section II provides relevant background on RGC and the key terms of the proposed mezzanine financing. Section III sets forth the applicable Nevada gaming regulatory framework, including the statutory and regulatory provisions governing suitability, beneficial ownership thresholds, institutional investor exemptions, and lender disclosure requirements. Section IV applies the regulatory framework to the current warrant coverage structure and confirms that no suitability filing is required at closing. Section V analyzes the PIK accrual and threshold creep risk in detail. Section VI addresses multi-jurisdictional considerations in Arizona and New Mexico. Section VII discusses collateral and real property lien restrictions. Section VIII briefly cross-references the interaction with RGC's existing senior credit facility. Section IX sets forth our conclusions and recommendations.
II. Background
A. Redstone Gaming Corp. — Regulatory Profile
Redstone Gaming Corp. is a Nevada corporation incorporated in 2015 and publicly traded on the Nasdaq Global Select Market under the ticker symbol "RDGM." The Company is headquartered at 4250 South Decatur Boulevard, Suite 1100, Las Vegas, Nevada 89103. RGC's executive management team includes Gerald "Gerry" Navarro (Chief Executive Officer), Priya Sandoval (Chief Financial Officer), Thomas Kierkegaard (General Counsel and Corporate Secretary), and Angela Fong (Treasurer).
RGC holds active gaming licenses in three states, as follows:
(a) Nevada. License No. NGC-2019-00847, issued by the Nevada Gaming Control Board. RGC is registered as a publicly traded corporation pursuant to NRS 463.585 and is subject to the continuing regulatory oversight of the NGCB and the Nevada Gaming Commission.
(b) Arizona. Gaming license issued by the Arizona Department of Gaming, primarily in connection with the Company's tribal gaming management operations conducted through RTM pursuant to tribal-state gaming compacts.
(c) New Mexico. Gaming license issued by the New Mexico Gaming Control Board, also related to the Company's tribal gaming management operations conducted through RTM.
The Company operates through two principal subsidiaries relevant to this transaction:
(i) Redstone Digital Wagering, LLC ("RDW") — a Nevada limited liability company (EIN: 88-0587214) that operates the Company's digital wagering platform. RDW holds and operates the proprietary RedBet wagering software, for which a trademark application was filed with the United States Patent and Trademark Office in August 2022. RDW is the primary subsidiary through which RGC conducts its interactive gaming operations in Nevada and, through reciprocal licensing arrangements, in certain other jurisdictions.
(ii) Redstone Tribal Management, Inc. ("RTM") — a Nevada corporation (EIN: 88-0601889) that holds and administers tribal gaming management contracts in Arizona and New Mexico. RTM's management contracts are entered into with federally recognized tribal nations and are subject to approval by the National Indian Gaming Commission ("NIGC") as well as the applicable state gaming regulators.
As of October 31, 2022, the Company had approximately 55,000,000 shares of common stock outstanding. The closing stock price on that date was $8.40 per share, yielding an approximate market capitalization of $462,000,000. For the twelve-month period ended June 30, 2022 (the Company's most recent fiscal year-end), RGC reported revenue of approximately $387.6 million and EBITDA of approximately $58.1 million. The Company's common stock trades with reasonable liquidity on Nasdaq, and RGC files periodic reports with the Securities and Exchange Commission as a reporting company under the Securities Exchange Act of 1934.
The regulatory profile of RGC is significant because, as a registered publicly traded gaming company in Nevada, the Company is subject to the most comprehensive gaming regulatory framework in the United States. All persons and entities who acquire significant financial interests in RGC — whether through equity ownership, lending relationships, or contractual arrangements — are potentially subject to investigation, disclosure, and suitability requirements imposed by the NGCB and the Commission.
B. The Proposed Mezzanine Financing — Key Terms
On December 2, 2022, RGC and Pinnacle Bridge Capital Partners, LP executed a non-binding term sheet (the "Term Sheet") setting forth the principal terms of the proposed mezzanine financing. The Term Sheet provides for a 90-day exclusivity period expiring on March 15, 2023, during which the parties will negotiate and execute definitive documentation. The key terms of the proposed transaction, as reflected in the Term Sheet and subsequent discussions between the parties and their respective counsel, are summarized below.
Borrower/Issuer. Redstone Gaming Corp.
Mezzanine Lender. Pinnacle Bridge Mezzanine Opportunities Fund IV, LP, a Delaware limited partnership (the "Fund"). The Fund is managed by its general partner, Pinnacle Bridge Capital Management, LLC, a Delaware limited liability company (the "General Partner"). The General Partner's Managing Partner is Victor Hargrove, and its Head of Credit Investments is Danielle Okonkwo. Pinnacle Bridge Capital Partners, LP, the Fund's ultimate parent entity, maintains its principal office at 280 Park Avenue, 22nd Floor, New York, NY 10017. Pinnacle Bridge manages approximately $3.8 billion in assets under management across credit and mezzanine strategies, with a particular institutional focus on the gaming, hospitality, and consumer sectors. The Fund has made prior investments in gaming-sector companies, including certain investments that have required the Fund to undergo gaming regulatory review in other jurisdictions. We understand from Pinnacle Bridge's counsel, Wainwright Hess & Caldwell LLP, that the Fund and its principals are not currently subject to any adverse findings, pending investigations, or unresolved suitability applications in any U.S. gaming jurisdiction.
Principal Amount. $35,000,000 subordinated mezzanine term note. The Mezzanine Note will be subordinated in right of payment to RGC's existing senior secured indebtedness under its credit facility with Cornerstone National Bank, N.A. (as described in Section VIII below).
Interest. The Mezzanine Note will bear interest at a blended all-in yield of 13.50% per annum, consisting of (a) 10.50% per annum cash interest, payable quarterly in arrears, and (b) 3.00% per annum PIK interest, compounding quarterly and added to the outstanding principal balance of the Mezzanine Note at the end of each quarterly interest period. The PIK interest feature is a standard component of subordinated mezzanine financings and allows the borrower to preserve cash during the early years of the note's term, with the accrued PIK interest increasing the principal amount due at maturity. As discussed in detail in Section V, the compounding effect of the PIK interest over the five-year term has potential implications for the gaming regulatory analysis.
Maturity. Five years from the date of funding. Based on the anticipated funding date of March 2023, the maturity date would fall in March 2028. The Mezzanine Note will be subject to customary prepayment provisions, including a non-call period and make-whole premium during the first two years, and par call thereafter.
Use of Proceeds. The proceeds of the Mezzanine Note are expected to be allocated as follows:
(i) Approximately $22,000,000 for "Project Catalyst," the Company's planned upgrade and expansion of its digital wagering platform (operated through RDW), including technology infrastructure improvements, expanded content and game library, enhanced user interface, and regulatory compliance enhancements for multi-state operations.
(ii) Approximately $13,000,000 for the expansion of tribal gaming management contracts in Arizona and New Mexico (operated through RTM), including the negotiation and execution of new management agreements with tribal gaming operations, working capital support for expanded operations, and capital expenditures for gaming floor improvements at tribal facilities.
Equity Kicker — Warrants. As consideration for the subordinated nature of the mezzanine investment and the associated credit risk, Pinnacle Bridge will receive warrants to purchase 1,650,000 shares of RGC common stock (the "Warrant Shares"), representing 3.00% of the Company's fully diluted equity based on the approximately 55,000,000 shares currently outstanding (55,000,000 × 3.00% = 1,650,000). The warrants will have a strike price of $9.24 per share, which represents a 10% premium to the 30-day volume-weighted average price ("VWAP") of approximately $8.40 per share as of the anticipated commitment date. The warrants will be exercisable at any time during the period commencing on the first anniversary of issuance and ending on the seventh anniversary of issuance, providing a two-year tail beyond the maturity of the Mezzanine Note. The warrant agreement will contain customary anti-dilution provisions, as discussed in detail in Section V.
Collateral. The Mezzanine Note will be secured by a second-priority pledge of 100% of the equity interests in RDW and RTM, as well as an assignment of certain intellectual property assets related to the RedBet proprietary wagering software. Importantly, the collateral package does not include any lien on real property associated with RGC's gaming operations. As discussed in Section VII, the exclusion of real property liens is intentional and avoids triggering a separate NGCB approval requirement. The second-priority nature of the equity pledge is subject to the terms of an intercreditor agreement to be negotiated with Cornerstone National Bank, N.A. as administrative agent under the senior credit facility.
Covenants and Governance Rights. The Term Sheet contemplates that the Mezzanine Note will include customary affirmative and negative covenants for a subordinated mezzanine financing of this type, including financial maintenance covenants (minimum EBITDA, maximum total leverage ratio, minimum fixed charge coverage ratio), reporting obligations, and negative covenants restricting additional indebtedness, restricted payments, asset dispositions, and changes of control. Pinnacle Bridge has also requested a board observation right (non-voting), which is under negotiation. The governance and consent rights ultimately included in the definitive documentation may have implications for the gaming regulatory analysis, as discussed in Section III.C below.
Exclusivity. The Term Sheet provides for a 90-day exclusivity period expiring March 15, 2023, during which RGC has agreed not to solicit, negotiate, or enter into any competing financing arrangements.
C. Placement Agent
Ashford Peak Advisory Group, LLC, a Delaware limited liability company and registered broker-dealer (FINRA CRD No. 174822), has been engaged by RGC as exclusive placement agent for the mezzanine financing. The engagement is under the direction of Jonathan Kuo, Managing Director at Ashford Peak. The placement agent fee is 1.50% of committed capital, totaling $525,000, payable at closing. Ashford Peak has provided financial advisory services to RGC in connection with the identification of potential mezzanine lenders, the structuring of the term sheet, and the coordination of due diligence. Ashford Peak's engagement does not raise independent gaming regulatory issues, as placement agents and financial advisors are not typically considered persons with a significant financial interest in a gaming licensee. However, RGC should confirm with Ashford Peak that it is not acquiring any equity interest in the Company in connection with this engagement.
III. Nevada Gaming Regulatory Framework
A. Overview of NRS Chapter 463 and NGCB Regulations
Nevada's gaming regulatory framework is widely regarded as the most comprehensive in the United States and serves as the model upon which many other states have based their own gaming regulatory statutes. The cornerstone of Nevada's regulatory scheme is NRS Chapter 463, which establishes the licensing, regulation, and control of all gaming activities conducted within the State of Nevada. The legislative policy underlying Chapter 463 is set forth in NRS 463.0129, which declares that "[t]he gaming industry is vitally important to the economy of the State and the general welfare of the inhabitants," and that "[t]he continued growth and success of gaming is dependent upon public confidence and trust that licensed gaming is conducted honestly and competitively, that the rights of the creditors of licensees are protected and that gaming is free from criminal and corruptive elements."
To effectuate this policy, NRS Chapter 463 establishes a comprehensive regulatory apparatus, comprising the Nevada Gaming Control Board (the "NGCB" or "Board") and the Nevada Gaming Commission (the "Commission"), which together exercise broad regulatory authority over every aspect of gaming operations in Nevada, including the licensing and suitability of all persons and entities with significant involvement in or influence over licensed gaming activities.
Of particular relevance to the proposed mezzanine financing are the provisions of NRS 463.585 through 463.643, which govern the registration and regulation of publicly traded corporations that are gaming licensees (or that hold, directly or indirectly, interests in gaming licensees). RGC, as a publicly traded Nevada corporation that holds a gaming license from the NGCB, is registered with the Commission pursuant to NRS 463.585 and is therefore subject to the full panoply of regulatory requirements applicable to registered publicly traded gaming companies. These requirements extend not only to RGC itself, but also to persons and entities who acquire significant ownership interests in, provide financing to, or exercise influence over the affairs of RGC.
The NGCB, as the investigative and enforcement arm of the regulatory apparatus, has broad authority to investigate any person or entity that exercises, or that may exercise, significant influence over the operations of a gaming licensee. This authority is not limited to persons who hold formal positions within the Company or who own shares above specified thresholds; rather, the Board retains discretion to investigate and require a finding of suitability from any person whose relationship with a gaming licensee warrants regulatory scrutiny. This broad discretionary authority is an important backdrop to the more specific threshold-based analysis that follows.
B. Beneficial Ownership Thresholds — The 5% Trigger
The principal statutory provision governing beneficial ownership suitability requirements for registered publicly traded gaming companies is NRS 463.643, which provides that any person who acquires beneficial ownership of 5% or more of the outstanding voting securities of a registered publicly traded corporation must report the acquisition to the Commission and, if required by the Board, apply for a finding of suitability.
Specifically, NRS 463.643 and NGCB Regulation 15.585 establish the following requirements:
(a) Notification Obligation. Any person or entity that acquires, directly or indirectly, beneficial ownership of 5% or more of the outstanding voting securities of a registered publicly traded corporation is required to file a notification with the NGCB within ten (10) days of crossing the 5% threshold. The notification must include the identity of the acquiror, the nature and source of funds used for the acquisition, the number of shares acquired, and the purpose of the acquisition.
(b) Finding of Suitability. Upon receipt of the notification, or upon its own initiative, the NGCB may require the acquiror to submit an application for a finding of suitability. A finding of suitability is a formal determination by the Commission, following investigation by the Board, that the person or entity is suitable to hold the equity interest in the gaming licensee. The suitability investigation typically includes a comprehensive background check, financial review, and assessment of the acquiror's business associations, criminal history (if any), and regulatory history in other jurisdictions.
(c) Discretionary Authority. The NGCB retains discretion to require a finding of suitability from any holder of voting securities whose ownership percentage exceeds 5%, and the Board may also, in its discretion, require suitability findings from persons holding less than 5% if the Board determines that the person's relationship with the gaming licensee warrants investigation. This discretionary authority provides the Board with a broad safety valve that exists independent of the mechanical threshold test.
For purposes of NRS 463.643 and NGCB Regulation 15.585, "beneficial ownership" is generally interpreted in a manner consistent with the beneficial ownership concepts articulated under the federal securities laws, including Rule 13d-3 under the Securities Exchange Act of 1934. Under this framework, beneficial ownership encompasses not only shares directly held by a person, but also shares that a person has the right to acquire within sixty (60) days through the exercise of options, warrants, conversion rights, or similar instruments. The inclusion of warrant shares and option shares in the beneficial ownership calculation is critically important in the context of the proposed mezzanine financing, because Pinnacle Bridge's beneficial ownership for NGCB purposes will include not only any shares of RGC common stock directly held by the Fund, but also the 1,650,000 shares underlying the Warrants.
Notwithstanding the general alignment with federal securities law concepts, the NGCB retains broad discretion to apply a "look-through" analysis to economic interests that do not fit neatly within the traditional beneficial ownership framework. For example, the Board has historically taken the position that it may look through complex financial instruments, derivative positions, or contractual arrangements to determine the economic substance of a person's interest in a gaming licensee, even if the person does not hold "beneficial ownership" in the strict securities-law sense. This look-through authority is a further consideration in assessing whether Pinnacle Bridge's overall economic interest in RGC — including the Mezzanine Note, the Warrants, and any governance or consent rights — could attract regulatory scrutiny even if the formal beneficial ownership percentage remains below 5%.
C. Institutional Investor Exemptions
NRS 463.643(3) provides a limited exemption from the suitability filing requirements for certain "institutional investors" that acquire and hold voting securities of a registered publicly traded corporation for investment purposes only. To qualify for this exemption, the institutional investor must satisfy the following conditions:
(a) The holder must not exercise control over, or participate in the management of, the gaming licensee or any entity that controls the gaming licensee.
(b) The holding must be passive and must not be intended to influence, and must not have the effect of influencing, the gaming operations of the licensee.
(c) The holder must file a certification with the NGCB, under oath, attesting to the passive nature of the investment and the holder's intent to hold the securities for investment purposes only.
The institutional investor exemption is most commonly utilized by registered investment companies (mutual funds), pension funds, insurance companies, and banks that acquire shares of publicly traded gaming companies as part of diversified investment portfolios. The exemption is available at ownership levels up to certain higher thresholds (typically 10% or 15%, depending on the nature of the institutional investor), subject to the Board's continuing oversight and the investor's ongoing compliance with the passivity requirements.
Applicability to Pinnacle Bridge. As a private investment fund, Pinnacle Bridge Capital Partners, LP (and its Fund vehicle, Pinnacle Bridge Mezzanine Opportunities Fund IV, LP) may facially qualify as an institutional investor if its holding of RGC equity is purely passive. However, several features of the proposed mezzanine financing could undermine a passive-holder characterization and potentially disqualify Pinnacle Bridge from relying on the institutional investor exemption:
(i) The warrant and conversion features of the financing represent an affirmative equity investment component, rather than a purely passive portfolio allocation.
(ii) The mezzanine lender's typical covenant and consent rights — including financial maintenance covenants, negative covenants restricting certain corporate actions, and the requirement for lender consent before the Company may take specified actions — may be viewed as conferring a degree of control or influence over the operations of the Company that is inconsistent with a passive-holder posture.
(iii) Pinnacle Bridge has requested, in Term Sheet discussions, a board observation right (non-voting). While a board observation right does not confer a formal governance role, the NGCB may view such a right as evidence of an intent to participate in or influence the management of the gaming licensee, which would be inconsistent with the institutional investor exemption.
We note that the institutional investor exemption analysis is currently moot because Pinnacle Bridge's beneficial ownership (3.00% warrant coverage) is below the 5% threshold at which the suitability filing obligation arises. The institutional investor exemption would become relevant only if Pinnacle Bridge's beneficial ownership were to reach or exceed 5%, at which point the Fund would need to either (a) undergo a full suitability review or (b) seek to qualify for the institutional investor exemption to avoid the suitability filing requirement. For the reasons discussed above, we believe it would be difficult for Pinnacle Bridge to rely on the institutional investor exemption given the active nature of its investment and the governance rights under negotiation, and this consideration further underscores the importance of ensuring that the 5% threshold is not crossed.
D. Key Employee and Lender Disclosure Forms
In addition to the beneficial ownership suitability requirements discussed above, the NGCB requires the submission of "Key Employee & Lender" disclosure forms by certain persons who provide financing to a gaming licensee. The Key Employee & Lender disclosure form is a comprehensive personal and financial disclosure document that must be completed by individuals who hold key positions within the gaming licensee's organizational structure, as well as by persons who provide financing to a gaming licensee under circumstances that give rise to regulatory concern.
With respect to lenders specifically, the NGCB may require the submission of a Key Employee & Lender disclosure form if:
(a) The lender acquires equity conversion rights, warrants, or options representing more than 5% of the outstanding shares of the gaming licensee; or
(b) The lender obtains governance or operational influence over the gaming licensee, such as board seats, board observation rights, veto or consent rights over material business decisions, or the right to appoint or remove officers or directors of the licensee.
The Key Employee & Lender disclosure form requires detailed personal financial information, including net worth statements, tax returns, bank account information, and disclosure of all business affiliations, legal proceedings, and regulatory history. The submission of the form triggers an investigation by the NGCB's Investigations Division, which may include background checks, interviews, and requests for additional documentation.
At the current 3.00% warrant coverage level, Pinnacle Bridge and its principals — Victor Hargrove and Danielle Okonkwo — would not be required to submit the Key Employee & Lender disclosure form based on the equity conversion threshold, as the warrant shares represent less than 5% of RGC's outstanding shares. However, if Pinnacle Bridge were to negotiate and obtain significant governance rights in the definitive documentation — particularly a board seat, board observation right with non-public information access, or broad consent rights over material corporate actions — the NGCB could exercise its discretionary authority to require the submission of the Key Employee & Lender disclosure form on the basis of governance influence, independent of the beneficial ownership percentage. RGC should bear this possibility in mind during the negotiation of the definitive mezzanine documents, and C&H is available to provide further guidance on the structuring of covenant and governance provisions to minimize the risk of triggering a disclosure obligation.
IV. Analysis of Current Warrant Coverage
A. Calculation of Warrant Ownership Percentage
The fundamental question presented by the proposed mezzanine financing is whether the issuance of Warrants to Pinnacle Bridge results in the Fund acquiring beneficial ownership of 5% or more of RGC's outstanding voting securities, thereby triggering the suitability filing requirements under NRS 463.643 and NGCB Regulation 15.585. To answer this question, we set forth the relevant calculations below.
Shares Outstanding. As of October 31, 2022, RGC had approximately 55,000,000 shares of common stock outstanding. For purposes of this analysis, we use this figure as the current share count and note that the exact share count at the time of closing (anticipated March 2023) may vary based on intervening share issuances (e.g., option exercises, restricted stock vesting, or other equity compensation activity) or repurchases. The Company should update this analysis with the actual share count at the time of closing.
Warrant Shares. The proposed Warrants would entitle Pinnacle Bridge to purchase 1,650,000 shares of RGC common stock. This figure was derived by applying the agreed-upon warrant coverage percentage of 3.00% to the 55,000,000 shares currently outstanding (55,000,000 × 3.00% = 1,650,000).
Warrant Strike Price. The exercise price of the Warrants is $9.24 per share, representing a 10% premium to the 30-day VWAP of approximately $8.40 as of the anticipated commitment date. The above-market strike price is relevant to certain beneficial ownership calculation methodologies (e.g., the treasury stock method used in computing diluted earnings per share under GAAP), though as noted below, the NGCB's beneficial ownership analysis does not necessarily apply the treasury stock method.
Post-Exercise Ownership Analysis. We calculate Pinnacle Bridge's beneficial ownership percentage under two methodologies:
(i) Simple percentage basis (warrants as a percentage of shares currently outstanding): 1,650,000 warrant shares ÷ 55,000,000 shares outstanding = 3.00%. This is the most straightforward calculation and represents the percentage of the Company's current outstanding equity that Pinnacle Bridge would hold upon full exercise of the Warrants (assuming no change in the outstanding share count other than the issuance of the Warrant Shares themselves, and not accounting for the dilutive effect of exercise on the denominator).
(ii) Fully diluted basis (warrants as a percentage of total shares after exercise): Assuming full exercise of the Warrants, the total number of shares outstanding would increase to 56,650,000 (55,000,000 existing shares + 1,650,000 new shares issued upon exercise). On this basis, Pinnacle Bridge's ownership percentage would be: 1,650,000 ÷ 56,650,000 = approximately 2.91%. This fully diluted calculation yields a lower percentage because the denominator includes the shares to be issued upon exercise.
Under either methodology, Pinnacle Bridge's beneficial ownership percentage is well below the 5% threshold. The simple percentage basis, which is the more conservative calculation and the one more likely to be applied by the NGCB, yields 3.00% — a full two percentage points below the 5% suitability trigger.
Conclusion. At the time of issuance, the proposed warrant coverage of 3.00% (1,650,000 shares) is comfortably below the 5% beneficial ownership threshold under NRS 463.643 and NGCB Regulation 15.585. The margin of safety is meaningful, providing a buffer of approximately 1,100,000 shares (i.e., Pinnacle Bridge would need to hold warrants or other equity rights covering an additional 1,100,000 shares, for a total of 2,750,000 shares, to reach the 5% threshold based on the current 55,000,000 shares outstanding).
B. No Current Suitability Filing Required
Based on the foregoing analysis, we conclude that no suitability filing is required at closing in connection with the proposed mezzanine financing. Specifically:
(a) Neither Pinnacle Bridge Capital Partners, LP, Pinnacle Bridge Mezzanine Opportunities Fund IV, LP, nor Pinnacle Bridge Capital Management, LLC, as entities, would be required to undergo a finding-of-suitability determination by the Commission or file a notification under NRS 463.643 in connection with the acquisition of the Warrants.
(b) Neither Victor Hargrove (Managing Partner of the General Partner) nor Danielle Okonkwo (Head of Credit Investments of the General Partner), as individual principals, would be required to submit personal applications for findings of suitability or to complete Key Employee & Lender disclosure forms in connection with the transaction.
(c) The issuance of the Mezzanine Note itself, as a debt instrument without equity conversion rights (the Warrants being issued as a separate instrument), does not independently trigger suitability requirements. While the NGCB monitors lending relationships involving gaming licensees, the mere extension of credit on a subordinated basis does not, standing alone, give rise to a suitability filing obligation, provided that the lender does not acquire equity conversion features, governance rights, or other attributes that would bring the lender within the scope of NRS 463.643 or the Key Employee & Lender disclosure framework.
We emphasize, however, that this conclusion is based on the current facts and the current terms of the proposed transaction as reflected in the Term Sheet and preliminary draft documents. Any material changes to the transaction terms — including an increase in the warrant coverage percentage, the addition of equity conversion features to the Mezzanine Note itself, or the grant of significant governance rights to Pinnacle Bridge — could alter this analysis and potentially trigger suitability or disclosure obligations. Additionally, as noted in Section III.A, the NGCB retains broad discretionary authority to require suitability filings from persons or entities whose relationship with a gaming licensee warrants regulatory scrutiny, even if the formal beneficial ownership threshold is not crossed. While we believe the exercise of such discretionary authority would be unlikely in this case given the modest 3.00% warrant coverage, the possibility cannot be entirely excluded.
V. PIK Accrual and Threshold Creep Risk
A. Mechanics of PIK Interest Compounding
As described in Section II.B, the Mezzanine Note provides for a PIK interest component of 3.00% per annum, compounding quarterly. Under the PIK mechanism, the 3.00% per annum interest is not paid in cash but is instead added to the outstanding principal balance of the Mezzanine Note at the end of each quarterly interest period. The PIK interest then accrues additional interest in subsequent periods, creating a compounding effect that increases the outstanding principal balance over the life of the note.
The following table illustrates the projected growth of the outstanding principal balance of the Mezzanine Note over the five-year term, assuming that PIK interest is elected in all periods (i.e., no voluntary cash payment of PIK interest by RGC) and that cash interest at 10.50% per annum is paid current:
Note: PIK accrual figures reflect quarterly compounding at a nominal annual rate of 3.00% (0.75% per quarter). Figures are approximate and subject to rounding.
Over the full five-year term, the outstanding principal balance of the Mezzanine Note is projected to grow from $35,000,000 to approximately $40,663,383, an increase of approximately $5,663,383, or approximately 16.2%. The total PIK accrual represents a meaningful increase in the economic exposure of the mezzanine investment.
The critical question for gaming regulatory purposes is whether the PIK accrual on the Mezzanine Note creates additional equity rights for Pinnacle Bridge or otherwise increases the number of Warrant Shares. As a general matter, PIK interest does not itself create additional equity. The PIK accrual increases the principal amount of the debt instrument, but the debt instrument remains a debt instrument, and the holder's equity interest in the Company does not increase merely because the principal balance of the note has grown due to PIK accrual.
However, the concern arises in the specific context of whether the Warrant Agreement includes provisions that could cause the number of Warrant Shares to increase in response to changes in the outstanding principal balance of the Mezzanine Note or changes in the total number of outstanding shares of the Company. As discussed in Section V.B below, certain anti-dilution provisions and potential structural modifications to the Warrant Agreement could create a pathway through which PIK accrual indirectly causes Pinnacle Bridge's beneficial ownership to approach or exceed the 5% threshold.
B. Scenario Analysis — Risk of Crossing the 5% Threshold
We have identified three principal risk scenarios under which Pinnacle Bridge's beneficial ownership could approach or exceed the 5% suitability threshold during the term of the Mezzanine Note, notwithstanding the fact that the initial warrant coverage is only 3.00%.
Scenario 1: Fixed Warrant Share Count with Share Buybacks
The current draft Warrant Agreement provides for a fixed number of 1,650,000 Warrant Shares. Under this structure, the number of Warrant Shares does not change regardless of changes in the outstanding principal balance of the Mezzanine Note. However, the denominator in the beneficial ownership calculation — i.e., the total number of shares of RGC common stock outstanding — is not fixed and will fluctuate over time based on share issuances and repurchases by the Company.
If RGC were to undertake a significant share repurchase program, the reduction in the outstanding share count would mechanically increase Pinnacle Bridge's beneficial ownership percentage, even though the number of Warrant Shares remains fixed at 1,650,000. The following table illustrates the impact of share count reductions on Pinnacle Bridge's beneficial ownership:
As shown, if RGC were to repurchase shares reducing the outstanding count to approximately 33,000,000 shares or fewer, Pinnacle Bridge's 1,650,000 Warrant Shares would represent 5% or more of the outstanding equity, crossing the suitability threshold. A reduction to 32,000,000 shares (a repurchase of approximately 23,000,000 shares, or approximately 42% of the current outstanding) would result in a beneficial ownership percentage of approximately 5.16%.
While a reduction of this magnitude would be significant and would require substantial capital deployment, it is not inconceivable over a five-year period, particularly if the Company generates strong free cash flow and prioritizes shareholder returns through buybacks. RGC's board and management should be mindful of this dynamic when evaluating future share repurchase authorizations.
Scenario 2: Anti-Dilution Adjustments Under the Draft Warrant Agreement
The draft Warrant Agreement includes standard broad-based weighted-average anti-dilution adjustment provisions. These provisions are designed to protect the warrant holder against dilution of its equity interest in the event of certain corporate actions, including:
(a) Stock splits, stock dividends, and other recapitalization events that increase the number of outstanding shares without a corresponding increase in the Company's equity value.
(b) Issuances of shares (or securities convertible into shares) at a price below the then-current exercise price of the Warrants, which trigger a weighted-average adjustment that reduces the exercise price and, in some formulations, increases the number of Warrant Shares.
(c) Reclassifications, mergers, consolidations, and other fundamental transactions that affect the composition or structure of the Company's equity.
The broad-based weighted-average anti-dilution formula adjusts the exercise price of the Warrants (and, under certain formulations, the number of Warrant Shares) based on the relative dilutive impact of the new issuance on the existing equity capitalization. While these provisions are market-standard for warrant agreements of this type and are generally less favorable to the warrant holder than full-ratchet anti-dilution protection, they nonetheless create the potential for the number of Warrant Shares (or the economic equivalent thereof, through a reduction in exercise price) to increase over time, moving Pinnacle Bridge's beneficial ownership closer to the 5% threshold.
We note that anti-dilution adjustments that merely prevent dilution of the warrant holder's existing percentage interest (i.e., adjustments that maintain the holder at 3.00% in the face of dilutive issuances) would not, standing alone, cause the 5% threshold to be crossed. However, the interaction between anti-dilution adjustments and share buybacks (Scenario 1) could produce a combined effect that moves the beneficial ownership percentage significantly higher.
Scenario 3: Renegotiation of Warrant Coverage Formula
In Term Sheet discussions, Pinnacle Bridge has proposed that the warrant coverage be tied to a percentage of fully diluted equity recalculated at the time of exercise, rather than a fixed share count determined at issuance. Under this approach, the number of Warrant Shares would be determined at the time of exercise by applying the 3.00% coverage percentage to the then-current fully diluted share count, which would be affected by intervening share issuances, repurchases, and other corporate actions.
If the warrant coverage were tied to a recalculated percentage rather than a fixed share count, the PIK accrual on the Mezzanine Note could indirectly affect the coverage calculation. For example, if the warrant coverage formula incorporated the ratio of the outstanding principal balance of the Mezzanine Note to total enterprise value, an increase in the note balance due to PIK accrual could result in a higher warrant coverage percentage, even without any change in the underlying share count.
C&H's Recommendation. We strongly recommend that the Warrant Agreement maintain a fixed share count of 1,650,000 Warrant Shares and resist any proposal by Pinnacle Bridge to tie the warrant coverage to a recalculated percentage of fully diluted equity. A fixed share count provides certainty and predictability in the gaming regulatory analysis, whereas a floating percentage introduces variables that could cause the 5% threshold to be crossed in ways that are difficult to predict or monitor. We have communicated this position to Pinnacle Bridge's counsel, Wainwright Hess & Caldwell LLP, and understand that Pinnacle Bridge has not yet definitively agreed to a fixed share count but has indicated a willingness to consider this structure.
In addition, we recommend that the Warrant Agreement include a provision (a "regulatory cap") providing that in no event shall the number of Warrant Shares, after giving effect to any anti-dilution adjustments or other increases, exceed the number of shares that would represent 4.99% of the Company's then-outstanding shares. This cap would serve as a structural safeguard against inadvertent crossing of the 5% threshold, regardless of the circumstances.
C. Monitoring Obligation
Even if the Warrant Agreement is structured with a fixed share count and a regulatory cap as recommended above, RGC should implement an internal monitoring protocol to track the Company's beneficial ownership profile on an ongoing basis throughout the term of the Mezzanine Note and the exercise period of the Warrants. Specifically, the monitoring protocol should include:
(a) Quarterly tracking of total outstanding shares. The Company's corporate secretary or general counsel should maintain a current record of the total number of shares of common stock outstanding, including any changes due to share repurchases, option exercises, restricted stock vesting, or other issuances. Any reduction in the outstanding share count that would cause Pinnacle Bridge's beneficial ownership to approach 4.50% should be flagged for further analysis.
(b) Monitoring of anti-dilution adjustments. The Company should track any corporate events (stock splits, below-market issuances, dividends, etc.) that could trigger anti-dilution adjustments under the Warrant Agreement and should calculate the resulting impact on the number of Warrant Shares and the beneficial ownership percentage.
(c) Regulatory developments. The Company should monitor any changes to NRS Chapter 463, NGCB regulations, or NGCB interpretive guidance that could affect the beneficial ownership thresholds or the definition of beneficial ownership for gaming regulatory purposes. The NGCB periodically issues informal guidance, policy memoranda, and workshop publications that may bear on these issues.
(d) Proactive engagement with the NGCB. If the beneficial ownership percentage approaches the 4.50% level, RGC should consider proactively engaging with NGCB staff — on an informal, off-the-record basis if possible — to discuss the situation before a formal filing obligation is triggered. The NGCB staff has historically been receptive to informal pre-filing consultations with gaming licensees and their counsel, and early engagement can help avoid surprises and facilitate a cooperative relationship with the regulatory authority.
C&H is prepared to assist RGC in designing and implementing the monitoring protocol described above and to provide periodic updates on regulatory developments that may affect this analysis.
VI. Multi-Jurisdictional Considerations
A. Arizona Department of Gaming
RGC holds gaming licenses issued by the Arizona Department of Gaming in connection with the Company's tribal gaming management operations conducted through RTM. Arizona's gaming regulatory framework is established by A.R.S. § 5-601 et seq. and is supplemented by the tribal-state gaming compacts entered into between the State of Arizona and the various federally recognized tribal nations that conduct gaming within the state.
Arizona gaming law imposes disclosure and suitability requirements on persons and entities with significant financial interests in gaming management companies, including entities that hold management contracts with tribal gaming operations. The Arizona Department of Gaming has regulatory authority over the qualification and suitability of all persons and entities involved in tribal gaming management, including the management company's principals, officers, directors, and significant financial stakeholders.
The proposed allocation of approximately $13,000,000 of the mezzanine proceeds to the expansion of tribal gaming management contracts in Arizona may heighten the Arizona regulator's interest in the source and structure of the financing. While the Arizona Department of Gaming does not automatically require suitability review of every lender to a gaming management company, the regulatory authority retains discretion to inquire into the identity and background of financial sources that fund gaming management operations. The expansion of RTM's Arizona operations funded by subordinated debt from a New York-based private investment fund, coupled with equity warrant coverage, is the type of financing arrangement that could attract regulatory inquiry.
Arizona's beneficial ownership thresholds for suitability review are generally similar in concept to Nevada's 5% equity ownership standard, although the specific statutory language and regulatory interpretations differ. The Arizona Department of Gaming also applies a broader "significant financial interest" standard that may encompass interests below the numerical equity ownership threshold if the regulator determines that the financial interest confers influence or control over gaming management operations.
Recommendation. RGC should notify the Arizona Department of Gaming of the proposed mezzanine financing as a matter of best practice, even if no formal filing obligation is currently triggered. The notification should describe the general terms of the financing, identify Pinnacle Bridge as the lender, and confirm that the warrant coverage is below any applicable suitability threshold. This proactive approach demonstrates good faith and regulatory cooperation, which is valuable in maintaining a positive relationship with the Arizona regulator. If the Arizona Department of Gaming requests additional information or determines that a suitability filing is required, RGC should promptly comply and coordinate with C&H on the appropriate response.
B. New Mexico Gaming Control Board
RGC also holds gaming licenses issued by the New Mexico Gaming Control Board in connection with RTM's tribal gaming management operations in New Mexico. New Mexico's Gaming Control Act (NMSA § 60-2E-1 et seq.) establishes a regulatory framework for the licensing and oversight of gaming activities within the state, including the regulation of persons and entities involved in the management and operation of gaming establishments.
Under New Mexico law, gaming licensees are required to disclose changes in ownership, financing arrangements, and corporate structure to the New Mexico Gaming Control Board. The applicable thresholds and requirements for suitability review differ from those in Nevada, and the New Mexico regulatory framework generally affords the Gaming Control Board discretion to determine when disclosure and suitability filings are required based on the facts and circumstances of each case.
The proposed allocation of a portion of the mezzanine proceeds to the expansion of tribal gaming management contracts in New Mexico may similarly attract the attention of the New Mexico Gaming Control Board, particularly given that the financing involves a subordinated debt instrument with equity conversion features (warrants) issued to a private investment fund.
Recommendation. Consistent with the approach recommended for Arizona, RGC should make an informational filing or inquiry with the New Mexico Gaming Control Board to confirm that no separate suitability or disclosure requirements apply in connection with the mezzanine financing. The filing should be coordinated with any notifications required under RTM's existing tribal gaming management contracts and the applicable tribal-state gaming compacts. C&H can assist in preparing the necessary correspondence and filings.
VII. Collateral and Real Property Lien Restrictions
The proposed mezzanine security structure includes a second-priority pledge of 100% of the equity interests in RDW and RTM, together with an assignment of certain intellectual property assets related to the RedBet proprietary wagering software. Importantly, the collateral package does not include any lien on real property associated with RGC's gaming operations.
This exclusion is significant from a gaming regulatory perspective. Nevada gaming regulations restrict the pledging, encumbering, or transfer of real property associated with gaming operations without prior approval from the NGCB. Specifically, NGCB Regulation 8.110 and related provisions require that a gaming licensee obtain Board approval before granting a lien on, or conveying a security interest in, real property that is used in connection with gaming operations. The purpose of this requirement is to ensure that the NGCB maintains oversight over the disposition of gaming assets and can prevent situations in which the foreclosure or enforcement of a lien by a creditor could result in the transfer of gaming-related real property to an unsuitable person or entity.
By excluding real property liens from the mezzanine collateral package, the proposed transaction avoids triggering this separate NGCB approval requirement. The equity pledge and IP assignment, while subject to their own regulatory considerations (particularly in the event of foreclosure, which would require the pledgee to undergo suitability review before acquiring the pledged interests), do not require prior NGCB approval as a condition to the creation of the security interest.
We note that this collateral structure is consistent with C&H's advice during the term sheet negotiation phase. Pinnacle Bridge and its counsel have accepted the limited collateral package, recognizing that the inclusion of real property liens would introduce additional regulatory complexity and delay. The intercreditor agreement with Cornerstone National Bank, N.A. will govern the relative priorities and enforcement rights of the senior and mezzanine lenders with respect to the pledged equity and IP collateral.
VIII. Interaction with Existing Senior Credit Facility
The gaming regulatory analysis set forth in this memorandum is independent of, and in addition to, the consent and intercreditor requirements arising under RGC's existing senior credit facility. For completeness, we note the relevant cross-reference.
RGC is party to a Second Amended and Restated Credit Agreement, dated March 15, 2021 (as amended, the "Senior Credit Agreement"), among RGC as borrower, Cornerstone National Bank, N.A. as Administrative Agent, and the lenders party thereto. The Senior Credit Agreement provides for a $125,000,000 senior secured revolving credit facility and a $75,000,000 senior secured term loan facility, secured by a first-priority lien on substantially all assets of RGC and its subsidiaries (subject to customary exclusions, including the exclusion of gaming licenses and permits that may not be pledged under applicable law).
Section 7.03(b) of the Senior Credit Agreement contains a negative covenant prohibiting RGC from incurring subordinated indebtedness in excess of $10,000,000 without the prior written consent of the Administrative Agent and the Required Lenders (defined as lenders holding more than 50% of the aggregate commitments and outstanding loans under the facility). The proposed $35,000,000 Mezzanine Note exceeds this threshold and therefore requires consent under Section 7.03(b). In addition, the Senior Credit Agreement requires that any permitted subordinated indebtedness be subject to an intercreditor agreement in form and substance satisfactory to the Administrative Agent and the Required Lenders.
The negotiation of the consent and intercreditor agreement with Cornerstone National Bank, N.A. is the subject of a separate C&H memorandum dated December 15, 2022. The gaming regulatory analysis presented in this memorandum is independent of the senior lender consent process, and the conclusions and recommendations set forth herein are not contingent upon the outcome of the consent negotiation. However, we note that the intercreditor agreement will address certain matters — including the rights of the mezzanine lender upon default and foreclosure of the equity pledge — that have potential gaming regulatory implications. In the event of a foreclosure by Pinnacle Bridge on the pledged equity interests in RDW and RTM, Pinnacle Bridge (or its designee) would be required to undergo a full suitability review and obtain a finding of suitability from the NGCB (and the Arizona and New Mexico gaming regulators, as applicable) before acquiring the equity interests of the gaming subsidiaries. This foreclosure scenario should be addressed in the intercreditor agreement through appropriate standstill and notice provisions.
IX. Conclusions and Recommendations
Based on the foregoing analysis, C&H provides the following conclusions and recommendations:
1. No current suitability filing required. The proposed 3.00% warrant coverage (1,650,000 shares of RGC common stock) is below the 5% beneficial ownership threshold under NRS 463.643 and NGCB Regulation 15.585. Accordingly, neither Pinnacle Bridge Capital Partners, LP, Pinnacle Bridge Mezzanine Opportunities Fund IV, LP, Pinnacle Bridge Capital Management, LLC, nor the individual principals of the General Partner (Victor Hargrove and Danielle Okonkwo) are required to submit a finding-of-suitability application or Key Employee & Lender disclosure form with the NGCB or the Commission in connection with the closing of the proposed mezzanine financing. The issuance of the Mezzanine Note, as a debt instrument without independent equity conversion features, does not trigger suitability requirements.
2. PIK accrual and threshold creep risk flagged. Although the 3.00% PIK interest component does not directly increase the number of Warrant Shares, the compounding effect on the outstanding principal balance of the Mezzanine Note, combined with (a) potential anti-dilution adjustments under the Warrant Agreement, (b) possible future share repurchases by RGC that would reduce the total outstanding share count, and (c) any renegotiation of the warrant coverage formula to a floating percentage basis, could cause Pinnacle Bridge's beneficial ownership to approach or exceed the 5% suitability threshold over the five-year term of the Mezzanine Note. C&H recommends (a) maintaining a fixed Warrant Share count of 1,650,000 rather than a recalculated percentage of fully diluted equity, (b) including a regulatory cap in the Warrant Agreement providing that in no event shall the Warrant Shares exceed 4.99% of the Company's then-outstanding shares, and (c) implementing an internal monitoring protocol to track changes in the outstanding share count, anti-dilution adjustments, and regulatory developments on a quarterly basis.
3. Multi-jurisdictional notice. RGC should make informational filings or inquiries with the Arizona Department of Gaming and the New Mexico Gaming Control Board to confirm that no separate suitability or disclosure requirements apply in connection with the mezzanine financing, particularly given the proposed use of approximately $13,000,000 of the proceeds for the expansion of tribal gaming management contracts in those jurisdictions.
4. No real property lien approval needed. The exclusion of real property from the mezzanine collateral package avoids triggering NGCB real property pledge approval requirements under Regulation 8.110. This collateral structure is consistent with C&H's advice and Pinnacle Bridge's acceptance of the limited collateral package.
5. Warrant agreement drafting. C&H will incorporate the following protective provisions in the Warrant Agreement to minimize the risk of threshold creep and ensure ongoing compliance with Nevada gaming regulations:
(a) A fixed Warrant Share count of 1,650,000, not subject to recalculation based on a floating percentage of fully diluted equity.
(b) A regulatory cap providing that the aggregate number of Warrant Shares, after giving effect to any anti-dilution adjustments or other increases, shall not exceed the number of shares representing 4.99% of the Company's then-outstanding shares of common stock.
(c) A provision requiring the warrantholder to provide written notice to RGC if the warrantholder's beneficial ownership of RGC common stock (including Warrant Shares, whether or not exercised) would exceed 4.50% of the Company's then-outstanding shares (an "early-warning mechanism").
(d) A provision requiring the warrantholder to cooperate with RGC in making any filings required by gaming regulatory authorities in connection with the Warrants.
(e) A provision restricting the transfer of the Warrants to p