Company Quick10K Filing
Quick10K
Empire Resorts
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$12.18 34 $419
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-04-23 Exit Costs
8-K 2019-03-25 Other Events
8-K 2019-03-12 Amendment
8-K 2019-02-20 Sale of Shares, Exhibits
8-K 2019-01-22 Exit Costs, Other Events
8-K 2019-01-01 Other Events
8-K 2018-11-30 Off-BS Arrangement
8-K 2018-11-21 Officers
8-K 2018-11-09 Enter Agreement, Sale of Shares, Amend Bylaw, Other Events, Exhibits
8-K 2018-11-05 Shareholder Vote
8-K 2018-08-30 Off-BS Arrangement
8-K 2018-07-23 Off-BS Arrangement
8-K 2018-07-02 Regulation FD, Exhibits
8-K 2018-06-25 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2018-05-03 Other Events, Exhibits
8-K 2018-02-05 Other Events, Exhibits
8-K 2018-01-17 Officers, Other Events
8-K 2017-12-28 Enter Agreement, Off-BS Arrangement, Sale of Shares, Exhibits
SCCO Southern Copper 31,900
WWE World Wrestling Entertainmentinc 7,660
NWBI Northwest Bancshares 1,810
BXG Bluegreen Vacations 1,140
HSTM Healthstream 909
WAAS Aquaventure Holdings 512
PDLB PDL Community Bancorp 262
EPSN Epsilon Energy 123
ZSAN Zosano Pharma 39
SGOL ETFS Gold Trust 0
NYNY 2018-12-31
Part I
Item 1. Business.
Item 1A. Risk Factors.
Item 1B. Unresolved Staff Comments.
Item 2. Properties.
Item 3. Legal Proceedings.
Item 4. Mine Safety Disclosures.
Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Item 8. Financial Statements and Supplementary Data.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Item 9A. Controls and Procedures.
Item 9B. Other Information.
Part III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management, and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accounting Fees and Services
Part IV
Item 15. Exhibits, Financial Statement Schedules.
EX-4.13 empire_moc-revolvingloanag.htm
EX-10.28 ex1028executioncopyhornere.htm
EX-10.60 ex1060projectendzone-colla.htm
EX-10.74 mhhawarrantexecutedmarch15.htm
EX-21.1 nyny-12312018xex211.htm
EX-23.1 nyny-12312018xex231.htm
EX-31.1 nyny-12312018xex311.htm
EX-31.2 nyny-12312018xex312.htm
EX-32.1 nyny-12312018xex321.htm

Empire Resorts Earnings 2018-12-31

NYNY 10K Annual Report

Balance SheetIncome StatementCash Flow

10-K 1 nyny-12312018x10k.htm 10-K Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________ 
FORM 10-K
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2018
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from              to             
Commission file number 1-12522
_______________________________________ 
EMPIRE RESORTS, INC.
(Exact name of registrant as specified in its charter)
Delaware
 
13-3714474
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
c/o Monticello Casino and Raceway, 204 State Route 17B,
P.O. Box 5013, Monticello, NY
 
12701
(Address of principal executive offices)
 
 (Zip Code)


(845) 807-0001
Registrant’s telephone number, including area code

Securities registered under Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock, $.01 par value per share
 
NASDAQ Global Market
Securities registered under Section 12(g) of the Act:
None
(Title of class)
_______________________________________ 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
¨
 
Accelerated filer
x

 
 
 
 
 
Non-accelerated filer
¨
 
Smaller reporting company
¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act)     Yes  ¨    No  x
The aggregate market value of the issuer’s common equity held by non-affiliates, as of June 29, 2018, was $71,753,062 based on the closing price of the registrant’s common stock on the NASDAQ Global Market.
As of March 14, 2019, there were 34,423,250 shares of the registrant’s common stock outstanding.
_______________________________________ 
DOCUMENTS INCORPORATED BY REFERENCE
None.



INDEX
 
 
 
 
ITEM 1.
ITEM 1A.
ITEM 1B.
ITEM 2.
ITEM 3.
ITEM 4.
 
 
 
 
 
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 7A.
ITEM 8.
ITEM 9.
ITEM 9A.
ITEM 9B.
 
 
 
 
 
ITEM 10.
ITEM 11.
ITEM 12.
ITEM 13.
ITEM 14.
 
 
 
 
 
ITEM 15.
 
 
 


i


PART I
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements about management’s current expectations. Examples of such forward-looking statements include discussions of the expected results of various strategies. Although we believe that our expectations are based upon reasonable assumptions, there can be no assurance that our financial goals will be realized. Our forward-looking statements concern matters that involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements, or industry results, to be materially different from the future results, performance or achievements described or implied by such forward-looking statements. Numerous factors may affect our actual results and may cause results to differ materially from those expressed in the forward-looking statements made by us or on our behalf. Any statements that are not statements of historical fact may be forward-looking statements. Among others, we have used the words, “believes,” “anticipates,” “plans,” “estimates,” and “expects” to identify forward-looking statements. Such statements may be considered forward looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Section 27A of the Securities Act of 1933, as amended (the “Securities Act”). Factors that could cause actual results, performance or achievements to differ materially from those expressed or implied by these forward-looking statements include, but are not limited to, the risk factors set forth in Item 1A of this Annual Report on Form 10-K. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this filing. We assume no obligation to update the forward-looking statements to reflect actual results or changes in the factors affecting such forward-looking statements.
Item 1.
Business.
Overview
Empire Resorts, Inc. (“Empire,” and, together with its subsidiaries, the “Company,” “us,” “our” or “we”) was organized as a Delaware corporation on March 19, 1993 and, since that time, has served as a holding company for various subsidiaries engaged in the hospitality and gaming industries.
Our indirect, wholly-owned subsidiary, Montreign Operating Company, LLC, doing business as Resorts World Catskills ("Montreign Operating"), owns and operates Resorts World Catskills, a casino resort (the "Casino"), which is located at the approximately1,700-acre site of a four-season destination resort ("Destination Resort") in Sullivan County, New York, approximately 90 miles from New York City. The Destination Resort in which Resorts World Catskills is located also includes a 101-room lifestyle hotel ("The Alder") adjacent to the Casino. The Alder is owned and operated by Empire Resorts Real Estate II, LLC ("ERREII"), a wholly-owned subsidiary of Montreign Operating. Empire Resorts I, LLC ("ERREI"), which is a wholly-owned subsidiary of Montreign Operating, is developing a golf course (the "Golf Course Project" and, together with the Casino and The Alder, the "Development Projects") at the Destination Resort.
Through our wholly-owned subsidiary, Monticello Raceway Management, Inc. ("MRMI"), we own and operate Monticello Casino and Raceway, which began racing operations in 1958 in Monticello, New York, which is proximate to the Casino. Monticello Casino and Raceway currently features a video gaming machine ("VGM") and harness horseracing facility. The Company recently announced that VGM operations and food and beverage service at Monticello Casino and Raceway will cease on or about April 23, 2019. We also generate racing revenues through pari-mutuel wagering on the running of live harness horse races, the import simulcasting of harness and thoroughbred horse races from racetracks across the country and internationally, and the export simulcasting of our races to offsite pari-mutuel wagering facilities.

Gaming and Resort Operations
Resorts World Catskills
Resorts World Catskills is located in the Town of Thompson, New York which is located in the Catskill region of New York State. The Catskill region has historically been a resort area. The Casino includes an 18-story hotel, casino and entertainment complex featuring more than 2,150 slot machines and 150 live table games, a poker room and private gaming salons. The Casino also offers varied bar and restaurant experiences, which includes an Italian steakhouse created by celebrity chef Scott Conant, and year-round live entertainment at the 2,500-seat RW Epicenter, casino bars and lounges. The 332-room all-suite hotel includes 27 premium accommodations consisting of garden suites, penthouse suites and two-story villas, as well as the Crystal Life Spa, two indoor pools, and two fitness centers. The Destination Resort has a dedicated interchange off New York State Route 17 at Exit 106 that delivers guests directly into the Destination Resort. Our casino operations are overseen by the New York State Gaming Commission ("NYSGC"). Gaming at the Casino is permitted 24 hours a day and is limited to persons over the age of 21. Smoking is not permitted in the Casino.


1



The Alder
The Alder is a 101-room modern lifestyle hotel adjacent to Resorts Word Catskills. The Alder features an upscale cantina- style eatery, a Topgolf Swing Suite and a gift shop.

Amenities
Portions of the Casino opened to the public on February 8, 2018, and the Casino and its full complement of amenities were open to the public on January 1, 2019. The Alder opened to the public on January 1, 2019. Amenities at the Casino and The Alder include:
 
Number of Guest Rooms and Suites
Approximate Square Footage
Slots
Gaming Tables
Casino
     332 (1)
100,000 (2)
2,156
163 (4)
The Alder
101
  69,500 (3)

(1) The Casino has 332 guest rooms and suites, which includes eight 1,000-1,200-square foot garden suites, seven 2,400-square foot two-story townhouse villas, and 12 penthouse-level suites.

(2) The Casino features a 100,000-square foot gaming floor, which includes a poker room, a VIP/high limit area located on the main gaming floor and a separate 4,000-square foot private gaming area containing private VIP gaming salons.

(3) The Alder is a 69,500-square foot building, which features an upscale cantina-style eatery, a Topgolf Swing Suite and a gift shop, as well as 101 guest rooms.

(4) Includes 144 house-banked games and 19 player-banked games.

Monticello Casino and Raceway
Monticello Casino and Raceway is a VGM and year-round harness horseracing facility. Monticello Casino and Raceway is approximately three miles away from the Destination Resort, is directly adjacent to New York State Route 17 and has highly visible signage and convenient access from Exit 104 of New York State Route 17.
    
VGM Operations
Monticello Casino and Raceway operates VGMs, which includes video lottery terminals (“VLTs”) and electronic table game positions (“ETGs”). VGMs are similar to slot machines, but they are connected to a central system and report financial information to the central system. ETGs include the games of roulette, blackjack and 3-card poker. Monticello Casino and Raceway currently features 1,070 VLTs and 20 ETGs (collectively, 1,090 VGMs) on a 45,000-square foot gaming floor with a separate high stakes VGM area. Monticello Casino and Raceway also has three dining options which include a food court, restaurant and sports bar.
    
The VGMs at Monticello Casino and Raceway are owned by New York State and are overseen by the NYSGC. Revenues derived from our VGM operations consist of VGM revenues and food and beverage revenues. Gross VGM revenues consist of the total amount wagered at our VGMs, less prizes awarded. Video lottery gaming is permitted for no more than 20 consecutive hours per day and on no day can such operation be conducted past 6:00 a.m.

The Company recently announced that VGM operations and food and beverage service at Monticello Casino and Raceway will cease on or about April 23, 2019.

Raceway Operations, Simulcasting and Pari-mutuel Wagering Activities

Raceway operations, which include live harness horseracing, simulcasting and pari-mutuel wagering activities in New York State, are overseen by the NYSGC. In a letter dated February 22, 2019, the NYSGC approved MRMI’s race dates for March and April, 2019. Generally, the annual license renewal process requires the NYSGC to review the financial responsibility, experience, character and general fitness of MRMI and its management.





2



We derive our racing, simulcasting and pari-mutuel wagering revenue principally from the following:

wagering at Monticello Casino and Raceway on live races run at Monticello Casino and Raceway and races broadcast from out-of-state racetracks using import simulcasting;
fees from wagering at out-of-state locations and internationally on races run at Monticello Casino and Raceway
using export simulcasting; and
revenue allocations, as prescribed by law, from betting activity at off-track betting facilities in New York State.

Simulcasting is the process by which a live horse race held at one facility (the “host track”) is transmitted to another location that allows patrons of such other location to wager on that race. Amounts wagered at each off-track betting location are combined into the appropriate pools at the host track’s tote facility where the final odds and payouts are determined. With the exception of a few holidays, we offer year-round simulcast wagering from racetracks across the country. In addition, races of national interest such as the Kentucky Derby, Preakness Stakes and Breeders’ Cup supplement our regular simulcast programming. We also export live broadcasts of our own races to race tracks, casinos and off-track betting facilities in the United States and internationally.

In pari-mutuel wagering, patrons bet against each other rather than against the operator of the facility or with pre-set odds. The amounts wagered form a pool of funds from which winnings are paid based on odds determined by the wagering activity. The racetrack acts as a stakeholder for the wagering patrons and deducts from the amounts wagered a “take-out” or gross commission from which the racetrack pays state and county taxes and racing purses. Our pari-mutuel commission rates are fixed as a percentage of the total handle or amounts wagered.

bet365 Collaboration Agreement

On November 14, 2018 (the “Effective Date”), the Company entered into a sportsbook and digital gaming collaboration agreement (the “Collaboration Agreement”) with Hillside (New York) LLC, an affiliate of bet365 Group Limited (“bet365”). Directly and through its affiliates, bet365 operates, owns, controls and manages online gaming and sports betting services throughout the world. The Collaboration Agreement provides the terms and conditions on which bet365 will participate with the Company in the offering of retail sports betting, an online sportsbook, online casino/table games and online poker in New York State, if and when permitted by applicable law (the “bet365 Collaboration”). The initial term of the Collaboration Agreement commenced on the Effective Date and, unless terminated earlier as described below, will continue in force until the earlier of the (i) 20th anniversary of the date on which the bet365 Gaming Services (as such term is defined below) are first offered to players pursuant to the Collaboration Agreement (the “Go-Live Date”) and (ii) termination of the Company’s Gaming Facility License. The initial term will be extended automatically for successive five-year periods unless a party provides at least 12 months’ written notice of its election not to renew.

Retail Sportsbook Lounge

The Casino is constructing a sportsbook lounge in anticipation of the adoption of regulations promulgated by the NYSGC regarding retail sports betting. Once bet365 receives the required approvals from the NYSGC with respect to the bet365 Collaboration and provides the Company notice, which notice will be provided within 12 months of the Go-Live Date, the operation and management of the sportsbook lounge will transition to bet365, at which point the lounge, originally branded with the Company’s brands, will be rebranded with a bet365 brand. Following the transition, bet365 will design and manage the betting platform, provide trading, odds and price setting and otherwise manage risk and provide marketing and marketing advisory services (the “bet365 Sportsbook Services”). The Company will continue to be responsible for the maintenance and day-to-day operational management of the sportsbook lounge following the transition. The Company will be reimbursed by bet365 for a portion of the build-out costs of the sportsbook lounge and 100% of the costs to operate the lounge prior to the transition, less the gaming revenue derived from the lounge after the payment of applicable gaming taxes prior to the transition (the “Pre-Transition Revenue”). If the Pre-Transition Revenue exceeds the build-out costs, such Pre-Transition Revenue will be shared in accordance with the Revenue Share Waterfall (which term is defined and discussed below). If the Collaboration Revenue (as such term is defined and discussed below) is insufficient to pay the build-out costs, bet365 will reimburse the Company and recover the shortfall payment through the Revenue Share Waterfall.

Online Sportsbook

If New York State enacts laws during the term of the Collaboration Agreement allowing the offering of an online sportsbook, bet365 will manage, control and administer an online sportsbook utilizing the Company’s Gaming Facility License (the “bet365 Online Sportsbook Services”). The online sportsbook will be offered under the bet365 brand. To the extent required by law, the online sportsbook will become branded with a bet365 brand and a Company brand, or branded solely with a Company brand. To the extent New York State allows more than one brand to operate an online gaming platform utilizing the Company’s Gaming

3



Facility License (each such brand, a “Skin”) and the Company desires to offer additional Skins on the Gaming Facility License, the Company will consult with bet365 in good faith prior to offering additional Skins. The decision to offer additional Skins ultimately will be made by the Company; provided, however, (i) if such additional Skin is added to the Gaming Facility License prior to a specified anniversary of the enactment of New York State gaming laws permitting an online sportsbook (the “Online Enactment Date”), the majority of the Company’s independent directors must approve such decision and (ii) if such additional Skin is added to the Gaming Facility License after a specified anniversary of the Online Enactment Date, such decision must be approved by the Collaboration Committee (which term is defined and discussed below). Depending on whether the additional Skins are Company-branded Skins, offered in connection with a strategic capital investment in the Company or exchanged in return for access to jurisdictions outside New York State, the revenue generated from, and the costs associated with, the additional Skins will be shared by the Company and bet365 in accordance with the terms of the Collaboration Agreement.

Online Casino/Table Games and Online Poker

If New York State enacts laws during the term of the Collaboration Agreement allowing the offering of online casino/table games and/or online poker (the “Online Gaming Services” and, together with the bet365 Online Sportsbook Services, the “bet365 Gaming Services”), the parties will work in good faith and provide each other with reasonable assistance for bet365 to manage, control and administer such Online Gaming Services utilizing the Gaming Facility License. Following the date on which holders of a Gaming Facility License are permitted to provide the online casino/table games and/or online poker in New York State, bet365 will use commercially reasonable efforts to (i) cause the Go-Live Date to occur as soon as possible and (ii) for the Online Gaming Services offered by bet365 to be competitive in New York State. If bet365 uses good faith efforts to launch the Online Gaming Services but is unable to do so, such failure will not be a breach of the Collaboration Agreement and the Company may freely contract with a third party for such Online Gaming Services and the proceeds of such venture will be deemed Collaboration Revenue. The Online Gaming Services will be offered under the bet365 brand. To the extent required by law, the Online Gaming Services will become branded with a bet365 brand and a Company brand, or branded solely with a Company brand. If a Company-branded online sportsbook is offered in New York State, the Company may request that the Company-branded online sportsbook be configured to include the Online Gaming Services, as applicable. To the extent bet365 is successful at offering Online Gaming Services in New York State, the Company will not enter into any arrangement with a third party to offer online casino/table games and/or online poker using the Company brands.

Management of the Collaboration

The parties will form a committee of representatives from each party to approve certain actions relating to the Collaboration Agreement (the “Collaboration Committee”). In addition, the Collaboration Committee will adopt an annual plan covering intended product developments relating to the bet365 Sportsbook Services and bet365 Gaming Services, if any. At all times, the parties have the right to appoint an equal number of members to the Collaboration Committee and each of the Company and bet365 will initially appoint two members each. Unless a member is deemed an unsuitable person for purposes of the gaming laws of New York State, in which case such member will be removed immediately, only a party that appointed a member to the Collaboration Committee may remove such member and appoint a replacement. Each member of the Collaboration Committee is entitled to one vote and any decision to be made by the Collaboration Committee must be approved by the affirmative vote of at least one bet365 member and one Company member then in office. In the event the Collaboration Committee deadlocks on a decision, each party may request a meeting with the senior executives of both parties with the power and authority to resolve such deadlock.

Equity Investment into the Company

In connection with entering into the Collaboration Agreement, Hillside (New Media Holdings) Limited, an affiliate of bet365 ("bet365 Investor"), and the Company entered into a common stock purchase agreement (the “bet365 Common Stock Purchase Agreement”) pursuant to which bet365 Investor agreed to purchase up to 2.5 million shares of common stock of the Company at a purchase price of $20.00 per share, for an aggregate investment of $50 million. The terms and conditions of the bet365 Common Stock Purchase Agreement are discussed below.

After all gaming taxes have been paid and the parties have recouped their costs and expenses from the Collaboration Revenue, bet365 may receive a distribution (the “Preferred Distribution”) equal to 50% of the positive difference, if any (the “delta”), between $20 and the value of the Company’s common stock measured on a given date (such date, the “Trigger Date”), multiplied by the number of shares of common stock then held by bet365 Investor. The Trigger Date is 30 days after the Company’s first filing of an annual or quarterly report with the Securities and Exchange Commission after bet365 recoups its costs incurred pursuant to the Collaboration Agreement. The delta will be the positive difference between $20 and the 30-day volume-weighted average price of the Company’s common stock on the Trigger Date. If the Company is no longer a reporting company, or if the Company’s common stock is not listed on a national securities exchange, the delta will be the positive difference between $20 and the fair market value of the Company’s common stock as determined by an investment bank retained by the parties. If a change

4



of control (as such term is defined in the Collaboration Agreement) of the Company occurs before the Trigger Date, the delta will be the positive difference between $20 and the per share value paid by a third party in a change of control transaction. The Preferred Distribution, if any, will be payable on a monthly basis over a period of three years (each such payment, a “Monthly Preferred Distribution”). If bet365 Investor sells any shares of common stock prior to the Trigger Date, the Preferred Distribution will be deemed to be $0.

Funding of Collaboration Costs and Distribution of Collaboration Revenue

Following the transition and the Go-Live Date, all costs associated with the bet365 Sportsbook Services and the bet365 Gaming Services, as applicable, will be funded out of the revenue generated pursuant to the Collaboration Agreement (the “Collaboration Revenue”). If the Collaboration Revenue is insufficient to cover the costs incurred under the Collaboration Agreement, bet365 will reimburse such costs and the shortfall will recouped by bet365 from future Collaboration Revenue.
    
The Collaboration Revenue will be distributed 50% to the Company and 50% to bet365 on a monthly basis according to a distribution waterfall (the “Revenue Share Waterfall”) set forth in the Collaboration Agreement, which sequentially will be distributed as follows: (i) all gaming taxes relating to the services provided pursuant to the Collaboration Agreement; (ii) costs incurred by the Company and then bet365 pursuant to the Collaboration Agreement; (iii) to bet365 until bet365 has recovered all investment costs incurred prior to the lounge or the Go-Live Date; (iv) Monthly Preferred Distribution to bet365, if any; (v) to bet365 to recoup agreed-upon gaming revenue shortfalls and capital investment catch-ups in the event there are additional Skins; and (vi) finally, 50% of the remaining Collaboration Revenue to each of the Company and bet365.

Gaming Approvals; Special Termination Right of bet365

Following the Effective Date, the Company and bet365 will engage in advocacy efforts in the New York State to permit the transactions contemplated by the Collaboration Agreement. In addition, following the Effective Date, bet365 will use commercially reasonable efforts to obtain the NYSGC approval required to own the equity of the Company. The Company will use commercially reasonable efforts to assist bet365 in obtaining such approval. In addition, if the New York State enacts regulations and/or laws during the term allowing the various transactions contemplated by the Collaboration Agreement, the parties agree to use their commercially reasonable efforts to obtain the necessary approvals to enable the parties to consummate the transactions contemplated by the Collaboration Agreement. To the extent required by the applicable gaming laws, the Company will be responsible for the regulatory oversight related to the arrangement with bet365.

Following the enactment of the regulations and/or laws necessary to enable the offering of the bet365 Sportsbook Services and/or the bet365 Gaming Services, the parties will monitor and assess such applicable gaming laws that affect the transactions contemplated by the Collaboration Agreement. To the extent that bet365 has a good faith concern that, as a result of provisions of the applicable gaming regulations and/or laws, the obligations of bet365 under the Collaboration Agreement will not be commercially viable, then the parties will discuss in good faith and engage in advocacy efforts to modify the applicable gaming laws. To the extent following such discussions or advocacy efforts, if in bet365’s good faith opinion it will not be commercially viable to operate the bet365 Gaming Services, bet365 can terminate the Collaboration Agreement. However, following such a termination, neither bet365 nor any affiliate may offer online gaming services in New York State for a period of 18 months.

Termination

The term of the Collaboration Agreement may be terminated by the mutual agreement of the parties. In addition, either party may terminate the Collaboration Agreement upon written notice (i) if New York State fails to enact laws authorizing an online sportsbook by certain agreed-upon dates, (ii) subject to notice and cure requirements, upon a material breach of the Collaboration Agreement, (iii) if the other party is deemed an unsuitable person under the applicable gaming laws and the issues cannot be remedied after commercially reasonable efforts, (iv) in the event the other party is bankrupt, (v) the NYSGC disapproves of the Collaboration Agreement and the parties are unable to amend the Collaboration Agreement without materially detrimentally frustrating the commercial intent of the parties, (vi) if a law is passed by New York State prohibiting an online sportsbook, (vii) if a federal law preempts the gaming laws of New York State such that the operation of an online sportsbook does not require a state license, or (viii) upon a change in control of the other party to a third party that is deemed to be a Highly Competitive Business (as such term is defined in the Collaboration Agreement) to such terminating party.

Guaranty and Offset

In connection with the Collaboration Agreement, bet365 Group Limited delivered to the Company a letter (the “Guaranty”) guarantying the payment obligations and indemnification obligations of bet365 under the Collaboration Agreement. The Guaranty

5



will terminate upon the fifth anniversary of the date on which the parties begin receiving a share of the profits of the arrangement pursuant to the Collaboration Agreement.

If a notice of material breach of the Collaboration Agreement is delivered from one party to the other after the Guaranty terminates, a portion of the profit share received by the breaching party from the Collaboration Revenue will be held and not used or otherwise distributed to such party’s equity holders until the breach is cured. In addition, the non-breaching party can withhold any profit share it owes to the breaching party until the earlier of (i) the agreed-upon hold-back value is attained or (ii) the breaching party cures the breach.

General

Each party granted to the other (in the case of the Company to bet365, subject to the terms of applicable license agreement of the Company and its subsidiaries) a worldwide, revocable, royalty-free, non-sublicensable, non-exclusive and non-transferable license to use the intellectual property brands owned or licensed by the granting party in connection with the retail and online sportsbook, online casino/table games and online poker. The customer data obtained through the operation of the retail and online betting and gaming services and the Company's customer loyalty program will be jointly owned by bet365 and the Company.

The Company agreed to indemnify bet365 and its affiliates against liabilities arising out of third party claims relating to the operation of the Casino, a breach of the representations, warranties and covenants of the Company under the Collaboration Agreement, the intellectual property of the Company, any violation of law or failure to pay applicable gaming taxes by the Company, the cancellation or suspension of the NYSGC approvals obtained by bet365 due to the act or omission of the Company and any claims relating to a data breach in which data in the possession of the Company is accessed in an unauthorized manner. bet365 agreed to indemnify the Company and its affiliates against liabilities arising out of third-party claims relating to a breach of the representations, warranties and covenants of the Company under the Collaboration Agreement, the intellectual property of bet365, any violation of law or failure to pay applicable gaming taxes by bet365, the cancellation or suspension of the NYSGC approvals obtained by the Company due to the act or omission of bet365 and any claims relating to a data breach in which data in the possession of bet365 is accessed in an unauthorized manner.

The Collaboration Agreement contains further agreements of the parties concerning, among other things, confidentiality, non-solicitation of employees, and cross-promotion of the sportsbook lounge and the bet365 Gaming Services. In addition, the Company will use commercially reasonable efforts to cause Resorts World Casino New York City to provide marketing support for the bet365 Gaming Services and to provide registration or management facilities or wager terminals at Resorts World Casino New York City if permissible under applicable gaming laws and requested by bet365. The transaction contemplated by the Collaboration Agreement, as well as the suitability of bet365 and bet365 Investor, are subject to the approval of the NYSGC.

bet365 Common Stock Purchase Agreement

In connection with entering into the Collaboration Agreement, bet365 Investor and the Company entered into the bet365 Common Stock Purchase Agreement pursuant to which bet365 Investor agreed to purchase up to 2.5 million shares of common stock of the Company at $20 per share. In accordance with the bet365 Common Stock Purchase Agreement, the bet365 Investor purchased 1,685,759 shares of common stock upon execution of the bet365 Common Stock Purchase Agreement. The purchase of these shares was subject to, among other things, evidence of a commitment by Kien Huat Realty III Limited to invest up to $126 million of equity financing into the Company and further evidence that $12 million of such commitment was funded. Following the closing, bet365 Investor and the Company agreed to use reasonable best efforts to obtain all necessary consents from the NYSGC for bet365 Investor’s ownership of the equity interests of the Company. The offer and sale of these shares was made pursuant to a shelf registration statement on Form S-3 (File No. 333-214119), which became effective on November 17, 2016, pursuant to a base prospectus dated as of November 17, 2016 contained in such registration statement and a prospectus supplement filed with the Securities and Exchange Commission on November 14, 2018. The Company received net proceeds of $33.7 million from the offering.

Pursuant to the bet 365 Common Stock Purchase Agreement, the bet365 Investor will be obligated to purchase the remaining 814,241 shares of common stock at $20.00 per share so long as the following closing conditions are met: (i) 30 days have passed following the receipt of approval from the NYSGC of bet365 Investor’s ownership of the Shares and the enactment of laws by New York State allowing the offering of the bet365 Online Sportsbook Services; (ii) the representations and warranties of the Company are true and correct in all material respects and the Company has complied with its obligations under the bet365 Common Stock Purchase Agreement; (iii) the Collaboration Agreement is in full force and effect and there is no material breach of the Collaboration Agreement by the Company outstanding; (iv) the common stock of the Company continues to be listed on The

6



Nasdaq Stock Market; (v) the Company continues to own 100% of the equity interests in the Casino; and (vi) the Gaming Facility License is still valid.

If the remaining shares are issued pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended, or if the bet365 Investor is deemed an affiliate of the Company following the issuance of such shares, the bet365 Investor will have certain demand resale registration rights with respect to such shares.

The bet365 Common Stock Purchase Agreement may be terminated at any time prior to the closing on the remaining shares upon mutual consent of the Company and the bet365 Investor. Additionally, either the Company or the bet365 Investor may terminate the bet365 Common Stock Purchase Agreement if the NYSGC issues an order prohibiting such closing if such order did not result from the terminating party’s breach of the bet365 Common Stock Purchase Agreement. Additionally, either the Company or the bet365 Investor may unilaterally terminate the bet365 Common Stock Purchase Agreement if the bet365 Investor or the Company, as applicable, is in material breach of the bet365 Common Stock Purchase Agreement that is not cured and the non-breaching party is then in compliance. The bet365 Common Stock Purchase Agreement will terminate automatically if the Collaboration Agreement is terminated prior to the closing on the remaining shares or if the NYSGC denies the Company’s request to approve the bet365 Investor’s ownership of such shares.

Marketing

    Our marketing efforts are conducted through various channels. These channels include radio, television, print, outdoor and digital throughout the Hudson-Valley Catskill region and the larger New York City metropolitan area. Our more targeted marketing efforts are conducted through direct mail and email. We maintain websites to inform individuals and potential customers about Resorts World Catskills and Monticello Casino and Raceway and utilize several social media sites to promote our brands, unique events and special deals. Further, our direct marketing efforts utilize advanced analytic techniques that identify patron preferences to allow us to make more relevant offers to patrons, influence incremental visits, and help build lasting patron relationships.

Resorts World Catskills

The Casino receives patronage from adults residing within the metropolitan New York City area, including New York City, northern and northwestern suburbs of New York City, northern New Jersey and northeastern Pennsylvania. The Casino has an overall drive-time advantage relative to other full-scale gaming facilities from the northern and northwestern suburbs of New York City and the Company is focused on servicing what we believe is an unmet demand in the New York metropolitan market.

The Casino has a range of high-end offerings, including 600 square-foot hotel suites, private gaming salons, poolside townhouse villas and garden suites and a VIP reception area and players’ lounge with private elevator, which are designed to appeal to higher-end gaming patrons in the market. The Casino and The Alder are integrated into the master-planned Destination Resort, which will feature a range of year-round amenities, including an indoor waterpark (the "Indoor Waterpark") for which subsidiaries of EPR Properties, a party unrelated to the Company, are responsible for developing, and the Golf Course Project. The Casino is also convenient to recreational offerings in the Catskill Mountains. The Indoor Waterpark together with the Development Project, are referred to herein as "Initial Projects".

We leverage the Resorts World brand, which is a well-known hospitality brand in the Asian markets, to target the large regional Asian gaming market and high-end Asian players. The Casino offers various Asian-themed amenities, including table games and slot machines, an Asian gaming pit, high-end gaming and private gaming salons, and various authentic Asian food options.
    
We have a patron loyalty program to encourage patron relationships with Resorts World Catskills and increase loyalty to the Resorts World brand through unique benefits and rewards, while promoting our brand. When expanded, the patron loyalty program will include a rewards program that will allow patrons to qualify for benefits at participating Resorts World-branded resorts and in both gaming and non-gaming areas. Members may earn points for their gaming play which can be redeemed at participating properties. Information from the loyalty and rewards programs is used to analyze patron usage and preferences by segment and individual player profile.

Monticello Casino and Raceway
Monticello Casino and Raceway receives patronage from adults residing within the surrounding counties of New York, New Jersey and Pennsylvania. The average drive-time of our current patrons is up to 60 minutes and therefore we focus on a convenience gaming market.

7



Monticello Casino and Raceway's mid-range offerings include gaming and dining options designed to appeal to locals and patrons interested in a more intimate and comfortable setting. Our Players' Club enables patrons to earn points that can be used for free slot play, complimentary food, merchandise, special offers, promotions, VIP invitations, discounts and coupons. The Players' Club also enables patrons to earn points when wagering on racing at Monticello Casino and Raceway.

Seasonality

The gaming market in the northeastern United States is seasonal in nature. Peak gaming activities occur during the months of May through September. Although winter weather may affect our patrons' ability to reach our facilities, we expect that the availability of the overnight accommodations at the Casino and The Alder will mitigate the adverse affects of winter weather on our gaming operations.

Competition

The casino entertainment industry is highly competitive. The industry is comprised of a diverse group of competitors that vary considerably in size and geographic diversity, quality of facilities and amenities available, marketing and growth strategies, and financial condition. Generally, we compete directly with casino and VGM facilities operating in the immediate and surrounding areas. Due to the geographic proximity, the Casino and Monticello Casino and Raceway may compete, in part, with each other for gaming patrons. The Casino competes with other gaming and non-gaming resorts and vacation areas, various other entertainment businesses, and also competes with other retail facilities, amusement attractions, food and beverage offerings, and entertainment venues.

In addition to competition from traditional gaming facilities, which is discussed in more detail below, the Casino and Monticello Casino and Raceway face competition from existing and prospective Internet gaming operations and sports wagering. New Jersey law permits Atlantic City casinos to conduct Internet gaming by accepting wagers from individuals who are physically present in New Jersey. Several New Jersey casinos and racetracks have sports wagering lounges and offer online sports pools. Additionally, mobile gaming is permitted in any area located within the property boundaries of a casino hotel facility, including any recreation or swimming pool and excluding parking garages and parking areas. Further, New Jersey law permits racetrack patrons to place bets on live or simulcast racing while they are on racetrack property, including the restaurants and outdoor areas, such as the paddock. New Jersey gaming regulations also authorized skill-based gaming options that appeal to a new generation of players. In October 2017, Pennsylvania signed into law new legislation also authorizes interactive gaming in the form of Internet gaming and up to five video gaming terminals at qualified truck stops. Further, several Pennsylvania casinos have begun to offer sports wagering.

A number of other states have adopted or are considering adopting legislation to specifically authorize Internet poker and Internet gambling. New Jersey, Nevada and Delaware entered into an agreement which allows Internet poker operators to pool players with partner sites in those states. New York legislators have introduced bills related to Internet gaming and Internet poker. Additionally, two state lotteries offer (and other state lotteries are considering offering) Internet instant game sales to in-state lottery customers and a number of other states, including New York, allow subscription sales of lottery draw games over the Internet. We are unable to determine whether and which, if any, additional legislation will be enacted and what effect it would have on our current operations.

In May 2018, the U.S. Supreme Court overturned the Professional and Amateur Sports Protection Act of 1992, which had prohibited states from authorizing sports wagering. As a result, certain states, including New York, have adopted or are considering adopting legislation to legalize sports betting. The NYSGC recently authorized the proposal of rules and regulations that would enable sports wagering to be offered at four commercial casinos in New York State, including the Casino. The proposed rules and regulations will enter a 60-day public comment period following the publication in the New York State Register before they become effective and the NYSGC can give final approval. The Casino is preparing to be able to offer sports wagering if and when it is permitted under the regulations.

We expect Internet gaming and sports wagering to continue to be the topic of additional legislation, including the expansion of legalization efforts within New York State to venues other than holders of Gaming Facility Licenses. We are unable to determine whether and which, if any, legislation will be enacted and what effect it will have on our operations and our prospects.
    
Resorts World Catskills
    
We face competition in and from the northeastern Pennsylvania, New Jersey and Connecticut gaming markets in marketing to and attracting patrons from the New York City metropolitan area. Pennsylvania casinos are the competitors located closest to

8



our Casino. Pennsylvania casinos operate table games and slot machines, grant casino credit and have access to unlimited non-taxable free play. The competing Pennsylvania facilities include the following: Mohegan Sun at Pocono Downs, in Wilkes-Barre, Pennsylvania, located approximately 95 miles southwest of Monticello; Mount Airy Casino Resort in Mount Pocono, Pennsylvania, approximately 70 miles southwest of Monticello; and Sands Casino Resort in Bethlehem, Pennsylvania, located approximately 95 miles southwest of Monticello. In addition, in October 2017, Pennsylvania signed into law new legislation that authorized a number of gaming expansion opportunities. The legislation authorized up to 10 new casino satellite facilities, which would operate between 300 to 750 slot machines and up to 50 table games each. Licenses for these new facilities are awarded through an auction process that began in January 2018. This legislation also authorizes interactive gaming in the form of Internet gaming and up to five video gaming terminals at qualified truck stops. The legislation additionally authorizes fantasy sports wagering and sports wagering. New York State has regulatory limitations on the amount of taxable free play that may be offered to patrons. This could impact our competitiveness as compared to casinos in neighboring jurisdictions.

In addition to facing potential competition from the casinos in Atlantic City, legislators in New Jersey have reviewed options to expand gaming to various locations in northern New Jersey which could increase competition. Although New Jersey voters previously defeated a referendum in November 2016 to amend the New Jersey State Constitution to permit two casinos in northern New Jersey, another referendum could be introduced in the future. Currently, two of the northern New Jersey racetracks offer online sports wagering. We are unable to predict the impact additional gaming opportunities in northern New Jersey will have on our operations. 

We face competition from Mohegan Sun and Foxwoods Resort Casino, both of which are located on tribal reservations in Connecticut, and from certain VGM facilities in New York State, including VGM facilities located at Yonkers Raceway and Aqueduct Racetrack, both of which are within the New York City metropolitan area.

Further, we also face potential competition from the current or future expansion of state-licensed and tribal gaming in the northeastern United States. Commercial casino gaming has expanded in the northeastern United States and is poised to expand further. These expansions, many of which are convenience gaming facilities as opposed to destination gaming facilities, may affect our revenues.

Monticello Casino and Raceway

In New York State, we face competition for our VGM guests from Orange, Dutchess and Ulster counties in New York and from a VGM facility at Yonkers Raceway. To a lesser extent, Monticello Casino and Raceway faces competition from the Pennsylvania casinos, Mohegan Sun at Pocono Downs and Mount Airy Casino Resort, which are discussed above.

Generally, Monticello Casino and Raceway does not compete directly with other harness racing tracks in New York State for live racing patrons. However, Monticello Casino and Raceway does face intense competition for off-track and other legalized wagering at numerous gaming sites within New York State and the surrounding region. The inability to compete with larger purses for the races at Monticello Casino and Raceway and the limitation on other forms of legalized wagering that Monticello Casino and Raceway may offer has been a significant limitation on our ability to compete for off-track and other legalized wagering revenues.

Development

Development Project Expenditures

The Company currently expects the Development Projects, when completed, will cost an aggregate of approximately $928 million, which includes $765 million of anticipated costs for construction of the Development Projects, $68 million for interest expenses, $51 million for the Gaming Facility License fee and $44 million of original issue discount and financing and legal fees. The Company began construction of The Alder in March 2018 after signing a guaranteed maximum price agreement with its construction manager, which was amended to $35.2 million in December 2018. During the fall of 2018, the Company signed a contractor agreement for the Golf Course Project for a total cost of approximately $21.2 million.
    
As of December 31, 2018, the Company has incurred an aggregate total of $867.3 million related to the Development Projects, including $704.7 million of capitalized Development Projects costs, of which approximately $699.0 million was reclassified to property and equipment upon the opening of the Casino and The Alder, $67.6 million of interest expense related to bank debt for the Development Projects, $51.0 million for the Gaming Facility License and incurred $44.0 million of debt issuance costs related to the Development Projects.

9



The Golf Course Project

In addition to the Casino and The Alder, the Company is constructing the Golf Course Project at the site of the Destination Resort and anticipates that the Golf Course Project will open for play in Summer 2019. ERREI entered into a standard contractor agreement for the construction of the Golf Course Project, at a cost of approximately $21.2 million. The Company began construction in September 2018 and anticipates the golf course will be open for play during Summer 2019.

Master Development Agreement and Completion Guaranties

On December 28, 2015, Montreign Operating, ERREI and ERREII (together, the "Project Parties"), on the one hand, and EPT Concord II, LLC ("EPT"), EPR Concord II, L.P. ("EPR LP") and Adelaar Developer, LLC, wholly-owned subsidiaries of EPR Properties (the “Destination Resort Developer,” together with EPT and EPR LP collectively, “EPR”), on the other hand, entered into an Amended and Restated Master Development Agreement (as amended, the “MDA”), which amends and restates that certain master development agreement by and between EPT and MRMI originally executed on December 14, 2012. The MDA defines and governs the overall relationship between EPR and the Project Parties with respect to the development, construction, operation, management and disposition of the Initial Projects.

In accordance with the terms of the MDA, EPR is responsible for the development and construction of the Indoor Waterpark and the common infrastructure-related improvements (such as streets, sidewalks, sanitary and storm sewer lines, water, gas, electric, telephone and other utility lines, systems, conduits and other similar facilities) for the Destination Resort. EPR has agreed to make a minimum capital investment of $120 million with respect to the Indoor Waterpark and the infrastructure for the Destination Resort. On December 28, 2015, EPR Properties, a real estate investment trust and the parent company of EPR, entered into a completion guaranty, guaranteeing completion of the development and construction obligations of EPR described in this paragraph.

Neither party has the right to terminate the MDA unless Montreign Operating fails to exercise the Purchase Option (as defined below) prior to its expiration in accordance with the terms and conditions of the Purchase Option Agreement (as defined below).

On January 24, 2017, the MDA was amended to (a) reflect that EPR has secured bond financing in connection with its infrastructure development obligations and (b) account for increases in the common infrastructure budget (and corresponding increases in Empire’s common infrastructure cap amount) in connection with the development of additional roads and increase in the budgeted amounts for New York State electric and gas costs. EPR financed the costs of the infrastructure by the issuance of tax-exempt bonds by a local development corporation. The debt service for these infrastructure bonds will be funded through special district tax assessments, a portion of which will be allocated to each of the parcels on which the Initial Projects are being built. EPR and the Project Parties have agreed to a capped dollar amount on the special district tax assessment for each of the parcels on which the Development Projects are being built, above which the Project Parties will not be responsible. The changes to Empire’s common infrastructure cap amount were also reflected in each of the amendments to the casino lease (the "Casino Lease"), the golf course lease (the "Golf Course Lease") and the lease for The Alder (the "Alder Lease").

Intellectual Property

RWS License Agreement
On March 31, 2017, Montreign Operating entered into a license agreement (the “RWS License Agreement”) with RW Services Pte Ltd (“RWS”). RWS is an affiliate of Tan Sri Lim Kok Thay, who is a beneficiary of and controls Kien Huat Realty III Limited ("Kien Huat"), Empire's largest stockholder. Pursuant to the RWS License Agreement, RWS granted Montreign Operating the non-exclusive, non-transferable, revocable and limited right to use certain “Genting” and “Resorts World” trademarks (the “RWS Licensed Marks”) in connection with the development, marketing, sales, management and operation (the “Permitted Uses”) of the Development Projects. The right to use the RWS Licensed Marks may be assigned or sublicensed only in certain limited circumstances. Because any use of the RWS Licensed Marks for a purpose other than the Permitted Uses will require the prior written consent of RWS, the Company will seek approval to use the RWS Licensed Marks in conjunction with the bet365 Collaboration. The name of the Casino is “Resorts World Catskills,” and, notwithstanding the foregoing, the use of such name is exclusive to Montreign Operating and may be used in connection with online gaming in addition to the Permitted Uses.
The initial term of the RWS License Agreement will expire on December 31, 2027, and will be extended automatically for additional terms of 12 months each, up to a maximum of 39 additional terms, unless either of the parties provides notice to terminate the RWS License Agreement or upon the mutual written consent of both parties. Montreign Operating’s rights and obligations under the RWS License Agreement are subject to and governed by the rules and regulations applicable to Montreign Operating’s

10



gaming operations at the Casino, and the fiduciary obligations of the boards of directors of Montreign Operating and Empire, as well as the fiduciary obligations of Kien Huat. Beginning on the date on which the Casino opened to the public, Montreign Operating pays to RWS a fee equivalent to a percentage of Net Revenue (as such term is defined in the RWS License Agreement) generated in each calendar year from (i) all activity at the Casino, (ii) each specific use of the RWS Licensed Marks in The Alder or Golf Course and (iii) each specific use of the name Resorts World Catskills in connection with on-line gaming. The percentage of Net Revenue payable as the fee is a low single digit percentage that will increase incrementally between the third year and sixth year of the term of the RWS License Agreement and will remain a low single digit percentage during the entire term of the RWS License Agreement. The Company incurred an expense of approximately $1.5 million for the year ended December 31, 2018, reflecting the fee payable pursuant to the RWS License Agreement.
During the term of the RWS License Agreement, Montreign Operating may participate in the Genting Rewards Alliance loyalty program (the “Alliance”), which would provide central marketing and cross-promotion opportunities for the Development Projects with other members of the Alliance. Montreign Operating’s participation in the Alliance is subject to the provisions of a separate agreement, which is currently being negotiated by the parties.

Trademarks

Our principal intellectual property consists of trademarks for Montreign Operating and Monticello Casino and Raceway and includes the license agreement to use the RWS Licensed Marks. These trademarks are brand names under which we market our properties, venues and services. We consider these brand names to be important to our business since they have the effect of developing brand identification. We believe that the name recognition, reputation and image that we have developed will attract patrons to our facilities. It is our intent to pursue and maintain the trademark registrations consistent with our goals for brand development and identification, and enforcement of our rights.

Employees and Labor Relations

As of December 31, 2018, we had approximately 1,756 full-time and 100 part-time employees. We had collective bargaining agreements with unions covering approximately 1,400 of our employees as of December 31, 2018. We consider our employee relations to be good.

On January 23, 2019, the Company notified employees of MRMI concerning the Company’s plans to cease VGM operations and food and beverage service at Monticello Casino and Raceway. The Company anticipates these operations to cease on or about April 23, 2019. All affected employees of MRMI have been offered a severance package or a position with Montreign Operating.

Regulation and Licensing

The gaming industry is highly regulated and we must maintain our licenses and pay gaming taxes to continue our operations. The Casino and Monticello Casino and Raceway are subject to extensive regulation under the laws, rules and regulations of New York State. These laws, rules, and regulations generally concern the conduct of operations as well as the responsibility, financial stability, and character of the facilities, owners, managers, and persons with financial interests in the gaming operations. Individuals and entities, including investors and vendors conducting business with us, must file license/registration applications with the NYSGC, and in some instances must submit to background investigations by the New York State Police in order to prove suitability for licensure/registration. Application, fingerprinting and investigative fees must be paid by us or by the individual or entity seeking licensure or registration. Failure to obtain and maintain a license or registration, as applicable, could require us to sever our relationship with such individuals and/or entities, which could have a material adverse effect on our operations .

Our businesses are also subject to various federal, state and local laws and regulations in addition to gaming regulations. These laws and regulations include, but are not limited to, restrictions and conditions concerning alcoholic beverages, smoking, environmental matters, employees, currency transactions, taxation, zoning and building codes, construction, land use, and marketing and advertising. We also deal with significant amounts of cash in our operations and are subject to various reporting and federal anti-money laundering ("AML") laws, as further discussed below. Such laws and regulations could change or could be interpreted differently in the future, or new laws and regulations could be enacted. Material changes, new laws or regulations, or material differences in interpretations by courts or governmental authorities could adversely affect our operations . 

11



Gaming Act and Gaming Facility License
The operations of the Casino are subject to regulation by the NYSGC, Division of Gaming. The Upstate New York Gaming and Economic Development Act ("Gaming Act") provides, among other things, the statutory framework for the regulation of full-scale casino gaming. The Gaming Act authorized the NYSGC to award up to four Gaming Facility Licenses. Effective March 1, 2016, the NYSGC awarded Montreign Operating the sole Gaming Facility License in the Hudson Valley-Catskills region, which consists of Columbia, Delaware, Dutchess, Greene, Orange, Sullivan and Ulster counties in New York State. The Gaming Facility License has an initial duration of 10 years from March 1, 2016 and will be renewable thereafter for a period of at least an additional 10 years, as determined by the NYSGC. The NYSGC also awarded one Gaming Facility License in the Albany region and two Gaming Facility Licenses in the eastern Southern Tier/Finger Lakes region. The Gaming Act provides that no casinos will be authorized in Bronx, Kings, New York, Queens or Richmond counties. New York State may, however, legislatively authorize additional Gaming Facility Licenses.
The Gaming Act provides for a seven-year exclusivity period for holders of Gaming Facility Licenses, commencing March 1, 2016, during which no further Gaming Facilities can be licensed by the NYSGC without legislative action. If the New York State legislature authorizes additional Gaming Facility Licenses within this exclusivity period, holders of the original four Gaming Facility Licenses will have the right to recover a pro rata portion of the license fee paid.
The Gaming Act imposes a $500 annual fee on each slot machine and table game. The tax rate on slot machines at the Casino is 39% and the tax rate on table games is 10%. Although free play allowances are not established by the Gaming Act, the NYSGC has promulgated a regulation that limits non-taxable free play, although the NYSGC may, at its discretion, authorize deviations from these limitations.
            
VGM and Racing Operations
Our VGM, harness horseracing and simulcast activities in New York State are overseen by the NYSGC, Division of Lottery and Division of Horse Racing and Pari-Mutuel Wagering, respectively. The NYSGC has the authority and responsibility to promulgate rules and regulations that affect the operations of our business. In a letter dated February 22, 2019, the NYSGC approved MRMI’s race dates for March and April, 2019. Generally, the annual license renewal process requires the NYSGC to review the financial responsibility, experience, character and general fitness of MRMI and its management.
We generate revenue from our VGM operations by receiving a commission on the gross revenue generated by the VGMs. The rate of this commission is set by statute. From April 1, 2008 until March 31, 2018, the statute provided that 41% of gross VGM revenue be distributed to us as a commission. Effective as of April 1, 2018, the statute reduced the commission rate to 39% of gross VGM revenue. However, with the arrival of casinos into the regions in which VGM facilities are currently operating in New York State, the Gaming Act provides that the commission payable to VGM facilities will be increased over the statutory amount and equalized to the blended tax rate payable by holders of Gaming Facilities Licenses with respect to gross gaming revenue generated on table games and slot machines. Accordingly, we expect the commission we receive on our VGM operations for the period following the opening of the Casino will equal the blended tax rate on the Casino's gross gaming revenue, which is calculated based on the Casino's gross gaming revenue divided by the actual taxes paid at the Casino. The actual blended tax rate is calculated for the period matching the fiscal year of New York State, which runs from April 1 of the current year to March 31 of the following calendar year. There is also a marketing allowance for racetracks operating video lottery programs of 10% on the first $100 million of net revenues generated and 8% thereafter. In addition, the statute provides for subsidized free play allowance of 15%.
The Gaming Act includes provisions intended to minimize the impact on horsemen of declining revenue at VGM facilities as a result of the introduction of casinos into the region. If VGM facilities are unable to maintain required purse support payments to horsemen at licensed racetracks in amounts equal to at least the 2013 payment amounts, as adjusted for the consumer price index, the holder of a Gaming Facility License in the region in which the licensed racetrack is located is required to make whole the deficit. Accordingly, if the purse support payments from Monticello Casino and Raceway to the horsemen are below the dollar levels realized in 2013, then the Casino must make whole the deficit.

Sports Wagering and Online Gaming

The Gaming Act provides, among other things, that sports betting at the gaming facilities such as the Casino is unlawful unless there has been a change in federal law authorizing such activity or upon ruling of a court of competent jurisdiction that such activity is lawful. In May 2018, the Supreme Court of the United States decided that the Professional and Amateur Sports Protection Act of 1992, which effectively outlawed sports betting nationwide, was unconstitutional. Therefore, upon the enactment of relevant regulations by the NYSGC, the Company may implement sports betting as part of the gaming experience at the Casino. In addition, if New York State enacts laws during the Term of the Collaboration Agreement allowing the offering of the bet365

12



Online Gaming Services, the Company may participate with bet365 in offering online sports betting and online casino games. We can provide no assurance that the NYSGC will enact such regulations enabling the bet365 Sportsbook Services, New York State will legalize the bet365 Gaming Services or such regulations and legislation will be enacted during the Term of the Collaboration Agreement.

Anti-Money Laundering Laws

            The operations of the Casino and Monticello Casino and Raceway are subject to federal AML laws. The AML laws relate to the reporting of large cash transactions and suspicious activity and include screening transactions against lists maintained by the Office of Foreign Assets Control in order to prevent the processing of transactions to or from certain countries, individuals, nationals and entities. Our AML policy was developed by applying a risk-based approach and is tailored to our business activities and patron risk profiles. The risk assessment will be updated and revised to reflect changes in our business to ensure sufficiency and effectiveness of our AML policy. Failure to comply with the AML laws could subject us to significant fines and penalties.
Website Access
Our website addresses are www.empireresorts.com, www.rwcatskills.com, and www.monticellocasinoandraceway.com. Our filings with the Securities and Exchange Commission are available at no cost on www.empireresorts.com as soon as practicable after the filing of such reports with the Securities and Exchange Commission.

Item 1A.
Risk Factors.

In addition to the other information contained in this report on Form 10-K, the following Risk Factors should be considered carefully in evaluating our business. If any of the following risks actually occur, our business, financial condition and results of operations could be materially and adversely affected.

Risks Relating to our Business

Our substantial indebtedness, and the fact that a significant portion of our cash flows is used to make principal and interest payments, fixed and percentage rent payments under the Casino Lease and the Alder Lease and meet other financial obligations, could adversely affect our ability to fund our operations, limit our ability to react to changes in the economy or our industry or implement new business initiatives and prevent us from making debt service payments and rent payments.

The Company is highly leveraged and as of December 31, 2018, we had approximately $596.0 million of principal amount of indebtedness outstanding. This amount includes $446.6 million outstanding under the Term B Loan, $64.8 million outstanding under the Term A Loan, $20 million outstanding under the Bangkok Bank Loan, $15 million outstanding under the Revolving Credit Facility, $30 million outstanding under the Kien Huat Subordinate Loan and $19.6 million outstanding under equipment purchase loans. Pursuant to the Casino Lease for the parcel on which the Casino is located and the Alder Lease on which The Alder is located, we will make approximately $7.7 million of fixed rent payments in 2019. In addition, we are obligated to pay annual percentage rent equal to five percent of eligible gaming revenue (according to a formula defined in the Casino Lease) and we are obligated to pay an annual special district tax assessment of approximately $1.8 million in the aggregate under the Casino Lease and the Alder Lease in 2019. Furthermore, as of the date on which the Casino opened to the public, Montreign Operating is required to pay RWS a fee equivalent to a percentage of Net Revenue (as such term is defined in the RWS License Agreement) generated in each calendar year for its use of the RWS Licensed Marks. The Company incurred an expense of approximately $1.5 million for the year ended December 31, 2018, reflecting the fee payable pursuant to the RWS License Agreement of which $0.9 million was payable at December 31, 2018. Our ability to satisfy our debt obligations and lease obligations and meet other financial obligations will depend upon, among other things, our future financial and operating performance, which will be affected by prevailing economic conditions and financial, business, regulatory and other factors, many of which are beyond our control.

Our substantial indebtedness and other financial obligations, and the restrictive covenants under the agreements governing the principal indebtedness, could:

require a substantial portion of our cash flow from operations be dedicated to the payment of interest and principal on our indebtedness and the payment of rent, thereby reducing our funds available to us for other purposes;
limit our ability to borrow money for our working capital, capital expenditures, Golf Course Project, debt service requirements, rent payment requirements, strategic initiatives, including the Collaboration, and other purposes;
increasing our exposure to general adverse economic and industry conditions;

13


limiting our flexibility to plan for, or react to, changes in our business and industry;
making it more difficult for us to satisfy our obligations with respect to our indebtedness and the Casino Lease and the Alder Lease, and any failure to comply with any of our obligations under our debt agreements or the Casino Lease or the Alder Lease, including restrictive covenants and borrowing conditions, could result in an event of default under those agreements; or
placing us at a competitive disadvantage compared to less-leveraged competitors.
 
Moreover, the Golf Course Project will continue to be capital intensive. To the extent that we cannot fund expenditures from the remaining proceeds of the Term Loan Facility and cash generated by our operations, funds must be borrowed or otherwise obtained. Any of the foregoing could have a material adverse effect on our business, financial conditions, results of operations, prospects and the ability to satisfy our outstanding debt obligations and lease obligations.

Current and future cash flow may be insufficient to service all our indebtedness, lease payment and other financial obligations. If sufficient cash flow is not generated from operations to service our debt, make rent payments and meet other financial obligations, our business, financial conditions, results of operations and prospects could be materially adversely affected.

Our ability to make payments on our indebtedness, lease arrangements and other financial obligations depends on our ability to generate cash flow and obtain financing pursuant to the 2018 Kien Huat Preferred Stock Commitment Letter. If regional and national economic conditions deteriorate or if competition further intensifies, we could experience decreased revenues from our operations and could fail to generate sufficient cash to fund our liquidity needs or fail to satisfy the financial and other restrictive covenants in the agreements governing our principal indebtedness. Our estimated debt service (including principal and interest) is $104.1 million for 2019 and $715.0 million thereafter to maturity for our currently outstanding indebtedness under our principal debt arrangements. Our estimated lease obligations are $10.4 million for 2019 and $387.8 million thereafter to maturity for our outstanding lease arrangements. We cannot provide assurance that our business will generate sufficient cash flow from operations to service or debt, make rent payments and meet other financial obligations. If sufficient cash flow is not generated from operations to meet these needs, and additional financing is not available pursuant to the 2018 Kien Huat Preferred Stock Commitment Letter or otherwise, we may be required, among other things, to:

seek additional financing in the debt or equity markets;
delay, curtail or abandon altogether our development plans, including the Collaboration;
refinance or restructure all or a portion of our indebtedness; or
sell selected assets.

Such measures might be insufficient to service the indebtedness, make lease payments or meet other financial obligations. In addition, any such financing, refinancing or sale of assets may not be available on commercially reasonable terms, or at all. If funds are not available when needed, or available on acceptable terms, we may be required to delay, scale back or eliminate some of our obligations with respect to the Golf Course Project or Collaboration. In addition, we may not be able to grow market share, take advantage of future opportunities or respond to competitive pressures or unanticipated requirements, which could negatively impact our business, operating results and financial condition.

The agreements governing our Term Loan Facility and other principal indebtedness contain restrictions and limitations that could significantly affect our ability to operate our business, as well as significantly affect our liquidity, and therefore could adversely affect our results of operations.

Covenants in the agreements governing our principal indebtedness restrict, among other things, our ability to:

pay dividends or distributions, including from subsidiaries to Empire, repurchase or issue equity, prepay certain debt or make certain investments;
incur additional debt, including limiting our ability to borrow further capital needed to complete the Golf Course Project or implement the Collaboration, if needed;
direct a significant portion of our available cash to the payment of principal and interest on our indebtedness, thereby reducing our use of available cash to fund our operations, capital expenditures and future business opportunities;
incur liens on assets;
make certain investments;
consolidate, merge, sell or otherwise dispose of all or substantially all of our assets;
enter into certain transactions with our affiliates; and
sell assets or consolidate with another company or sell all or substantially all of our assets.


14


As a result of these covenants, we are limited in the manner in which we conduct our business and we may be unable to engage in favorable business activities or finance future operations or capital needs. Moreover, our ability to comply with these provisions may be affected by events beyond our control. The breach of any such covenants or obligations not otherwise waived or cured could result in a default under the applicable debt obligations and could trigger acceleration of those obligations, which in turn could trigger cross-defaults under other agreements governing our long-term indebtedness. In addition, the Term Loan Agreement requires us to satisfy certain financial covenants, including a maximum first lien net leverage ratio, a minimum interest coverage ratio, a maximum of consolidated capital expenditures and certain mandatory prepayments. Any default under the Term Loan Facility, the Revolving Credit Facility, Bangkok Bank Loan or the other principal debt agreements could adversely affect our growth, our financial condition, our results of operations and our ability to make payments on our debt. The ability to make payments of principal and interest on indebtedness will depend on the future performance of the Casino and The Alder, which is subject to general economic conditions, industry cycles and financial, business and other factors affecting our operations, many of which are beyond our control.

Repayment of our and our subsidiaries’ debt is dependent on cash flow generated by our subsidiaries.

Our subsidiaries currently own a significant portion of our assets and conduct a significant portion of our operations. Accordingly, repayment of our and our subsidiaries’ indebtedness is dependent, to a significant extent, on the generation of cash flow by our subsidiaries and, in the case of Empire’s debt, their ability to make such cash available to us by dividend, if needed, or otherwise. Our subsidiaries may not be able to, or may not be permitted to, make distributions to enable us to make payments in respect of our or our other subsidiaries’ indebtedness. Each subsidiary is a distinct legal entity and, under certain circumstances, legal and contractual restrictions may limit our ability to obtain cash from our subsidiaries.

Defaults under any of our principal debt arrangements could result in a substantial loss of our assets.

We have pledged a significant portion of our assets as collateral under the Term Loan Agreement, the Revolving Credit Agreement and the Bangkok Bank Loan Agreement. A failure to repay any of this indebtedness as it becomes due or to otherwise comply with the covenants contained in any of our principal debt agreements could result in an event of default thereunder. If not cured or waived, an event of default under any of our principal debt agreements could enable the lenders thereunder to declare all borrowings outstanding on such debt, together with accrued and unpaid interest and fees, to be due and payable and terminate all commitments to extend further credit. The lenders could also elect to foreclose on our assets securing such debt. Such actions by the lenders could cause cross defaults pursuant to the terms of our principal debt agreements. In such an event, the Company may not be able to refinance or repay all of its indebtedness, pay dividends or have sufficient liquidity to meet operating and capital expenditure requirements. Any such acceleration could cause us to lose a substantial portion of our assets and will substantially adversely affect our ability to continue our operations.
The gaming industry in the northeastern United States is highly competitive, with many of our competitors better known and better financed than us.

We primarily compete directly with other hotel, resort and casino and VGM facilities operating in the immediate and surrounding market areas. The gaming industry in the northeastern United States is highly competitive and increasingly dominated by multinational corporations or Native American tribes that enjoy widespread name recognition, established brand loyalty, decades of casino operation experience, an array of amenities, high-quality management talent and a diverse portfolio of gaming assets and with substantially greater financial resources. To the extent that new casinos enter our market or hotel room capacity is expanded by others, competition will increase. Major competitors, including potential new entrants, may also expand their hotel room capacity, expand their range of amenities, improve their level of service, or construct new resorts in our regional markets in which we operate, all of which could attract our customers. Additionally, in May 2018, the United States Supreme Court overturned a federal ban on sports betting that had prohibited single-game gambling in most states, raising the potential for increased competition in sports betting should additional states pass legislation to legalize it.  The expansion of online gaming, sports betting, and other types of gaming in these and other jurisdictions may further compete with our operations by reducing customer visitation and spend in our casino resorts.
 
In a broader sense, our gaming operations face competition from all manner of leisure and entertainment activities, including shopping, athletic events, television and movies, concerts and travel. If our competitors operate more successfully than we do, if they attract patrons away from us as a result of aggressive pricing and promotion, if they are more successful than us in attracting and retaining employees, if their properties are enhanced or expanded, if they operate in jurisdictions that give them operating advantages due to differences or changes in gaming regulations or taxes, or if additional hotels and casinos are established in and around the locations in which we conduct business, we may lose market share or the ability to attract or retain employees. In particular, the expansion of casino gaming in or near any geographic area from which we attract or expect to attract a significant number of our patrons could have a significant adverse effect on our business, financial condition and results of operations.

15



Our business is subject to extensive regulation and the cost of compliance or failure to comply with such regulations may adversely affect our business and results of operations. Moreover, our inability or the inability of our subsidiaries, key personnel, significant stockholders, vendors financial sources or joint venture partners to obtain or maintain required gaming regulatory licenses, permits or approvals could prevent us from operating our facilities or otherwise adversely impact our results of operation.

Gaming is a highly regulated industry that is subject to extensive federal, state, provincial, and/or local laws, regulations and ordinances that are administered by the relevant regulatory agency or agencies in each jurisdiction. These laws, regulations and ordinances vary from jurisdiction to jurisdiction, but generally concern the responsibilities, financial stability and character of the owners and managers of gaming operations as well as persons financially interested or involved in gaming operations, and often require such parties to obtain certain licenses, permits and approvals. In addition, some of the licenses that we and our subsidiaries, officers, directors, principal stockholders, financial sources and vendors hold expire after a relatively short period of time and thus require frequent renewals and reevaluations. Obtaining these licenses in the first place and the renewal process involves a subjective determination by the regulatory agencies. We can provide no assurance that we will be able to continually renew all registrations, permits, approvals or licenses necessary to conduct our operations as intended. The regulatory environment may change in the future and any such change could have a material adverse effect on our results of operations. For example, recently the U.S. Department of Justice reversed a 2011 opinion that had concluded that the Wire Act of 1961 was limited to gaming relating to sports; the Department of Justice concluded instead that certain of the Wire Act’s provisions apply also to other forms of wagering activity. This interpretation may adversely affect our business operations and our ability to engage in the Collaboration.  If we or our subsidiaries, financial sources or vendors do not obtain and maintain the required licenses, permits and approvals, we or such individuals or entities, may be required to divest any interest in our current or future gaming facilities or our current gaming facilities risk losing their licenses. These laws, regulations and ordinances may also affect the operations of our gaming facilities or our plans in pursuing future projects. Any adverse developments in the regulation of the gaming industry in New York State could be difficult to comply with and could significantly increase our costs, which could cause our operations to be unsuccessful.

Changes in the laws, regulations, and ordinances (including local laws) to which our gaming operations are subject, and changes in the application or interpretation of existing laws and regulations to our operations, may adversely affect our results of operation.

Casino gaming is still a relatively new industry in New York and many of the rules and regulations governing casino gaming are still evolving and subject to interpretation. Under the Gaming Act, the NYSGC has extensive authority to regulate gaming activities. The NYSGC also has the authority to interpret the Gaming Act, which has far-reaching effect on our business decisions. For example, the NYSGC decides whether a gaming option available at the Casino constitutes a slot machine or table game and that decision impacts the choices we make on laying out the gaming floor. Certain provisions of the gaming regulations that have significant impact on our operations, such as the allowance for free play, are promulgated by the NYSGC and not established by the Gaming Act. The NYSGC has further discretion to deviate from the established free play allowance and to revoke such deviation at any time. Moreover, lack of visibility into the applicability of, and the expense related to complying with, specific licensing requirements and background investigations means we are unable to pass on these costs to vendors and employees and thereby reduce our costs of operation. The uncertainty surrounding the evolving interpretations of the Gaming Act and the regulations promulgated by the NYSGC may hinder our ability to negotiate agreements with third parties, such as a vendor or a junket enterprise, and establish policies relating to our workforce because we are unable to effectively judge the relative costs and benefits of these relationships. These new or changing regulations and interpretations of the Gaming Act, as well as the uncertainty of the NYSGC's further actions with respect to such regulations and interpretations could adversely affect our results of operations.

New York State could grant additional Gaming Facility Licenses in our area or in New York City or the surrounding counties earlier than the expected seven-year blackout period, which could significantly increase the already intense competition in the northeastern United States and cause us to lose or be unable to gain market share.

The Gaming Act provides for the award of up to four Gaming Facility Licenses in three regions of upstate New York, including our area, and prohibits the issuance of Gaming Facility Licenses in the “downstate” region, which includes New York City and its surrounding counties. The award of such a Gaming Facility License is intended to be exclusive for a period of seven years commencing on the date of our award of the Gaming Facility License, which occurred in December 2015. We can provide no assurance that the New York State government will not change this law and issue additional Gaming Facility Licenses before the expiration of this seven-year exclusivity period. We expect the pressure on the New York State government to issue additional licenses before the seven-year exclusivity period will intensify as larger, well-established competitors, like MGM Resorts International, enter the New York market. If the New York State government were to allow additional competitors to operate in our area or in other regions of New York through the grant of additional Gaming Facility Licenses, we would face additional

16


competition, which could significantly increase the already intense competition in the northeastern United States and cause us to lose or be unable to gain market share.

We expect that competition from internet gaming will continue to grow and intensify.

We expect that we will face increased competition from internet gaming as the potential for legalized internet gaming continues to grow. Several states have authorized internet gaming and Nevada, Delaware and New Jersey have entered into an agreement which allows internet poker operators to pool players with partner sites in those states. New Jersey casinos also participate in intrastate internet gaming. Our ability to compete in a marketplace containing multiple virtual casino platforms and monetize the Collaboration will depend on our ability to effectively market our gaming products to our patrons in the face of stiff competition as well as the availability of internet gaming in New York State. Currently, online gaming is not permitted in New York State and it is unclear when online gaming will be permitted, if at all. Furthermore, competition from internet lotteries and other internet wagering gaming services, which allow their patrons to wager on a wide variety of sporting events and play Las Vegas-style casino games from home, could divert patrons from the Casino and thus adversely affect our business. Such internet wagering services are likely to expand in future years and become more accessible to domestic gamblers as a result of initiatives in some states to consider legislation to legalize intrastate internet wagering. There have also been proposals that would specifically legalize internet gaming under federal law.

Our business is particularly sensitive to reductions in discretionary consumer and corporate spending as a result of global economic conditions.

Consumer demand for resort casinos, trade shows and conventions and for the type of luxury amenities that we offer is particularly sensitive to changes in the global economy, which adversely impact discretionary spending on leisure activities. Changes in discretionary consumer spending or consumer preferences brought about by factors such as perceived or actual general global economic conditions, high unemployment, weakness in housing or oil markets, perceived or actual changes in disposable consumer income and wealth, an economic recession and changes in consumer confidence in the global economy, or fears of war and future acts of terrorism have in the past and could in the future reduce patron demand for the luxury amenities and leisure activities we offer, and may have a significant negative impact on our operating results.

The loss or a reduction in the play of our most significant patrons could have a material adverse effect on our business, financial condition, results of operations and cash flows. A downturn in economic conditions in the countries in which these patrons reside could cause a reduction in the frequency of visits by and revenue generated from these patrons.

Also, consumer demographics and preferences may evolve over time, which, for example, has resulted in growth in consumer demand for non-gaming offerings. Our success depends in part on our ability to anticipate the preferences of consumers and react to those trends and any failure to do so may negatively impact our operating results.

We are subject to greater risks than a geographically diverse company.
Our operations are limited to the Catskills region of New York State, which has been affected by a decades-long decline in economic conditions. The majority of the patrons for our Casino come from the New York metropolitan area. As a result, in addition to our susceptibility to adverse global and domestic economic, political and business conditions, any economic downturn in the Catskills region or the New York metropolitan area could have a material adverse effect on our operations. An economic downturn would likely cause a decline in the disposable income of consumers, which could result in a decrease in the number of patrons at our facilities, the frequency of their visits and the average amount that they would be willing to spend at our facilities. We are subject to greater risks than more geographically diversified gaming or resort operations, including:

a downturn in national, regional or local economic conditions;
an increase in competition in New York State or the northeastern United States and Canada, particularly for day-trip patrons residing in the New York metropolitan area, including as a result of other gaming and entertainment operations in New York State, Connecticut, New Jersey and Pennsylvania;
impeded access due to road construction or closures of primary access routes; and
adverse weather and natural and other disasters in the northeastern United States.
The occurrence of any one of the events described above could cause a material disruption in our business and make us unable to generate sufficient cash flow to make payments on our obligations.

17


We depend on our skilled employees and key personnel and the loss of their services would adversely affect our operations and business strategy.
The operation of our businesses requires qualified executives, managers and skilled employees with gaming, hospitality and horse racing industry experience and qualifications to enable such individuals to obtain and maintain the requisite licenses and approvals from the NYSGC. We also place substantial reliance on the gaming, project development and hospitality industry experience and knowledge of the northeastern United States gaming market possessed by members of our senior management team. If we are unable to maintain our key personnel and attract new skilled employees with high levels of expertise in the gaming areas in which we engage and propose to engage, or are unable to do so without unreasonably increasing our labor costs, the execution of our business strategy may be hindered and our growth limited. We believe that our success is largely dependent on the continued employment of our executive management and the hiring of strategic personnel at reasonable costs. Competition for skilled employees and qualified executives is intense and we can give no assurance that we would be able to hire a qualified replacement with the required level of experience and expertise for any current members of our senior management, if required to do so. Accordingly, if any of our current key executives were unable or unwilling to continue in his or her present position, or we were unable to attract a sufficient number of qualified employees at reasonable rates, our business, results of operations and financial condition would be materially adversely impacted. Additionally, recruiting and hiring a replacement for any skilled employees or executive management position could divert the attention of other senior management and increase our operating expenses.

A significant portion of our labor force is covered by collective bargaining agreements. Work stoppages, labor problems and unexpected shutdowns may limit our operational flexibility and negatively impact our future profits.

A significant portion of our workforce is represented by labor unions, and we could incur additional costs or experience work stoppages as a result of the renegotiation of our labor contracts.As of December 31, 2018, approximately 80% of our workforce was represented by labor unions. A prolonged dispute with the covered employees or any labor unrest, strikes or other business interruptions in connection with labor negotiations or others could have an adverse impact on our operations. Further, adverse publicity in the marketplace related to union messaging could further harm our reputation and reduce customer demand for our services. Also, wage and/or benefit increases resulting from new labor agreements may be significant and could also have an adverse impact on our results of operations.

The addition of new or changes to the existing collective bargaining agreements could cause significant increases in labor costs, which could have a material adverse effect on our businesses, financial condition and results of operations. In addition, the unions with which we have collective bargaining agreements or other unions could seek to organize groups of employees at our properties that are not currently represented by unions. Union organization efforts could cause disruptions in our businesses and result in significant costs. we cannot predict what level of success unions may have in further organizing this workforce or the potentially negative impact it would have on our operations. Any unexpected shutdown of our properties from a work stoppage or strike action could have a material adverse effect on our businesses and results of operations. Moreover, strikes, work stoppages or other job actions could also result in adverse media attention or otherwise discourage patrons, including convention and meeting groups, from visiting our properties. We cannot assure that we can be adequately prepared for labor developments that may lead to a temporary or permanent shutdown of any of our properties.

We often extend credit, and we may not be able to collect gaming receivables from our credit players or credit play may decrease.

We conduct our gaming activities on a credit as well as a cash basis. The casino credit we extend is generally unsecured and due on demand. We will extend casino credit to those patrons whose level of play and financial resources, in the opinion of management, warrant such an extension. The collectability of receivables from international patrons could be negatively affected by future business or economic trends or by significant events in the countries in which these patrons reside.

While gaming debts evidenced by a credit instrument, including what is commonly referred to as a "marker," are enforceable under the current laws of New York, and judgments on gaming debts are enforceable in all states of the United States under the Full Faith and Credit Clause of the United States Constitution, other jurisdictions may determine that direct or indirect enforcement of gaming debts is against public policy. Although courts of some foreign nations will enforce gaming debts directly and the assets in the United States of foreign debtors may be used to satisfy a judgment, judgments on gaming debts from U.S. courts are not binding on the courts of many foreign nations. We cannot assure that we will be able to collect the full amount of gaming debts owed to us, even in jurisdictions that enforce them. Changes in economic conditions may make it more difficult to assess creditworthiness and more difficult to collect the full amount of any gaming debt owed to us. Our inability to collect gaming debts could have a significant negative impact on our operating results.


18


We face the risk of fraud and cheating.

Our gaming patrons may attempt or commit fraud or cheat in order to increase winnings. Acts of fraud or cheating could involve the use of counterfeit chips or other tactics, possibly in collusion with our employees. Internal acts of cheating could also be conducted by employees through collusion with dealers, surveillance staff, floor managers or other casino or gaming area staff. Failure to discover such acts or schemes in a timely manner could result in losses in our gaming operations. In addition, negative publicity related to such schemes could have an adverse effect on our reputation, potentially causing a material adverse effect on our business, financial condition, results of operations and cash flows.

Win rates for our gaming operations depend on a variety of factors, some of which are beyond our control.

The gaming industry is characterized by an element of chance. In addition to the element of chance, win rates are also affected by other factors, including players’ skill and experience, the mix of games played, the financial resources of players, the spread of table limits, the volume of bets played, the amount of time played and undiscovered acts of fraud or cheating. Our gross gaming revenues are mainly derived from the difference between our casino winnings and the casino winnings of our gaming patrons. Since there is an inherent element of chance in the gaming industry, we do not have full control over our winnings or the winnings of our gaming patrons.

In addition, premium gaming is more volatile than other forms of gaming, and variances in win-loss results attributable to high-end gaming may have a positive or negative impact on cash flow and earnings in a particular quarter.

Our table games business is subject to volatility which could adversely affect our financial condition.

Table gaming, especially high-end table gaming, is more volatile than other forms of gaming, and variances in table games hold percentage may have a positive or negative impact on our quarterly revenues and operating results. Negative variations in quarterly revenues and operating results could adversely affect our financial condition.

Extreme weather conditions may cause property damage or interrupt business, which could hard our business and results of operations.

Our properties are located in an area that may be subject to extreme winter weather conditions. Such extreme weather conditions may interrupt our operations, damage our property and reduce the number of customers who visit our facilities during these times. Such weather conditions may discourage potential patrons from traveling or may deter or prevent patrons from reaching our facilities and may cause visits to our properties to decrease for an indefinite period. If this occurs, it could have a material adverse effect on our operating results and ability to meet our financial obligations.

Our business is particularly sensitive to energy prices and a rise in energy prices could harm our operating results.
We are a large consumer of electricity and other energy and, therefore, higher energy prices may have an adverse effect on our results of operations. Accordingly, increases in energy costs may have a negative impact on our operating results. Additionally, higher electricity and gasoline prices which affect our patrons may result in reduced visitation to Resorts World Catskills and Monticello Casino and Raceway and a reduction in our revenues.

Negative conditions affecting the lodging industry may have an adverse effect on our revenues and cash flows.

We depend on revenues generated from our hotel, together with revenues generated from other portions of the facilities, to meet our financial obligations and fund our operations. Revenues generated from our hotel are primarily subject to conditions affecting our gaming operations, but are also subject to the lodging industry in general, and as a result, our financial performance and cash flows may be affected not only by the conditions in the gaming industry, but also by those in the lodging industry. Some of these conditions are as follows:

changes in the local, regional or national economic climate, including economic recessions;
changes in local conditions such as the supply of hotel properties;
decreases in the level of demand for hotel rooms and related services;
the attractiveness of our hotel to patrons;
cyclical over-building in the hotel industry;
changes in travel patterns;
public health concerns affecting public accommodations or travel generally or regionally; and
changes in room rates and increases in operating costs due to inflation and other factors.

19



We are required to comply with extensive non-gaming laws and regulations.

We are also subject to a variety of other rules and regulations, including zoning, environmental, construction and land-use laws and regulations governing the serving of alcoholic beverages. If we are not in compliance with these laws, it could have a material adverse effect on our business, financial condition and results of operations.
    
We deal with significant amounts of cash in the operations and will be subject to various reporting and anti-money laundering regulations. We cooperate with all such inquiries. Any violation of AML laws or regulations, on which in recent years governmental authorities have been increasingly focused, with a particular focus on the gaming industry, by any of our properties could have a material adverse effect on our businesses, performance, prospects, value, financial condition and results of operations.

We have implemented internal control policies and procedures and employee training and compliance programs to educate employees about applicable regulation and deter prohibited practices. However, such policies, procedures and programs may not be effective in prohibiting our directors, employees, vendors or agents from violating or circumventing our policies and the law. If we or our directors, employees, vendors or agents fail to comply with applicable laws or our policies governing our operations, we may face investigations, prosecutions and other legal proceedings and actions, which could result in civil penalties, administrative remedies and criminal sanctions. Any such government investigations, prosecutions or other legal proceedings or actions could adversely affect our business, performance, prospects, value, financial condition, and results of operations.

A downgrade in our credit ratings could materially adversely affect our business and financial condition.

In connection with the Term Loan Facility and the Revolving Credit Facility, Montreign Operating was required to obtain credit ratings for its debt offering. Although the maintenance of a certain credit rating is not a condition to the availability of the Term Loan Facility or the Revolving Credit Facility, an adverse change in this credit rating and the credit ratings assigned to our debt securities could adversely affect our business. Such ratings are subject to ongoing evaluation by credit rating agencies, and any rating could be changed or withdrawn by a rating agency in the future if, in its judgment, circumstances warrant such action. For example, such ratings could change based upon, among other things, our results of operations and financial condition.

The credit rating for the Term Loan Facility was downgraded in 2018 and the Company's rating outlook is negative. If any of the credit rating agencies that have rated our securities further downgrades or lowers its credit rating, or if any credit rating agency indicates that it has placed any such rating on a "watch list" for a possible downgrade or lowering, such action could have a material adverse effect on our costs and availability of funding in the future, which could in turn have a material adverse effect on our financial condition, results of operations, cash flows, the trading price of our securities and our ability to satisfy our debt service obligations, among other obligations.

We may incur additional indebtedness and lease commitments, which could adversely affect our ability to pursue certain business opportunities.

We and our subsidiaries may incur additional indebtedness and lease commitments at any time and from time to time in the future. Although the terms of the agreements governing our principal indebtedness contain restrictions on our ability to incur additional indebtedness, these restrictions are subject to a number of important qualifications and exceptions, and the indebtedness and lease commitments incurred in compliance with these restrictions could be substantial.

Instability and volatility in the financial markets could have a negative impact on our ability to raise additional capital to expand our businesses.

We may need to raise additional capital or incur additional indebtedness to finance our plans for growth. Instability and volatility in the financial markets caused by general economic conditions or otherwise may impede our ability to raise capital in the public or private credit or equity markets to fund our business strategy on terms we believe to be reasonable, if at all. Meanwhile, existing indebtedness, such as the Term Loan Facility and Revolving Credit Facility, contain, restrictive covenants that limit our ability to incur debt at all. Moreover, we may be unable to raise capital on terms acceptable to the Company. An inability to obtain the capital we need to finance our growth plans may adversely effect our operations and business prospects.

We may be subject to environmental liability as a result of unknown environmental hazards.

We are subject to various federal, New York State and local environmental laws and regulations that govern our operations and the construction of the Development Projects, including emissions and discharges into the environment, and the storage, handling and disposal of hazardous and non-hazardous substances and wastes. Failure to comply with such laws and regulations

20


could result in regulatory fines, legal fees and costs for remediation. Such fines and costs could be related to our storage, handling and disposal of waste from our racing operations, the existence of asbestos-containing material at Monticello Casino and Raceway and the existence of environmental conditions at the site of the Development Projects, which could have a material adverse effect on our businesses, financial condition or results of operations.
Our information technology and other systems are subject to cybersecurity risk including misappropriation of patron information or other breaches of information security.
We rely on information technology and other systems to maintain and transmit patrons' personal and/or financial information, credit card information, mailing lists and other information. Cyber attacks, including through the use of malware, computer viruses, dedicated denial of services attacks, credential harvesting, social engineering and other means for obtaining unauthorized access to or disrupting the operation of our networks and systems and those of our suppliers, vendors and other service providers, could have an adverse effect on our business.We have taken steps designed to safeguard our patrons' personal and financial information and have implemented systems designed to meet all requirements of the payment card industry standards for data protection. However, our information and processes are subject to the ever-changing threat of compromised security, in the form of a risk of potential breach, system failure, computer virus or unauthorized or fraudulent access or use by unauthorized individuals. Cyber attacks may cause equipment failures, loss of information, including sensitive personal information of patrons or employees or valuable technical and marketing information, as well as disruptions to our operations. Cyber attacks against companies have increased in frequency, scope and potential harm in recent years. Further, the perpetrators of cyber attacks are not restricted to particular groups or persons. These attacks may be committed by company employees or external actors operating in any geography, including jurisdictions where law enforcement measures to address such attacks are unavailable or ineffective, and may even be launched by or at the behest of nation states. Cyber attacks may occur alone or in conjunction with physical attacks, especially where disruption of service is an objective of the attacker. While, to date, we have not been subject to cyber attacks which, individually or in the aggregate, have been material to our operations or financial condition, the preventive actions we take to reduce the risks associated with cyber attacks, including protection of our systems and networks, may be insufficient to repel or mitigate the effects of a major cyber attack in the future. The steps we take to deter and mitigate these risks may not be successful, and any resulting compromise or loss of data or systems could adversely impact operations or regulatory compliance and could result in remedial expenses, fines, litigation and loss of reputation, potentially impacting our financial results. Although we have invested in and deployed security systems and developed processes that are designed to protect all sensitive data, prevent data loss and reduce the impact of any security breach, such measures cannot provide absolute security. A significant theft, loss or fraudulent use of customer or company data maintained by us or by a third-party service provider could have an adverse effect on our reputation, cause a material disruption to our operations, and result in remediation expenses, regulatory penalties and litigation by customers and other parties whose information was subject to such attacks, all of which could have a material adverse effect on our business, results of operations and cash flows.

The failure to maintain the integrity of our computer systems and customer information could result in damage to our reputation and/or subject us to fines, payment of damages, lawsuits and restrictions on our use of data. 

We collect and process information relating to our employees, guests, and others for various business purposes, including marketing and promotional purposes. The collection and use of personal data are governed by privacy laws and regulations enacted by various jurisdictions. Privacy laws and regulations continue to evolve and on occasion may be inconsistent between jurisdictions. Various federal, state and foreign legislative or regulatory bodies may enact or adopt new or additional laws and regulations concerning privacy, data retention, data transfer, and data protection. For example, the European Union has adopted a data protection regulation known as the General Data Protection Regulation, which became fully enforceable in May 2018, that includes operational and compliance requirements with significant penalties for non-compliance. In addition, California has enacted a new privacy law, known as the California Consumer Privacy Act of 2018, which takes effect in 2020 and provides some of the strongest privacy requirements in the United States.
    
Compliance with applicable privacy laws and regulations may increase our operating costs and/or adversely impact our ability to market our products, properties and services to our guests. In addition, non-compliance with applicable privacy laws and regulations by us (or in some circumstances non-compliance by third parties engaged by us), including accidental loss, inadvertent disclosure, unapproved dissemination or a breach of security on systems storing our data may result in damage to our reputation and/or subject us to fines, payment of damages, lawsuits or restrictions on our use or transfer of data. We rely on proprietary and commercially available systems, software, and tools to provide security for processing of customer and employee information, such as payment card and other confidential or proprietary information. Our data security measures are reviewed and evaluated regularly; however, they might not protect us against increasingly sophisticated and aggressive threats including, but not limited to, computer malware, viruses, hacking and phishing attacks by third parties. In addition, while we maintain cyber risk insurance to assist in the cost of recovery from a significant cyber event, such coverage may not be sufficient.


21


Risks Relating to the Development Projects

Construction of the Development Projects, some of which is still ongoing, is subject to hazards that may cause personal injury or loss of life, thereby subjecting us to liabilities and possible losses, which may not be covered by insurance.

The construction of large-scale projects such as the Development Projects can be dangerous. Construction workers at our projects are subject to hazards that may cause personal injury or loss of life, thereby subjecting the contractor and us to liabilities, possible losses, delays in completion of the projects and negative publicity. In the event of such accidents, we may stop construction for several days to allow for safety inspections and investigations. We and our contractors will take safety precautions that are consistent with industry practice, but these safety precautions may not be adequate to prevent serious personal injuries or further loss of life, damage to property or delays. If such accidents occur, we may be subject to delays, including delays imposed by regulators, liabilities and possible losses, which may not be covered by insurance, and our business, prospects and reputation may be materially and adversely affected.

The costs associated with the Development Projects may increase due to risks inherent in the design and development of such projects and their construction.

The costs associated with the Development Projects may increase due to factors including unanticipated design, construction, regulatory and environmental problems. We could also experience:

changes to plans and specifications, even after the opening of such facilities;
delays and significant cost increases;
shortages of materials;
shortages of skilled labor or work stoppages for contractors and subcontractors;
inability to meet MWBE participation goals;
labor disputes or work stoppages;
disputes with and defaults by contractors and subcontractors;
health and safety incidents and site accidents;
engineering problems, including defective plans and specifications;
poor performance or nonperformance by any third parties on whom we place reliance;
unforeseen construction scheduling, engineering, environmental, permitting, construction or geological problems;
environmental issues, including the discovery of unknown environmental contamination;
weather interference, floods, fires or other casualty losses;
other unanticipated circumstances or cost increases; and
failure to obtain necessary licenses, permits, entitlements or other governmental approvals.

The occurrence of any of these development and construction risks could increase the total costs of the Development Projects or delay or prevent the construction or opening or otherwise affect the design and features of the Development Projects, all of which could materially adversely affect our financial condition and cause us to require additional external financing.

The Casino and The Alder have limited operating history and the Golf Course has no operating history. Our expectations for the operations of such properties may not serve as an adequate basis to judge our future operating results and prospects.
The Casino has limited historical information and The Alder opened in January 2019. There is no historical information about the Golf Course Project, which is still under development. As a result, you should consider our business and prospects in light of the risks, expenses and challenges that we will face as a company that recently began operating a major new development project and gaming business in a rapidly growing and intensely competitive market.
We have encountered and will continue to encounter risks and difficulties frequently experienced by companies developing a major new project, and those risks and difficulties may be heightened in a rapidly developing market such as the gaming market in the northeastern United States. Some of the risks relate to our ability to:
attract and retain patrons and qualified employees;
operate, support, expand and develop our operations and our facilities;
maintain effective control of our operating costs and expenses;
develop and maintain internal personnel, systems and procedures to assure compliance with the extensive regulatory requirements applicable to the gaming business;
respond to changes in our regulatory environment; and
respond to competitive market conditions.


22


If we are unable to complete any of these tasks, we may be unable to complete and operate the Casino, The Alder and, when completed, the Golf Course Project, in the manner we contemplate and generate revenues in the amounts and by the times we anticipate. If any of these events were to occur, it would have a material adverse effect on our business and prospects, financial condition, results of operations and cash flows.

Even if the Casino, The Alder and the Golf Course Project are completed as planned and opened, they may not be financially successful, which would limit our cash flow and would materially adversely affect our operations and our ability to repay our debt.
Even if the Casino, The Alder and the Golf Course Project are completed as planned, one or more still may not be a financially successful venture or generate the cash flows that we anticipate. We cannot assure that the level of consumer demand for the Casino or for the type of luxury amenities that we offer will meet our expectations, and we may not attract the level of patronage that we are seeking. If the Casino, The Alder or the Golf Course Project do not attract sufficient business, this will limit our cash flow and would materially adversely affect our operations and our ability to service payments under our debt agreements. If any of these issues were to occur, it could adversely affect our prospects, financial condition, or results of operations.

Our business depends on a strong brand and if we are not able to build, maintain and enhance our brand, our ability to expand our market will be impaired and our business and operating results will be harmed.

On March 31, 2017, we entered into the RWS License Agreement, pursuant to which RWS granted to Montreign Operating the non-exclusive, non-transferable, revocable and limited to right to use certain “Genting” and “Resorts World” trademarks. Building, maintaining and enhancing our brand may require us to make substantial investments and these investments may not be successful. If we fail to promote and maintain our brand, or if we incur excessive expenses in this effort, our business, operating results and financial condition will be materially adversely affected. We anticipate that, as our market becomes increasingly competitive, maintaining and enhancing our brand may become increasingly difficult and expensive.

We consider the Resorts World brand name under which we market our facility, property and services to be important to our business since it has the effect of developing brand identification. We believe that the name recognition, reputation and image that we have developed attract patrons to our facilities. We anticipate the possibility that income generated from high-end gaming patrons can cause variability in our results.

Risks Relating to our Ownership Structure

Stockholders’ ability to influence corporate decisions may be limited because our major stockholder owns a large percentage of our common stock.

Kien Huat is the beneficial holder of 28,914,606 shares of our common stock, representing approximately 84.0% of our voting power as of March 14, 2019. Pursuant to the terms of the Kien Huat 2018 Preferred Stock Commitment Letter, Kien Huat currently holds 320 shares of Series F Preferred Stock, which are convertible into an aggregate of 1,600,000 shares of common stock, as of March 14, 2019. If Kien Huat exercised such conversion option, Kien Huat's common stock holdings would increase to to 30,514,606 shares of our common stock, representing approximately 88.6% of our voting power as of March 13, 2019.

Under the terms of an investment agreement dated November 12, 2009 (the "2009 Investment Agreement"), Kien Huat is entitled to recommend three directors candidates whom we are required to cause to be elected or appointed to our Board of Directors (“Board”), subject to the satisfaction of all legal and governance requirements regarding service as a director and to the reasonable approval of the Corporate Governance and Nominations Committee of our Board. Kien Huat will continue to be entitled to recommend three directors candidates for so long as it owns at least 24% of our voting power outstanding at such time, after which the number of directors whom Kien Huat will be entitled to designate for election to our Board will be reduced proportionally to Kien Huat’s percentage of ownership. Under the 2009 Investment Agreement, for so long as Kien Huat is entitled to recommend nominees to serve as Board members, among other things, Kien Huat will have the right to nominate one of its director designees to serve as the Chairman of the Board. Emanuel Pearlman has been appointed to serve as Chairman of the Board pursuant to Kien Huat’s recommendation. Until such time as Kien Huat ceases to own capital stock with at least 30% of our voting power outstanding at such time, our Board will be prohibited under the terms of the Investment Agreement from taking certain actions relating to fundamental transactions involving us and our subsidiaries and certain other matters without the affirmative vote of the directors recommended by Kien Huat and elected by shareholders. Consequently, Kien Huat has the ability to exert significant influence over our policies and affairs, including the election of our Board and the approval of any action requiring a stockholder vote, such as approving amendments to our certificate of incorporation and mergers or sales of substantially all of our assets, as well as other matters. Although Kien Huat has expressed no interest in doing so, Kien Huat is not restricted from acquiring additional shares

23


of our common stock, including through open market purchases. However, on February 17, 2016, and as amended on December 28, 2017, we entered into a letter agreement with Kien Huat (the "Kien Huat Letter Agreement"), wherein Kien Huat agreed, for a period of four years from the date of the Kien Huat Letter Agreement, to seek certain approvals of the Board and minority shareholders in connection with any "going-private" transaction. Notwithstanding the Kien Huat Letter Agreement, this concentration of voting power could delay or prevent an acquisition of the Company on terms that other stockholders may desire or force the sale of our company on terms undesirable to other stockholders.

Risks Relating to the Market Value of Our Common Stock

The Racing, Pari-Mutuel Wagering and Breeding Law of New York State requires our stockholders to possess certain qualifications. If the NYSGC believes a stockholder does not meet its subjective determination, a stockholder may be forced to sell any stock they hold and such sale may result in a material loss of investment value for the stockholder.

The Racing, Pari-Mutuel Wagering and Breeding Law of New York State requires our stockholders to possess certain qualifications. A failure to possess such qualifications could lead to a material loss of investment by either us or our stockholders, as it would require divestiture of the stockholder’s direct or indirect interest in us. Consequently, should any stockholder ever fail to meet the qualifications necessary to own a direct or indirect interest in us as determined by NYSGC, such stockholder could be forced to liquidate all interests in us. Should such stockholder be forced to liquidate these interests within a relatively short period of time, such stockholder would likely be forced to sell at a discount, causing a material loss of investment value.

The market price of our common stock is volatile, leading to the possibility of its value being depressed at a time when our stockholders want to sell their holdings.

The market price of our common stock has in the past been, and may in the future continue to be, illiquid and volatile. For instance, between January 1, 2018 and March 14, 2019, the closing price of our common stock has ranged between $6.42 and $30.90 per share. A variety of events may cause the market price of our common stock to fluctuate significantly, including, but not limited to the following:

quarter-to-quarter variations in operating results;
day traders;
adverse or positive news reports or public announcements; and
market conditions for the gaming industry.
In addition, the stock market in recent years has experienced significant price and volume fluctuations. This volatility has had a substantial effect on the market prices of companies, at times for reasons unrelated to their operating performance. These market fluctuations may adversely affect the price of our common stock and other interests in the Company at a time when our stockholders want to sell their interest in us.
If we fail to meet the applicable continued listing requirements of NASDAQ Global Market, NASDAQ may delist our common stock, in which case the liquidity and market price of our common stock could decline.
Our common stock is currently listed on the NASDAQ Global Market. In order to maintain that listing, we must satisfy certain continued listing requirements. If we are deficient in maintaining the necessary listing requirements, our common stock may be delisted. If our common stock is delisted, an active trading market for our common stock may not be sustained and the market price of our common stock could decline.
We do not anticipate declaring any dividends in the foreseeable future.
During the past three fiscal years, we did not declare or pay any cash dividends with respect to our common stock. Pursuant to the terms of the Bangkok Bank Loan Agreement, neither Empire nor any of its subsidiaries is permitted to declare or pay any dividends or make other payments to purchase, redeem, retire or otherwise acquire any capital stock of the Company. Such restriction will lapse upon the payment in full of any amounts outstanding under the Bangkok Bank Loan Agreement. We do not anticipate declaring any cash dividends on our common stock in the foreseeable future. We intend to retain all future earnings for use in the development of our business. There can be no assurance that we will have, at any time, sufficient surplus under Delaware law to be able to pay any dividends.


24


Future sales of our common stock by our insiders may cause our stock price to decline.
A portion of our outstanding shares are held by directors and executive officers and a significant portion of our outstanding shares are held by Kien Huat, our largest stockholder. Resales of a substantial number of shares of our stock by these stockholders, announcements of the proposed resale of substantial amounts of our stock, or the perception that substantial resales may be made by such stockholders could adversely impact the market price of our stock. Some of our directors and executive officers have entered into Rule 10b5-1 trading plans pursuant to which they have arranged to sell shares of our common stock from time to time in the future. Actual or potential sales by these insiders, including those under a prearranged Rule 10b5-1 trading plan may adversely impact the market price of our stock.
Future sales of shares of our common stock in the public market could adversely affect the trading price of shares of our common stock and our ability to raise funds in new stock offerings.
Future sales of substantial amounts of shares of our common stock in the public market, including pursuant to the 2018 Kien Huat Preferred Stock Commitment Letter , or the perception that such sales are likely to occur could affect the market price of our common stock. Kien Huat’s stock ownership may also discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of us, which in turn could reduce our stock price or prevent our stockholders from realizing a premium over our stock price.

Risks Relating to our Racing Operations

The continuing decline in the popularity of horse racing, decline of the horse population and increasing competition in simulcasting could adversely impact the business of Monticello Casino and Raceway.

Since the mid-1980s, there has been a general decline in the number of people attending and wagering at live horse races at North American racetracks due to a number of factors, including increased competition from other forms of gaming, unwillingness of guests to travel a significant distance to racetracks and the increasing availability of off-track wagering. The declining attendance at live horse racing events has prompted racetracks to rely increasingly on revenues from inter-track, off-track and account wagering markets. The industry-wide focus on inter-track, off-track and account wagering markets has increased competition among racetracks for outlets to simulcast their live races. In each of 2018, 2017 and 2016, we generated approximately $2.9 million of revenues from the import and export simulcasting of out-of-state racing, of which approximately $1.4 million in each year was due to the horsemen. A continued decrease in attendance at live events and in on-track wagering, continued decline in the horse population and available drivers, as well as increased competition in the inter-track, off-track and account wagering markets, could lead to a decrease in the amount wagered at Monticello Casino and Raceway. Our business plan anticipates the possibility of Monticello Casino and Raceway attracting new guests to our racetrack wagering operations through VGMs in order to offset the general decline in raceway attendance. However, even if our VGM operations attract new guests to our racetrack, we may not be able to generate profit from operations. Public tastes are unpredictable and subject to change. Any further decline in interest in horse racing or any change in public tastes may adversely affect our revenues and, therefore, limit our ability to make a positive contribution to our results of operation.

Risks Relating to the Collaboration

There can be no assurance that the New York State will enact regulations and/or laws allowing the offering of the bet365 Sportsbook Services or the bet365 Gaming Services, in which case we may never sell additional shares to bet365 under the Collaboration Agreement or otherwise generate any Collaboration Revenues from the Collaboration Agreement.

The Gaming Act provides, among other things, that sports betting at gaming facilities such as the Casino is unlawful unless there has been a change in federal law authorizing such activity or upon ruling of a court of competent jurisdiction that such activity is lawful. In May 2018, the Supreme Court of the United States decided that the Professional and Amateur Sports Protection Act of 1992, which effectively outlawed sports betting nationwide, was unconstitutional. Therefore, upon the enactment of relevant regulations by the NYSGC, the Company may implement sports betting as part of the gaming experience at the Casino. In addition, if the State of New York enacts laws during the term of the Collaboration Agreement allowing the offering of the bet365 Online Gaming Services, the Company may participate with bet365 in offering online sports betting and online casino games. We can provide no assurance that the NYSGC will enact such regulations enabling the bet365 Sportsbook Services, that New York State will legalize the bet365 Gaming Services or such regulations and legislation will be enacted during the term of the Collaboration Agreement. Unless New York State promulgates the regulations enabling the Company to offer the bet365 Sportsbook Services or any of the bet365 Gaming Services during the term of the Collaboration Agreement, the Company’s ability to generate revenues under the Collaboration Agreement will be materially adversely affected.


25


The NYSGC may deem bet365 a person unsuitable to offering any of the bet365 Sportsbook Services or bet365 Gaming Services pursuant to the Collaboration Agreement or the bet365 Investor unsuitable to own equity interests in the Company, in which case we may never sell the shares not yet issued to bet365 under the Collaboration Agreement, we may need to repurchase the shares previously purchased by bet365 pursuant to the terms of applicable gaming laws and our Second Amended and Restated Certificate of Incorporation, and we may never generate any Collaboration Revenues from the Collaboration Agreement.

The ownership of equity interest in the Company and the management and operation of gaming services are subject to extensive state laws and regulations administered by the NYSGC. These laws and regulations concern the responsibilities, financial stability and character of the owners and managers of gaming operations as well as persons financially interested or involved in gaming operations, and require such parties to obtain certain licenses, permits and approvals. In addition, the licenses, permits and approvals generally expire after a relatively short period and thus require frequent renewals and reevaluations. Obtaining these licenses, permits and approvals in the first place and the renewal process involves a subjective determination by the NYSGC. If bet365 or bet365 Investor do not obtain and maintain the required licenses, permits and approvals, we may never sell the shares not yet issued to bet365, we may need to repurchase the shares previously purchased by bet365, and we may never generate any Collaboration Revenues from the Collaboration Agreement. If, after receipt of a license, permit or approval bet365 or bet365 Investor are required to divest their interest in the Company or the operation of the bet365 Sportsbook Services or bet365 Gaming Services, we risk losing our Gaming Facility License unless such divestiture occurs.

Following the receipt of approval of bet365 Investor's ownership of the shares or the enactment of the regulations and/or laws necessary to enable the offering of the bet365 Sportsbook Services and/or the bet365 Gaming Services, bet365 may determine the Collaboration Agreement is not commercially viable, in which case it may terminate the Collaboration Agreement. If bet365 terminates the Collaboration Agreement pursuant to this right, the Company’s ability to offer commercially competitive sports betting and online gaming services may be materially adversely affected.

Following the enactment of the regulations and/or laws necessary to enable the offering of the bet365 Sportsbook Services and/or the bet365 Gaming Services, the parties will monitor and assess such applicable gaming laws that affect the transactions contemplated by the Collaboration Agreement. To the extent that bet365 has a good faith concern that, as a result of provisions of the applicable gaming regulations and/or laws, the obligations of bet365 under the Collaboration Agreement will not be commercially viable, then the parties will discuss in good faith and engage in advocacy efforts to modify the applicable gaming laws. If in bet365’s good faith opinion it will not be commercially viable to operate the bet365 Gaming Services, bet365 can terminate the Collaboration Agreement. If bet365 terminates the Collaboration Agreement, we may not be able to compete successfully for gaming customers with established sports betting or online gaming service providers, which may have a significant adverse effect on our ability to generate any revenue from sports betting or online gaming services in New York State.

In the event the market price or fair market value of the Company’s common stock will be below $20 on the Trigger Date, bet365 will receive the Preferred Distribution in the amount of the Common Stock Delta, which will reduce or delay the Company’s receipt of a share of profits from the Collaboration Revenue.

After all gaming taxes have been paid and the parties have recouped their costs and expenses from the Collaboration Revenue, bet365 is entitled to receive from the Collaboration Revenue a distribution equal to 50% of the positive difference, if any, between $20 and the value of the Company’s common stock (measured in accordance with the Collaboration Agreement) on the Trigger Date multiplied by the number of shares of common stock bet365 then holds. The Preferred Distribution, if any, will be payable from the Collaboration Revenue on a monthly basis over a period of three years. The payment of a Preferred Distribution from the Collaboration Revenue will defer and may materially adversely affect the amount of profits the Company receives from the Collaboration Revenue.

Even if New York State enacts regulations and/or laws permitting the bet365 Sportsbook Services and/or the bet365 Gaming Services during the term of the Collaboration Agreement, the bet365 Collaboration may never be profitable for the Company.

There is no operating history between the Company and bet365, and the proposed transaction is highly speculative. The success of the bet365 Collaboration is dependent on the enactment by New York State of the regulations and laws required to allow the Company and bet365 to provide the products and services contemplated by the Collaboration Agreement. We may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely affect the bet365 Collaboration and our ability to commercialize any products or services pursuant thereto. Even if the products and services contemplated by the bet365 Collaboration obtain the necessary approvals of New York State, our products and services may fail to achieve market acceptance and we may never become profitable. Even if the bet365 Collaboration achieves profitability in the future, we may not be able to sustain profitability in subsequent periods. As a result, our stockholders may never benefit from the transaction.
                        

26



Item 1B.
Unresolved Staff Comments.
None. 
Item 2.
Properties.

The Casino, The Alder and the Golf Course Project

The Casino and The Alder are located at the site of the Destination Resort on approximately 1,700 acres in the Town of Thompson in Sullivan County, New York, which is owned by EPR Properties, an entity unrelated to the Company. The Golf Course Project is being developed on a parcel adjacent to the Casino and The Alder. The Company also has opportunities for future expansion on the existing and adjacent parcels within the Destination Resort. The Project Parties lease from subsidiaries of EPR Properties the parcels on which the Development Projects are located. The terms of such leases are described below.
    
Casino Lease

On December 28, 2015, Montreign Operating entered into the Casino Lease with EPT for the lease of the parcel on which the Casino was constructed (the "Casino Parcel"). The Casino Lease has a term that expires on the earlier of (i) March 31, 2086 and (ii) Montreign Operating giving EPT written notice of its election to terminate the Casino Lease (the "Termination Option") at least 12 months prior to each of the 20th, 30th, 40th, 50th and 60th anniversaries of the commencement of the Casino Lease (each such anniversary, an "Option Date"). Upon Montreign Operating's timely notice of exercise of its Termination Option, the Casino Lease will be automatically terminated effective as of the applicable Option Date.


The following table represents the future fixed rent payments under the Casino Lease at December 31, 2018:

Year ending December 31,
Fixed Rent Payments due by Period
 
(in thousands)
2019 (1)
$7,500
2020 (1)
7,500

2021 (1)
8,000

2022 (1)
8,100

2023 (1)
8,100

2024 to 2056 (1)
$338,424

(1)
From September 1, 2018 through the remainder of the term of the Casino Lease, fixed rent will equal $7.5 million per year, subject to an eight percent escalation every five years (the "Base Amount").

In addition to fixed rent, beginning in September 2018 and through the remainder of the term of the Casino Lease (the "Percentage Rent Period"), Montreign Operating is obligated to pay an annual percentage rent equal to five percent of the Eligible Gaming Revenue (as such term is defined in the Casino Lease) in excess of the Base Amount for the Percentage Rent Period. Additionally, the lease is a net lease, and Montreign Operating has an obligation to pay the rent payable under the Casino Lease and other costs related to Montreign Operating's use and operation of the Casino Parcel, including the special district tax assessments allocated to the Casino Parcel, not to exceed the capped dollar amount applicable to the Casino Parcel.

Golf Course Lease

On December 28, 2015, ERREI entered into the Golf Course Lease with the Destination Resort Developer for the lease of the parcel on which the Golf Course will be developed (the "Golf Course Parcel"). The terms of the Golf Course Lease are substantially similar to the Casino Lease, subject to the material differences described below. Under the Golf Course Lease, there is no percentage rent due.

27


The following table represents the future fixed rent payments under the Golf Course Lease at December 31, 2018:

Year ending December 31,
Fixed Rent Payments due by Period
 
(in thousands)
2019 (1) (2)
$63
2020 (2)
150

2021 (2)
150

2022 (2)
150

2023 (2)
150

2024 to 2056 (2) (3)
$7,483

(1)
From the date the Golf Course Lease commenced and until the date on which the Golf Course opens for business, which is expected to be in Summer 2019 (the "Golf Course Opening Date"), fixed rent payments will equal $0.
(2)
From the Golf Course Opening Date and continuing for the 10 years thereafter, fixed rent will equal $150,000 per year.
(3)
From August 2029 through the remainder of the term of the Golf Course Lease, fixed rent will equal $250,000 per year.

The Golf Course Lease is a net lease and ERREI is obligated to pay the rent payable under the Golf Course Lease and other costs related to ERREI's use and operation of the Golf Course Parcel, including the special district tax assessments allocated to the Golf Course Parcel, not to exceed the capped dollar amount applicable to the Golf Course Parcel. This obligation will not be assessed against ERREI prior to 60 months following the Golf Course Lease Commencement Date.

The Alder Lease

On December 28, 2015, ERREII entered into the Alder Lease with the Destination Resort Developer, for the lease of the parcel on which The Alder was constructed (the "Alder Parcel" and, together with the Casino Parcel and the Golf Course Parcel, the "Project Parcels"). The terms of the Alder Lease are substantially similar to the Casino Lease, subject to the material differences described below. Under the Alder Lease, there is no percentage rent due.

The following table represents the future fixed rent payments under the Alder Lease at December 31, 2018:

Year ending December 31,
Fixed Rent Payments due by Period
 
(in thousands)
2019 (1) (2)
$150
2020 (2)
150

2021 (2)
150

2022 (2)
150

2023 (2)
150

2024 to 2056 (2) (3)
7,542


(1)
Prior to January 2, 2019 (the "Alder Opening Date"), fixed rent payments were equal to $0.
(2)
From January 2, 2019, and continuing for the 10 years thereafter, fixed rent will equal $150,000 per year.
(3)
From January 2029 through the remainder of the term of the Alder Lease, fixed rent will equal $250,000 per year.

The Alder Lease is a net lease and ERREII is obligated to pay the rent payable under the Alder Lease and other costs related to ERREII's use and operation of the Alder Parcel, including the special district tax assessments allocated to the Alder Parcel, not to exceed the capped dollar amount applicable to the Alder Parcel. This obligation will not be assessed against ERREII prior to 60 months following the Alder Lease Commencement Date.

On January 24, 2017, each of the Casino Lease, the Golf Course Lease and the Alder Lease were amended to correct scrivener’s errors in the legal descriptions of the Project Parcels.


28


Purchase Option Agreement

On December 28, 2015, Montreign Operating and EPT, EPR Concord II, Destination Report Developer and EPR Concord II, L.P. ("EPR LP" and together with EPT and Destination Resort Developer, "EPR") entered into a Purchase Option Agreement (the "Purchase Option Agreement"), pursuant to which EPR granted to Montreign Operating the option to purchase (the "Purchase Option") all, but not fewer than all, of the Project Parcels for a purchase price of $175 million ($200 million after the sixth anniversary on March 1, 2022, less a credit of up to $25 million for certain previous payments made by the Project Parties). The Purchase Option commenced on December 28, 2015 and will expire on the earlier to occur of (i) the natural expiration of the term of the Casino Lease and (ii) 90 days following the earlier termination of the Casino Lease, if otherwise terminated in accordance with its terms (the “Purchase Option Period”).

Under the Purchase Option Agreement, EPR also granted to Montreign Operating the option (the "Resort Project Purchase Option") to purchase not less than all of the balance of the contiguous acres owned by EPR (the "EPR Property"), excluding the Development Project Parcels and the Waterpark (the "Resort Property"), for an additional fee. The Resort Project Purchase Option may be exercised only simultaneously with or after the exercise of the Purchase Option. The Resort Project Purchase Option commenced on December 28, 2015 and will expire on the earlier to occur of (a) the expiration of the Purchase Option Period or (b) March 1, 2026.

Under the Purchase Option Agreement, EPR also granted to Montreign Operating a right of first offer ("ROFO") with respect to all or any portion of the Resort Property. Under the terms of the ROFO, if EPR makes an offer to or rejects an offer made by Montreign Operating, then EPR is precluded for a period of six months from transferring the designated portion of the Resort Property at a price and on terms which are on the whole substantially equivalent to or worse than those proposed or accepted by Montreign Operating. The ROFO commenced on December 28, 2015 and will continue in full force and effect until EPR has sold, leased, licensed or otherwise transferred all of the Resort Property.

Monticello Land
Monticello Casino and Raceway is located on a 232-acre parcel of land in Monticello, New York, which is held in fee by MRMI. Monticello Casino and Raceway includes pari-mutuel wagering facilities (including simulcasting), a paddock, exterior barns and related facilities for the horses, drivers, and trainers. In addition, our VGM operation is conducted at Monticello Casino and Raceway, which includes a 45,000-square foot gaming floor. The corporate offices of the Company are located at Monticello Casino and Raceway.
Item 3.
Legal Proceedings.
We are a party from time to time to various legal actions that arise in the normal course of business. In the opinion of management, the resolution of these other matters will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.
Item 4.
Mine Safety Disclosures.
Not applicable.


29


PART II 
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common stock is listed on the NASDAQ Global Market under the symbol “NYNY”.
Holders
According to Continental Stock Transfer & Trust Company, the Company's transfer agent, there were approximately 200 holders of record of our common stock at March 14, 2019.
Dividends
During the past three fiscal years, we did not declare or pay any cash dividends with respect to our common stock and we do not anticipate declaring any cash dividends on our common stock in the foreseeable future. We intend to retain all future earnings for use in the development of our business. There can be no assurance that we will have, at any time, sufficient surplus under Delaware law to be able to pay any dividends.
Pursuant to the terms of the Bangkok Bank Loan Agreement, neither Empire nor any of its subsidiaries is permitted to declare or pay any dividends or make other payments to purchase, redeem, retire or otherwise acquire any capital stock of the Company. Such restriction will lapse upon the payment in full of any amounts outstanding under the Bangkok Bank Loan Agreement. Notwithstanding the foregoing, so long as no event of default has occurred, subsidiaries of Empire are permitted to pay dividends to Empire and Empire may pay dividends on the Series B Preferred Stock and for withholding taxes payable in connection with equity compensation programs.
The Board authorized the cash payment of Series B Preferred Stock quarterly dividends for the 2018 calendar year. Payments in the amount of $32,087 were made on April 2, 2018, July 3, 2018, October 1, 2018 and January 2, 2019, respectively.
The Series F Preferred stock is entitled to receive, and the Company will pay, dividends on shares of Series F Preferred Stock equal (on an as-converted basis) to and in the same form as dividends actually paid on shares of common stock of the Company, when, as and if such dividends are paid on shares of the common stock.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table provides information as of December 31, 2018 with respect to the shares of our common stock that may be issued under our existing equity compensation plans:
 
(1)
 
 
 
 
 
Number of
securities to be
issued upon exercise of outstanding options, warrants and rights or
vesting of restricted stock units
 (column - a)
 
Weighted-
average exercise
price of
outstanding options, warrants and rights or vesting of
restricted stock units
(column - b)
 
Number of
securities
remaining
available for
future issuance
under equity
compensation
plans
(excluding
securities
reflected in
column (a))
(column - c)
2015 - Equity compensation plan approved by security holders
233,034

(2)
$

 
2,280,701

Total
233,034

 
$

 
2,280,701

 (1)
This amount reflects restricted stock units granted under our 2015 Equity Incentive Plan.
(2)
All restricted stock units have no exercise price. Total includes both unvested and vested but not yet settled restricted stock units.









30



Performance Graph

The following graph shows a comparison of the five-year total cumulative returns of an investment of $100 in cash on December 31, 2013 in (i) our common stock, (ii) the Nasdaq Composite Index, (iii) S&P 500, and (iv) the Dow Jones U.S. Gambling Index. All values assume reinvestment of the full amount of all dividends (to date, we have not declared any dividends).

This stock performance graph will not be deemed “filed” with the SEC or subject to Section 18 of the Securities Exchange Act, nor will it be deemed incorporated by reference in any of our filings under the Securities Act of 1933, as amended (the “Securities Act”).
Comparison of $100 invested on December 31, 2013 in Empire common stock or in the indexes listed below, including reinvestment of dividends:
chart-46c4c2bb7540567b910.jpg

 
Period Ending
 
12/31/2013
12/31/2014
12/31/2015
12/31/2016
12/31/2017
12/31/2018
Empire Resorts Inc.
$100.00
$160.33
$74.38
$94.01
$111.57
$41.86
S&P 500
$100.00
$111.39
$110.58
$121.13
$144.65
$135.63
Dow Jones U.S. Gambling Index
$100.00
$79.20
$58.67
$72.87
$99.17
$66.80
Nasdaq Composite Index
$100.00
$113.40
$119.89
$128.89
$165.29
$158.87



31



Item 6.
Selected Financial Data
The following table presents our selected consolidated financial data for the five most recent fiscal years, which is derived from our audited consolidated financial statements and the notes to those statements. Because the data in this table does not provide all of the data contained in our consolidated financial statements, including the related notes, you should read "Management's Discussion and Analysis of Financial Condition and Results of Operations," and our consolidated financial statements, including the related notes, contained elsewhere in this document and other data we have filed with the U.S. Securities and Exchange Commission.
 
 
Fiscal Year Ended December 31, (amounts in thousands, except per share data):
 
 
2018
2017
2016
2015
2014
Statement of Operations
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
Gaming
 
$156,546
$60,540
$59,633
$60,463
$59,831
Racing
 
5,335

5,820

5,957

6,177

4,684

Food and beverage
 
20,056

2,560

3,571

3,893

3,981

Room
 
7,345





Other
 
5,563

973

1,140

1,101

1,018

Gross revenues
 
194,845

69,893

70,301

71,634

69,514

Less: Promotional allowances
 

(4,042
)
(2,847
)
(3,468
)
(4,288
)
Net revenues
 
194,845

65,851

67,454

68,166

65,226

Total operating costs and expenses
 
283,909

95,768

91,137

102,126

79,912

Loss from operations
 
(89,064
)
(29,917
)
(23,683
)
(33,960
)
(14,686
)
Other expense
 
(561
)




Interest expense
 
(49,835
)
(19,269
)
(524
)
(2,643
)
(9,219
)
Interest income
 
873

2,842

10



Loss before income taxes
 
(138,587
)
(46,344
)
(24,197
)
(36,603
)
(23,905
)
Income tax provision
 
109



7

7

Net loss
 
(138,696
)
(46,344
)
(24,197
)
(36,610
)
(23,912
)
Dividends on preferred stock
 
(128
)
(128
)
(168
)
(178
)
(188
)
Net loss applicable to common stockholders
 
$(138,824)
$(46,472)
$(24,365)
$(36,788)
$(24,100)
 
 
 
 
 
 
 
Weighted average common shares outstanding:
 
 
 
 
 
 
Basic
 
32,882

30,981

28,221

10,749

9,286

Diluted
 
32,882

30,981

28,221

10,749

9,286

Loss per common share:
 
 
 
 
 
 
Basic
 
$(4.22)
$(1.50)
$(0.86)
$(3.42)
$(2.60)
Diluted
 
$(4.22)
$(1.50)
$(0.86)
$(3.42)
$(2.60)
 
 
 
 
 
 
 

32



 
 
Fiscal Year Ended December 31, (amounts in thousands, except per share data):
 
 
2018
2017
2016
2015
2014
Other Data:
 
 
 
 
 
 
Net cash provided by / (used in):
 
 
 
 
 
 
Operating activities
 
$(66,698)
$(34,304)
$(13,189)
$(31,380)
$(15,492)
Investing activities, including capital costs
 
(76,089
)
(416,722
)
(225,279
)
(20,298
)
(1,549
)
Financing activities
 
139,482

465,607

253,717

51,655

15,950

Capital expenditures
 
(1,012
)
(2,007
)
(1,974
)
(767
)
(1,542
)
Capitalized Development Projects costs
 
(204,524
)
(300,277
)
(157,305
)
(4,074
)

 
 
 
 
 
 
 
Balance Sheet Data:
 
 
 
 
 
 
Cash and cash equivalents
 
$28,338
$10,380
$11,012
$6,412
$6,435
Total assets
 
846,426

832,238

339,758

65,418

39,867

Total long-term debt, net of debt issuance costs
 
495,693

455,148


17,426

17,426

Series E Preferred Stock payable, including current portion
 



30,480

30,480

Stockholders' equity/(deficit)
 
211,839

271,321

279,566

(1,459
)
(17,101
)
 
 
 
 
 
 
 
Operating Data:
 
 
 
 
 
 
Total number of video gaming machines
 
1,090

1,110

1,110

1,110

1,110

Total number of video lottery terminals
 
1,070

1,070

1,070

1,070

1,090

Total number of electronic table games positions
 
20

40

40

40

20

 
 
 
 
 
 
 
Total number of slot machines
 
2,156





Total number of table game positions
 
163





 

33



Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion of our financial condition and results of operations should be read in conjunction with the consolidated Financial Statements and Notes thereto appearing elsewhere in this document.

Overview
Empire Resorts, Inc. (“Empire,” and, together with its subsidiaries, the “Company,” “us,” “our” or “we”) was organized as a Delaware corporation on March 19, 1993, and since that time has served as a holding company for various subsidiaries engaged in the hospitality and gaming industries.
Our indirect wholly-owned subsidiary, Montreign Operating Company, LLC, doing business as Resorts World Catskills ("Montreign Operating"), owns and operates Resorts World Catskills, a casino resort (the "Casino"), which is located at the approximately 1,700-acre site of a four-star destination resort (the "Destination Resort") in Sullivan County, New York, approximately 90 miles from New York City. The Destination Resort in which Resorts World Catskills is located also includes a 101-room lifestyle hotel ("The Alder") adjacent to the Casino. The Alder is owned and operated by Empire Resorts Real Estate II, LLC ("ERREII"), a wholly-owned subsidiary of Montreign Operating. Empire Resorts I, LLC ("ERREI"), which is a wholly-owned subsidiary of Montreign Operating, is developing a golf course (the "Golf Course Project" and, together with the Casino and The Alder, the "Development Projects") at the Destination Resort.
Through our wholly-owned subsidiary, Monticello Raceway Management, Inc. ("MRMI"), we own and operate Monticello Casino and Raceway, which began racing operations in 1958 in Monticello, New York, which is proximate to the Casino. Monticello Casino and Raceway currently features a video gaming machine ("VGM") and harness horseracing facility. The Company recently announced that VGM operations and food and beverage service at Monticello Casino and Raceway will cease on or about April 23, 2019. We also generate racing revenues through pari-mutuel wagering on the running of live harness horse races, the import simulcasting of harness and thoroughbred horse races from racetracks across the country and internationally, and the export simulcasting of our races to offsite pari-mutuel wagering facilities.

Off-Balance Sheet Arrangements

None.

Critical Accounting Policies

The preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”) in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and judgments related to the application of certain accounting policies.

While we base our estimates on historical experience, current information and other factors deemed relevant, actual results could differ from those estimates. We consider accounting estimates to be critical to our reported financial results if (i) the accounting estimate requires us to make assumptions about matters that are uncertain and (ii) different estimates that we reasonably could have used for the accounting estimate in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, would have a material impact on our financial statements.

We consider our policies for revenue recognition to be critical due to the continuously evolving standards and industry practice related to revenue recognition, changes which could materially impact the way we report revenues. Accounting polices related to: accounts receivable, impairment of long-lived assets, stock-based compensation, fair value and income taxes are also considered to be critical as these policies involve considerable subjective judgment and estimation by management. Critical accounting policies, and our procedures related to these policies, are described in detail below.

Revenue recognition and Promotional allowances

Gaming revenue is the net difference between gaming wagers and payouts for prizes, non-subsidized free play and accruals related to the anticipated payout of progressive jackpots. Progressive jackpots contain base jackpots that increase at a progressive rate based on the credits played and are charged to revenue as the amount of the jackpots increase. The Company recognizes gaming revenues before deductions of such related expenses as NYSGC share of VGM revenue and the Monticello Harness Horsemen’s Association (the “MHHA”) and Agriculture and New York State Horse Breeding Development Fund’s contractually required shares of revenue.


34



Food, beverage, room, racing, retail, entertainment and other services are recognized at the time such service is performed or delivered (i.e., for food and retail revenue). Racing revenue is generally pari-mutuel wagering on live harness racing and simulcast signals to and from other tracks. We recognize racing revenues before deductions of such related expenses as purses, stakes and awards. Some elements of the racing revenues from Off-Track Betting Corporations are recognized as collected, due to uncertainty of receipt of and timing of payments.

Net revenues are recognized net of certain sales incentives in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Certification (“ASC”) 606, “Revenue from Contracts with Customers”.
Prior to January 1, 2018, the Company operated a promotional program without patron membership fees. The retail value of complimentary food, beverages and other items provided to our guests was included in gross revenues and then deducted as promotional allowances to arrive at net revenues. The estimated cost of providing such food, beverage, room, retail, entertainment and other items was included in gaming, food, beverage, room, racing and other expenses. In addition, promotional costs including non-subsidized free play offered to the Company's guests based on their relative gaming worth and prizes included in certain promotional marketing programs was included in marketing expenses.
Subsequent to the adoption of ASC 606 on January 1, 2018, complimentary food and beverage revenues and room revenues are included in food and beverage revenues, room revenues, and other revenues, with a corresponding decrease to gaming revenues, in the unaudited condensed consolidated statements of operations.

The Company’s patron transactions primarily consist of gaming wagers, hotel room and food and beverage purchases. The transaction price for gaming wagers is the difference between gaming wins and losses, not the total amount wagered. The transaction price for hotel room and food and beverage purchases is the net amount collected from the patron for such goods and services. Hotel room and food and beverage goods and services have been determined to be separate, stand-alone transactions and the transaction price for such goods or services is recorded as revenue as they are transferred to the patron over the duration of the patron’s stay at the hotel or when the Company provides the food and beverage services. In the case of a hotel stay involving multiple days, the total transaction price of the stay is recognized on a straight-line basis. The Company collects advanced deposits from hotel patrons for future reservations representing obligations of the Company until the room stay is provided to the patron.

Gaming wagers by patrons who are members of our loyalty programs represent two performance obligations of the Company. Patrons who are members of our loyalty programs earn loyalty points for gaming wagers. Points awarded under our loyalty programs are given to members based on their gaming play and the promise to provide points to members is required to be accounted for as a separate performance obligation. The Company applies a practical expedient by accounting for gaming wagers on a portfolio basis, as such wagers have similar characteristics and the Company reasonably expects the effects on the financial statements of applying the revenue recognition guidance to the portfolio to not differ materially from that which would result if applying the guidance to each individual patron. For purposes of allocating the transaction price when loyalty points are earned, the Company allocates an amount to the loyalty point liability based on the stand-alone selling price ("SSP") of the points earned, which is determined by the value of a point that can be redeemed for a hotel room or food and beverage services. An amount is allocated to the gaming wager performance obligation using the residual approach as the stand-alone price for wagers is highly variable and no set established price exists for such wagers. The allocated revenue for gaming wagers is recognized when the wagers occur because all such wagers settle immediately. The loyalty point liability amount is deferred and recognized as revenue when the patron redeems the points for a hotel room stay or for food and beverage services and such goods or services are provided to the patron. Prior to the adoption of ASC 606, we determined our liability for unredeemed points based on the estimated costs of services or merchandise to be provided and estimated redemption rates.

Additionally, outside of our loyalty programs and at our discretion, we offer our patrons complimentary goods and services, primarily food and beverage and hotel room stays. Such complimentaries are provided in conjunction with revenue-generating gaming activity and are largely provided to entice contemporaneous and future revenue-generating gaming activities. We allocate a portion of the transaction price for gaming wagers we receive from such patrons to the complimentary goods and services provided to such patrons using the residual approach. This allocation is based on the estimated SSP of the underlying goods and services provided, which are determined based on observed SSP we receive for selling such goods and services.

Food and beverage revenues, and room revenues include (i) revenues generated from transactions with patrons for such goods and/or services, (ii) revenues recognized through the redemption of points from our loyalty programs for such goods and/or services, and (iii) revenues generated as a result of providing such goods and/or services on a complimentary basis in conjunction with gaming activities. Food and beverage revenues and room revenues are recognized when goods are delivered and services are performed. In general, performance obligations associated with these transactions are satisfied at a point-in-time, but may also be satisfied over a period of time, which is typically over the course of a patron’s stay. Advance deposits on rooms are reflected as a performance obligation liability until the goods and/or services are provided to the patron. The Company's performance obligation

35



liabilities are included in “Accrued expenses and other accrued liabilities” in our unaudited condensed consolidated balance sheets.

Racing revenues include revenue earned from pari-mutuel wagering on live harness racing and simulcast signals to and from other tracks. Some elements of racing revenue from Off-Track Betting Corporations (“OTBs”) are recognized as collected, due to uncertainty of receipt and timing of payments.

Other revenues primarily include commissions received on ATM transactions and cash advances, as well as lottery tickets, which are recorded on a net basis as the Company represents the agent in its relationship with the third-party service providers. Other revenues also include the sale of retail goods, which are recognized at the time the goods are delivered to the customer.
Accounts receivable
Accounts receivable, net of allowances, are stated at the amount we expect to collect. When required, an allowance for doubtful accounts is recorded based on information on the collectability of specific accounts. Accounts are considered past due or delinquent based on contractual terms, how recently payments have been received and the Company's judgment of collectability. In the normal course of business, the Company settles wagers for other racetracks and are exposed to credit risk. These wagers are included in accounts receivable. Account balances are charged against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.
Impairment of long-lived assets
The Company periodically reviews the carrying value of our long-lived assets in relation to historical results, as well as management’s best estimate of future trends, events and overall business climate. If such reviews indicate an issue as to whether the carrying value of such assets may not be recoverable, the Company will then estimate the future cash flows generated by such assets (undiscounted and without interest charges). If such future cash flows are insufficient to recover the carrying amount of the assets, then impairment is triggered and the carrying value of any impaired assets would then be reduced to fair value.

Stock-based compensation

The cost of all stock-based awards to employees, including grants of employee stock options, restricted stock and restricted stock units ("RSUs"), is recognized in the financial statements based on the fair value of the awards at grant date. The fair value of stock option awards is determined using the Black-Scholes valuation model on the date of grant. The fair value of restricted stock awards is equal to the market price of our common stock on the date of grant. The fair value of stock-based awards is recognized as stock-based compensation expense on a straight-line basis over the requisite service period from the date of grant.

Fair value

The Company follows the provisions of ASC 820, “Fair Value Measurement,” issued by the FASB for financial assets and liabilities. This standard defines fair value, provides guidance for measuring fair value, requires certain disclosures and discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow) and the cost approach (cost to replace the service capacity of an asset or replacement cost). The Company chose not to elect the fair value option as prescribed by FASB, for our financial assets and liabilities that had not been previously carried at fair value. The Company's financial instruments are comprised of current assets, restricted cash and investments, Interest Rate Cap, current liabilities and long-term loans. Current assets and current liabilities approximate fair value due to their short-term nature.



36


Results of Operations - Fiscal 2018 Compared to Fiscal 2017
The results of operations for the years ended December 31, 2018 and 2017 are summarized below (dollars in thousands):
 
2018
 
2017
 
Variance $
 
Variance %
Revenues:
 
 
 
 
 
 
 
Gaming
$156,546
 
$60,540
 
$96,006
 
158.6
 %
Racing
5,335

 
5,820

 
(485
)
 
(8.3
)%
Food and beverage
20,056

 
2,560

 
17,496

 
683.4
 %
Room
7,345

 

 
7,345

 

Other
5,563

 
973

 
4,590

 
471.7
 %
Gross revenues
194,845

 
69,893

 
124,952

 
178.8
 %
Less: Promotional allowances

 
(4,042
)
 
4,042

 
(100.0
)%
Net revenues
194,845

 
65,851

 
128,994

 
195.9
 %
Operating costs and expenses:
 
 
 
 


 

Gaming
126,186

 
44,486

 
81,700

 
183.7
 %
Racing
8,049

 
5,229

 
2,820

 
53.9
 %
Food and beverage
25,453

 
4,221

 
21,232

 
503.0
 %
Room
8,161

 

 
8,161

 


Other
191

 
259

 
(68
)
 
(26.3
)%
Selling, general and administrative
68,518

 
18,498

 
50,020

 
270.4
 %
Development Projects
12,574

 
21,558

 
(8,984
)
 
(41.7
)%
Amortization of gaming license
5,784

 

 
5,784

 


Depreciation
28,993

 
1,517

 
27,476

 
N.M.

Total operating costs and expenses
283,909

 
95,768

 
188,141

 
196.5
 %
Loss from operations
(89,064
)
 
(29,917
)
 
(59,147
)
 
197.7
 %
Other expense
(561
)
 

 

 
N.M.

Interest expense
(49,835
)
 
(19,269
)
 
(30,566
)
 
158.6
 %
Interest income
873

 
2,842

 
(1,969
)
 
(69.3
)%
Loss before income taxes
(138,587
)
 
(46,344
)
 
(92,243
)
 
199.0
 %
Income tax provision
109

 

 
109

 
 
Net loss
$(138,696)
 
$(46,344)
 
$(92,352)
 
199.3
 %
    
Gaming Revenues and Expenses
Gaming revenues increased by $96.0 million, or 158.6%, for the 12 months ended December 31, 2018 ("fiscal 2018") as compared to the 12 months ended December 31, 2017 ("fiscal 2017"), from $60.5 million to $156.5 million. The increase in gaming revenues was primarily due to revenues generated by the Casino, which generated $178.2 million in gross gaming revenue in fiscal 2018. Monticello Casino and Raceway ("MCR") generated $32.5 million in gross gaming revenue during fiscal 2018 as compared to $60.5 million for the fiscal 2017 period. The decrease in gaming revenue at MCR was primarily due to decreased visits by gaming patrons to MCR relating to the opening of the Casino, which is proximate to MCR. The Company recorded $57.4 million of complimentary revenue reclassifications during fiscal 2018, primarily due to the increase in business at the Casino during fiscal 2018, as a result of the disclosure changes due to the implementation of ASC 606.
Gaming expenses increased $81.7 million, or 183.7%, for the fiscal 2018 period as compared to the fiscal 2017 period, from $44.5 million to $126.2 million. The increase in gaming expenses was primarily due to expenses generated by the Casino, which includes gaming taxes and payroll expenses, partially offset by an increase in the commission rate associated with operations at MCR. The Company's commission rate was increased due to NYSGC regulations that allow for a higher commission that is commensurate with the blended tax rate paid by the Casino.
    

37


Racing Revenues and Expenses
Racing revenues decreased approximately $0.5 million, or 8.3%, for the fiscal 2018 period as compared to the fiscal 2017 period, from $5.8 million to $5.3 million. The decrease in racing revenues is primarily due to a decrease in revenues from regional OTBs for racing as compared to the fiscal 2017 period. Racing expenses increased $2.8 million, or 53.9%, for the fiscal 2018 period as compared to the fiscal 2017 period, from $5.2 million to $8.0 million. The increase in racing expenses of $2.8 million is primarily due to larger purse contributions and higher fees required by regulation to be paid by the Company as a result of the Casino opening.
Food and Beverage Revenues and Expenses
Food and beverage revenues increased approximately $17.5 million, or 683.4%, for the fiscal 2018 period as compared to the fiscal 2017 period, from approximately $2.6 million to $20.1 million due to the opening of the new food venues at the Casino. Food and beverage expenses increased $21.2 million, or 503.0% for the fiscal 2018 period as compared to the fiscal 2017 period, from $4.2 million to $25.5 million. The increase was primarily due to the opening of the Casino and its attendant additional food venues, which increased costs for food, beverage and supplies, as well as payroll expense.
Room Revenues and Expenses
The Casino generated approximately $7.3 million in room revenue for the fiscal 2018 period due to the Casino opening. We incurred room expenses of approximately $8.2 million, which is primarily due to payroll and benefit expenses.
Other Revenues and Expenses
Other revenues consist primarily of ATM revenues at the Casino, as well as retail sales and commissions from the sale of lottery tickets. Other revenues increased by approximately $4.6 million, or 471.7%, during the fiscal 2018 period as compared to the fiscal 2017 period, from approximately $1.0 million to approximately $5.6 million, primarily due to an increase in ATM revenues along with the opening of the retail store and spa at the Casino. Other expenses decreased by approximately $0.1 million, or 26.3%, during the fiscal 2018 period as compared to the fiscal 2017 period, from approximately $0.3 million to approximately $0.2 million, due to the reduction of staffing at Monticello Casino and Raceway.    
Selling General and Administrative (“SG&A”)
SG&A expenses increased $50.0 million, or 270.4%, for the fiscal 2018 period as compared to the fiscal 2017 period, from $18.5 million to $68.5 million. The increase in SG&A expenses is primarily due to an increase in payroll and benefits, insurance, marketing and a license fee, in connection with the use of the Resorts World brand relating to the Casino.
Development Projects Expenses
Development Projects expenses decreased by $9.0 million, or 41.7%, for the fiscal 2018 period as compared to the fiscal 2017 period, from $21.6 million to $12.6 million. The decrease was primarily due to the Casino opening in February 2018, at which time costs associated with the Casino ceased to be capitalized. The Casino opened to the public on February 8, 2018 and the penthouse suites at the Casino, along with The Alder, were substantially completed on January 1, 2019. The Golf Course Project is under development. Costs associated with these Development Projects are primarily capitalized and will be included in Capitalized Development Projects Costs on the consolidated balance sheet until the project is completed.

Interest expense
Interest expense increased $30.6 million, or 158.6%, for the fiscal 2018 period as compared to the fiscal 2017 period, from $19.3 million to $49.8 million. The increase in interest expense was primarily due to increased borrowings under the Term Loan Facility in fiscal 2018 to finance the substantial completion of the Casino and The Alder projects and the reduction to capitalized interest expense for the fiscal 2018 period as compared to the fiscal 2017 period due to the opening of the Casino. Upon the opening of the Casino, interest expense for the Term Loan Facility associated with the construction of the Casino could no longer be capitalized.

Interest income
Interest income decreased approximately $2.0 million, or 69.3%, for the fiscal 2018 period as compared to the fiscal 2017 period, from $2.8 million to $0.9 million. The decrease in interest income is due to the reduction in unused proceeds of the Term Loan Facility invested in restricted cash and investments for Development Projects during the fiscal 2018 period as such funds were used to support the construction of the Development Projects.




38


Results of Operations - Fiscal 2017 Compared to Fiscal 2016
The results of operations for the years ended December 31, 2017 and 2016 are summarized below (dollars in the table in thousands):
 
2017
 
2016
 
Variance $
 
Variance %
Revenues:
 
 
 
 
 
 
 
Gaming
$60,540
 
$59,633
 
$907
 
2
 %
Racing
5,820

 
5,957

 
(137
)
 
(2
)%
Food and beverage
2,560

 
3,571

 
(1,011
)
 
(28
)%
Other
973

 
1,140

 
(167
)
 
(15
)%
Gross revenues
69,893

 
70,301

 
(408
)
 
(1
)%
Less: Promotional allowances
(4,042
)
 
(2,847
)
 
(1,195
)
 
42
 %
Net revenues
65,851

 
67,454

 
(1,603
)
 
(2
)%
Operating costs and expenses:
 
 
 
 
 
 
 
Gaming
44,486

 
44,238

 
248

 
1
 %
Racing
5,229

 
5,174

 
55

 
1
 %
Food and beverage
4,221

 
4,732

 
(511
)
 
(11
)%
Other
259

 
268

 
(9
)
 
(3
)%
Selling, general and administrative
18,498

 
22,414

 
(3,916
)
 
(17
)%
Development Projects
21,558

 
12,970

 
8,588

 
66
 %
Depreciation
1,517

 
1,341

 
176

 
13
 %
Total operating costs and expenses
95,768

 
91,137

 
4,631

 
5
 %
Loss from operations
(29,917
)
 
(23,683
)
 
(6,234
)
 
26
 %
Interest expense
(19,269
)
 
(524
)
 
(18,745
)
 
N.M.

Interest income
2,842

 
10

 
2,832

 
N.M.

Loss before income taxes
(46,344
)
 
(24,197
)
 
(22,147
)
 
92
 %
Income tax provision

 

 

 
 
Net loss
$(46,344)
 
$(24,197)
 
$(22,147)
 
92
 %
Gaming revenue
Gaming revenue increased by approximately $0.9 million, or 2%, for the fiscal 2017 period as compared to the 12 months ended December 31, 2016 ("fiscal 2016"), from $59.6 million to $60.5 million. The increase in non-subsidized free play of $1.7 million, was a primary driver for the revenue increase. Handle decreased by approximately $10.1 million, or 1.1%, for the same period. The average daily win per unit decreased from $147.05 in fiscal 2016 to $143.11 in fiscal 2017. VGM hold percentage remained unchanged at 6.4% in fiscal 2017 versus fiscal 2016. The severe weather during the first quarter of the fiscal 2017 period significantly impacted gaming revenue. During the second and third quarters of the fiscal 2017 period, we made a concentrated effort to reduce our marketing to lower-tier unprofitable player segments and we increased our marketing efforts to attract mid- and high-level tier players. While this results in lower overall win due to fewer players, it generally increases overall player profitability. During fiscal 2017, the Company recorded $4.0 million for the cost of promotional allowances associated with the complimentary promotional benefits granted to gaming patrons.
    
Racing revenue

Racing revenue decreased by $0.1 million in fiscal 2017 as compared to fiscal 2016. The decrease in racing revenue was primarily due to a decrease in the horse population and the number of available drivers during fiscal 2017, resulting in fewer races.

Food and beverage revenue

Food and beverage revenue decreased by $1.0 million in the fiscal 2017 period as compared to the fiscal 2016 period. During the fourth quarter of the fiscal 2016 period, the Company renovated the Terrace Room, which was closed from November 5 through December 19, 2016. The Terrace Room reopened as the Upper Deck, an a la carte restaurant on December 19, 2016.

39


The Company closed the buffet restaurant at MCR on December 19, 2016. The Company opened a new sports bar, named the Press Box, in May 2017. Although the sports bar increased revenue volumes late in the fiscal 2017 period, it did not offset the loss in revenue from the buffet closure. These changes, along with the business disruption during the construction period, caused the reduction in food and beverage revenues at MCR during the fiscal 2017 period as compared to the fiscal 2016 period.

Other revenue

Other revenue decreased by approximately $0.2 million in the fiscal 2017 period as compared to the fiscal 2016 period, primarily due to a decrease in ATM revenue and an increase in fixed asset disposals in the fiscal 2017 period.
    
Promotional allowances

Promotional allowances increased by $1.2 million, or 42%, in the fiscal 2017 period as compared to the fiscal 2016 period, from $2.8 million to $4.0 million. Non-subsidized free play (free play subject to NYSGC and other commissions) increased approximately $1.7 million. Coupons, discounts and promotions decreased by $0.5 million in the fiscal 2017 period due to the reduction in promotional activity after closing of the buffet and renovation of the Terrace Room at MCR. Players club awards decreased by $0.1 million in the fiscal 2017 period as compared to the fiscal 2016 period.
    
Gaming expenses

Gaming expenses increased by approximately $0.2 million, or 1%, in fiscal 2017 as compared to fiscal 2016, from $44.2 million to $44.5 million, primarily due to higher NYSGC and other commissions of approximately $0.5 million, resulting from higher gaming revenue. Partially offsetting these increases were decreases in gaming wages and related benefits of approximately $0.2 million as compared to fiscal 2016, primarily due to lower payroll related expenses. Other gaming expenses decreased by approximately $0.1 million, primarily due to lower utilities expenses.


Food, beverage, racing and other expenses

Food, beverage, racing and other expenses decreased approximately $0.5 million, or 5%, in the fiscal 2017 period as compared to the fiscal 2016 period, from $10.2 million to $9.7 million. The decrease was primarily caused by the decrease in cost of sales of approximately $0.5 million in the fiscal 2017 period as compared to the fiscal 2016 period, caused by lower food and beverage revenues resulting from the buffet closure at MCR. Additionally, purses were $52,000 lower than the fiscal 2016 period due to fewer races. Repairs and maintenance expenses were $41,000 lower than the fiscal 2016 period. Partially offsetting these decreases was an increase of $81,000 in racing expenses due to New York State mandated horse drug testing.    

Selling, general and administrative expenses

Selling, general and administrative expenses decreased approximately $3.9 million, or 17%, in the fiscal 2017 period as compared to the fiscal 2016 period, from $22.4 million to $18.5 million. This decrease is primarily due to the decrease in legal fees by approximately $1.0 million, attributable to higher legal fees incurred in the fiscal 2016 period related to financing efforts for the Development Projects. Additionally, a $0.8 million charge was recorded in the fourth quarter of the fiscal 2016 period related to a contingent matter which was settled in the first quarter of the fiscal 2017 period. Other professional service fees decreased in the fiscal 2017 period by approximately $2.0 million primarily due to decreased lobbying expenses in the fiscal 2017 period. Consulting fees decreased by approximately $0.8 million in the fiscal 2017 period, primarily due to costs incurred in the fiscal 2016 period for financing efforts related to the Development Projects that were not consummated. Director fees decreased $0.4 million in the fiscal 2017 period, due to the creation of the Executive Chairman position in the fiscal 2016 period. These savings were partially offset by increases in payroll and related payroll benefits of $0.6 million, due to the increase in staffing during the fiscal 2017 period and the impact of the full year annual salary for the Executive Chairman position. Real estate taxes increased $0.3 million in the fiscal 2017 period, due to the phase out of the Empire Zone Tax Credit. Insurance expense increased $0.2 million in the fiscal 2017 period, primarily due to higher director and officer insurance premiums.
    
Development Projects expenses

Development projects expenses increased by $8.6 million, or 66%, in the fiscal 2017 period as compared to the fiscal 2016 period, from approximately $13.0 million to $21.6 million. Payroll and related benefits costs increased $4.1 million in the fiscal 2017 period, as the Company hired the management team and staff for the Casino, primarily during latter part of the fiscal 2017 period. Bank fees increased approximately $2.0 million, due to fees associated with the Term Loan Facility. Marketing expenses increased $0.9 million, due to efforts to increase branding. Professional fees increased $0.5 million, primarily due to higher

40


lobbying and consulting fees. Land lease and rents increased $0.4 million as compared to the fiscal 2016 period, and real estate taxes increased $0.2 million, primarily due to higher assessed valuations for the property on which Monticello Casino and Raceway is located. Other development expenses increased approximately $0.9 million, due to pre-opening expenses incurred in preparation for the Casino opening.

Interest expense
Interest expense increased $18.7 million in fiscal 2017 as compared to the fiscal 2016 period, from $0.5 million to approximately $19.3 million. The increase in interest expense was primarily due to borrowing under the Term B Loan and the Kien Huat Montreign Loan and is inclusive of $2.1 million of amortized debt issuance costs.

Interest income
Interest income increased approximately $2.8 million in the fiscal 2017 period as compared to the fiscal 2016 period. The increase in interest income is due to interest received on the investment of unused restricted cash and investments for Development Projects.

Liquidity and Capital Resources
    
The accompanying consolidated financial statements have been prepared on a basis that contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. Historically and prospectively, our primary sources of liquidity and capital resources have been, and will continue to be cash flow from operations, borrowings from banks and proceeds from the issuance of debt and equity securities. The Company anticipates that its current cash and cash generated from operations, as well as the remaining net proceeds of the Term Loan Facility and equity financing available under the 2018 Kien Huat Preferred Stock Commitment Letter, which are discussed below, will be sufficient to meet our working capital requirements, the expected costs of the Development Projects and our anticipated debt service requirements for the next 12 months. Our future operating performance and our ability to service our debt will be subject to future economic conditions and to financial, business and other factors, many of which are beyond our control. See “Risk Factors” of this Annual Report on Form 10‑K for a discussion of the risks related to our liquidity and capital structure.

Cash Flows

Net cash used in operating activities was approximately $66.7 million, $34.3 million and $13.2 million during the fiscal 2018, 2017 and 2016 periods, respectively. We continue to generate net losses and negative cash flows from operating activities, due to the pre-opening expenses we are incurring related to the Development Projects as well as increased costs related to the operation of the Casino. We incurred $12.6 million, $21.6 million and $13.0 million of Development Projects costs during the fiscal 2018, 2017 and 2016 periods, respectively. Operating activity for the fiscal 2018 period was significantly impacted by the opening of the Casino in February 2018. Due to the ongoing ramp up of operations at the Casino, along with continued efforts to supplement and develop managerial and operational staffing, the Company's operating losses of $138.7 million for the fiscal 2018 period were significant. Interest expense increased to $49.8 million for the fiscal 2018 period as compared to $19.3 million for the 2017 fiscal period. Operating activity for the fiscal 2018 period benefited from the reduction in Casino development expenses of $9.0 million. Our operating cash flows in fiscal 2018 were negatively impacted by severe weather during the first quarter that caused a reduction from expected revenues. The decrease in cash flow in fiscal 2018 was primarily due to the operating losses incurred by the Company and was partially offset by the increase in financing activities as the Company completed the Development Project financing totaling $115.0 million and obtained additional working capital from the $29.6 million bet365 equity investment and $11.9 million from the Series F Preferred Stock issuance.

We have had continuing net losses and negative cash flow from operating activities, including a loss from operations of $138.7 million in the fiscal 2018 period. The net loss in the fiscal 2018 period was inclusive of Development Projects costs of $12.6 million and interest expense of $48.9 million in the fiscal 2018 period.
 
Net cash used in investing activities was approximately $76.1 million, $416.7 million and $225.3 million during the fiscal 2018, 2017 and 2016 periods, respectively. The decrease in net cash used in the fiscal 2018 period was primarily due to spending for Capitalized Development Projects costs of $204.5 million for the fiscal 2018 period and was partially offset by the reduction of $94.5 million of investments for Development Project Costs and a refund of $35 million in cash collateral bonds required to be posted in the fiscal 2017 and 2016 periods, respectively. The increase in the fiscal 2017 period over the fiscal 2016 period was due primarily to a greater usage of restricted cash and investments for the Development Projects and higher capitalized Development

41



Project costs of $94.5 million and $300.3 million, respectively. In the fiscal 2017 period, we made a $20.0 million payment for the cash collateral bond required for the construction of the Casino by the NYSGC. In the fiscal 2016 period, we made a payment of $15.0 million for the cash collateral bond and $51.0 million for the Gaming Facility License. At December 31, 2017, our total assets included restricted cash and investments for the Development Projects of $110.0 million. At December 31, 2018, our total assets included approximately $21.0 million of restricted cash for the Development Projects.

Net cash provided by financing activities was approximately $139.5 million, $465.6 million and $253.7 million during the fiscal 2018, 2017 and 2016 periods, respectively. In the fiscal 2018 period, approximately $70.0 million was borrowed under the Term A Loan, $15.0 million was borrowed under the Revolving Credit Facility, $4.0 million was borrowed under the Bangkok Bank Loan and $30 million was borrowed under the Kien Huat Subordinate Loan. In November 2018, the Company issued $12.0 million of Series F preferred stock to Kien Huat Realty III Limited ("Kien Huat") and approximately $33.9 million of shares of common stock to bet365 Investor. The Company repaid $10.7 million of obligations due under the equipment loans and repaid $8.6 million of obligations due under the Term Loan Facility during the fiscal 2018 period.

In the fiscal 2017 period, approximately $441.9 million, net of discount, was borrowed under the Term B Loan and an additional $32.0 million was borrowed under the Kien Huat Montreign Loan. These amounts were partially offset by payments of $23.9 million of debt issuance costs and Interest Rate Cap fees. Furthermore, approximately $16.0 million was borrowed pursuant to the Bangkok Bank Loan in the fiscal 2017 period. In connection with the Bangkok Bank Loan, the Kien Huat Montreign Loan was exchanged for shares of common stock in full satisfaction of such loan in the fiscal 2017 period. During the fiscal 2016 period, approximately $286.0 million was received from the January 2016 Rights Offering, which was net of approximately $4.0 million of expenses, and $30.7 million of such proceeds was used to redeem the Series E Preferred Stock. At December 31, 2018, the Company had $20.4 million of equipment loans outstanding for the purchase of slot machines, equipment and software for the Casino.

Development Project Expenditures

The Company expects the Development Projects will cost approximately $928 million, which includes $765 million of anticipated costs for construction of the Development Projects, $68 million for interest expenses, $51 million for the Gaming Facility License fee and $44 million of original issue discount and financing and legal fees. The Company began construction of The Alder in March 2018 after signing a guaranteed maximum price agreement with its construction manager, which was amended to $35.2 million in December 2018. During the fall of 2018, the Company signed a contractor agreement for the Golf Course Project for a total cost of approximately $21.2 million.
    
As of December 31, 2018, the Company has incurred an aggregate total of $867.3 million related to the Development Projects, including $704.7 million of capitalized Development Projects costs, of which approximately $699.0 million was reclassified to property and equipment upon the opening of the Casino and The Alder, $67.6 million of interest expense related to bank debt for the Development Projects, $51.0 million for the Gaming Facility License and incurred $44.0 million of debt issuance costs related to the Development Projects.
    
Principal Debt Arrangements

Term Loan Agreement

On January 24, 2017, Montreign Operating entered into the Building Term Loan Agreement (the “Original Term Loan Agreement”), among Montreign Operating, the lenders from time to time party thereto, and Credit Suisse AG, Cayman Islands Branch (“Credit Suisse”), as administrative agent. On May 26, 2017, the parties entered into the first amendment to the Term Loan Agreement and certain ancillary agreements (the “Amended Term Loan Agreement” and, together with the Original Term Loan Agreement, the “Term Loan Agreement”). In the aggregate, the Term Loan Agreement provides Montreign Operating with loans in principal amount of $520 million (the “Term Loan Facility”). The borrowings under the Term Loan Facility are being used to fund the costs of the Development Projects.

The Term Loan Agreement provides Montreign Operating with senior secured first lien term loans consisting of $70 million of Term A Loans and $450 million of Term B Loans. The obligations of Montreign Operating under the Term Loan Facility are guaranteed by the Project Parties and are secured by security interests in substantially all of the assets of the Project Parties, as well as by a pledge of the membership interests in Montreign Operating. In connection with the Term Loan Facility, Empire provided a completion guaranty capped at $30 million on the completion of construction of the Casino and The Alder. Interest accrues on outstanding borrowings under the Term A Loan at a rate equal to LIBOR plus 5.0% per annum, or an alternate base rate plus 4.0% per annum. Interest accrues on outstanding borrowings under the Term B Loan at a rate equal to LIBOR (with a

42



LIBOR floor of 1%) plus 8.25% per annum, or an alternate base rate plus 7.25% per annum. As of December 31, 2018, $64.8 million was currently outstanding under the Term A Loan and $446.6 million was outstanding under the Term B Loan.

As a condition to the Term Loan Agreement, the net proceeds from the Term Loan Facility and the Kien Huat Montreign Loan, which is discussed below, were deposited into an account controlled by the lenders under the Term Loan Facility. The Company further funded this lender-controlled account with approximately $9.9 million in the fiscal 2017 period pursuant to the Term Loan Agreement from the proceeds of the Bangkok Bank Loan, which is discussed below. In order to access the funds (including the net proceeds from the Term Loan Facility and the Kien Huat Montreign Loan) held in these lender-controlled accounts, Montreign Operating had to satisfy the applicable disbursement conditions set forth in the Term Loan Agreement and ancillary agreements, such as providing evidence that the withdrawn funds are used for permitted purposes in connection with the Development Projects.
The Term Loan Agreement restricts the Project Parties from incurring additional indebtedness except for, among other things, obligations pursuant to hedging agreements required under the Term Loan Agreement, capital lease obligations and purchase money indebtedness (including FF&E financing) in an amount not exceeding $40 million, subordinated indebtedness so long as the proceeds are applied pursuant to the terms of the Term Loan Agreement and other indebtedness not exceeding $10 million. Also, the Project Parties may not make any dividend or other distribution, redeem or otherwise acquire any equity securities or subordinated indebtedness. Moreover, the Project Projects are restricted from entering into advisory, management or consulting agreements with an affiliate of any Project Party, including Empire, except for payments pursuant to tax sharing agreements, distributions in an amount not exceeding 1% of the net revenues of the Project Parties in any fiscal year, repurchase of capital stock of the Company in an amount not exceeding $1 million and required by the NYSGC, and certain available amounts of cash based on the application of financial covenants.
The Term Loan Agreement contains representations and warranties, customary events of default, and affirmative, negative and financial covenants, including that the Company maintain compliance with a maximum first lien net leverage ratio not to exceed 5.00:1.00, a minimum interest coverage ratio not to exceed 2.00:1.00 and a consolidated capital expenditure covenant not to exceed $10 million of eligible expenses in any calendar year. In addition, the Company is allowed to add back pro forma EBITDA in the amount of $108.4 million, $77.5 million and $39.4 million, respectively, in each of the first three testing quarters, respectively. These financial covenants will be applicable beginning with the first fiscal quarter following the "full opening" of the Casino, as such term is defined in the Term Loan Agreement. Additionally, excess cash flow, as such term is defined in the Term Loan Agreement, must be applied towards repayment of the Term Loan Facility commencing with the fiscal year in which the "full opening" of the Casino occurs. At December 31, 2018, Montreign Operating was in compliance with all the required financial covenants.
In March 2018, the Company contributed $3.6 million to an interest reserve fund under the Term Loan Agreement. This contribution reflects the additional interest paid on the Term Loan Facility, as a result of the Company's deferral of the completion of 15 VIP suites at the Casino from March 1, 2018 to March 30, 2018.

Revolving Credit Agreement

On January 24, 2017, Montreign Operating also entered into a revolving credit agreement, which was subsequently amended on May 24, 2017 and December 7, 2017 (as amended, the “Revolving Credit Agreement”) among Montreign Operating, the lenders from time to time party thereto, and Fifth Third Bank, as administrative agent. The Revolving Credit Agreement provides for loans or other extensions of credit to be made to Montreign Operating in an aggregate principal amount of up to $15 million (including a letter of credit sub-facility of $10 million) (the “Revolving Credit Facility”), the proceeds of which may be used for working capital needs, capital expenditures and other general corporate purposes following the initial opening of the Casino to the public. Interest will accrue on outstanding borrowings at a rate equal to LIBOR plus 5.0% per annum, or an alternate base rate plus 4.0% per annum. The Revolving Credit Facility will mature on January 24, 2022. At December 31, 2018, the Revolving Credit Facility was fully drawn.
    
Kien Huat Montreign Loan Agreement and Kien Huat Note Exchange Agreement

On January 24, 2017, Kien Huat and Montreign Holding entered into a loan agreement (the “Kien Huat Montreign Loan Agreement”), pursuant to which Montreign Holding obtained from Kien Huat a loan in the principal amount of $32.3 million (the "Kien Huat Montreign Loan"), the net proceeds of which were used as a capital contribution to Montreign Operating for use towards the expenses of the Development Projects. The obligations of Montreign Holding under the Kien Huat Montreign Loan Agreement were secured by a pledge of all the membership interests of Montreign Holding by Empire.

Concurrently with and as a condition to the closing of the Bangkok Bank Loan Agreement, which is discussed below, on December 28, 2017, Empire, Montreign Holding, and Kien Huat entered into a note exchange agreement (the “Kien Huat Note

43



Exchange Agreement”). The Kien Huat Note Exchange Agreement provided for the issuance of 1,379,873 shares of common stock (the “Exchange Shares”) to Kien Huat in full satisfaction of the Kien Huat Montreign Loan. On December 28, 2017, total indebtedness outstanding under the Kien Huat Montreign Loan was $36.2 million. Such total indebtedness outstanding under the Kien Huat Montreign Loan was exchanged for the Exchange Shares at an exchange rate of $26.21, which exchange rate represents the volume-weighted average price of the Company’s common stock for the 30-day period immediately preceding the date on which the Kien Huat Note Exchange Agreement was executed. In connection with the satisfaction in full of the Kien Huat Montreign Loan pursuant to the Kien Huat Note Exchange Agreement, Empire's pledge of its membership interests in Montreign Holding was released. The Exchange Shares were issued pursuant to an exemption from the registration requirement of the Securities Act provided in Section 4(a)(2) of the Securities Act.

Bangkok Bank Loan Agreement

On December 28, 2017, the Company entered into a Delayed Draw Term Loan Credit Agreement (the “Bangkok Bank Loan Agreement”) with Bangkok Bank PCL, New York Branch (“Bangkok Bank”), as lender, and MRMI, as guarantor. The Bangkok Bank Loan Agreement provides for loans to be made to the Company in an aggregate principal amount of up to $20 million (the “Bangkok Bank Loan”).

Interest accrues on outstanding borrowings under the Bangkok Bank Loan Agreement at a rate equal to LIBOR plus 6.25%, or an alternate base rate plus 5.25% per annum. In addition, the Company paid commitment fee to Bangkok Bank equal to the undrawn amount of the Bangkok Bank Loan commitment multiplied by a rate equal to 1.50% per annum. The Bangkok Bank Loan will mature on December 28, 2019. The Bangkok Bank Loan is guaranteed by MRMI and is secured by a security interest in Monticello Casino and Raceway. The Bangkok Bank Loan Agreement contains customary representations and warranties and affirmative covenants, negative covenants and financial covenants, including representations, warranties and covenants that, among other things, restrict the ability of the Company and MRMI to incur additional debt, incur or permit liens on assets, make investments and acquisitions, consolidate or merge with any other company, engage in certain transactions with affiliates, or make dividends or other distributions.

The Company borrowed $16 million at the closing of the Bangkok Bank Loan, on December 28, 2017. Of this amount, the Company contributed approximately $9.9 million to Montreign Operating pursuant to the terms of the Term Loan Agreement, as discussed above. The Company subsequently borrowed an additional $2 million on each of September 4, 2018 and November 7, 2018 for the general corporate purposes of the Company. As of December 31, 2018, the Bangkok Bank Loan was fully drawn.

Kien Huat Backstop Loan Agreement
Concurrently with and as a condition to the closing of the Bangkok Bank Loan Agreement, on December 28, 2017, Empire and Kien Huat entered into a loan agreement (the “Kien Huat Backstop Loan Agreement”), providing for loans to Empire in an aggregate principal amount of up to $20 million (the “Kien Huat Backstop Loan”). Any amounts borrowed under the Kien Huat Backstop Loan will be used exclusively to make payments required under the Bangkok Bank Loan Agreement and will mature on the one-year anniversary of the Maturity Date of the Bangkok Bank Loan, or such earlier date that the Bangkok Bank Loan is terminated (the “Backstop Maturity Date”). As of December 31, 2018, no amounts had been borrowed under the Kien Huat Backstop Loan.

Equipment Loan Agreements

The Company has entered into several long-term financing agreements related to the purchase of its slot machines, equipment and software for the Casino's hotel, information technology and other operations. The amount financed was $31.1 million and the terms of these agreements run between six and 36 months. The balances outstanding at December 31, 2018 and 2017 were $20.4 million and $31.1 million, respectively. The stated interest rates for these loans are between zero and eight percent per annum. The Company has imputed interest, on several equipment loans with stated interest rates of zero percent, using the Company's cost of funds rate of approximately 10%. The weighted average of the monthly repayments is approximately $1.0 million.

Equity Financings

2018 Kien Huat Preferred Stock Commitment Letter

On November 6, 2018, the Company and Kien Huat entered into a commitment letter (as amended and restated on November 9, 2018, the "2018 Kien Huat Preferred Stock Commitment Letter"), pursuant to which Kien Huat committed to provide equity financing in support of the general corporate and working capital requirements of the Company and its subsidiaries. Pursuant to the 2018 Kien Huat Preferred Stock Commitment Letter, Kien Huat agreed to purchase up to $126 million (the "Commitment

44



Amount") of Series F Preferred Stock on the terms set forth in the 2018 Kien Huat Preferred Stock Commitment Letter. Kien Huat committed to purchase the Series F Preferred Stock pursuant to the following schedule: (i) up to $12 million no earlier than November 9, 2018; (ii) up to $20 million no earlier than February 15, 2019; (iii) up to $20 million no earlier than May 15, 2019; (iv) up to $15 million no earlier than August 15, 2019; (v) up to $37 million no earlier than November 15, 2019; and (vi) up to $22 million no earlier than March 15, 2020.

The Company agreed to use its reasonable efforts to secure third-party financing in an amount equal to the Commitment Amount and the Commitment Amount will be reduced by the amount of any third-party financing raised by the Company. However, any equity financing raised by the Company from any person entering into a commercial agreement relating to online gaming and sports betting at the Casino in an amount up to $29 million will not reduce the Commitment Amount. Kien Huat will be entitled to a funding fee in the amount of 1% of the portion of the Commitment Amount funded by Kien Huat. Any future sales to bet365 Investor pursuant to the bet365 Common Stock Purchase Agreement will further reduce the Commitment Amount under the 2018 Kien Huat Preferred Stock Commitment Letter.

    Kien Huat is entitled to a funding fee in the amount of 1% of the portion of the Commitment Amount funded by Kien Huat. Unless earlier terminated by mutual agreement, the 2018 Kien Huat Preferred Stock Commitment Letter will terminate upon the earlier of (a) the Company's receipt of third-party financing in the Commitment Amount or (b) April 15, 2020.
On each of November 13, 2018 and February 20, 2019, the Company and Kien Huat entered into subscription agreements to purchase an aggregate of 320 shares of Series F Preferred Stock for an aggregate purchase price of $32 million and net proceeds to the Company (after deducting a $0.3 million funding fee due to Kien Huat) of $31.7 million.

bet365 Common Stock Purchase Agreement

On November 14, 2018, the Company entered into a sportsbook and digital gaming collaboration agreement (the “Collaboration Agreement”) with Hillside (New York) LLC, an affiliate of bet365 Group Limited (“bet365”). In connection with entering into the Collaboration Agreement, Hillside (New Media Holdings) Limited, an affiliate of bet365 ("bet365 Investor"), and the Company entered into a common stock purchase agreement (the “bet365 Common Stock Purchase Agreement”) pursuant to which bet365 Investor agreed to purchase up to 2.5 million shares of common stock of the Company at a purchase price of $20.00 per share, for an aggregate investment of $50 million.

In accordance with the bet365 Common Stock Purchase Agreement, the bet365 Investor purchased 1,685,759 shares of common stock upon execution of the bet365 Common Stock Purchase Agreement. The offer and sale of these shares was made pursuant to a shelf registration statement on Form S-3 (File No. 333-214119), which became effective on November 17, 2016, pursuant to a base prospectus dated as of November 17, 2016 contained in such registration statement and a prospectus supplement filed with the Securities and Exchange Commission on November 14, 2018. The Company received net proceeds of $33.7 million from the offering, which will be used for the general working capital purposes of the Company.

Pursuant to the bet 365 Common Stock Purchase Agreement, the bet365 Investor will be obligated to purchase the remaining 814,241 shares of common stock at $20.00 per share so long as the conditions set forth in the bet365 Common Stock Purchase Agreement are met.

After all gaming taxes have been paid and the parties have recouped their costs and expenses, bet365 may receive a distribution (the “Preferred Distribution”) equal to 50% of the positive difference, if any (the “delta”), between $20 and the value of the Company’s common stock measured on a given date (such date, the “Trigger Date”), multiplied by the number of shares of common stock then held by bet365 Investor. The Trigger Date is 30 days after the Company’s first filing of an annual or quarterly report with the Securities and Exchange Commission after bet365 recoups its costs incurred pursuant to the Collaboration Agreement. The delta will be the positive difference between $20 and the 30-day volume-weighted average price of the Company’s common stock on the Trigger Date.

The payment of a Preferred Distribution, if any, will defer and may materially adversely affect the amount of profits the Company receives pursuant to the Collaboration Agreement. If bet365 or bet365 Investor do not obtain and maintain the required licenses, permits and approvals, we may never sell the remaining 814,241 shares pursuant to the bet365 Common Stock Purchase Agreement and we may need to repurchase the shares previously purchased by bet365 Investor.

Other Factors Affecting Liquidity
                                                                                                                                                                                                                                                                                                                                                                                                         
The Company may also raise additional equity or debt capital or enter into arrangements to secure necessary financing to fund the completion of the Development Projects, to meet obligations under the Term Loan Facility or for the general corporate

45



purposes of the Company. Such arrangements may take the form of loans, strategic agreements, joint ventures or other agreements. The sale of additional equity could result in additional dilution to the Company’s existing stockholders, and financing arrangements may not be available to us, or may not be available in sufficient amounts or on acceptable terms.

On October 14, 2016, we filed a universal shelf registration statement on Form S-3 (the "Shelf Registration Statement") covering the offer and sale of $250 million of our securities. The Shelf Registration Statement, which also carried over $83.8 million of our securities registered on an expiring shelf registration statement that remained unsold, was declared effective on November 17, 2016. Instruction I.B.6 of Form S-3 imposes a limitation on the maximum amount of securities that we may sell pursuant to the registration statement during any 12-month period to the extent that the aggregate market value of our outstanding common stock held by non-affiliates (our “public float”) as of a day during the 60 days immediately preceding such sale is less than $75 million. As of March 8, 2019, our public float was $73,580,097. If our public float remains below $75 million, then at the time we sell securities pursuant to the registration statement, the amount of securities to be sold plus the amount of any securities we have sold during the prior 12 months in reliance on Instruction I.B.6 may not exceed one-third of our public float as of a day during the 60 days immediately preceding such sale as computed in accordance with Instruction I.B.6. Whether we sell securities under the registration statement will depend on a number of factors, including the market conditions at that time, our cash position at that time and the availability and terms of alternative sources of capital. Unless otherwise indicated in a prospectus supplement, the Company expects the net proceeds from the sale of securities will be used to support the Development Projects, working capital and for other general corporate purposes. The Company may also use a portion of the net proceeds to acquire or invest in businesses, products and technologies that are complementary to our business.
    
From time to time, we may pursue various strategic business opportunities. These opportunities may include proposed development and/or management of, investment in or ownership of additional gaming operations through direct investments, acquisitions, joint venture arrangements and other transactions. We are not currently exploring such opportunities. We can provide no assurance that we will successfully identify such opportunities or that, if we identify and pursue any of these opportunities, any of them will be consummated.

Our common stock is transferable subject to the provisions of Section 303 of the Racing, Pari-Mutuel Wagering and Breeding Law, so long as we hold directly or indirectly, a racetrack license issued by the NYSGC, and may be subject to compliance with the requirements of other laws pertaining to licenses held directly or indirectly by us. The owners of common stock issued by us may be required by regulatory authorities to possess certain qualifications and may be required to dispose of their common stock if the owner does not possess such qualifications.
Contractual Obligations
 
Payments due by period
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
Total
 
Less than
1 year
 
1 – 3
years
 
3 – 5
years
 
Years 6 - 40
Casino Lease (a)
$377,624
 
$7,500
 
$15,500
 
$16,200
 
$338,424
Golf Course Lease (b)
8,146

 
63

 
300

 
300

 
7,483

The Alder Lease (c)
8,292

 
150

 
300

 
300

 
7,542

Term Loan A (d)
76,880

 
14,408

 
28,159

 
34,313

 

Term Loan B (e)
644,428

 
53,884

 
106,404

 
484,140

 

Equipment Loans (f)
21,735

 
14,880

 
6,855

 

 

Bangkok Bank Loan (g)
21,754

 
21,754

 

 

 

Operating leases (h)
4,098

 
2,669

 
1,429

 

 

Revolving Credit Facility (i)
18,563

 
1,161

 
2,326

 
15,076

 

Kien Huat Subordinate Loan (j)
39,725

 

 
39,725

 

 

Total
$1,221,245

$116,469
 
$200,998
 
$550,329
 
$353,449


(a)
Annual fixed rent payments under the Casino Lease are as follows: beginning September 2018, payments of $625,000 per month, escalating every five years by 8% through the end of the lease term.

46



(b)
Annual fixed rent payments under the Golf Course lease are as follows: (i) $0 prior to the Golf Course Opening Date, which is expected to be in the Summer of 2019; (ii) $150,000 for the first 10 years following the Golf Course Opening Date; and (iii) $250,000 thereafter for the remainder of the term of the Golf Course Lease.
(c)
Annual fixed rent payments under the Alder Lease are as follows: (i) $0 prior to the Alder Opening Date, which occurred on January 1, 2019; (ii) $150,000 for the first 10 years following the Alder Opening Date; and (iii) $250,000 thereafter for the remainder of the term of the Alder Lease.
(d)
The Term A Loan is a variable rate instrument. The payments reflected above include principal amounts and interest payments based on the interest rate at December 31, 2018.
(e)
The Term B Loan is a variable rate instrument. The payments reflected above include principal amounts and interest payments based on the interest rate at December 31, 2018.
(f)
Equipment loan payments, primarily for the purchase of slot machines, software and other equipment for the Casino. The repayment period terms are between 24 and 36 months. These amounts include interest payments.
(g)
The Bangkok Bank Loan is a variable rate instrument. The payments reflected above include principal amounts and interest payments based on the interest rate at December 31, 2018.
(h)
Operating lease payments for the short-term lease of slot machines, copiers and other Casino equipment. The lease periods extend from six months to 36 months.
(i)
The Revolving Credit Facility is a variable rate instrument. The payments reflected above include principal amounts and interest payments based on the interest rate at December 31, 2018.
(j)
The Kien Huat Subordinate Note includes accrued cumulative compounded interest and matures on December 20, 2020.


47



Item 7A.
Quantitative and Qualitative Disclosures About Market Risk.
Market risk is the risk of loss arising from adverse changes in market rates and prices, including interest rates, commodity prices and equity prices. We currently have invested proceeds from the Term A and Term B Loans in money-market bank accounts. At December 31, 2018, these investments totaled approximately $27,000. We believe the short-term nature of these investments limits our exposure to interest rate risk.

The interest rate on the Term B Loan entered into on January 24, 2017, contains a variable component based on one-month LIBOR. However, the Interest Rate Cap entered into in February 2017 provided a limit on our exposure to increases in one-month LIBOR on $415 million from May 1, 2017 through February 28, 2018 and, for a portion of our Term B Loan balance, provides a limit on our exposure through July 31, 2019. In addition, the Company had $20 million of delayed draw term loans outstanding at December 31, 2018, under the Bangkok Bank Loan. The Bangkok Bank Loan matures on December 28, 2019. The interest rate on the Bangkok Bank Loan entered into on December 28, 2017, contains a variable component based on one-month LIBOR. Accordingly, based on outstanding borrowings at December 31, 2018, a one-point increase in LIBOR would increase interest expense (prior to interest capitalization) by approximately $4.4 million for the next 12-month period ending December 31, 2018. 

48


Item 8.
Financial Statements and Supplementary Data.
 



49



Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors of Empire Resorts, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Empire Resorts, Inc. and subsidiaries (the Company) as of December 31, 2018 and 2017, the related consolidated statements of operations and comprehensive loss, stockholders’ equity/(deficit), and cash flows for each of the three years in the period ended December 31, 2018, and the related notes and the financial statement schedule listed in Item 15 (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated March 15, 2019 expressed an adverse opinion thereon.

Change in Accounting Principles

As discussed in Note B to the consolidated financial statements, the Company has changed its presentation of restricted cash and restricted cash equivalents on the statement of cash flows due to the adoption of ASU 2016-18, Restricted Cash. This change has been applied retrospectively to all periods presented.

As discussed in Note B to the consolidated financial statements, the Company has changed its method for recognizing revenue on January 1, 2018 due to the adoption of ASU Topic 606, Revenue from Contracts with Customers.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
  
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.



/s/ Ernst & Young LLP

We have served as the Company's auditor since 2012.

Philadelphia, Pennsylvania
March 15, 2019

50



Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors of Empire Resorts, Inc.

Opinion on Internal Control over Financial Reporting

We have audited Empire Resorts, Inc. and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, because of the effect of the material weakness described below on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2018, based on the COSO criteria.

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management’s assessment.

Management has identified a material weakness in the design and operation of the Company’s review control around the accounting for stock compensation expense.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2018 and 2017, the related consolidate statements of operations and comprehensive loss, stockholders' equity/(deficit) and cash flows for each of the three years ended December 31, 2018, and the related notes and the financial statement schedule listed in Item 15. This material weakness was considered in determining the nature, timing and extent of audit tests applied in our audit of the 2018 (consolidated) financial statements, and this report does not affect our report dated March 15, 2019, which expressed an unqualified opinion thereon.

Basis for Opinion

The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.


51



Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.



/s/ Ernst & Young LLP

Philadelphia, Pennsylvania
March 15, 2019

52


EMPIRE RESORTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)

 
December 31,
 
December 31,
 
2018
 
2017
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$28,338
 
$10,380
Restricted cash
373

 
693

Accounts receivable, net
5,965

 
1,273

Inventories
936

 
174

Prepaid expenses and other current assets
8,026

 
3,376

Total current assets
43,638

 
15,896

Property and equipment, net
697,679

 
26,863

Capitalized Development Projects costs
5,724

 
566,797

Restricted cash and investments for Development Projects
21,039

 
136,431

Intangible assets
45,216

 
51,000

Cash collateral for deposit bond

 
35,000

Other assets
33,130

 
251

Total assets
$846,426
 
$832,238
Liabilities and Stockholders’ equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$9,894
 
$2,686
 Current portion of long-term debt
48,004

 
14,588

Accrued Development Projects costs
4,922

 
71,712

Accrued expenses and other current liabilities
33,678

 
7,320

Total current liabilities
96,498

 
96,306

Long-term loan, related party, net of debt issuance costs
30,954

 

Long-term debt, net of current portion
495,693

 
455,148

Other long-term liabilities
11,442

 
9,463

Total liabilities
634,587

 
560,917


 
 
 
Stockholders’ equity:
 
 
 
Preferred Stock, 5,000,000 shares authorized; $0.01 par value
 
 
 
Series B, $29 per share liquidation value, 44,258 shares issued and outstanding at December 31, 2018 and 2017, respectively
1

 

Series F, redeemable, $20 per share redemption value, 120 shares issued and outstanding as of December 31, 2018, (aggregate liquidation value of $20 as of December 31, 2018)

 

Common stock, $0.01 par value, 150,000,000 shares authorized, 34,403,250 and 32,559,617 shares issued and outstanding at December 31, 2018 and 2017, respectively
344

 
326

       Additional paid-in capital
651,623

 
572,342

       Accumulated other comprehensive loss
(219
)
 
(315
)
       Accumulated deficit
(439,910
)
 
(301,032
)
Total stockholders’ equity
211,839

 
271,321

Total liabilities and stockholders’ equity
$846,426
 
$832,238
The accompanying notes are an integral part of these consolidated financial statements.


53


EMPIRE RESORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
YEARS ENDED DECEMBER 31,
(In thousands, except for per share data)
 
 
2018
2017
2016
Revenues:
 
 
 
Gaming
$156,546
$60,540
$59,633
Racing
5,335

5,820

5,957

Food and beverage
20,056

2,560

3,571

Room
7,345



Other
5,563

973

1,140

Gross revenues
194,845

69,893

70,301

Less: Promotional allowances

(4,042
)
(2,847
)
Net revenues
194,845

65,851

67,454

Operating costs and expenses:
 
 
 
Gaming
126,186

44,486

44,238

Racing
8,049

5,229

5,174

Food and beverage
25,453

4,221

4,732

Room
8,161



Other
191

259

268

Selling, general and administrative
68,518

18,498

22,414

Development Projects
12,574

21,558

12,970

Amortization of gaming license
5,784



Depreciation
28,993

1,517

1,341

Total operating costs and expenses
283,909

95,768

91,137

Loss from operations
(89,064
)
(29,917
)
(23,683
)
Other expense
(561
)


Interest expense
(49,835
)
(19,269
)
(524
)
Interest income
873

2,842

10

Loss before income taxes
(138,587
)
(46,344
)
(24,197
)
Income tax provision
109



Net loss
(138,696
)
(46,344
)
(24,197
)
Dividends on preferred stock
(128
)
(128
)
(168
)
Net loss applicable to common stockholders
$(138,824)
$(46,472)
$(24,365)
 
 
 
 
Weighted average common shares outstanding:
 
 
 
Basic
32,882

30,981

28,221

Diluted
32,882

30,981

28,221

Loss per common share:
 
 
 
Basic
$(4.22)
$(1.50)
$(0.86)
Diluted
$(4.22)
$(1.50)
$(0.86)
 
 
 
 
Comprehensive loss:
 
 
 
 
 
 
 
Net loss
$(138,696)
$(46,344)
$(24,197)
Other comprehensive gain (loss):
 
 
 
Unrealized gain (loss) on Interest Rate Cap
96

(315
)

Comprehensive loss
$(138,600)
$(46,659)
$(24,197)
The accompanying notes are an integral part of these consolidated financial statements.

54


EMPIRE RESORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY/(DEFICIT)
YEARS ENDED DECEMBER 31, 2018, 2017 and 2016
(In thousands)
 
Preferred Stock
 
Common Stock
 
Additional
paid-in
capital
 
Other Comprehensive Loss
 
Accumulated deficit
 
Total
Stockholders’
Equity/(Deficit)
 
Series B
Series F, redeemable
 
 
Shares
 
Amount
 
Shares
 
Amount
 
Shares
 
Amount
 
Balances, December 31, 2015
44

 
$

 

 
$0
 
9,561

 
$96
 
$228,512
 
$0
 
$(230,067)

$(1,459)
Dividends paid - Series B Preferred Stock

 

 

 

 

 

 

 
 
 
(295
)

(295
)
Kien Huat note conversion

 

 

 

 
1,332

 
14

 
17,412

 
 
 


17,426

Common stock issued from exercise of rights offering

 

 

 

 
20,139

 
201

 
285,802

 
 
 


286,003

Stock-based compensation

 

 

 

 

 

 
2,122

 
 
 


2,122

Other

 

 

 

 
124

 
1

 
(35
)
 
 
 


(34
)
Net loss

 

 

 

 

 

 

 
 
 
(24,197
)

(24,197
)
Balances, December 31, 2016
44

 

 

 

 
31,156

 
312

 
533,813

 

 
(254,559
)

279,566

Dividends paid -Series B Preferred Stock

 

 

 

 

 

 

 
 
 
(129
)
 
(129
)
Options exercised

 

 

 

 
2

 

 
16

 
 
 

 
16

Restricted stock forfeited for tax payment