Company Quick10K Filing
Quick10K
Empire Resorts
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$12.00 34 $413
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
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
TXRH Texas Roadhouse
CBRL Cracker Barrel Old Country Store
WING Wingstop
EAT Brinker
DENN Dennys
RRGB Red Robin
FRGI Fiesta Restaurant
NDLS Noodles
DFRG Del Frisco's
GTIM Good Times Restaurants
NYNY 2018-09-30
Part I - Financial Information
Item 1. Financial Statements.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Item 4. Controls and Procedures.
Part II - Other Information
Item 1. Legal Proceedings.
Item 1A. Risk Factors.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities.
Item 4. Mine Safety Disclosures.
Item 5. Other Information.
Item 6. Exhibits.
EX-3.1 nyny-09302018xex31.htm
EX-31.1 nyny-09302018xex311.htm
EX-31.2 nyny-09302018xex312.htm
EX-32.1 nyny-09302018xex321.htm
EX-32.2 nyny-09302018xex322.htm

Empire Resorts Earnings 2018-09-30

NYNY 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 nyny-09302018x10q.htm 10-Q Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________ 
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 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

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

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

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

As of November 7, 2018, there were 32,717,491 shares of the registrant’s common stock outstanding.




INDEX
 
 
 
PART I
FINANCIAL INFORMATION
 
 
 
ITEM 1.
FINANCIAL STATEMENTS (Unaudited)
 
Condensed Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017
 
Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three-Month and Nine-Month Periods Ended September 30, 2018 and 2017
 
Condensed Consolidated Statements of Cash Flows for the Nine-Month Periods Ended September 30, 2018 and 2017
 
Notes to Condensed Consolidated Financial Statements
 
 
 
ITEM 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
ITEM 3.
Quantitative and Qualitative Disclosures about Market Risk
ITEM 4.
Controls and Procedures
 
 
 
 
PART II
OTHER INFORMATION
 
 
 
ITEM 1.
Legal Proceedings
ITEM 1A.
Risk Factors
ITEM 2.
Unregistered Sales of Equity Securities and Use of Proceeds
ITEM 3.
Defaults Upon Senior Securities
ITEM 4.
Mine Safety Disclosures
ITEM 5.
Other Information
ITEM 6.
Exhibits
 
 
 
 


i


PART I - FINANCIAL INFORMATION
Item 1.
Financial Statements.
 
EMPIRE RESORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)(Unaudited)

 
September 30,
 
December 31,
 
2018
 
2017
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
18,390

 
$
10,380

Restricted cash
502

 
693

Accounts receivable, net
10,843

 
1,273

Inventories
2,418

 
174

Prepaid expenses and other current assets
5,619

 
3,376

Total current assets
37,772

 
15,896

Property and equipment, net
659,737

 
26,863

Capitalized Development Projects costs
19,544

 
566,797

Restricted cash and investments for Development Projects
64,178

 
136,431

Intangible asset, net
46,794

 
51,000

Cash collateral for deposit bond

 
35,000

Other assets
3,307

 
251

Total assets
$
831,332

 
$
832,238

Liabilities and Stockholders’ equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
10,195

 
$
2,686

 Current portion of long-term debt
28,118

 
14,588

Accrued Development Projects costs
27,945

 
71,712

Accrued expenses and other current liabilities
33,941

 
7,320

Total current liabilities
100,199

 
96,306

Long-term loan, related party, net of debt issuance costs
20,064

 

Long-term debt, net of current portion
518,645

 
455,148

Other long-term liabilities
7,555

 
9,463

Total liabilities
646,463

 
560,917




 


Stockholders’ equity:
 
 
 
Preferred Stock, 5,000 shares authorized; $0.01 par value
 
 
 
Series B, $29 per share liquidation value, 44 shares issued and outstanding

 

Common stock, $0.01 par value, 150,000 shares authorized, 32,717 and 32,560 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively
327

 
326

       Additional paid-in capital
577,736

 
572,342

       Accumulated other comprehensive loss
(89
)
 
(315
)
       Accumulated deficit
(393,105
)
 
(301,032
)
Total stockholders’ equity
184,869

 
271,321

Total liabilities and stockholders’ equity
$
831,332

 
$
832,238

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


1


EMPIRE RESORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except for per share data) (Unaudited)
 
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
Revenues:
 
 
 
 
 
 
 
Gaming
$
47,381

 
$
17,833

 
$
115,706

 
$
46,956

Racing
1,368

 
1,438

 
3,926

 
4,161

Food and beverage
6,452

 
794

 
13,593

 
1,892

Room
2,826

 

 
5,285

 

Other
1,921

 
267

 
4,096

 
731

Gross revenues
59,948

 
20,332

 
142,606

 
53,740

Less: Promotional allowances

 
(1,619
)
 

 
(3,072
)
Net revenues
59,948

 
18,713

 
142,606

 
50,668

Operating costs and expenses:

 

 
 
 
 
Gaming
35,737

 
12,739

 
91,547

 
34,384

Racing
2,223

 
1,312

 
5,948

 
3,771

Food and beverage
7,526

 
1,136

 
17,108

 
3,174

Room
2,662

 

 
5,622

 

Other
43

 
54

 
154

 
215

Selling, general and administrative
19,754

 
4,730

 
44,787

 
14,158

Development Projects
452

 
5,196

 
12,084

 
13,881

Amortization of gaming license
1,577

 

 
4,206

 

Depreciation
7,864

 
390

 
20,325

 
1,115

Total operating costs and expenses
77,838

 
25,557

 
201,781

 
70,698

Loss from operations
(17,890
)
 
(6,844
)
 
(59,175
)
 
(20,030
)
Interest expense
(15,932
)
 
(4,833
)
 
(33,385
)
 
(16,546
)
Interest income
106

 
805

 
635

 
2,337

Loss before income taxes
(33,716
)
 
(10,872
)
 
(91,925
)
 
(34,239
)
Income tax provision

 

 

 

Net loss
(33,716
)
 
(10,872
)
 
(91,925
)
 
(34,239
)
Dividends on Preferred Stock
(32
)
 
(32
)
 
(96
)
 
(96
)
Net loss applicable to common stockholders
$
(33,748
)
 
$
(10,904
)
 
$
(92,021
)
 
$
(34,335
)
 
 
 
 
 
 
 
 
Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
32,689

 
30,973

 
32,653

 
30,975

Diluted
32,689

 
30,973

 
32,653

 
30,975

Loss per common share:
 
 
 
 
 
 
 
Basic
$
(1.03
)
 
$
(0.35
)
 
$
(2.82
)
 
$
(1.11
)
Diluted
$
(1.03
)
 
$
(0.35
)
 
$
(2.82
)
 
$
(1.11
)
 
 
 
 
 
 
 
 
Comprehensive loss:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss
$
(33,716
)
 
$
(10,872
)
 
$
(91,925
)
 
$
(34,239
)
Other comprehensive gain (loss):
 
 
 
 
 
 
 
Unrealized income (loss) on Interest Rate Cap
39

 
(99
)
 
226

 
(489
)
Comprehensive loss
$
(33,677
)
 
$
(10,971
)
 
$
(91,699
)
 
$
(34,728
)
The accompanying notes are an integral part of these consolidated financial statements.

2


EMPIRE RESORTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)(Unaudited)
Nine Months Ended September 30,
 
2018
 
2017
Cash flows provided by (used in) operating activities:
 
Net loss
$
(91,925
)
 
$
(34,239
)
Adjustments to reconcile net loss to net cash used in operating activities:

 

Depreciation
20,325

 
1,115

Amortization of gaming license
4,206

 

Amortization of debt issuance costs
3,143

 
3,955

Net recovery of doubtful accounts
(17
)
 

Non-cash interest expense
334

 
2,794

Loss on disposal of property and equipment

 
42

Stock-based compensation
2,042

 
2,213

Changes in operating assets and liabilities:


 


Accounts receivable
(9,553
)
 
(138
)
Inventories
(2,244
)
 
(4
)
Prepaid expenses and other current assets
(2,242
)
 
601

Accounts payable
7,509

 
(195
)
Accrued expenses and other current liabilities
26,087

 
170

Net cash used in operating activities
(42,335
)
 
(23,686
)
Cash flows provided by (used in) investing activities:


 


Purchase of property and equipment
(932
)
 
(1,823
)
Capitalized Development Projects costs
(148,783
)
 
(201,405
)
Refund/(payment) of cash collateral for deposit bond
35,000

 
(20,000
)
Net change in investments for Development Projects
94,450

 
(189,845
)
Other
13

 
8

Net cash used in investing activities
(20,252
)
 
(413,065
)
Cash flows provided by (used in) financing activities:

 
 
Proceeds from Term B Loan, net of discount

 
441,871

Proceeds from Term A Loan
70,000

 

Proceeds from Revolving Credit Facility
15,000

 

Proceeds from related party long-term loan
20,000

 

Proceeds from related party equity contribution

 
32,000

Proceeds from Bangkok Bank Loan
2,000

 

Principal payments on Term Loan Facility
(5,750
)
 

Principal payments on equipment loans
(7,038
)
 

Series B Preferred Stock dividend payment
(96
)
 
(96
)
Proceeds from exercise of stock options and option matching rights
50

 

Payment of debt issuance costs and Interest Rate Cap fees
(598
)
 
(22,878
)
Other payments
(966
)
 
(275
)
Net cash provided by financing activities
92,602

 
450,622

Net increase in cash, cash equivalents and restricted cash
30,015

 
13,871

Cash, cash equivalents and restricted cash, beginning of period
53,055

 
38,474

Cash, cash equivalents and restricted cash, end of period
$
83,070

 
$
52,345

Supplemental disclosures of cash flow information:

 

Cash paid for interest
$
31,934

 
$
27,710

Non-cash investing and financing activities:

 

Accrued Development Projects costs
$
27,945

 
$
75,291

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

3


EMPIRE RESORTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note A. Organization and Nature of 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 opened to the public on February 8, 2018. The Casino is located in Sullivan County, New York, approximately 90 miles from New York City. Montreign Operating is the sole holder of a gaming license (a "Gaming Facility License") issued by the New York State Gaming Commission ("NYSGC") in the Hudson Valley-Catskill region, which consists of Columbia, Delaware, Dutchess, Greene, Orange, Sullivan and Ulster counties in New York State.
In addition to the Casino, Empire Resorts Real Estate I, LLC ("ERREI") and Empire Resorts Real Estate II, LLC ("ERREII" and, together with Montreign Operating and ERREI, the "Project Parties"), each of which is a wholly-owned subsidiary of Montreign Operating, are developing an entertainment village (the "Entertainment Project") and a golf course (the "Golf Course Project" and, together with the Casino and the Entertainment Project, the "Development Projects"), respectively, at the site of a four-season destination resort in Sullivan County, New York.
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. 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.

Recent Events

Kien Huat 2018 Preferred Stock Commitment Letter
On November 6, 2018, the Company entered into a letter agreement (the “KH 2018 Preferred Stock Commitment Letter”) with Kien Huat Realty III Limited ("Kien Huat") 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 KH 2018 Preferred Stock Commitment Letter, Kien Huat agreed to purchase up to $126 million (the "Commitment Amount") of Series F Preferred Stock, $0.01 par value per share (the "Series F Preferred Stock") of the Company on the terms set forth in the KH 2018 Preferred Stock Commitment Letter and in accordance with the terms of the Certificate of Designations of the Series F Preferred Stock, which the Company filed with the Secretary of State of the State of Delaware on November 5, 2018. Kien Huat committed to purchase the Commitment Amount of the Series F Preferred Stock pursuant to the following schedule: (i) up to $12 million no earlier than November 9, 2018, (ii) up to $20 million no earlier than February 15, 2019, (iii) up to $20 million no earlier than May 15, 2019, (iv) up to $15 million no earlier than August 15, 2019, (v) up to $37 million no earlier than November 15, 2019 and (vi) up to $22 million no earlier than March 15, 2020. The Company agreed to use its reasonable efforts to secure third-party financing in an amount equal to the Commitment Amount and the Commitment Amount will be reduced by the amount of any third-party financing raised by the Company. However, any equity financing raised by the Company from any person entering into a commercial agreement relating to online gaming and sports betting at the Casino in an amount up to $29 million will not reduce the Commitment Amount. Kien Huat will be entitled to a funding fee in the amount of 1% of the portion of the Commitment Amount funded by Kien Huat. Unless earlier terminated by mutual agreement, the KH 2018 Preferred Stock Commitment Letter will terminate upon the earlier of (a) the Company's receipt of third-party financing in the Commitment Amount or (b) April 15, 2020.
    




4



Basis for Presentation

The condensed consolidated financial statements and notes as of September 30, 2018 and December 31, 2017 and for the three- and nine-month periods ended September 30, 2018 and September 30, 2017 include the accounts of Empire and its subsidiaries. All intercompany balances and transactions are eliminated in consolidation.

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared under the rules and regulations of the Securities and Exchange Commission ("SEC") applicable for interim periods, and therefore do not include all information necessary for complete financial statements in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”). Our financial statements require the use of estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, as well as the disclosure of contingent liabilities. Actual amounts could differ from those estimates. These condensed consolidated financial statements reflect all adjustments (consisting primarily of normal recurring accruals) which are, in the Company’s opinion, necessary for a fair presentation of financial position, results of operations and cash flows for the interim periods. These condensed consolidated financial statements and notes should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2017. The results of operations for our interim periods may not be necessarily indicative of the results of operations that may be achieved for the entire year.

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 generated from operations, borrowings from banks and proceeds from the issuance of debt and equity securities. Based on our current level of operations and our expected results of operations of the Casino and the remaining Development Projects as they are completed,we believe that cash generated from operations and cash on hand, together with amounts available under our principal debt arrangements and the KH 2018 Preferred Stock Commitment Letter will be sufficient to meet the working capital requirements and the expected remaining costs of the Development Projects over the next 12 months. We cannot be certain that our business will generate sufficient cash flow from operations, that our anticipated earnings from the Development Projects will be realized, or that future borrowings will be available under our existing debt arrangements or otherwise to enable us to service our indebtedness, make anticipated capital expenditures and satisfy working capital needs. As a result, we may need to raise additional capital or incur additional indebtedness, including by issuing securities from our Shelf Registration Statement (as defined below), which has a current availability of approximately $333 million, to finance our plans for growth and general corporate purposes. 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” in our Annual Report on Form 10‑K for the fiscal year ended December 31, 2017 for a discussion of the risks related to our liquidity and capital structure.
Note B. Summary of Significant Accounting Policies
Reclassifications
Certain amounts in the accompanying consolidated financial statements for the 2017 period have been reclassified to conform to presentation in the 2018 period, most notably, amortization of debt issuance costs has been included within interest expense on the Condensed Consolidated Statement of Operations.
Revenue recognition
As described below, the Company adopted the provisions of new accounting standards and updates as codified in the Accounting Standards Codification (ASC) Topic 606 regarding revenue recognition. The Company adopted this guidance as of January 1, 2018 using the modified retrospective approach. Under the modified retrospective approach, amounts presented as of December 31, 2017 and for the three-month and nine-month periods ended September 30, 2017 have not been adjusted to reflect the impact of the ASC Topic 606. This approach does not significantly impact the comparability of the 2018 and 2017 amounts. The promotional allowances recorded in 2017 are no longer presented in 2018 under ASC Topic 606. The adoption of the provisions of ASC 606 resulted in an increase of $54,000 to both “Other accrued liabilities” and “Accumulated deficit” at January 1, 2018. These increases were exclusively the result of remeasuring the loyalty program liability from a deferred cost model to a deferred revenue model. This change only impacts MRMI, since the Casino did not commence operations until February 8, 2018.

The Company’s patron transactions primarily consist of gaming wagers, hotel room and food and beverage purchases. The transaction price for gaming wagers is the difference between gaming wins and losses, not the total amount wagered. The transaction price for hotel room and food and beverage purchases is the net amount collected from the patron for such goods and services. Hotel room and food and beverage goods and services have been determined to be separate, stand-alone transactions and the

5


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.

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

Racing Revenues: 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: Other revenues primarily include commissions received on ATM transactions and cash advances, as well as lottery tickets, which are recorded on a net basis as the Company represents the agent in its relationship with the third-party service providers. Other revenues also include the sale of retail goods, which are recognized at the time the goods are delivered to the customer.

Subsequent to the adoption of ASC 606, complimentary food and beverage revenues and room revenues are included in food and beverage revenues, room revenues, and other revenues, with a corresponding decrease to gaming revenues, in the unaudited condensed consolidated statements of operations. See “Recent Accounting Pronouncements” for further information regarding the adoption of ASC 606.









6


Complimentary food and beverage revenues, and complimentary room revenues for the three-month and nine-month periods ended September 30, 2018 and 2017, respectively, were as follows:

 
 
Three Months Ended
 
Nine Months Ended
 
 
09/30/2018
 
09/30/2017
 
09/30/2018
 
09/30/2017
 
 
(in thousands)
 
(in thousands)
Complimentary food and beverage revenues
 
$
3,178

 
$
212

 
$
6,350

 
$
487

Complimentary room revenues
 
1,378

 

 
2,328

 


The Company’s performance obligation related to its loyalty point obligation is generally completed within one year, as a patron’s loyalty point balance is forfeited after six months of inactivity, as defined in the loyalty programs. The Company’s liability for its loyalty point performance obligations was $2.1 million and $0.3 million at September 30, 2018 and December 31, 2017, respectively. Loyalty points are generally earned and redeemed continuously over time.
    
Cash, cash equivalents and restricted cash
Cash and cash equivalents include cash on hand, demand deposits and certificates of deposit with original maturities of three months or less at acquisition. The Company maintains significant cash balances with financial institutions, which are not covered by the Federal Deposit Insurance Corporation. The Company has not incurred any losses in such accounts and believes it is not exposed to any significant credit risk on cash.
The Company has several types of restricted cash accounts. These restrictions are in accordance with the NYSGC regulations. In addition, at September 30, 2018, the Company had restricted cash of $64.2 million from the proceeds of the Term Loan Facility (as defined below) held in the lender-controlled accounts pursuant to the Term Loan Facility.
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same such amounts shown in the statement of cash flows:
 
 
September 30, 2018
 
December 31, 2017
 
September 30, 2017
 
December 31, 2016
 
 
(in thousands)
Cash and cash equivalents
 
$
18,390

 
$
10,380

 
$
6,213

 
$
11,012

Restricted cash
 
502

 
693

 
920

 
1,078

Restricted cash for Development Projects
 
64,178

 
41,982

 
45,212

 
26,384

Total cash, cash equivalents and restricted cash shown in the statement of cash flows
 
$
83,070

 
$
53,055

 
$
52,345

 
$
38,474


Restricted cash and investments for Development Projects
Restricted cash and investments for Development Projects represent the remaining funds from the Term Loan Facility to be utilized for the Development Projects. At September 30, 2018, restricted cash and investments for Development Projects of $64.2 million was comprised entirely of cash and cash equivalent balances. At December 31, 2017, restricted cash and investments for Development Projects of $136.4 million was comprised of cash and cash equivalent balances of approximately $42.0 million and short-term investments maturing within one year of approximately $94.5 million. At December 31, 2017, short-term investments were comprised of commercial paper of approximately $59.4 million and U. S. Treasury notes of approximately $35.1 million, all with maturities of less than one year. The short-term investments are recorded at amortized cost, which approximates fair value due to their short-term nature.
Accounts receivable
Accounts receivable, net of allowances, are stated at the amount the Company expects to collect. When required, an allowance for doubtful accounts is recorded based on information on the collectibility 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 collectibility. The Company extends credit to certain gaming patrons upon completion of a credit application process. Gaming patrons are expected to repay gaming markers within a predetermined period of time, the Company also settles wagers for other racetracks and is exposed to credit risk. These amounts are included in accounts receivable. Account balances are charged against the allowance

7


after all means of collection have been exhausted and the potential for recovery is considered remote. The Company recorded an allowance for doubtful accounts of approximately $154,000 and $171,000 at September 30, 2018 and December 31, 2017, respectively.
Capitalized Interest
Interest costs incurred in connection with the construction of the Casino and the Development Projects have been capitalized in the cost of the projects. Capitalization will cease when the Casino or the other Development projects are substantially complete or if development activity is suspended for an extended period of time.
The Company capitalized $0.3 million and $8.2 million of interest charges during the three-month periods ending September 30, 2018 and September 30, 2017, respectively, and $11.7 million and $17.6 million for the nine-month periods ended September 30, 2018 and September 30, 2017, respectively.
Other long-term liabilities
The difference between our cash payments and straight-line rent on our land leases of $7.5 million and $8.3 million at September 30, 2018 and December 31, 2017, respectively, is included in other long-term liabilities.
Common stock - loss per share
The Company computes basic loss per share by dividing net loss applicable to common shares by the weighted-average common shares outstanding for the period. Diluted loss per share reflects the potential dilution of earnings that could occur if securities or contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the loss of the entity. Since the effect of common stock equivalents is anti-dilutive with respect to losses, these common stock equivalents have been excluded from the Company’s computation of loss per common share. Therefore, basic and diluted loss per common share for the three-month and nine-month periods ended September 30, 2018 and and 2017 were the same.
The following table shows the approximate number of common stock equivalents outstanding at September 30, 2018 and 2017 that could potentially dilute basic loss per share in the future, but were not included in the calculation of diluted loss per share for the three-month and nine-month periods ended September 30, 2018 and 2017, because their inclusion would have been anti-dilutive to the loss per common share:
 
Outstanding at
 
September 30,
2018
 
September 30,
2017
Unvested Restricted stock
37,000

 
149,000

Warrants
193,000

 
133,000

Restricted stock units ("RSUs")
154,000

 
55,000

Option Matching Rights

 
3,000

Options
11,000

 
15,000

Total
395,000

 
355,000

    
On August 19, 2009, the Company entered into an investment agreement (the "Investment Agreement") with Kien Huat, pursuant to which Kien Huat purchased shares of common stock of the Company during the year ended December 31, 2009. Under the Investment Agreement, if any options or warrants outstanding at the time of the final closing under the Investment Agreement, or the first 200,000 options or warrants granted to directors or officers as of the final closing date under the Investment Agreement, are exercised, Kien Huat has the right to purchase an equal number of additional shares of common stock as are issued upon such exercise at the exercise price for the applicable option or warrant. The Company refers to these rights as the “Option Matching Rights.” The last remaining Option Matching Rights expired in July 2018.
Interest Rate Cap Agreement
In February 2017, the Company entered into an interest rate cap agreement with Credit Suisse AG, International to limit its exposure to increases in interest rates on its Term B Loan (as defined below) from May 1, 2017 through February 28, 2018 and then for a portion of the balance of its Term B Loan through July 31, 2019 (the "Interest Rate Cap"). The Company paid $675,000 for the Interest Rate Cap. The cost of the Interest Rate Cap is amortized over its term as interest expense. The fair value of the Interest Rate Cap was $287,000 at September 30, 2018 and $251,000 at December 31, 2017, and is presented at fair value as "Other Assets" on the Condensed Consolidated Balance Sheet. The difference between the fair value and amortized cost is recorded as an adjustment to accumulated other comprehensive loss.

8


Accumulated Other Comprehensive Loss
As of September 30, 2018 and December 31, 2017, accumulated other comprehensive loss was $89,000 and $315,000, respectively, and consisted solely of the fair value adjustment relating to the Interest Rate Cap.
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 the FASB for its financial assets and liabilities that had not been previously carried at fair value. The Company’s financial instruments are primarily comprised of current assets, restricted cash and investments, Interest Rate Cap, current liabilities and long-term debt. Current assets, investments and current liabilities approximate fair value due to their short-term nature.

In determining fair value, the Company uses quoted prices and observable inputs.  Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company.
    
The fair value hierarchy of observable inputs used by the Company is broken down into three levels based on the source of inputs as follows:
- Level 1 - Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities.
- Level 2 - Valuations based on inputs that are observable inputs and quoted prices in active markets for similar assets and liabilities.
- Level 3 - Valuations based on inputs that are unobservable and models that are significant to the overall fair value measurement. 

The following table presents the carrying amount, fair values and classification level within the fair value hierarchy of financial instruments measured or disclosed at fair value on a recurring basis:

 
 
September 30, 2018
 
December 31, 2017
 
 
 
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
 
Level of Fair Value Hierarchy
Assets:
 
(in thousands)
 
 
Cash and cash equivalents
 
$
18,390

 
$
18,390

 
$
10,380

 
$
10,380

 
Level 1
Restricted cash
 
502

 
502

 
693

 
693

 
Level 1
Interest Rate Cap
 
287

 
287

 
251

 
251

 
Level 2
Restricted cash and investments for Development Projects:
 
 
 
 
 
 
 
 
 
 
       Cash and cash equivalents
 
64,178

 
64,178

 
41,982

 
41,982

 
Level 1
       Short-term investments
 

 

 
94,449

 
94,209

 
Level 2
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
Term B Loan, net of discount
 
441,635

 
447,463

 
443,161

 
449,749

 
Level 2
Term A Loan
 
66,500

 
66,500

 

 

 
Level 2
Bangkok Bank Loan
 
18,000

 
18,000

 
16,000

 
16,000

 
Level 3
Revolving Credit Facility
 
15,000

 
15,000

 

 

 
Level 2
Related party loan, net of unamortized issuance costs
 
20,064

 
20,064

 

 

 
Level 3
Equipment loans
 
24,057

 
24,057

 
31,095

 
31,095

 
Level 3



9


Stock-based compensation
The cost of all share-based awards to employees, including grants of employee stock options and restricted stock, 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 Empire’s common stock on the date of grant. The fair value of share-based awards is recognized as stock-based compensation expense on a straight-line basis over the requisite service period from the date of grant. As of September 30, 2018, there was approximately $2.3 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Company’s equity compensation plan. That cost is expected to be recognized over a period of three years. This expected cost does not include the impact of any future stock-based compensation awards.
Income taxes
The Company applies the asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed for differences between the financial statement and tax bases of assets and liabilities that will result in future taxable or deductible amounts, based on enacted tax laws and rates for the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
Intangible Assets
In accordance with ASC 350, Intangibles - Goodwill and Other, the Company amortizes intangible assets over their estimated useful lives unless the Company determines their lives to be indefinite.
As a condition of the Gaming Facility License, the Company paid a license fee of $51 million on February 25, 2016. The term of the Gaming Facility License is 10 years from the date of grant; however, amortization did not commence until the Casino opened to the public in February 2018. Amortization has been recognized on a straight-line basis beginning in February 2018 and will continue until the license is up for renewal in 2026. The Company will assess the intangible asset for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired.
Recent accounting pronouncements
In February 2016, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") 2016-02, "Leases (Topic 842)" ("ASU 2016-02"), which provides guidance for accounting for leases. Under ASU 2016-02, the Company will be required to recognize the assets and liabilities for the rights and obligations created by leased assets. ASU 2016-02 will take effect for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The standard must be adopted using a modified retrospective approach and provides for certain practical expedients. Early adoption is permitted. The Company intends to adopt the standard on January 1, 2019 and apply the package of practical expedients available to it upon adoption. The Company continues to evaluate the effect that ASU 2016-02 will have on consolidated financial statements, but we expect that ASU 2016-02 will have a material effect on the condensed consolidated balance sheets as a result of the recognition of certain leases as right-of-use assets and lease liabilities.

In November 2016, FASB issued ASU 2016-18, "Restricted Cash" Topic 230, which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash and restricted cash equivalents. The Company adopted this standard on January 1, 2018 using the retrospective transition method. The impact of the new standard is that the Company's condensed consolidated statements of cash flows now present the change in a combined amount for both restricted and unrestricted cash and cash equivalents for all periods presented.


10



Note C. Prepaid Expenses and Other Assets

The Company participated in the New York State Empire Zones real estate tax credit program for over 10 years. Under this program, the Company receives a refund for real estate taxes paid during the year, after the end of New York State's fiscal year. Beginning in 2014, the amount of the tax credit received was reduced by 20% each year until the tax credit ended for the Company on December 31, 2017. For the year ended December 31, 2017, the Company will receive a 20% refund for real estate taxes paid, equal to $269,000 in Spring 2019.

The increases in prepaid real estate taxes, advertising, gaming expenses and security deposits are directly related to the opening of the Casino during the current nine-month period. Included in prepaid gaming expenses are $863,000 of annual slot machine and table gaming license fees at the Casino, which are amortized to expense on a straight-line basis.

Prepaid expenses and other current assets, as presented on the balance sheet, are comprised of the following at September 30, 2018 and December 31, 2017:
 
 
9/30/2018
 
12/31/2017
 
 
(in thousands)
Empire Zones real estate tax credit
 
$
269

 
$
814

Prepaid real estate taxes
 
1,082

 
443

Prepaid insurance
 
312

 
327

Prepaid advertising
 
160

 

Prepaid gaming expenses
 
1,039

 
74

Prepaid maintenance contracts
 
931

 
476

Development escrow and refundable security deposit
 
987

 
780

Prepaid other
 
839

 
462

Total prepaid expenses and other current assets
 
$
5,619

 
$
3,376


Note D. Property and Equipment
Property and equipment at September 30, 2018 and December 31, 2017 consists of the following:
 
 
 
9/30/2018
 
12/31/2017
 
(in thousands)
Land
$
770

 
$
770

Land improvements
2,110

 
1,759

Buildings
579,203

 
4,727

Building improvements
76,740

 
29,874

Furniture, fixtures and equipment
35,483

 
5,551

Construction in Progress
1,651

 
77

 
695,957

 
42,758

Less: Accumulated depreciation
(36,220
)
 
(15,895
)
 
$
659,737

 
$
26,863

The $653.2 million increase in property and equipment was primarily due to the reclassification of capitalized Project Development costs to buildings, building improvements and furniture, fixtures and equipment during the nine-month period ended September 30, 2018. At September 30, 2018, $19.5 million remains classified as capitalized Project Development costs reflecting the ongoing construction of the Development Projects.
Depreciation expense was approximately $7.9 million and $0.4 million for the three-month periods ended September 30, 2018 and 2017, respectively, and approximately $20.3 million and $1.1 million for the nine-month periods ended September 30, 2018 and 2017, respectively.

11



The VGMs at Monticello Casino and Raceway are owned by the NYSGC and, accordingly, the Company's consolidated financial statements include neither the cost nor the depreciation of those devices.

Note E. Development Projects Costs
Capitalized Project Development Costs
At September 30, 2018 and December 31, 2017, total Capitalized Project Development costs incurred were approximately $19.5 million and $566.8 million, respectively. Total Capitalized Development Project costs at September 30, 2018 consisted of $17.4 million of construction costs, site development, contractor insurance, general conditions, architectural fees and construction manager fees, and approximately $2.1 million of professional service fees including legal and accounting fees. Total Capitalized Project Development costs at December 31, 2017 consisted of $560.2 million of construction costs, site development, contractor insurance, general conditions, architectural fees and construction manager fees, and approximately $6.6 million of professional service fees, including legal and accounting fees, and is reflected on the balance sheet as Capitalized Development Project costs. The Casino opened for business on February 8, 2018, after receiving an operating certificate from the NYSGC.
ERREI entered into a standard contractor agreement with normal and customary terms with Petillo, Inc., related to 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.
Cash Collateral for Deposit Bond
In February 2016 and June 2017, the Company deposited $15 million and $20 million, respectively, in performance bonds to guarantee the completion of the Development Projects. On December 28, 2017, the Company notified the NYSGC that it had expended 85% of the Company's required minimum capital investment in the Development Projects. On January 4, 2018, the NYSGC notified the Company that it had confirmed that such minimum capital investment criteria as required by the Gaming Act had been met and the funds returned to the Company were deposited into a lender-controlled account for use towards Development Projects expenses.
Note F. Accrued Expenses and Other Current Liabilities
Accrued Development Projects costs at September 30, 2018 and December 31, 2017 were $27.9 million and $71.7 million, respectively, and were primarily comprised of amounts due to the construction managers for costs incurred for the Development Projects, as well as amounts due to the architect and other vendors. The proceeds from the Term Loan Facility will be used to pay the accrued Development Project costs.
Accrued expenses and other current liabilities, as presented on the condensed consolidated balance sheet, are comprised of the following at September 30, 2018 and December 31, 2017:
 
 
 
9/30/2018
 
12/31/2017
 
(in thousands)
Liability for horseracing purses
$
1,164

 
$
886

Accrued payroll
5,494

 
1,715

Deferred revenue - loyalty points
2,065

 
271

Liability to the NYSGC
2,836

 
1,507

Liability for local progressive jackpot
2,452

 
1,110

Accrued premium game leases
880

 

Accrued professional fees
2,136

 
744

Accrued interest expense
9,279

 
14

Accrued utilities
792

 
81

Accrued other
6,843

 
992

Total accrued expenses and other current liabilities
$
33,941

 
$
7,320



12



The increase in deferred revenue - loyalty points at September 30, 2018 of $1.8 million primarily reflects the increase in deferred revenues due to the increase in loyalty points earned by new customers as a result of the Casino opening. The liability to the NYSGC represents the amounts payable for taxes assessed by the NYSGC from gaming operations at the Company's facilities. The liability for local progressive jackpot represents the liability the Casino and the Monticello Casino and Raceway has incurred for all progressive jackpot games at each period ending date. Accrued premium game leases represent accruals for short-term slot machine leases for certain popular games.
Note G. Long-Term Debt
Long-term debt, other than Related Party debt, consisted of the following at September 30, 2018 and December 31, 2017:
 
 
9/30/2018
 
12/31/2017
 
 
(in thousands)
Term B Loan (stated amount less unamortized discount)
 
$
441,635

 
$
443,161

Term A Loan
 
66,500

 

Bangkok Bank Loan
 
18,000

 
16,000

Revolving Credit Facility
 
15,000

 

Equipment Loans
 
24,057

 
31,095

Total long-term debt
 
565,192

 
490,256

Debt issuance costs
 
(18,429
)
 
(20,520
)
Total long-term debt, net
 
546,763

 
469,736

Less: Current portion of long-term debt
 
(28,118
)
 
(14,588
)
Long term-debt, net of current portion
 
$
518,645

 
$
455,148


Term Loan Facility
At September 30, 2018, Montreign Operating's senior secured term loan facility (the "Term Loan Facility") consisted of $66.5 million outstanding under the Term A loan (the "Term A Loan") and $441.6 million outstanding (net of original issue discount) under the Term B loan (the "Term B Loan"). Pursuant to the Building Term Loan Agreement (as amended, the "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, the Term A Loan is fully drawn in accordance with the Term Loan Agreement, which required the Company to complete the draw down of the Term A Loan by July 24, 2018. The Term A Loan will mature on January 24, 2022 and the Term B Loan will mature on January 24, 2023. 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. At September 30, 2018, the interest rate on the Term A Loan was 7.35%. Interest accrues on outstanding borrowings under the Term B Loan at a rate equal to LIBOR (with a floor of 1%) plus 8.25% per annum, or an alternate base rate plus 7.25% per annum. At September 30, 2018, the interest rate on the Term B Loan was 10.59%. In addition, Montreign Operating paid a commitment fee to each Term A Loan lender equal to the undrawn amount of such lender’s commitment multiplied by a rate equal to 5.0% per annum through July 24, 2018.

The Company is currently required to make principal payments under the Term B Loan and the Term A Loan at the end of each calendar quarter, which began with the period ended June 30, 2018. The Company repays 1% of the original principal balance of the Term B Loan each year, in quarterly payments of approximately $1.1 million. The Company currently repays 2.5% of the original principal amount of the Term A Loan, in quarterly payments of approximately $1.8 million for the period ending March 31, 2019, and quarterly installments of approximately $2.6 million thereafter. The Company repaid approximately $3.5 million and $2.3 million on the Term A Loan and Term B Loan, respectively, in the nine-month period ended September 30, 2018.
    
The net proceeds from the Term A Loan and the Term B Loan, which are discussed below, were deposited into a lender controlled account.

The Term Loan Facility is guaranteed by the Project Parties and is secured by security interests in substantially all the real and personal property of the Project Parties and by a pledge of all the membership interests of Montreign Operating held by Montreign Holding Company, LLC ("Montreign Holding"), a wholly-owned subsidiary of Empire.


13



The Term Loan Facility contains representations and warranties, customary events of default, and affirmative, negative and financial covenants. For example, the Project Parties are restricted from entering into advisory, management or consulting agreements with an affiliate of any of the Project Parties, 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 Facility also includes target dates by which the Casino is required to be opened to the public and by which its development must be fully complete (as such concepts are defined in the Term Loan Agreement).

In addition, the Term Loan Agreement requires us to satisfy certain financial covenants, including a maximum first lien leverage ratio, a minimum interest coverage ratio and a limitation on the maximum permissible capital expenditures by the Project Parties. The financial covenants relating to the maximum first lien leverage ratio and the minimum interest coverage ratio will be measured beginning in the first full fiscal quarter following the "Full Opening Date" of the Casino, which is the date on which at least 95% of all rooms in the hotel are open to the public. The Company anticipates that at least 95% of the hotel rooms will be ready to be occupied during the late forth quarter of 2018. As of September 30, 2018, the Company was in compliance with all applicable covenant requirements under the Term Loan Facility.

Mandatory prepayments of the Term Loan Facility will be required upon the occurrence of certain events, including sales of certain assets, casualty events and the incurrence of certain additional indebtedness, subject to certain exceptions and reinvestment rights.
Revolving Credit Facility
At September 30, 2018, Montreign Operating's revolving credit facility (the "Revolving Credit Facility") consisted of $15 million of outstanding borrowings. The Revolving Credit Facility 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) pursuant to the terms of the Revolving Credit Agreement, among Montreign Operating, the lenders from time to time party thereto, and Fifth Third Bank, as administrative agent (as amended, the "Revolving Credit Agreement"). The proceeds of the Revolving Credit Facility may be used for working capital needs, capital expenditures and other general corporate purposes. The Revolving Credit Facility will mature on January 24, 2022. Interest accrues on outstanding borrowings at a rate equal to LIBOR plus 5.0% per annum, or an alternate base rate plus 4.0% per annum. At September 30, 2018, the interest rate on borrowings under the Revolving Credit Facility was 7.34%.

The Revolving Credit Facility is guaranteed by the Project Parties and is secured by security interests in substantially all the real and personal property of the Project Parties and by a pledge of all the membership interests of Montreign Operating held by Montreign Holding.

The Revolving Credit Facility contains representations and warranties, customary events of default, and affirmative, negative and financial covenants substantially similar to the terms of the Term Loan Agreement. Mandatory prepayments of the Revolving Credit Facility will be required upon the occurrence of certain events, including sales of certain assets, casualty events and the incurrence of certain additional indebtedness, subject to certain exceptions and reinvestment rights. As of September 30, 2018, the Company was in compliance with all applicable covenant requirements under the Term Loan Facility.
Bangkok Bank Loan
At September 30, 2018, the Delayed Draw Term Loan, as amended (the "Bangkok Bank Loan") consisted of $18 million of outstanding borrowings and availability of $2 million pursuant to the Delayed Draw Term Loan Credit Agreement (the “Bangkok Bank Loan Agreement”), among Empire, Bangkok Bank PCL, New York Branch (“Bangkok Bank”), as lender, and MRMI, as guarantor. On November 7, 2018, the Company borrowed the remaining $2 million under the Bank of Bangkok Loan Agreement.

The Bangkok Bank Loan will mature on December 28, 2019. Interest accrues on outstanding borrowings under the Bangkok Bank Loan at a rate equal to LIBOR plus 6.25%, or an alternate base rate plus 5.25% per annum. At September 30, 2018, the interest rate on the Bangkok Bank Loan was 8.49%. In addition, the Company pays a commitment fee to Bangkok Bank equal to the undrawn amount of the Bangkok Bank Loan commitment multiplied by a rate equal to 1.50% per annum. Such commitment fee is paid on the last business day of each quarter and commenced on March 31, 2018.

The Bangkok Bank Loan was amended (the "Bangkok Bank Loan Amendment") on June 25, 2018 concurrently with the execution of the Kien Huat Subordinate Loan Agreement (which is defined and discussed in Note H below). The Bangkok Bank Loan Amendment permitted the Company to incur the Kien Huat Subordinate Loan.


14



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, negative and financial covenants, including representations, warranties and covenants that, among other things, restrict the ability of the Company and MRMI to incur additional debt, incur or permit liens on assets, make investments and acquisitions, consolidate or merge with any other company, engage in certain transactions with affiliates, or make dividends or other distributions. Obligations under the Bangkok Bank Loan Agreement may be accelerated upon certain customary events of default (subject to grace periods, as applicable), including among others, nonpayment of principal, interest or fees, breach of the affirmative or negative covenants, revocation of a gaming license after the expiration of certain cure periods, and a change of control of the Company.

In addition, the Bangkok Bank Loan Agreement contains a financial covenant that restricts the maximum total leverage ratio to four times the adjusted EBITDA of MRMI, which financial covenant is applicable beginning with the fiscal quarter ending December 31, 2018. The Bangkok Bank Loan Amendment excludes the Kien Huat Subordinate Loan from calculations of the Company's maximum total leverage so long as the Kien Huat Subordinate Loan remains subordinate to the Bangkok Bank Loan. The Company is in compliance with the covenant requirements as of September 30, 2018.
Equipment Loans
The Company has entered into several financing agreements related to the purchase of its slot machines, equipment and software for its telephone, hotel and Casino operations. The original amount financed was $31.1 million and the terms of these agreements run between six and 36 months. The balances outstanding at September 30, 2018 totaled approximately $24.1 million. 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 0%, using the Company's cost of funds rate of approximately 10%. The weighted average of the monthly principal repayments is approximately $1.0 million.

The following table lists the annual principal repayments due for the Company's long term debt as of September 30, 2018:

 Year ending December 31,
Totals
 
(in thousands)
2018
$7,711
2019
44,841

2020
20,690

2021
15,815

2022
30,000

2023
452,250

Totals
$571,307

Note H. Long-Term Loans, Related Party
Kien Huat Subordinate Loan Agreement
On June 25, 2018, Kien Huat and the Company entered into a loan agreement (the “Kien Huat Subordinate Loan Agreement”), providing for loans of up to $30 million (the “Kien Huat Subordinate Loan”). The Kien Huat Subordinate Loan is subordinate to the Bangkok Bank Loan. The proceeds of the Kien Huat Subordinate Loan may be used exclusively to make capital contributions to Montreign Operating. Montreign may use such funds for marketing and general corporate purposes (including the payment of debt service). All amounts due under the Kien Huat Subordinate Loan will mature on December 28, 2020, which date may be extended for additional one-year periods if the Bangkok Bank Loan is similarly extended or accelerated in the event the Bangkok Bank Loan is accelerated. The maturity of the Kien Huat Subordinate Loan may also be extended for up to one year at the sole discretion of Kien Huat. At September 30, 2018, $20 million was outstanding under the Kien Huat Subordinate Loan and an additional $10 million was advanced on October 16, 2018. The Company paid Kien Huat a commitment fee of $300,000 (or 1% of the principal amount) out of the proceeds of the first advance.
The Kien Huat Subordinate Loan bears interest at a rate of 12% per annum, compounded monthly, and will be payable at maturity. Prior to the maturity of the Kien Huat Subordinate Loan, interest will not be required to be paid in cash and will be added to the outstanding principal of the Kien Huat Subordinate Loan and will thereafter be deemed to be part of the principal indebtedness due thereunder upon maturity. The Kien Huat Subordinate Loan may be repaid in full or in part at any time without premium or penalty.

15



The Kien Huat Subordinate Loan Agreement contains customary representations and warranties and affirmative covenants, including a restriction on the use of the proceeds of the Kien Huat Subordinate Loan as described above. Obligations under the Kien Huat Subordinate Loan Agreement may be accelerated upon certain customary events of default (subject to grace periods, as applicable), including among others: nonpayment of principal, interest or fees; breach of the affirmative covenants; and a default in payment of or acceleration of the Bangkok Bank Loan. Additionally, any future amendments to the Bangkok Bank Loan Agreement relating to default provisions thereunder, prepayment provisions or an increase of the maximum principal amount thereunder will be subject to Kien Huat’s prior written consent.
The Company agreed to indemnify and defend Kien Huat and its affiliates from negligent acts or omissions of the Company and its affiliates, any failure of the Company to comply with the terms of the Kien Huat Subordinate Loan Agreement and any failure of the Company to comply with any laws, except to the extent resulting from the gross negligence or willful misconduct of Kien Huat or its affiliates.

Kien Huat Backstop Loan Agreement
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. Any amounts borrowed pursuant to the Kien Huat Backstop Loan Agreement 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. At September 30, 2018, there were no outstanding borrowings pursuant to the Kien Huat Backstop Loan Agreement.

The Kien Huat Backstop Loan Agreement contains representations and warranties and affirmative covenants that are usual and customary, including representations, warranties and covenants that restrict the Company’s use of the proceeds of any loans made pursuant to the Kien Huat Backstop Loan Agreement to pay amounts due and payable under the Bangkok Bank Loan. Obligations under the Kien Huat Backstop Loan Agreement may be accelerated upon certain customary events of default (subject to grace periods, as appropriate), including among others, nonpayment of principal, interest or fees, and breach of the affirmative covenants.
Note I. Stockholders’ Equity
Common Stock

Restriction on Ownership
Our common stock is transferable only subject to the provisions of Section 303 of the Racing, Pari-Mutuel Wagering and Breeding Law, so long as we hold, directly or indirectly, a license issued by the NYSGC, and may be subject to compliance with the requirements of other laws pertaining to licenses held directly or indirectly by us. The owners of common stock issued by us may be required by regulatory authorities to possess certain qualifications and may be required to dispose of their common stock if the owner does not possess such qualifications.
    
Restriction on Ability to Pay Dividends
Pursuant to the terms of the Bangkok Bank Loan Agreement, neither Empire nor any of its subsidiaries is permitted to declare or pay any dividends or make other payments to purchase, redeem, retire or otherwise acquire any capital stock of the Company. Such restriction will lapse upon the payment in full of any amounts outstanding under the Bangkok Bank Loan Agreement. Notwithstanding the foregoing, so long as no event of default has occurred, subsidiaries of Empire are permitted to pay dividends to Empire and Empire may pay dividends on the Series B Preferred Stock and for withholding taxes payable in connection with equity compensation programs.
Preferred Stock and Dividends
    
Series B Preferred Stock
The Company paid dividends, required by the terms of the Series B Preferred Stock, during 2017 and 2018 as follows: on April 2, 2018, July 2, 2018 and October 1, 2018, quarterly payments in the amount of $32,087 were made for the first three quarters of 2018. For the 2017 fiscal year, quarterly payments in the amount of $32,087 were made on April 3, 2017, July 3, 2017, October 2, 2017 and January 2, 2018.


16



Series F Preferred Stock
On November 5, 2018, the Company filed a certificate of designations for the Series F Preferred Stock with the Secretary of State of the State of Delaware. In addition, on November 6, 2018, the Company entered into the KH 2018 Preferred Stock Commitment Letter pursuant to which Kien Huat agreed to purchase up to $126 million of the Series F Preferred Stock on the terms set forth therein. See Note K for further information concerning the KH 2018 Preferred Stock Commitment Letter.

Note J. Concentration

As of September 30, 2018, the Company had no receivable which represented more than 10.0% of the total net outstanding accounts receivable.

As of December 31, 2017, the Company had one debtor, Hawthorne OTB, which represented 13.0% of the total net outstanding accounts receivable.

Note K. Related Party Transactions
Kien Huat 2018 Preferred Stock Commitment Letter
On November 6, 2018, the Company entered into the KH 2018 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 KH 2018 Preferred Stock Commitment Letter, Kien Huat agreed to purchase up to $126 million of Series F Preferred Stock on the terms set forth in the KH 2018 Preferred Stock Commitment Letter and the Certificate of Designations of the Series F Preferred Stock, which the Company filed with the Secretary of State of the State of Delaware on November 5, 2018. Kien Huat committed to purchase the Commitment Amount of the Series F Preferred Stock pursuant to the following schedule: (i) up to $12 million no earlier than November 9, 2018, (ii) up to $20 million no earlier than February 15, 2019, (iii) up to $20 million no earlier than May 15, 2019, (iv) up to $15 million no earlier than August 15, 2019, (v) up to $37 million no earlier than November 15, 2019 and (vi) up to $22 million no earlier than March 15, 2020. The Company agreed to use its reasonable efforts to secure third-party financing in an amount equal to the Commitment Amount and the Commitment Amount will be reduced by the amount of any third-party financing raised by the Company. However, any equity financing raised by the Company from any person entering into a commercial agreement relating to online gaming and sports betting at the Casino in an amount up to $29 million will not reduce the Commitment Amount. Kien Huat will be entitled to a funding fee in the amount of 1% of the portion of the Commitment Amount funded by Kien Huat. Unless earlier terminated by mutual agreement, the KH 2018 Preferred Stock Commitment Letter will terminate upon the earlier of (a) the Company's receipt of third-party financing in the Commitment Amount or (b) April 15, 2020.
RWS License Agreement
On March 31, 2017, Montreign Operating entered into a license agreement (the “RWS License Agreement”) with RW Services Pte Ltd (“RWS”). RWS is an affiliate of Tan Sri Lim Kok Thay, who is a beneficiary of, and controls, Kien Huat. Pursuant to the RWS License Agreement, RWS granted Montreign Operating the non-exclusive, non-transferable, revocable and limited right to use certain “Genting” and “Resorts World” trademarks (the “RWS Licensed Marks”) in connection with the development, marketing, sales, management and operation (the “Permitted Uses”) of the Development Projects. The 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.
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 Entertainment Project or Golf Course and (iii) each specific use of the name Resorts World Catskills in connection with online gaming. The percentage of Net Revenue payable as the fee is a low single digit percentage that will increase incrementally between the third year and sixth year of the term of the RWS License Agreement and will remain a low single digit percentage during the entire term of the RWS License Agreement. The Company recorded an expense of approximately $494,000 and $1.1 million for the three-month and nine-month periods ended September 30, 2018, respectively, reflecting the fee payable pursuant to the RWS License Agreement.

17




Moelis Agreement
On August 7, 2018, the Company entered into an engagement agreement (the "Moelis Engagement Agreement") pursuant to which it engaged Moelis & Company LLC ("Moelis") to act as the Company’s exclusive financial advisor in its review of opportunities in online gaming, sports betting and interactive gaming. Pursuant to the Moelis Engagement Agreement, Moelis has also been engaged as exclusive financial advisor with respect to a strategic financing transaction for the Company, if any. Pursuant to the Moelis Engagement Agreement, we will pay Moelis a retainer fee of $100,000 upon execution. In the event a transaction is consummated, the Moelis Engagement Agreement contemplates additional transaction-based fees would be earned by Moelis.

Gregg Polle, one of the directors of the Company, is a Managing Director of Moelis. Mr. Polle refrained from participating in the discussion of the Moelis Engagement Agreement and abstained from voting on whether to enter into such agreement.
Note L. Commitments and Contingencies
    
Legal Proceedings
The Company is a party from time to time to various legal actions that arise in the normal course of business. In the opinion of management, the resolution of these other matters will not have a material and adverse effect on our consolidated financial position, results of operations or cash flows.

Operating Leases
The following table represents the minimum lease payments under the Company's operating leases at September 30, 2018:
Year ending December 31,
Total Payments
 
(in thousands)
2018
$
2,559

2019
9,291

2020
8,948

2021
8,489

2022
8,400

2023 to 2056
361,849

Total
$
399,536


The details of operating lease commitments are described below.

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

    






18



The following table represents the fixed rent payments under the Casino Lease at September 30, 2018:

Year ending December 31,
Fixed Rent Payments due by Period
 
(in thousands)
2018 (1) (2)
$1,875
2019 (2)
7,500

2020 (2)
7,500

2021 (2)
8,000

2022 (2)
8,100

2023 to 2056 (2)
346,524


(1)
From March 1, 2017 through August 31, 2018, fixed rent was $1 million per month.
(2)
From September 1, 2018 through the remainder of the term of the Casino Lease, fixed rent is $7.5 million per year, subject to an eight percent escalation every five years ("Base Amount").

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

Golf Course Lease

On December 28, 2015, ERREI entered into a sublease (the “Golf Course Lease”) with Adelaar Developer, LLC (the "Destination Resort Developer") for the lease of the Golf Course Parcel. The terms of the Golf Course Lease are substantially similar to the Casino Lease, subject to the material differences described below. Under the Golf Course Lease, there is no percentage rent due.

The following table represents the future fixed rent payments under the Golf Course Lease at September 30, 2018:
Year ending December 31,
Fixed Rent Payments due by Period
 
(in thousands)
2018 (1)
$0
2019 (1) (2)
63

2020 (2)
150

2021 (2)
150

2022 (2)
150

2023 to 2056 (2) (3)
7,633


(1)
From the date the Golf Course Lease commenced (the “Golf Course Lease Commencement Date”) and until the date on which the Golf Course opens for business, which is expected to be in Summer 2019 (the “Golf Course Opening Date”), fixed rent payments 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.



19



Entertainment Project Lease
On December 28, 2015, ERREII entered into a sublease (the “Entertainment Project Lease”) with the Destination Resort Developer, for the lease of the Entertainment Project Parcel. The terms of the Entertainment Project Lease are substantially similar to the Casino Lease, subject to the material differences described below. Under the Entertainment Project Lease, there is no percentage rent due.

The following table represents the future fixed rent payments under the Entertainment Project Lease at September 30, 2018:

Year ending December 31,
Fixed Rent Payments due by Period
 
(in thousands)
2018 (1) (2)
$0
2019(2)
150

2020 (2)
150

2021 (2)
150

2022 (2)
150

2023 to 2056 (2) (3)
7,675


(1)
From the date the Entertainment Project Lease commenced (the “Entertainment Project Lease Commencement Date”) and until the date on which the Entertainment Project opens for business, which is expected to be at the end of December 2018 (the “Entertainment Project Opening Date”), fixed rent payments will equal $0.
(2)
From the Entertainment Project Opening Date and continuing for the 10 years thereafter, fixed rent will equal $150,000 per year.
(3)
From January 2029 through the remainder of the term of the Entertainment Project Lease, fixed rent will equal $250,000 per year.

The Entertainment Project Lease is a net lease and ERREII is obligated to pay the rent payable under the Entertainment Project Lease and other costs related to ERREII's use and operation of the Entertainment Project Parcel, including the special district tax assessments allocated to the Entertainment Project Parcel, not to exceed the capped dollar amount applicable to the Entertainment Project Parcel. This obligation will not be assessed against ERREII prior to 60 months following the Entertainment Project Lease Commencement Date.
Note M. Subsequent Events
On October 16, 2018, the Company borrowed $10 million under the Kien Huat Subordinate Loan Agreement. See Note H for a discussion of the terms of the Kien Huat Subordinate Loan Agreement.
On November 5, 2018, the Company filed a certificate of designations for the Series F Preferred Stock with the Secretary of State of the State of Delaware.
On November 6, 2018, the Company entered into the KH 2018 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 KH 2018 Preferred Stock Commitment Letter, Kien Huat agreed to purchase up to $126 million of Series F Preferred Stock on the terms set forth in the KH 2018 Preferred Stock Commitment Letter and the Certificate of Designations of the Series F Preferred Stock. Kien Huat committed to purchase the Commitment Amount of the Series F Preferred Stock pursuant to the following schedule: (i) up to $12 million no earlier than November 9, 2018, (ii) up to $20 million no earlier than February 15, 2019, (iii) up to $20 million no earlier than May 15, 2019, (iv) up to $15 million no earlier than August 15, 2019, (v) up to $37 million no earlier than November 15, 2019 and (vi) up to $22 million no earlier than March 15, 2020. The Company agreed to use its reasonable efforts to secure third-party financing in an amount equal to the Commitment Amount and the Commitment Amount will be reduced by the amount of any third-party financing raised by the Company. However, any equity financing raised by the Company from any person entering into a commercial agreement relating to online gaming and sports betting at the Casino in an amount up to $29 million will not be used to reduce the Commitment Amount. Kien Huat will be entitled to a funding fee in the amount of 1% of the portion of the Commitment Amount funded by Kien Huat. Unless earlier terminated by mutual agreement, the KH 2018 Preferred Stock Commitment Letter will terminate upon the earlier of (a) the Company's receipt of third-party financing in the Commitment Amount or (b) April 15, 2020.

20



    On November 7, 2018, the Company borrowed the remaining $2 million under the Bangkok Bank Loan Agreement. See Note G for a discussion of the terms of the Bangkok Bank Loan Agreement.

Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations.
The Management’s Discussion and Analysis of the Financial Condition and Results of Operations should be read together with the Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Condensed Consolidated Financial Statements and related notes thereto in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2017.

Forward-Looking Statements
This Quarterly Report on Form 10-Q contains statements which constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements generally relate to our strategies, plans and objectives for future operations and are based upon management’s current plans and beliefs or estimates of future results or trends. Forward-looking statements also involve risks and uncertainties, including, but not restricted to, the risks and uncertainties described in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2017 which could cause actual results to differ materially from those contained in any forward-looking statement. Many of these factors are beyond our ability to control or predict.

You should not place undue reliance on any forward-looking statements, which are based on current expectations. Further, forward-looking statements speak only as of the date they are made, and we will not update these forward-looking statements, even if our situation changes in the future. We caution the reader that a number of important factors discussed herein, and in other reports filed with the Securities and Exchange Commission, could affect our actual results and cause actual results to differ materially from those discussed in forward-looking statements.
Overview
Empire 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, doing business as Resorts World Catskills, owns and operates Resorts World Catskills, a casino which opened to the public on February 8, 2018. The Casino is located in Sullivan County, New York approximately 90 miles from New York City. Montreign Operating is the sole holder of a Gaming Facility License issued by the NYSGC in the Hudson Valley-Catskill region, which consists of Columbia, Delaware, Dutchess, Greene, Orange, Sullivan and Ulster counties in New York State.
In addition to the Casino, ERREI and ERREII and, together with the Project Parties, each of which is a wholly-owned subsidiary of Montreign Operating, are developing the Development Projects, a four-season destination resort in Sullivan County.
Through our wholly-owned subsidiary, 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 VGM and harness horseracing facility. 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.
Recent Events

Kien Huat 2018 Preferred Stock Commitment Letter
On November 6, 2018, the Company entered into the KH 2018 Preferred Stock Commitment Letter pursuant to which Kien Huat committed to provide equity financing it support the general corporate and working capital requirements of the Company and its subsidiaries. Pursuant to the KH 2018 Preferred Stock Commitment Letter, Kien Huat agreed to purchase up to $126 million of Series F Preferred Stock on the terms set forth in the KH 2018 Preferred Stock Commitment Letter and the Certificate of Designations of the Series F Preferred Stock, which the Company filed with the Secretary of State of the State of Delaware on November 5, 2018. Kien Huat committed to purchase the Commitment Amount of the Series F Preferred Stock pursuant to the following schedule: (i) up to $12 million no earlier than November 9, 2018, (ii) up to $20 million no earlier than February 15, 2019, (iii) up to $20 million no earlier than May 15, 2019, (iv) up to $15 million no earlier than August 15, 2019, (v) up to $37 million no earlier than November 15, 2019 and (vi) up to $22 million no earlier than March 15, 2020. The Company agreed to use its reasonable efforts to secure third-party financing in an amount equal to the Commitment Amount and the Commitment Amount will be reduced by the amount of any third-party financing raised by the Company. However, any equity financing raised

21



by the Company from any person entering into a commercial agreement relating to online gaming and sports betting at the Casino in an amount up to $29 million will not reduce the Commitment Amount. Kien Huat will be entitled to a funding fee in the amount of 1% of the portion of the Commitment Amount funded by Kien Huat. Unless earlier terminated by mutual agreement, the KH 2018 Preferred Stock Commitment Letter will terminate upon the earlier of (a) the Company's receipt of third-party financing in the Commitment Amount or (b) April 15, 2020.

Critical Accounting Policies and Estimates
    
We make certain judgments and use certain estimates and assumptions when applying accounting principles in the preparation of our consolidated financial statements. The nature of the estimates and assumptions are material due to the levels of subjectivity and judgment necessary to account for highly uncertain factors or the susceptibility of such factors to change.
We believe the current assumptions and other considerations used to estimate amounts reflected in our consolidated financial statements are appropriate. However, if actual experience differs from the assumptions and other considerations used in estimating amounts reflected in our consolidated financial statements, the resulting changes could have a material adverse effect on our consolidated results of operations and, in certain situations, could have a material adverse effect on our consolidated financial condition. 
For further information on our critical accounting estimates, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the notes to our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2017. With the exception of the adoption of ASC 606 on January 1, 2018, there have been no material changes to our critical accounting policies and estimates. See Note B to the condensed consolidated financial statements for further information regarding our updated revenue recognition and loyalty program accounting policies.



22


Results of Operations - Three months ended September 30, 2018 Compared to Three Months ended September 30, 2017

The following table highlights the various sources of revenues and expenses for the three months ended September 30, 2018 as compared to the three months ended September 30, 2017:
 
Three Months Ended
 
 
 
September 30, 2018
 
September 30, 2017
 
Percent Change
 
  (in thousands, except percentages)
 
 
Gaming revenues
$
47,381

 
$
17,833

 
165.7
 %
Gaming expenses
35,737

 
12,739

 
180.5
 %
 
 
 
 
 
 
Racing revenues
1,368

 
1,438

 
(4.9
)%
Racing expenses
2,223

 
1,312

 
69.4
 %
 
 
 
 
 
 
Food and beverage revenues
6,452

 
794

 
712.6
 %
Food and beverage expenses
7,526

 
1,136

 
562.5
 %
 
 
 
 
 
 
Room revenues
2,826

 

 
n/m
Room expenses
2,662

 

 
n/m
 
 
 
 
 
 
Other revenues
1,921

 
267

 
619.5
 %
Other expenses
43

 
54

 
(20.4
)%
 
 
 
 
 
 
Selling, general and administrative expenses
19,754

 
4,730

 
317.6
 %
 
 
 
 
 
 
Development Projects expenses
452

 
5,196

 
(91.3
)%
Gaming Revenues and Expenses
Gaming revenues increased $29.5 million, or 165.7%, for the three-month period ended September 30, 2018 as compared to the three-month period ended September 30, 2017, from $17.8 million to $47.4 million. The increase in gaming revenues was primarily due to revenues generated by the Casino, which generated $43.0 million in gross gaming revenue. Monticello Casino and Raceway generated $8.7 million in gross gaming revenue for the three-month period ended September 30, 2018 as compared to $17.8 million for the three-month period ended September 30, 2017. The decrease in gaming revenue at Monticello Casino and Raceway was primarily due to a decrease in volume relating to the opening of the Casino.
Gaming expenses increased $23.0 million, or 180.5%, for the three-month period ended September 30, 2018 as compared to the three-month period ended September 30, 2017, from $12.7 million to $35.7 million. The increase in gaming expenses was primarily due to expenses generated by the Casino, which includes gaming taxes and payroll expenses, offset by an increase in the commission rate earned by the Company at operations at Monticello Casino and Raceway. 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.
Racing Revenues and Expenses
Racing revenues decreased approximately $70,000, or 4.9%, for the three-month period ended September 30, 2018 as compared to the three-month period ended September 30, 2017. The decrease in racing revenues is due to a decrease in racing simulcast revenues as compared to the three-month period ended September 30, 2017. Racing expenses increased $0.9 million, or 69.4%, for the three-month period ended September 30, 2018 as compared to the three-month period ended September 30, 2017, from $1.3 million to $2.2 million. The increase is due to larger purse contributions and higher fees required by New York State.
Food and Beverage Revenues and Expenses
Food and beverage revenues increased approximately $5.7 million, or 712.6%, for the three-month period ended September 30, 2018 as compared to the three-month period ended September 30, 2017, from approximately $0.8 million to $6.5 million due to the opening of the new food venues at the Casino. Food and beverage expenses increased $6.4 million, or 562.5% for the three-month period ended September 30, 2018 as compared to the three-month period ended September 30, 2017, from $1.1 million to $7.5 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.

23


Room Revenues and Expenses
The Casino generated approximately $2.8 million in room revenue for the three-month period ended September 30, 2018 due to the Casino opening. We incurred room expenses of approximately $2.7 million, which is primarily due to payroll and benefit expenses.
Other Revenues and Expenses
Other revenues are primarily due to ATM revenues at the Casino, as well as retail sales and commissions from the sale of lottery tickets. Other revenues increased by approximately $1.7 million, or 619.5%, during the three-month period ended September 30, 2018 as compared to the three-month period ended September 30, 2017, from approximately $0.3 million to approximately $1.9 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 $11,000, or 20.4%, during the three-month period ended September 30, 2018 as compared to the three-month period ended September 30, 2017, from approximately $54,000 to approximately $43,000 due to the reduction of staffing at Monticello Casino and Raceway.    
Selling General and Administrative (“SG&A”)
SG&A expenses increased $15.0 million, or 317.6%, for the three-month period ended September 30, 2018 as compared to the three-month ended September 30, 2017, from $4.7 million to $19.8 million. The increase in SG&A expenses is primarily due to an increase in payroll and benefits, insurance, marketing and a branding fee, all relating to the Casino.
Development Projects Expenses
Development Projects expenses decreased by $4.7 million, or 91.3% for the three-month period ending September 30, 2018 as compared to the three-month period ended September 30, 2017, from $5.2 million to $0.4 million. The decrease was primarily due to the Casino opening. Costs associated with the Casino will cease to be capitalized upon the complete opening of the Casino. At September 30, 2018, the Casino is open, however the penthouse suites at the Casino are still under construction and are expected to be complete in December 2018. The Company is also currently constructing the Entertainment Project hotel and recently began construction of the Golf Course Project. Costs associated with these Projects are primarily capitalized and are included in Capitalized Development Projects Costs on the Balance Sheet.






















24


Results of Operations - Nine months ended September 30, 2018 Compared to Nine Months ended September 30, 2017

The following table highlights the various sources of revenues and expenses for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017 (in thousands, except percentages):
 
Nine Months Ended
 
 
 
September 30, 2018
 
September 30, 2017
 
Percent Change
 
  (in thousands, except percentages)
 
 
Gaming revenues
$
115,706

 
$
46,956

 
146.4
 %
Gaming expenses
91,547

 
34,384

 
166.2
 %
 
 
 
 
 
 
Racing revenues
3,926

 
4,161

 
(5.6
)%
Racing expenses
5,948

 
3,771

 
57.7
 %
 
 
 
 
 
 
Food and beverage revenues
13,593

 
1,892

 
618.4
 %
Food and beverage expenses
17,108

 
3,174

 
439.0
 %
 
 
 
 
 
 
Room revenues
5,285

 

 
n/m
Room expenses
5,622

 

 
n/m
 
 
 
 
 
 
Other revenues
4,096

 
731

 
460.3
 %
Other expenses
154

 
215

 
(28.4
)%
 
 
 
 
 
 
Selling, general and administrative expenses
44,787

 
14,158

 
216.3
 %
 
 
 
 
 
 
Development Projects expenses
12,084

 
13,881

 
(12.9
)%

Gaming Revenues and Expenses
Gaming revenues increased $68.8 million, or 146.4%, for the nine-month period ended September 30, 2018 as compared to the nine-month period ended September 30, 2017, from $47.0 million to $115.7 million. The increase in gaming revenues was primarily due to the opening of the Casino in February 2018, which generated $98.0 million in gross gaming revenue. Monticello Casino and Raceway generated $17.8 million in gross gaming revenue for the nine-month period ended September 30, 2018 as compared to $47.0 million for the nine-month period ended September 30, 2017. The decrease in gaming revenue at Monticello Casino and Raceway was primarily due to a decrease in volume due to the opening of the Casino, as well as unfavorable weather during the first quarter.
Gaming expenses increased $57.2 million, or 166.2%, for the nine-month period ended September 30, 2018 as compared to the nine-month period ended September 30, 2017, from $34.4 million to $91.5 million. The increase in gaming expenses was primarily due to the Casino opening, which includes gaming taxes and payroll expenses, offset by an increase in the commission rate earned by the Company at operations at Monticello Casino and Raceway. 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.
Racing Revenues and Expenses
Racing revenues decreased approximately $0.2 million, or 5.6%, for the nine-month period ended September 30, 2018 as compared to the nine-month period ended September 30, 2017, from $4.2 million to $3.9 million. The decrease in racing revenues is due to a decrease in racing simulcast revenues as compared to the nine-month period ended September 30, 2017. Racing expenses increased $2.2 million, or 57.7%, for the nine-month period ended September 30, 2018 as compared to the nine-month period ended September 30, 2017, from $3.8 million to $5.9 million. The increase is due to larger purse contributions and higher fees required by New York State.
Food and Beverage Revenues and Expenses
Food and beverage revenues increased approximately $11.7 million, or 618.4%, for the nine-month period ended September 30, 2018 as compared to the nine-month period ended September 30, 2017, from approximately $1.9 million to $13.6 million due to the opening of the new food venues at the Casino. Food and beverage expenses increased $13.9 million, or 439.0% for the

25


nine-month period ended September 30, 2018 as compared to the nine-month period ended September 30, 2017, from $3.2 million to $17.1 million. The increase was primarily due to the opening of the Casino and its additional food venues, which increased costs for food, beverage and supplies, as well as payroll related expenses.
Room Revenues and Expenses
The Casino generated approximately $5.3 million in room revenue for the nine-month period ended September 30, 2018 due to the Casino opening. We incurred room expenses of approximately $5.6 million, which is primarily due to payroll and benefit expenses relating to the Casino opening.
Other Revenues and Expenses
The increase in other revenues is primarily due to ATM revenues generated by the Casino, as well as retail revenues and commissions from the sale of lottery tickets. Other revenues increased by approximately $3.4 million, or 460.3%, during the nine-month period ended September 30, 2018 as compared to the nine-month period ended September 30, 2017, from approximately $0.7 million to approximately $4.1 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 $61,000, or 28.4%, during the nine-month period ended September 30, 2018 as compared to the nine-month period ended September 30, 2017, from approximately $215,000 to approximately $154,000 due to the reduction of staffing at Monticello Casino and Raceway.    
Selling General and Administrative (“SG&A”)
SG&A expenses increased $30.6 million, or 216.3%, for the nine-month period ended September 30, 2018 as compared to the nine-month period ended September 30, 2017, from $14.2 million to $44.8 million. The increase in SG&A expenses is primarily due to an increase in payroll and benefits, insurance, marketing and a branding fee, all relating to the Casino opening.
Development Projects Expenses
Development Projects expenses decreased by $1.8 million or 12.9% for the nine-month period ending September 30, 2018 as compared to the nine-month period ended September 30, 2017, from $13.9 million to $12.1 million. The decrease was primarily due to decreased payroll and benefits for Casino employees and management staffing prior to Casino opening, as well as marketing and advertising expenses in preparation for the Casino opening. Costs associated with the Casino will cease to be capitalized upon the complete opening of the Casino, which is expected to occur in December 2018.
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 generated from operations, borrowings from banks and proceeds from the issuance of debt and equity securities. Based on our current level of operations and our expected results of operations of the Casino and the remaining Development Projects as they are completed, we believe that cash generated from operations and cash on hand, together with amounts available under our principal debt arrangements and the KH 2018 Preferred Stock Commitment Letter, will be sufficient to meet the working capital requirements and the expected remaining costs of the Development Projects over the next 12 months. We cannot be certain that our business will generate sufficient cash flow from operations, that our anticipated earnings from the Development Projects will be realized, or that future borrowings will be available under our existing debt arrangements or otherwise to enable us to service our indebtedness or to make anticipated capital expenditures. As a result, we may need to raise additional capital or incur additional indebtedness, including by issuing securities from our Shelf Registration Statement (as defined below), which has a current availability of approximately $333 million, to finance our plans for growth and general corporate purposes. 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” in our Annual Report on Form 10‑K for the fiscal year ended December 31, 2017 for a discussion of the risks related to our liquidity and capital structure.
Cash Flows

Net cash used in operating activities was approximately $42.3 million during the nine-month period ended September 30, 2018. Net cash used in operating activities was $23.7 million during the nine-month period ended September 30, 2017. We continue to generate net losses due to the expenses we incurred related to the Casino and the Development Projects prior to the opening of the Casino. We incurred $12.1 million and $13.9 million of Development Projects costs during the nine-month periods ended September 30, 2018 and 2017, respectively. Our operating cash flows during the nine-month period ended September 30, 2017 were negatively impacted by severe weather during the period resulting in a reduction in revenues. The decrease in cash flow for the nine-month period ended September 30, 2018 was primarily due to the impact of the net loss for the period along with the increase in accounts receivable and prepaid expenses associated with the Casino opening. Cash flows for the current year may not

26



be indicative of future results due to the timing of the Casino opening, a lack of full amenities and delayed marketing expenditures for the Casino.

The Casino opened to the public in February 2018 with limited amenities. Additional amenities were added to the Casino during the nine-month period ended September 30, 2018. The Entertainment Project is expected to be completed in December 2018 and the Golf Course is expected to open in Summer 2019. Moreover, Resorts World Catskills opened during the winter season, which is historically a season of lower visitation to casinos. As a result, the Company’s expenditures on marketing the Casino were lower during the first six months in 2018. The Company used a portion of the proceeds of the Kien Huat Subordinate Loan to expand the marketing activity during the three-month period ended September 30, 2018, when gaming patrons were more likely to visit the Casino. As a result, net revenues increased from $49.1 million to $59.9 million for the three-month periods ending June 30, 2018 and September 30, 2018, respectively.

Net cash used in investing activities was approximately $20.3 million and $413.1 million during the nine-month periods ended September 30, 2018 and 2017, respectively. The decrease in net cash used for the nine-month period ended September 30, 2018 as compared to 2017 was due primarily to the reduction in investments of unused loan proceeds in 2018. The Company incurred $148.8 million of costs for the Capitalized Development Projects during the nine-month period ended September 30, 2018. Development Projects costs were funded by $129.5 million of proceeds of the Term Loan Facility held in lender-controlled accounts. At September 30, 2018, our total assets included approximately $64.2 million of remaining net proceeds available from the Term Loan Facility, which are presented on the condensed consolidated balance sheet as a non-current asset (restricted cash and investments for Development Projects). The proceeds of the Term Loan Facility may be used solely to pay for costs relating to the Development Projects. During the nine-month period ended September 30, 2017, the Company invested $189.8 million of proceeds from the Term Loan Facility in restricted investments for the Development Projects and incurred $201.4 million of Capitalized Development Project costs. During the nine-month period ended September 30, 2017, the Company also made a $20.0 million payment for a cash performance bond as required for the Casino.

Net cash provided by financing activities was approximately $92.6 million and $450.6 million during the nine-month periods ended September 30, 2018 and 2017, respectively. Approximately $15.0 million was borrowed under the Revolving Credit Facility, $2.0 million was borrowed under the Bangkok Bank Loan Agreement and the Company borrowed an additional $70.0 million of Term A Loans during the nine-month period ended September 30, 2018. The Company also received $20.0 million under the Kien Huat Subordinate Loan Agreement. The Company repaid $7.0 million of equipment loans and an additional $5.8 million of Term A and Term B Loans during the nine-month period ended September 30, 2018. At September 30, 2018, the Company had $24.1 million of equipment loans outstanding for the purchase of slot machines, equipment and software for the Casino. During the nine-month period ended September 30, 2018, restricted stock grants of certain executives vested, resulting in $1.0 million of income tax withholding taxes paid by the Company in exchange for the surrender of a portion of the vested shares. Approximately $441.9 million of net proceeds were borrowed pursuant to the Term Loan Facility and an additional $32.0 million was borrowed pursuant to the then-outstanding Kien Huat Montreign Loan during the nine-month period ended September 30, 2017.
Development Projects Expenditures
The Company expects that upon completion, the Development Projects will have cost approximately $925 million, which includes $762 million of anticipated costs for construction of the Development Projects and contingency, $68 million for interest reserves, $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 Entertainment Project in March 2018, after signing a guaranteed maximum price agreement of $32.7 million with its construction manager. The Company recently signed a contractor agreement for the Golf Course for a total cost of approximately $21.2 million.
As of September 30, 2018, the Company had incurred an aggregate total of $854.1 million related to the Development Projects. This included $691.5 million of capitalized Development Projects costs, of which $630.1 million was reclassified to property and equipment upon the opening of the Casino, $67.6 million of interest expense related to bank debt for the Development Projects, $51.0 million for the Gaming Facility License and $44.0 million of debt issuance costs related to the Development Projects. The Company expects the $64.2 million of net proceeds from the Term Loan Facility held in the lender-controlled accounts at September 30, 2018 will be sufficient to meet the expected cost of completing the Development Projects.
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 Development Projects could experience changes to plans and specifications, even after the opening of such facilities, delays and significant cost increases, labor disputes or work stoppages, poor performance or nonperformance by any third party on which we rely, or other unanticipated circumstances or cost increases. 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 these circumstances could materially adversely affect our financial condition and cause us to require additional funding, generated from our operations or external sources, to complete the construction of the Development Projects.

27




Principal Debt Arrangements

Term Loan Facility

At September 30, 2018, the Term Loan Facility consisted of $66.5 million borrowings outstanding under the Term A Loan and $441.6 million outstanding (net of original issue discount) under the Term B Loan. At September 30, 2018, the interest rate on the Term A Loan was 7.35% and the interest rate on the Term B Loan was 10.59%. The proceeds of the Term Loan Facility are held in a lender-controlled account and may be used solely to pay the expenses of the Development Projects. The Company is currently repaying 1% of the original principal balance of the Term B Loan each year in quarterly payments of approximately $1.1 million, which began in June 2018. The Company will repay 2.5% of the original principal amount of all Term A Loan Commitments on January 24, 2017, in quarterly payments of approximately $1.8 million through March 31, 2019 and quarterly payments of approximately $2.6 million thereafter. The Company repaid $3.5 million and $2.3 million on the Term A Loan and Term B Loan, respectively, in the nine-month period ended September 30, 2018.

The Term Loan Facility contains representations and warranties, customary events of default, and affirmative, negative and financial covenants. For example, the Project Parties are restricted from entering into advisory, management or consulting agreements with an affiliate of any Project Parties, 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 further requires the Project Parties to satisfy certain financial covenants, including a maximum first lien leverage ratio, a minimum interest coverage ratio and mandatory prepayments from excess cash flow. The Project Parties are also prohibited from incurring, subject to certain adjustments, in excess of $10.5 million in capital expenditures (on a consolidated basis) in any fiscal year, which limit is not applicable to expenses related to the Casino and Entertainment Project and up to $25 million related to the Golf Course Project. The financial covenants relating to the maximum first lien leverage ratio and the minimum interest coverage ratio will be measured beginning in the first full fiscal quarter following the "Full Opening Date" of the Casino, which is the date on which at least 95% of all rooms in the Casino hotel are open to the public. The financial covenant relating to mandatory prepayments will be measured beginning in the first fiscal year in which the Full Opening Date occurs. The Company currently expects that at least 95% of all hotel rooms at the Casino will be open to the public during the fourth quarter of 2018. At September 30, 2018, the Company was in compliance with all applicable covenant requirements under the Term Loan Facility.

Our affiliates may, from time to time, seek to purchase our outstanding Term B Loan through cash purchases in open market purchases, privately negotiated transactions or otherwise. We will evaluate any such transactions in light of then-existing market conditions, taking into account our current liquidity, prospects for future access to capital and contractual restrictions. The amounts involved may be material.

Revolving Credit Facility
    
    At September 30, 2018, the Revolving Credit Facility consisted of $15 million of outstanding borrowings. At September 30, 2018, the interest rate on borrowings under the Revolving Credit Facility was 7.33%. The proceeds of the Revolving Credit Facility may be used for working capital needs, capital expenditures and other general corporate purposes.

The Revolving Credit Facility contains representations and warranties, customary events of default, and affirmative, negative and financial covenants substantially similar to the terms of the Term Loan Facility. At September 30, 2018, the Company was in compliance with all applicable covenant requirements under the Term Loan Facility.
    
Bangkok Bank Loan

At September 30, 2018, the Bangkok Bank Loan consisted of $18 million of outstanding borrowings and an additional $2 million was available for borrowing. On November 7, 2018, the Company borrowed the remaining $2 million under the Bangkok Bank Loan Agreement. At September 30, 2018, the interest rate on the Bangkok Bank Loan was 8.49%. The Company also pays a commitment fee to Bangkok Bank equal to the undrawn amount of the Bangkok Bank Loan multiplied by a rate equal to 1.50% per annum. Such commitment fee was payable on the last business day of each quarter beginning on March 31, 2018. The Bangkok Bank Loan Agreement contains customary representations and warranties and affirmative covenants, negative covenants and financial covenants that, among other things, restrict the ability of Empire 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

28



with affiliates, or make dividends or other distributions. In addition, the Bangkok Bank Loan Agreement contains a financial covenant that restricts the maximum total leverage ratio to four times the adjusted EBITDA of MRMI, which financial covenant is applicable beginning with the fiscal quarter ending December 31, 2018.The Bangkok Bank Loan Amendment excludes the Kien Huat Subordinate Loan from calculations of the Company's maximum total leverage so long as the Kien Huat Subordinate Loan remains subordinate to the Bangkok Bank Loan. At September 30, 2018, the Company was in compliance with the covenant requirements of the Bangkok Bank 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 original amount financed was approximately $31.1 million and the terms of these agreements run between six and 36 months. The balances outstanding at September 30, 2018 totaled approximately $24.1 million. 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 0%, using the Company's cost of funds rate of approximately 10%. The weighted average of the monthly repayments is approximately $1.0 million.

Kien Huat Subordinate Loan Agreement
On June 25, 2018, Kien Huat and the Company entered into the Kien Huat Subordinate Loan Agreement, providing for loans of up to $30 million. At September 30, 2018, $20 million was outstanding under the agreement. The Company borrowed an additional $10 million on October 16, 2018. The Kien Huat Subordinate Loan is subordinate to the Bangkok Bank Loan. The proceeds of the Kien Huat Subordinate Loan may be used exclusively to make capital contributions to Montreign Operating. Montreign may use such funds for marketing and general corporate purposes (including the payment of debt service).
The Kien Huat Subordinate Loan bears interest at a rate of 12% per annum, compounded monthly, and will be payable at maturity. Prior to the maturity of the Kien Huat Subordinate Loan, interest will not be required to be paid in cash and will be added to the outstanding principal of the Kien Huat Subordinate Loan and will thereafter be deemed to be part of the principal indebtedness due thereunder upon maturity. The Kien Huat Subordinate Loan may be repaid in full or in part at any time without premium or penalty.
The Kien Huat Subordinate Loan Agreement contains customary representations and warranties and affirmative covenants, including a restriction on the use of the proceeds of the Kien Huat Subordinate Loan as described above. Obligations under the Kien Huat Subordinate Loan Agreement may be accelerated upon certain customary events of default (subject to grace periods, as applicable), including among others: nonpayment of principal, interest or fees; breach of the affirmative covenants; and a default in payment of or acceleration of the Bangkok Bank Loan. Additionally, any future amendments to the Bangkok Bank Loan Agreement relating to default provisions thereunder, prepayment provisions or an increase of the maximum principal amount thereunder will be subject to Kien Huat’s prior written consent.

Other Factors Affecting Liquidity
                                                                                                                                                                                                                                                                                                                                                                                                         
The Company may 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 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. As of November 7, 2018, we had up to approximately $333 million available for future issuances under the Shelf Registration Statement. 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, capital expenditures, working capital and for other general corporate purposes, including servicing debt obligations. 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.

29




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

The table below lists the payment commitments of the Company as of September 30, 2018.
 
Payments due by period
(in thousands)
 
 
 
 
 
 
 
 
 
 
 
Total
 
Less than
1 year
 
1 – 3
years
 
3 – 5
years
 
Years 6 - 40
Casino Lease (a)
$
379,499

 
$
7,500

 
$
15,350

 
$
16,200

 
$
340,449

Golf Course Lease (b)
8,146

 
25

 
300

 
300

 
7,521

Entertainment Project Lease (c)
8,292

 
113

 
300

 
300

 
7,579

Term B Loan (d)
447,750

 
4,500

 
9,000

 
9,000

 
425,250

Term A Loan (e)
66,500

 
8,750

 
21,000

 
21,000

 
15,750

Equipment Loans (f)
24,945

 
15,193

 
9,752

 

 

Bangkok Bank Loan (g)
18,000

 

 
18,000

 

 

Operating leases (h)
3,599

 
1,972

 
1,627

 

 

Revolving Credit Facility (i)
15,000

 

 

 
15,000

 

Kien Huat Subordinate Loan (j)
20,000

 

 
20,000

 

 

Total
$
991,731


$
38,053

 
$
95,329

 
$
61,800

 
$
796,549



(a)
Annual fixed rent payments under the Casino Lease are as follows: (i) beginning March 2017 through August 2018, payments of $1 million per month; (ii) beginning September 2018, payments of $625,000 per month escalating every five years by 8% through the end of the lease term.
(b)
Annual fixed rent payments under the Golf Course Lease are as follows: (i) $0 prior to the date the golf course opens for business to the public (the “Golf Course Opening Date”), which is expected to be in Summer 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 Entertainment Project Lease are as follows: (i) $0 prior to the date any portion of Entertainment Project first opens for business to the public (the “EP Opening Date”), which is expected to be in December 2018; (ii) $150,000 for the first 10 years following the EP Opening Date; and (iii) $250,000 thereafter for the remainder of the term of the Entertainment Project Lease.
(d)
The Term B Loan is a variable rate instrument. Accordingly, the payments reflected above include only principal amounts.
(e)
The Term A Loan is a variable rate instrument. Accordingly, the payments reflected above include only principal amounts.
(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 exclude interest payments.
(g)
The Bangkok Bank Loan is a variable rate instrument. Accordingly, the payments reflected above include only principal amounts.
(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. Accordingly, the payments reflected above include only principal amounts.
(j)
The Kien Huat Subordinate Loan includes accrued cumulative compounded interest and matures on December 20, 2020.



30




Off-balance Sheet Arrangements

None.

Item 3.
Quantitative and Qualitative Disclosures About Market 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. The Company had approximately $66.5 million of Term A Loans outstanding at September 30, 2018. The interest rate on the Term A Loan contains a variable component based on one-month LIBOR. The Company had $15.0 million outstanding under the Revolving Credit Facility at September 30, 2018. The interest rate on the Revolving Credit Facility Loans contains a variable component based on one-month LIBOR. In addition, the Company had $18.0 million of delayed draw term loans outstanding at September 30, 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 September 30, 2018, a one-point increase in LIBOR would increase interest expense (prior to interest capitalization) by approximately $4.0 million for the next 12-month period. 
Item 4.
Controls and Procedures.

Evaluation of Controls and Procedures
     We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Management has determined, however, that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
We carried out an evaluation as of September 30, 2018 under the supervision and with the participation of management, including our President and Chief Executive Officer and our Chief Accounting Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as required by Rule 13a-15 of the Securities Exchange Act of 1934, as amended. Based upon that evaluation, our President and Chief Executive Officer and our Chief Accounting Officer concluded that our disclosure controls and procedures are effective.
Changes in Internal Control over Financial Reporting
There were no changes in our internal controls over financial reporting during the fiscal quarter covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

31


PART II  - Other Information
Item 1.
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 1A.
Risk Factors.

There have been no material changes in our risk factors from those set forth in our Form 10-K for the year ended December 31, 2017, which should be read in conjunction with this report.

These risks are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or results of operations.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3.
Defaults Upon Senior Securities.
    
None.
Item 4.
Mine Safety Disclosures.
Not applicable.

Item 5.
Other Information.
    
On November 5, 2018, the Company filed a certificate of designations (the "Series F Certificate of Designations") for the Series F Preferred Stock with the Secretary of State of the State of Delaware. A copy of the Series F Certificate of Designations is attached as Exhibit 3.1 hereto and incorporated by referenced herein.

On November 6, 2018, the Company entered into the KH 2018 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 KH 2018 Preferred Stock Commitment Letter, Kien Huat agreed to purchase up to $126 million of Series F Preferred Stock on the terms set forth in the KH 2018 Preferred Stock Commitment Letter and the Certificate of Designations of the Series F Preferred Stock. Kien Huat committed to purchase the Commitment Amount of the Series F Preferred Stock pursuant to the following schedule: (i) up to $12 million no earlier than November 9, 2018, (ii) up to $20 million no earlier than February 15, 2019, (iii) up to $20 million no earlier than May 15, 2019, (iv) up to $15 million no earlier than August 15, 2019, (v) up to $37 million no earlier than November 15, 2019 and (vi) up to $22 million no earlier than March 15, 2020. The Company agreed to use its reasonable efforts to secure third-party financing in an amount equal to the Commitment Amount and the Commitment Amount will be reduced by the amount of any third-party financing raised by the Company. However, any equity financing raised by the Company from any person entering into a commercial agreement relating to online gaming and sports betting at the Casino in an amount up to $29 million will not reduce the Commitment Amount. Kien Huat will be entitled to a funding fee in the amount of 1% of the portion of the Commitment Amount funded by Kien Huat. Unless earlier terminated by mutual agreement, the KH 2018 Preferred Stock Commitment Letter will terminate upon the earlier of (a) the Company's receipt of third-party financing in the Commitment Amount or (b) April 15, 2020.


32




As previously reported in a Current Report on Form 8-K,dated January 3, 2018, on December 28, 2017, the Company entered into the Bangkok Bank Loan Agreement, as amended on June 25, 2018, with Bangkok Bank, as lender, and Monticello Raceway Management, Inc., the Company’s wholly-owned subsidiary, 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 Company previously drew down $16 million and $2 million on the Bangkok Bank Loan on December 28, 2017 and on August 30, 2018, respectively. On November 7, 2018, the Company drew down $2 million under the Bangkok Bank Loan at LIBOR plus 6.25%, for a total of $20 million drawn down under the Bangkok Bank Loan. The proceeds of the Bangkok Bank Loan are being used for general corporate purposes.

Item 6.
Exhibits.
 
Certificate of the Designations, Powers, Preferences and Rights of the Series F Convertible Preferred Stock, filed with the Secretary of State of the State of Delaware on November 5, 2018.
  
Section 302 Certification of Principal Executive Officer.
  
Section 302 Certification of Principal Financial Officer.
  
Section 906 Certification of Principal Executive Officer
 
Section 906 Certification of Principal Financial Officer.
101
  
Interactive Data File (XBRL).
 


33



SIGNATURES
In accordance with the requirements of Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
EMPIRE RESORTS, INC.
 
 
By:  
/s/ Ryan Eller
 
Name:    
Ryan Eller
 
Title:
President and Chief Executive Officer (Principal Executive Officer)
 
Date:
November 7, 2018

In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
EMPIRE RESORTS, INC.
 
 
By:  
/s/ Jamie M. Sanko
 
Name:    
Jamie M. Sanko
 
Title:
Chief Accounting Officer (Principal Financial and Accounting Officer)
 
Date:
November 7, 2018


34