NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note A. Organization and Nature of Business

Basis for Presentation

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.

The condensed consolidated financial statements and notes as of March 31, 2017 and December 31, 2016 and for the three months ended March 31, 2017 and March 31, 2016 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, 2016. The results of operations for our interim periods may not be necessarily indicative of the results of operations that may by achieved for the entire year.

Liquidity and Capital Resources

The accompanying condensed 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. The Company anticipates that its current cash and cash equivalents balances and cash generated from operations, as well as the net proceeds of the Term Loan Facility, the Kien Huat Montreign Loan (each as defined below) and the $35 million required to be deposited into the lender-controlled account created under the Term Loan Facility, which are discussed below, will be sufficient to meet working capital requirements and the expected costs of the Development Projects (defined below) for at least the next 12 months. Additionally, following the opening of the casino project (the "Casino Project") to the public, which is expected to occur in March 2018, the Revolving Credit Facility (defined below) will be available for use towards the working capital needs, capital expenditures and for other general corporate purposes of the Project Parties (defined below), subject to our ability to meet the conditions therein. Whether these resources are adequate to meet the Company’s liquidity needs beyond that period, including with respect to the costs of the entertainment village project (the "Entertainment Village Project") and the golf course project (the "Golf Course Project" and, together with the Casino Project and Entertainment Village Project, the "Development Projects") , will depend on the Company’s growth and operating results and the final designs and progress of the Development Projects. In addition, cost overruns, delays in the construction schedule or changes in design are among the factors that may increase the projected costs of the Development Projects, which may also require us to raise additional capital. Pursuant to the Term Loan Facility, Montreign Operating is required to deposit $35 million into the lender-controlled account holding the net proceeds of the Term Loan Facility and the Kien Huat Montreign Loan, which amount will be used towards the Entertainment Village Project. Of this payment, $15 million is required to be deposited by June 30, 2017, and the remaining $20 million is required to be deposited by December 31, 2017. The $35 million must be funded in the form of a further equity contribution to Montreign Operating, for which the Company expects to raise additional debt or equity capital by the dates on which the deposits must be made. Additionally, the Company expects to raise furniture, fixtures and equipment ("FF&E") financing of up to $40 million to complete the Development Projects. To raise additional capital necessary for the Development Projects, to meet obligations under the Term Loan Facility or for the general corporate purposes of the Company, we may seek to enter into strategic agreements, joint ventures or similar agreements or we may sell additional debt or equity in public or private transactions, including pursuant to the commitment of Kien Huat to backstop a rights offering of Empire in the amount of $35 million . 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 necessary amounts or on acceptable terms.

As of March 31, 2017, we had total current assets of approximately $13.6 million and total current liabilities of approximately $57.3 million , which includes approximately $45.7 million in accrued Development Projects costs. As of March 31, 2017, our total assets included approximately $393.4 million of remaining net proceeds from the Term Loan Facility (as defined and discussed below), which will be used to pay the accrued Development Projects costs included in our current liabilities. The net proceeds from the Term Loan Facility, which are being used to pay the costs of the Development Projects, are presented on the Condensed Consolidated Balance Sheet as Cash for Development Projects.

We have had continuing net losses and negative cash flow from operating activities, including a loss from operations of $6.4 million for the three months ended March 31, 2017. The net loss for the three months ended March 31, 2017 was primarily related to the Development Projects expenses in the amount of $4.3 million that could not be capitalized. Additionally, $52.1 million of the costs incurred for the Development Projects were capitalized for the three months ended March 31, 2017.    

Note B. Summary of Significant Accounting Policies

Revenue recognition and Promotional allowances

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

Food, beverage, racing and other revenue includes food and beverage sales, racing revenue earned from pari-mutuel wagering on live harness racing and simulcast signals to and from other tracks and miscellaneous income. The Company recognizes racing revenues before deductions of such related expenses as purses, stakes and awards. Some elements of the racing revenues from Off-Track Betting Corporations (“OTBs”) are recognized as collected, due to uncertainty of receipt of and timing of payments.

Net revenues are recognized net of certain sales incentives in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Certification (“ASC”) 605-50, “Revenue Recognition—Customer Payments and Incentives ”.

The retail value of complimentary food, beverage and other items provided to the Company’s guests is included in gross revenues and then deducted as promotional allowances. The estimated cost of providing such food, beverage and other items as promotional allowances is included in food, beverage, racing and other expense. In addition, promotional allowances include non-subsidized free play offered to the Company’s guests based on their relative gaming worth and prizes included in certain promotional marketing programs.

The retail value amounts included in promotional allowances for the three months ended March 31, 2017 and 2016 are as follows:

The estimated cost of providing complimentary food, beverage and other items for the three months ended March 31, 2017 and 2016 are as follows:

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 collectability of specific accounts. Accounts are considered past due or delinquent based on contractual terms, how recently payments have been received and the Company’s judgment of collectability. In the normal course of business, the Company settles wagers for other racetracks and is exposed to credit risk. These wagers are included in accounts receivable. Account balances are charged against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company recorded an allowance for doubtful accounts of approximately $171,000 as of March 31, 2017 and December 31, 2016.

Other long-term liabilities

The difference between our cash payments and straight-line rent on our leases of $8.5 million and $8.0 million at March 31, 2017 and December 31, 2016, 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 holders of common stock by the weighted-average common stock 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 periods ended March 31, 2017 and 2016 were the same.

The following table shows the approximate number of common stock equivalents outstanding at March 31, 2017 and 2016 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 months ended March 31, 2017 and 2016, because their inclusion would have been anti-dilutive:

Interest Rate Cap Agreement

In February 2017, the Company entered into an interest rate cap agreement with Credit Suisse AG, International, pursuant to which the Company has effectively limited its exposure to increases in interest rates on its Term B Loan balance from May 1, 2017 through February 28, 2018 and then for a portion of its Term B Loan balance 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 will be amortized over its term as interest expense. The fair value of the Interest Rate Cap was $584,000 at March 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.

Accumulated Other Comprehensive Loss

As of March 31, 2017, accumulated other comprehensive loss of $91,000 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 FASB, for its financial assets and liabilities that had not been previously carried at fair value. The Company’s financial instruments are comprised of current assets, Interest Rate Cap (as defined below), current liabilities and long-term loans. Current assets 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 unobservable 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 Company used a third party to complete the valuation of its Interest Rate Cap, which is considered a Level 2 asset and is measured at fair value on a recurring basis using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows for the Interest Rate Cap.

At March 31, 2017, the estimated fair value of the Company's Term B Loan (as defined below) outstanding was approximately $414.4 million and the carrying value was approximately $415.0 million . The fair value of the Kien Huat Montreign Loan (as defined below) has not been estimated due to its related party nature and lack of comparable market information.

Stock-based compensation

    

The cost of all stock-based awards to employees, officers, directors and consultants, 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 would be 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 stock-based awards is recognized as stock-based compensation expense on a straight-line basis over the requisite service period from the date of grant. As of March 31, 2017, there was approximately $1.9 million of total unrecognized compensation cost related to non-vested stock-based compensation arrangements granted under the Company’s equity compensation plan. That cost is expected to be recognized over a period of 2.75 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's policy is to amortize intangible assets over their estimated useful lives unless the Company determines their lives to be indefinite.

On December 21, 2015, the Company was granted a gaming license (the "Gaming Facility License"), for which it paid $51 million on March 30, 2016. The term of the Gaming Facility License is 10 years from the effective date, which was March 1, 2016. Amortization will not commence until the completion of construction and the opening to the general public of the Casino Project. Amortization will be recognized on a straight-line basis beginning at that time and continuing until the license is up for renewal in 2026. During the period that the Company is not amortizing the intangible asset, the Company will assess it for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired.

Recent Accounting Pronouncements

In May 2014, the FASB issued new revenue recognition guidance, which will supersede nearly all existing revenue recognition guidance. The core principle of the guidance is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve the core principle, the new guidance implements a five-step process for customer contract revenue recognition. The guidance also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenues and cash flows arising from contracts with customers. The new guidance is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Entities can transition to the new guidance either retrospectively or as a cumulative-effect adjustment as of the date of adoption.

The Company currently anticipates adopting this accounting standard during the first quarter of 2018, with a cumulative-effect adjustment as of the date of adoption. Although we are still evaluating the full impact of this standard on our consolidated financial statements, the Company has concluded that the adoption of this standard will affect how we account for our customer loyalty program(s) as well as the classification of revenues between gaming, food and beverage, lodging, retail, entertainment and other. Under our current customer loyalty program, customers earn points based on their level of play, which may be redeemed for various benefits, such as cash back or dining, among others. We currently determine our liability for unredeemed points based on the estimated costs of services or merchandise to be provided and estimated redemption rates. Under the new standard, points awarded under our customer loyalty program are considered a material right given to the players based on their gaming play and the promise to provide points to players will need to be accounted for as a separate performance obligation. The new standard will require us to allocate the revenues associated with the players’ activity between gaming revenue and the value of the points and to measure the liability based on the estimated standalone value of the points earned after factoring in the likelihood of redemption. As a result, we expect that gaming revenues will be reduced with a corresponding increase, in total, of food and beverage, lodging, retail, entertainment and other revenues. The revenue associated with the points earned will be recognized in the period in which they are redeemed. The quantitative effects of these changes have not yet been determined and are still being analyzed.

In February 2016, FASB issued 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 has not yet completed its assessment of the impact of the new standard on the Company's consolidated financial statements. The Company currently anticipates adopting this standard during 2019.

In March 2016, FASB issued ASU 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting ("ASU 2016-09"), which provides guidance for accounting for stock-based compensation for employees. Under ASU 2016-09, several aspects of the accounting for share-based payment award transactions are simplified,

including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 will take effect for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The Company adopted this standard during the first quarter of 2017 and there was no material impact from the implementation this guidance.

Note C. Prepaid Expenses and Other Assets

Our wholly-owned subsidiary, Monticello Raceway Management, Inc. ("MRMI"), has 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 is reduced by 20% each year until the tax credit ends for the Company at December 31, 2017. For the year ended December 31, 2017, the Company will receive a 20% refund for real estate taxes paid. The amounts of the expected real estate tax credits are included in prepaid expenses and other current assets on the accompanying Condensed Consolidated Balance Sheet at March 31, 2017 and December 31, 2016, and were approximately $609,000 and $1.3 million, respectively.

Prepaid expenses and other current assets, as presented on the Condensed Consolidated Balance Sheet, are comprised of the following at March 31, 2017 and December 31, 2016:

Depreciation expense was approximately $336,000 for each of the three-month periods ended March 31, 2017 and 2016, respectively.

The VGMs in the Company’s facility 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, Cash Collateral for Deposit Bond and Cash for Development Projects

Development Projects Costs

At March 31, 2017 and December 31, 2016, total capitalized Development Projects costs were approximately $254.5 million and $202.4 million , respectively. Total capitalized Development Projects costs consist of construction costs, site development, contractor insurance, general conditions, construction manager fees, and professional fees such as architectural, legal and accounting fees, and is reflected on the Condensed Consolidated Balance Sheet as capitalized Development Projects costs. Interest expense totaling $3.7 million was capitalized during the three-month period ended March 31, 2017.

During the three-month period ended March 31, 2017, total Development Projects costs incurred were approximately $56.3 million , of which $52.0 million was capitalized and $4.3 million was expensed. Development Projects expenses consisted of $2.6 million of land lease costs, $652,000 of salary and related benefits, $353,000 of bank charges, $158,000 of real estate taxes, $143,000 of insurance expenses, $93,000 of marketing expenses, $35,000 of consulting and professional service fees, and an additional $218,000 of pre-opening expenses.

During the three-month period ended March 31, 2016, total Development Projects costs incurred were approximately $44.3 million , of which $41.2 million was capitalized and $3.1 million was expensed. Development Projects expenses consisted of $2.6 million of land lease costs, $194,000 of consulting and professional service fees, $97,000 of real estate taxes, $106,000 of insurance expenses, and an additional $113,000 of pre-opening expenses.

Cash Collateral for Deposit Bond

In February 2016, the Company deposited $15 million in performance bonds to guarantee the completion of the Development Projects. These funds will be returned to the Company upon the satisfactory completion of the Development Projects.

Cash for Development Projects

At March 31, 2017, the $393.4 million of Cash for Development Projects represented the remaining funds from the Term Loan Facility to be utilized for the Development Projects. At December 31, 2016, the $26.4 million of Cash for Development Projects on the Condensed Consolidated Balance Sheet represented the remaining funds from the January 2016 Rights Offering (defined below) to be utilized for the Development Projects.

Note G. Term Loan Agreement and Revolving Credit Agreement

Term Loan Agreement

On January 24, 2017 (the "Loan Closing Date"), Montreign Operating entered into a Building Term Loan Agreement (the “Term Loan Agreement”) with Montreign Operating, the lenders from time to time party thereto, and Credit Suisse AG, Cayman Islands Branch (“Credit Suisse”), as administrative agent. The Term Loan Agreement provides for loans to be made to Montreign Operating in an aggregate principal amount of $485 million (the “Term Loan Facility”).

The Term Loan Facility consists of $70 million of Term A loans ( the “Term A Loan”) and $415 million of Term B loans (the “Term B Loan”). The Term B Loan was borrowed in full on the Loan Closing Date and the proceeds were used to pay fees and expenses related to the financing and fund various lender-controlled accounts. The proceeds of the Term Loan Facility (including proceeds of the Term A Loan, which will be deposited into the lender-controlled accounts upon borrowing) will be made available to Montreign Operating, subject to Montreign Operating satisfying the disbursement conditions set forth in the Term Loan Agreement and related loan documents, to pay debt service and costs relating to the development and construction of the Development Projects.

The Term A Loan may be borrowed during the period from the Loan Closing Date to July 24, 2018, subject to meeting the conditions set forth in the Term Loan Agreement at the time of the borrowing. The Term A Loan will mature on January 24, 2022 and the Term B Loan will mature on January 24, 2023. Interest will accrue on outstanding borrowings under the Term A Loan at a rate equal to LIBOR plus 5.0%  per annum, or an alternate base rate plus 4.0%  per annum. Interest will accrue on outstanding borrowings under the Term B Loan at a rate equal to LIBOR (with a LIBOR floor of 1% ) plus 8.25%  per annum, or an alternate base rate plus 7.25%  per annum. In addition, Montreign Operating will pay a commitment fee to each Term A Loan lender (“Term A Lender”) equal to the undrawn amount of such Term A Lender’s Term A Loan commitment multiplied by a rate equal to 2.5%  per annum for the period commencing on the Loan Closing Date through March 24, 2018 and 5.0%  per annum thereafter.

As of March 31, 2017, $415 million was outstanding under the Term B Loan and there were no borrowings outstanding under the Term A Loan. No principal repayments are due prior to the projected Casino Project opening date (which is expected to be March 1, 2018). Thereafter, principal payments are due at the end of each calendar quarter. The first loan repayment is due June 30, 2018. The following table lists the annual principal repayments due under the Term B Loan agreement:

 

 

In the event that the Term B Loan is prepaid or repaid in whole or in part for any reason other than as a result of scheduled amortization and certain other exceptions, Montreign Operating is required to pay prepayment premiums based on a make-whole if the prepayment occurs from the Loan Closing Date to (but excluding) the 30th-month anniversary following the Loan Closing Date (the “30th Month”), and a 2% and 1% premium if the prepayment occurs from the 30th Month to (but excluding) the 42nd-month anniversary of the Loan Closing Date (the “42nd Month”) and from the 42nd Month to (but excluding) the 54th-month anniversary of the Loan Closing Date, respectively.

Revolving Credit Agreement

On the Loan Closing Date, Montreign Operating also entered into a Revolving Credit Agreement (the “Revolving Credit Agreement”) with Montreign Operating, the lenders from time to time party thereto, and Fifth Third Bank, as administrative agent. The Revolving Credit Agreement provides for loans or other extensions of credit to be made to Montreign Operating in an aggregate principal amount of up to $15 million (including a letter of credit sub-facility of $10 million ) (the “Revolving Credit Facility”), the proceeds of which may be used for working capital needs, capital expenditures and other general corporate purposes following the opening of the Casino Project to the public. The Revolving Credit Facility will mature on January 24, 2022. Interest will accrue on outstanding borrowings at a rate equal to LIBOR plus 5.0%  per annum, or an alternate base rate plus 4.0%  per annum.

Collateral and Other Provisions

The Term Loan Facility and the Revolving Credit Facility are each guaranteed by Empire Resorts Real Estate I, LLC ("ERREI") and Empire Resorts Real Estate II, LLC ("ERREII" and together with ERREI, the "Montreign Subsidiaries"), both indirect, wholly-owned subsidiaries of Montreign Operating, and are secured by security interests in substantially all the real and personal property of Montreign Operating and the Montreign Subsidiaries 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. In addition, Empire delivered a completion guaranty in connection with the Term Loan Facility guaranteeing the completion of the construction of the Casino Project and the Entertainment Village Project. Empire’s liability under the completion guaranty (excluding lender’s enforcement costs) is capped at $30 million .

The Term Loan Facility and the Revolving Credit Agreement contain representations and warranties, affirmative covenants, negative covenants and financial covenants that are usual and customary, including representations, warranties and covenants that, among other things, restrict the ability of Montreign Operating and the Montreign Subsidiaries to incur additional debt, incur or permit liens on assets, make investments and acquisitions, consolidate or merge with any other company, or make dividends or other distributions. Additionally, Montreign Operating is required to deposit $35 million into the lender-controlled account holding the net proceeds of the Term Loan Facility and the Kien Huat Montreign Loan, which amount will be used towards the Entertainment Village Project. Of the $35 million , $15 million is required to be deposited by June 30, 2017 and the remaining $20 million is required to be deposited by December 31, 2017. The Company must fund the $35 million in the form of a further equity contribution to Montreign Operating. The Company expects to raise additional debt or equity capital by the dates on which the deposits must be made.

Obligations under the Term Loan Agreement and the Revolving Credit 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; breach of the affirmative or negative covenants; revocation of a gaming license for seven consecutive business days; and a change of control (as such term is defined in the Term Loan Agreement) of Montreign Operating.

Note H. Long-Term Loans (Related Party)

Conversion of Kien Huat Note

On November 17, 2010, Empire entered into a loan agreement (the "2010 Kien Huat Loan Agreement") with Kien Huat Realty III Limited ("Kien Huat") pursuant to which Empire issued a convertible promissory note (the "2010 Kien Huat Note") in the original principal amount of $35.0 million , of which $17.4 million was outstanding as of December 31, 2015. On February 17, 2016, upon consummation of the January 2016 Rights Offering (defined below), the 2010 Kien Huat Note was converted into 1,332,058 shares of common stock (the "Note Conversion") in accordance with the terms of the 2010 Kien Huat Loan Agreement.

Kien Huat Construction Loan Agreement     

On October 13, 2016, Montreign Operating and Kien Huat entered into a loan agreement (the "KH Construction Loan Agreement") pursuant to which Kien Huat agreed to make available to Montreign Operating up to an aggregate of $50 million of loans to pay the expenses of the Casino Project while the debt financing for the Development Projects was being finalized. The term of the KH Construction Loan Agreement would expire on the earlier of (i) the consummation of financing in an amount no less than the remaining contract amount under the Casino Project construction contract and (ii) October 13, 2017. In connection with the closing of the Term Loan Facility and the Kien Huat Montreign Loan, on January 24, 2017, the KH Construction Loan Agreement expired pursuant to its terms without being utilized by Montreign Operating. Montreign Operating paid Kien Huat a commitment fee of $500,000 upon execution of the KH Construction Loan. The commitment fee was capitalized and was included in other assets at December 31, 2016. It was written off on January 24, 2017 upon the issuance of the Kien Huat Montreign Loan Agreement (defined and described below).     

Kien Huat Montreign Loan Agreement

On the Loan Closing Date, Kien Huat and Montreign Holding entered into a loan agreement (the "Kien Huat Montreign Loan Agreement"), pursuant to which Montreign Holding obtained from Kien Huat a loan in the principal amount of $32.3 million (the "Kien Huat Montreign Loan"), the net proceeds of which were used as a capital contribution to Montreign Operating for use towards the expenses of the Development Projects. The Kien Huat Montreign Loan will mature on February 24, 2024 (the “Kien Huat Loan Maturity Date”), which date may be extended by Kien Huat in its sole discretion by up to an additional year.

The Kien Huat Montreign Loan bears interest at a rate of 12% per annum. Prior to the Kien Huat Loan Maturity Date, interest on the Kien Huat Montreign Loan shall accrue and be added to the outstanding principal of the Kien Huat Montreign Loan (the “Principal Indebtedness”) on the first business day of each calendar month beginning on February 1, 2017 (each an “Interest Payment Date”) and shall thereafter be deemed to be part of the Principal Indebtedness. The Principal Indebtedness, including all interest due through the applicable Interest Payment Date and other amounts due under the Kien Huat Montreign Loan, shall be payable in cash on the Kien Huat Loan Maturity Date. Notwithstanding the foregoing, Montreign Holding shall be required to pay in cash to Kien Huat, at the end of any “accrual period” (as defined in Section 1275(a)(5) of the Internal Revenue Code of 1986, as amended (the “Code”)) ending after the fifth anniversary of the Loan Closing Date, the aggregate amount by which (x) the sum of (i) the amount of accrued interest on the Kien Huat Montreign Loan that has been added to the Principal Indebtedness plus (ii) any other accrued but unpaid original issue discount (as determined under Section 163(i) of the Code) on the Kien Huat Montreign Loan from the closing date through the end of such accrual period, in each case that has not been paid in cash, exceeds (y) the product of (i) the “issue price” (as defined for purposes of the Code) and (ii) the “yield to maturity” (as defined for purposes of the Code). In addition to the interest payable on the Kien Huat Montreign Loan, Kien Huat was entitled to a commitment fee of 1% , which fee was added to the Principal Indebtedness of the Kien Huat Montreign Loan.

Until the Kien Huat Montreign Loan is repaid in full, Montreign Holding shall make no dividend or other distributions to Empire except for purposes of (i) paying bona fide corporate overhead expenses in an amount not to exceed $9 million (which amount is subject to further reduction pursuant to the Kien Huat Montreign Loan Agreement) and (ii) the payment of taxes by Empire, to the extent also permitted by the Term Loan Agreement with respect to distributions to Montreign Operating. The Kien Huat Montreign Loan may be prepaid in full or in part at any time without premium or penalty.

The obligations of Montreign Holding under the Kien Huat Montreign Loan Agreement are secured by a pledge of all the membership interests of Montreign Holding by Empire. The Kien Huat Montreign Loan Agreement contains representations and warranties and affirmative covenants that are usual and customary, including representations, warranties and covenants that, among other things, restrict Montreign Holding’s use of the proceeds of the Kien Huat Montreign Loan to expenses relating to the Development Projects. Obligations under the Kien Huat Montreign 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, breach of the affirmative covenants and a default with respect to the payment of principal or interest under the Term Loan Facility by Montreign Operating or acceleration of the Term Loan Facility for any reason.

Note I. Bryanston Settlement Agreement     

Effective as of June 30, 2013, the Company and its affiliates consummated the closing of a Settlement Agreement and Release (as amended, the “Bryanston Settlement Agreement”) with Bryanston Group, Inc. and its affiliates (the “Bryanston Parties”). Pursuant to ASC 480, the Series E Preferred Stock held by the Bryanston Parties became contractually redeemable subject to the terms and conditions of the Bryanston Settlement Agreement and was recorded as a liability on the December 31, 2015 balance sheet.

On March 7, 2016, the Company redeemed the outstanding Series E Preferred Stock held by the Bryanston Parties for approximately $30.7 million pursuant to the terms of the Bryanston Settlement Agreement. Because the event that caused the entire liability to become due occurred during 2016, the liability was recorded pursuant to the payment terms in place at December 31, 2015, of which $1.5 million was recorded as a current liability and the remainder was recorded as a long-term liability on the December 31, 2015 balance sheet. Interest expense associated with the change in the redemption amount of the liability was $231,000 for the three months ended March 31, 2016.

Note J. Stockholders’ Equity

Authorized Capital

On November 1, 2016, Empire filed the Second Amended and Restated Certificate of Incorporation (the "Restated Charter”) with the Secretary of State of the State of Delaware. Pursuant to the Restated Charter, Empire’s authorized capital stock consists of 155 million shares, of which 150 million shares are common stock, par value $0.01 per share, and five million shares are preferred stock, par value $0.01 per share.

Common Stock

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 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.

    

January 2016 Rights Offering

On January 4, 2016, we commenced a rights offering (the "January 2016 Rights Offering") of transferable subscription rights to holders of record of our common stock and our Series B Preferred Stock (the "Series B Preferred Stock") as of January 4, 2016 to purchase up to 20,138,888 shares of our common stock. The subscription rights were listed for trading on The Nasdaq Stock Market under the symbol "NYNYR" for the duration of the January 2016 Rights Offering. In connection with the January 2016 Rights Offering, on December 31, 2015, the Company and Kien Huat entered into a standby agreement (the "January 2016 Standby Purchase Agreement"), pursuant to which Kien Huat agreed to exercise (i) its basic subscription rights to acquire approximately $30 million of our common stock within 10 days of the commencement of the January 2016 Rights Offering with a closing proximate thereto and (ii) the remainder of its basic subscription rights prior to the expiration date of the January 2016 Rights Offering. In addition, Kien Huat agreed it would exercise all rights not otherwise exercised by the other holders in the January 2016 Rights Offering, which is referred to as the standby purchase, upon the same terms as other holders in an aggregate amount not to exceed  $290 million .

The January 2016 Rights Offering closed on February 17, 2016. The Company issued a total of 20,138,888 shares of common stock for aggregate gross proceeds of approximately $290 million . This includes 176,086 shares issued to holders upon exercise of their basic subscription and over-subscription rights and 13,136,817 shares issued to Kien Huat upon exercise of its basic subscription rights. Kien Huat also acquired the remaining 6,825,985 shares not sold in the January 2016 Rights Offering pursuant to the January 2016 Standby Purchase Agreement. The net proceeds of the January 2016 Rights Offering were approximately $286.0 million following the deduction of expenses, which were used (i) to pay the expenses relating to the construction of the Casino Project, (ii) to redeem the outstanding shares of the Series E Preferred Stock in accordance with the terms of the Bryanston Settlement Agreement on March 7, 2016 and (iii) for the working capital needs of the Company.

Pursuant to the January 2016 Standby Purchase Agreement, we paid Kien Huat a commitment fee of $1,450,000 , which is equal to 0.5% of the maximum amount of the January 2016 Rights Offering, and reimbursed Kien Huat for expenses in the amount of $50,000 .

Preferred Stock and Dividends

The Company’s Series B Preferred Stock has voting rights of 0.054 votes per share and each share is convertible into 0.054 shares of its common stock. It has a liquidation value of $29 per share and is entitled to annual cumulative dividends of $2.90 per share payable quarterly in cash. The Company has the right to pay dividends on an annual basis by issuing shares of its common stock at the rate of $3.77 per share. The value of shares of common stock issued as payment is based upon the average closing price for the shares of common stock for the 20 trading days preceding January 30 of the year following that for which the dividends are due. At March 31, 2017 and December 31, 2016, there were 44,258 shares of Series B Preferred Stock outstanding.

The Board authorized the cash payment of the Series B Preferred Stock on March 8, 2016. Quarterly dividend payments in the amount of $32,087 were made on April 1, 2016, July 1, 2016, October 3, 2016 and January 3, 2017. On April 3, 2017, a payment of $32,087 was made for the first quarter of 2017.

On March 2, 2016, the Board authorized the cash payment of dividends due for the year ended December 31, 2015 on the Series B Preferred Stock in the amount of approximately $167,000 . At December 31, 2015, the Company had undeclared cash dividends on the Series B Preferred Stock of approximately $167,000 and payment was made the same day. The cash dividend was calculated as if it were a dividend issued in shares of common stock, which in accordance with the terms of the Series B Preferred Stock, means the amount of the cash payment is the annual cash dividend value (if it had been paid quarterly) multiplied by 1.3 .

Note K. Concentration

As of March 31, 2017, the Company had one debtor, Woodbine Entertainment Group, which represented 10.8% of the total net outstanding racing-related accounts receivable. As of December 31, 2016, the Company had one debtor, Hawthorne OTB, which represented 16.9% of the total net outstanding racing-related accounts receivable.

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 adverse effect on its consolidated financial position, results of operations or cash flows.

Contingent Liability Settlement

On January 4, 2017, the Company entered into an agreement (the “2017 Settlement Agreement”) to issue 33,333 registered shares (the "Settlement Shares") of its common stock to an individual as part of the settlement of a claim asserted in connection with such individual's alleged provision of certain services to the Company. Pursuant to the 2017 Settlement Agreement, the Company issued the Settlement Shares on January 9, 2017. The 2017 Settlement Agreement provided for a mutual full release of all potential claims upon the Company's delivery of such Settlement Shares to the individual. The amount of the liability of $758,000 was included in accrued expenses at December 31, 2016.

Operating leases

The following table represents the minimum future lease payments under the Company's operating leases at March 31, 2017:

The details of 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"), a wholly-owned subsidiary of EPR Properties, (an entity unrelated to the Company), for the lease of the parcel on which the Casino Project is being 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 shall be automatically terminated effective as of the applicable Option Date.

T he following table represents the future fixed rent payments under the Casino Lease at March 31, 2017:

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.

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 shall not be assessed against ERREI prior to 60 months following the Golf Course Lease Commencement Date.

Entertainment Village Lease

On December 28, 2015, Empire Resorts Real Estate II, LLC ("ERREII"), an indirect, wholly-owned subsidiary of Montreign Operating, entered into a sublease (the “Entertainment Village Lease”) with the Destination Resort Developer, for the lease of the parcel of land on which the Entertainment Village would be built (the "Entertainment Village Parcel" and, together with the Casino Parcel and Golf Course Parcel, the "Project Parcels"). The terms of the Entertainment Village Lease are substantially similar to the Casino Lease, subject to the material differences described below. Under the Entertainment Village Lease, there is no percentage rent due. Fixed rent payments under the Entertainment Village Lease are represented in the table below:

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

Purchase Option Agreement

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

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

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

Note M. Related Party Transactions

Moelis Agreements     

On December 9, 2013, the Company executed a letter agreement, as supplemented by a letter dated May 20, 2015, (together, the "Moelis Letter Agreement") pursuant to which it engaged Moelis & Company LLC ("Moelis") to act as its financial advisor in connection with the Casino Project. In the event a financing is consummated, the Moelis Letter Agreement contemplates additional transaction-based fees would be earned by Moelis.

At the close of the January 2016 Rights Offering, Moelis was paid approximately $2.1 million for financial advisory services in connection with the Casino Project pursuant to the Moelis Letter Agreement.

On January 24, 2017, in connection with the closing of the Term Loan Facility and the Revolving Credit Facility, Moelis was paid approximately $2.5 million for financial advisory services pursuant to the Moelis Letter Agreement.

In March 7, 2017, Montreign Operating entered into an engagement agreement with Moelis (the "Moelis-Montreign Engagement Agreement") pursuant to which Moelis will act as exclusive financial advisor to Montreign Operating. Pursuant to the Moelis-Montreign Engagement Agreement, Moelis is entitled to an advisory fee of $100,000 , which was paid upon execution, and reimbursement of expenses up to $75,000 . The Moelis-Montreign Engagement Agreement will automatically terminate on December 31, 2017, unless either party terminates earlier.

Gregg Polle, a director of the Company, is a Managing Director of Moelis. Mr. Polle recused himself from participating in the discussion of the Moelis Letter Agreement, the Moelis-Montreign Engagement Agreement and the determination of whether to enter into such agreements.

RWS License Agreement

On March 31, 2017, Montreign Operating entered into a license agreement (the “RWS License Agreement”) with RW Services Pte Ltd (“RWS”). Pursuant to the RWS License Agreement, RWS granted Montreign Operating the non-exclusive, non-transferable, revocable and limited right to use certain “Genting” and “Resorts World” trademarks (the “RWS Licensed Marks”) in connection with the development, marketing, sales, management and operation (the “Permitted Uses”) of the Development Projects. The right to use the RWS Licensed Marks may be assigned or sublicensed only in certain limited circumstances. However, any use of the RWS Licensed Marks for a purpose other than the Permitted Uses will require the prior written consent of RWS. The Company expects the name of the Casino Project (the “Casino Name”) to be “Resorts World” used in combination with additional words as mutually agreed upon by Montreign Operating and RWS. The right to use the Casino Name is exclusive to Montreign Operating. Montreign Operating will have the right to use the Casino Name in connection with on-line gaming.

The initial term of the RWS License Agreement will expire on December 31, 2027, and shall be extended automatically for additional terms of 12 months each, up to a maximum of 39 additional terms, unless either of the parties provides notice to terminate the RWS License Agreement or upon the mutual written consent of both parties. Montreign Operating’s rights and obligations under the RWS License Agreement are subject to and governed by the rules and regulations applicable to Montreign Operating’s gaming operations at the Casino Project, and the fiduciary obligations of the boards of directors of Montreign Operating and Empire, as well as the fiduciary obligations of Kien Huat. Beginning on the date on which the Casino Project opens to the public, Montreign Operating will pay 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 Project, (ii) each specific use of the RWS Licensed Marks in the Entertainment Village or Golf Course and (iii) each specific use of the Casino Name in connection with on-line gaming. The percentage of Net Revenue payable as the fee is a low single digit percentage that will increase incrementally between the third year and sixth year of the term of the RWS License Agreement and will remain a low single digit percentage during the entire term of the RWS License Agreement.

During the term of the RWS License Agreement, Montreign Operating may participate in the Genting Rewards Alliance loyalty program (the “Alliance”), which would provide central marketing and cross-promotion opportunities for the Development Projects with other members of the Alliance. Montreign Operating’s participation in the Alliance is subject to the provisions of a separate agreement, which is currently being negotiated by the parties. RWS is an affiliate of Tan Sri Lim Kok Thay, who is a beneficiary of and controls Kien Huat.