Summary of Significant Accounting Policies

Principles of consolidation

The consolidated financial statements include Empire’s accounts and their wholly-owned subsidiaries. All inter-company balances and transactions are eliminated in consolidation.

Estimates and assumptions

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from estimates.

Reclassifications

Certain amounts in the accompanying consolidated financial statements for fiscal 2016 and 2015 have been reclassified to conform to presentation in fiscal 2017, most notably amortization of debt issuance costs has been included within interest expense on the Statement of Operations.

Revenue recognition and Promotional allowances

Gaming revenue is the net difference between gaming wagers and payouts for prizes from 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 such related expenses as NYSGC’s share of VGM revenue and the Monticello Harness Horsemen’s Association (the “MHHA”) and Agriculture and New York State Horse Breeding Development Fund’s contractually required percentages.

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, beverages 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.

As described below in "Recently Issued Accounting Pronouncements," the accounting related to our revenues, including complimentary revenue, will be impacted by the adoption of ASC 606 during the first quarter of 2018.

The retail value amounts included in promotional allowances for the years ended December 31, 2017, 2016 and 2015 were as follows:



	Year ended December 31,
	2017		2016		2015
	(in thousands)
Food and beverage	$	1,000	$	1,486	$	1,553
Non-subsidized free play	2,718		978		1,720
Players Club awards	324		383		195
Total retail value of promotional allowances	$	4,042	$	2,847	$	3,468

The estimated cost of providing complimentary food, beverages and other items for the years ended December 31, 2017, 2016 and 2015 were as follows:



	Year ended December 31,
	2017		2016		2015
	(in thousands)
Food and beverage	$	1,750	$	2,080	$	2,109
Non-subsidized free play	1,603		577		1,015
Players Club awards	324		383		195
Total cost of promotional allowances	$	3,677	$	3,040	$	3,319

Cash and cash equivalents

Cash and cash equivalents include cash on account, 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.

Restricted cash

The Company has three types of restricted cash accounts.

Approximately $368,000 of cash is held in reserve in accordance with NYSGC regulations as of December 31, 2017 as listed below. The Company granted the NYSGC a security interest in the segregated cash account used to deposit NYSGC’s share of net win in accordance with the NYSGC Rules and Regulations.

Under New York State Racing, Pari-Mutuel Wagering and Breeding Law, MRMI is obliged to withhold a certain percentage of certain types of racing and pari-mutuel wagers towards the establishment of a pool of money, the use of which is restricted to the funding of approved capital improvements. Periodically during the year, MRMI petitions the NYSGC to certify that the noted expenditures are eligible for reimbursement from the capital improvement fund. The balance in this account was approximately $25,000 and $39,000 at December 31, 2017 and 2016, respectively. In April 2005, the New York law governing VGM operations was modified to provide an increase in the revenues retained by the VGM operator. A portion of that increase was designated as a reimbursement of marketing expenses incurred by the VGM operator. The amount of revenues directed toward this reimbursement is deposited in a bank account under the control of the NYSGC and the VGM operator. The funds are transferred from this account to the VGM operator upon the approval by NYSGC officials of the reimbursement requests submitted by the VGM operator. The balance in this account was approximately $343,000 and $354,000 at December 31, 2017 and 2016, respectively.

In addition to the NYSGC restricted cash balances listed above, the Company established an account to segregate amounts collected and payable to Monticello Harness Horsemen’s Association (the “MHHA”) and pursuant to its contract. The balance in this account was approximately $324,000 and $685,000 at December 31, 2017 and 2016, respectively.

Restricted cash and investments for Development Projects

Restricted cash and investments for Development Projects represented the remaining funds from the Term Loan Facility and the Kien Huat Montreign Loan to be utilized for the Development Projects. At December 31, 2017, restricted cash and investments for Development Projects balance of $136.4 million is comprised of cash balances of approximately $11.2 million, cash equivalents of approximately $30.7 million and short-term investments maturing within one year of approximately $94.5 million. At December 31, 2017, short-term marketable securities 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 marketable securities 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 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 and $171,000, as of December 31, 2017 and 2016, respectively.

Property and equipment

Property and equipment is stated at cost less accumulated depreciation. The Company provides for depreciation on property and equipment used by applying the straight-line method over the following estimated useful lives:



Assets	Estimated Useful Lives
Vehicles	5-10 years
Furniture, fixtures and equipment	5-10 years
Land improvements	5-20 years
Building improvements	5-40 years
Buildings	40 years

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 $29.1 million of interest charges for the year ended December 31,2017. The Company did not recognize any capitalized interest charges for the fiscal years ended December 31, 2016 and 2015.

Debt issuance costs

Debt issuance costs are amortized on a straight-line basis which approximates the effective interest method over the term of the related debt. The amortization is included within interest expense and is included as a component of the capitalized interest costs.

Development Projects Costs

The Company's application for a Gaming Facility License was submitted in a competitive environment and the Company could not be certain it would be awarded a Gaming Facility License, accordingly all costs incurred for the Development Projects were expensed until the Company was awarded a Gaming License on December 21, 2015. Once awarded the Gaming Facility License, the Company began capitalizing qualifying expenditures on the Development Projects during the fourth quarter of 2015.

Impairment of long-lived assets

The Company periodically reviews the carrying value of its long-lived assets in relation to historical results, as well as management’s best estimate of future trends, events and overall business climate. If such reviews indicate an issue as to whether the carrying value of such assets may not be recoverable, the Company will then estimate the future cash flows generated by such assets (undiscounted and without interest charges). If such future cash flows are insufficient to recover the carrying amount of the assets, then impairment is triggered and the carrying value of any impaired assets would then be reduced to fair value.

Loss contingencies

There are times when non-recurring events may occur that require management to consider whether an accrual for a loss contingency is appropriate. Accruals for loss contingencies typically relate to certain legal proceedings, customer and other claims and litigation. As required by generally accepted accounting principles in the United States of America (“GAAP”), the Company determines whether an accrual for a loss contingency is appropriate by assessing whether a loss is deemed probable and can be reasonably estimated. The Company analyzes its legal proceedings and other claims based on available information to assess potential liability. The Company develops its views on estimated losses in consultation with outside counsel handling its defense in these matters, which involves an analysis of potential results assuming a combination of litigation and settlement strategies.

Other long-term liabilities

The difference between our cash payments and straight-line rent on our land leases of $8.3 million at December 31, 2017 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 years ended December 31, 2017, 2016 and 2015 were the same.

The following table shows the approximate number of common stock equivalents outstanding at December 31, 2017, 2016 and 2015 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 years ended December 31, 2017, 2016 and 2015, because their inclusion would have been anti-dilutive:



	Outstanding at December 31,
	2017	2016	2015
Restricted stock	139,000	216,000	137,000
Warrants	133,000	133,000	133,000
Restricted stock units ("RSU's)	73,000	—	—
Option Matching Rights	3,000	21,000	229,000
Options	13,000	34,000	57,000
Shares to be issued upon conversion of long-term loan, related party	—	—	1,332,000
Total	361,000	404,000	1,888,000

Pursuant to the terms of the Investment Agreement (defined in Note J), Kien Huat has the right to purchase an equal number of additional shares of common stock as are issued upon the exercise of certain options and warrants (the "Option Matching Rights"). On February 17, 2016, the Company provided written notice to Kien Huat regarding the exercise of certain Option Matching Rights to elect whether to exercise such Option Matching Rights. On February 17, 2016, Kien Huat declined to exercise the Option Matching Rights to purchase 204,706 shares of common stock. On January 24, 2018, Kien Huat exercised its option to purchase 1,666 shares of common stock due to a recent option exercise.

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 $251,000 at December 31, 2017 and is presented at fair value as "Other Assets" on the 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 December 31, 2017, accumulated other comprehensive loss of $315,000 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 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:



	December 31, 2017		December 31, 2016
	Carrying Amount	Fair Value	Carrying Amount	Fair Value	Level of Fair Value Hierarchy
Assets:	(in thousands)
Cash and cash equivalents	$10,380	$10,380	$11,012	$11,012	Level 1
Restricted cash	693	693	1,078	1,078	Level 1
Interest Rate Cap	251	251	—	—	Level 2
Restricted cash and investments for Development Projects:
Cash and cash equivalents	41,920	41,920	—	—	Level 1
Marketable securities	94,511	94,209	—	—	Level 2

Liabilities:
Term B Loan	450,000	449,749	—	—	Level 2
Bangkok Bank Loan	16,000	16,000	—	—	Level 3
Equipment loans	31,095	31,095	—	—	Level 3

The fair value of cash and cash equivalents and restricted cash are based on the fair values of identical assets in active markets. 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 December 31, 2017, the the estimated fair value of the Company's investments in marketable securities was $94.2 million and the carrying value was approximately $94.5 million. At December 31, 2017, the estimated fair value of the Company's outstanding Term B Loan was approximately $449.7 million and the carrying value was approximately $450.0 million. The fair value of the Bangkok Bank Loan and the equipment loans approximate carrying value, due to the Company entering those agreements in close proximity to December 31, 2017.

Advertising

The Company records in selling, general and administrative expense the costs of general advertising, promotion and marketing programs at the time those costs are incurred. Advertising expense was approximately, $1.4 million, $1.1 million, and $1.1 million for the years ended December 31, 2017, 2016 and 2015, respectively.

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 December 31, 2017, there was approximately $1.7 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 2.50 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 was granted a gaming license, for which it paid $51 million on February 25, 2016. The term of the gaming license is 10 years; however, amortization did not commence until the completion of construction and the opening to the general public of the Casino in February 2018. Amortization will be recognized on a straight-line basis beginning in February 2018 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 ASU No. 2014-09, "Revenue from Contracts with Customers" (Topic606), which introduced 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 has identified and implemented changes to its accounting policies and practices, business processes and controls to support the new revenue recognition standard. The Company is continuing its assessment of potential changes to the Company's financial disclosures related to revenue recognition will have on its consolidated financial statements and footnote disclosures. the Company anticipates adopting this accounting standard during the first quarter of 2018 with a cumulative-effect adjustment as of the date of adoption. However, the Company has identified a few significant impacts. Under the new guidance, the Company expects it will no longer be permitted to recognize revenues for goods and services provided to customers for free, as an inducement to gamble, as gross revenue with a corresponding offset to promotional allowances to arrive at net revenues. The Company expects the majority of such amounts will offset gaming revenues. In addition, accounting for complimentaries and loyalty points granted under the Company’s customer loyalty program may also change. Under the new guidance, complimentaries and loyalty points earned by customers through past revenue transactions will be identified as separate performance obligations and recorded as a reduction in gaming revenues when earned at the retail value of such benefits owed to the customer (less estimated breakage). When customers redeem such benefits and the performance obligation is fulfilled by the Company, revenue will be recognized in the department that provides the goods or services (e.g., hotel, food and beverage, or entertainment). In addition, given that customer rewards is an aspirational loyalty program with multiple customer tiers, which provide certain benefits to tier members, the Company will need to assess if such benefits are deemed to be separate performance obligations under the new guidance.

In May 2014, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, which introduced a new standard related to revenue recognition, ASC Topic 606, Revenue from Contracts with Customers (“ASC 606” or the “new revenue standard”). Under ASC 606, recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to receive in exchange for those goods or services. In addition, the new revenue standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts. Subsequent to May 2014, the FASB issued additional ASU's to provide clarifying guidance and deferred the effective date to years beginning after December 15, 2017, including interim periods within that reporting period. Entities can transition to the new guidance either retrospectively or using the modified retrospective approach including recording a cumulative effect adjustment for the impact of adopting ASC 606 as of the date of adoption (January 1, 2018).

The modified retrospective approach requires the Company to provide disclosures in the notes that accompany the consolidated financial statements describing the financial statement line items impacted by ASC 606. The Company is adopting ASC 606 during the first quarter 2018 using the modified retrospective approach

The Company has concluded that the adoption of the new revenue standard principally affects (1) how it measures the liability associated with our loyalty program and (2) the classification and the measurement, of revenues and expenses among gaming, food and beverage, lodging, and retail, entertainment and other.

Under our loyalty program, guests earn points based on their level of play, which may be redeemed for various benefits, such as free play, dining, or other amenities. Prior to the adoption of ASC 606, the Company determined its liability for unredeemed points based on the estimated costs of services or merchandise to be provided and estimated redemption rates.

Upon adoption of ASC 606, points awarded under our loyalty program are considered a material right given to players based on their gaming play and the promise to provide points to players is required to be accounted for as a separate performance obligation. In addition, certain tier benefits associated with our loyalty program represent material rights in a manner similar to player points, which results in such benefits constituting separate performance obligations. Therefore, ASC 606 requires us to allocate the revenues associated with the players’ activity between gaming revenue and the value of the points and certain tier benefits, if applicable. The measurement of the liability is based on the estimated standalone selling price of the points earned after factoring in the likelihood of redemption. The revenue associated with the points earned will be recognized in the period in which they are redeemed.

In addition to the above, prior to the adoption of ASC 606, complimentary revenues pertaining to food and beverage, and other amenities, were included in gross revenues and also deducted as a promotional allowance in the Consolidated Statements of Operations and Comprehensive Loss. However, subsequent to the adoption of ASC 606, food and beverage, lodging and other services furnished to our guests on a complimentary basis will be measured at the estimated standalone selling prices and included as revenues within food and beverage, lodging, and retail, entertainment and other, as appropriate, with a corresponding decrease in gaming revenues, in the Consolidated Statements of Operations.

The amounts relating to promotional allowances and estimated costs of providing complimentary goods and services for the years ended December 31, 2017, 2016 and 2015, are presented tabularly in “Revenue Recognition and promotional allowances” above. Lastly, we expect that the cumulative effect adjustment to our accumulated deficit upon adoption of ASC 606 will not be significant.

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 the first quarter of 2019.

In August 2016, FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230), Restricted Cash (“ASU 2016-18”), which provides guidance for accounting for restricted cash transactions. Under ASU 2016-18, several aspects of the accounting for restricted cash transactions are simplified, including the presentation and classification of cash receipts and cash payments in the statement of cash flows. ASU 2016-18 will take effect for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted. The Company currently anticipates adopting this standard during the first quarter of 2018 and is currently evaluating the impact that this guidance will have on its financial statements.

In January 2017, FASB issued ASU 2017-18, Statement of Cash Flows (Topic 230), Restricted Cash (“ASU 2016-18”), which eliminates the second step in the goodwill impairment test that requires an entity to determine the implied fair value of the reporting unit's goodwill. Going forward, an entity would recognize an impairment loss if the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, with the impairment loss not to exceed the amount of goodwill allocated to the reporting unit. ASU 2017-18 will take effect for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. The Company is currently evaluating the impact, if any, that this guidance will have on its financial statements.