Commitments and Contingencies

Legal Proceedings

On October 8, 2019 and October 28, 2019, respectively, two putative class action complaints challenging the Merger were filed in New York State Supreme Court, Sullivan County. The first Sullivan County case is captioned David Mullen v. Empire Resorts, Inc. et al., Index No. E2019-2085 (the “Mullen State Court Litigation”). The second Sullivan County case is captioned Julie Milano v. Empire Resorts, Inc. et al., Index No. E2019-2207 (the “Milano Litigation,” and, collectively with the Mullen State Court Litigation, the “Sullivan County Litigations”). The Sullivan County Litigations allege that the members of the Board breached their fiduciary duties in connection with the negotiation and approval of the Merger Agreement, as well as in authorizing the disclosures made in the Company's preliminary proxy statement filed with the SEC on September 24, 2019. The Sullivan County Litigations further allege that each of the Company, Parent, Merger Sub, Kien Huat, and GenM aided and abetted the Board’s alleged breaches of fiduciary duty. On October 28, 2019, the plaintiff in the Mullen State Court Litigation voluntarily dismissed the Mullen State Court Litigation.

On October 15, 2019, October 18, 2019, and October 29, 2019, respectively, three federal complaints challenging the Merger were filed in the United States District Court for the District of Delaware and the United States District Court for Southern District of New York. The Delaware federal case is captioned Adam Franchi v. Empire Resorts, Inc. et al., Case No. 1:19-cv-01947-RGA (the “Franchi Litigation”) and the two New York federal cases are captioned David Mullen v. Empire Resorts, Inc. et al., Case No. 1:19-cv-09632-LAK (the “Mullen Federal Litigation” and Harold Litwin v. Empire Resorts, Inc. et al., Case No. 1:19-cv-10026 (the “Litwin Litigation,” and, collectively with the Franchi Litigation, the Milano Litigation, and the Mullen Federal Litigation, the “Merger Litigations”). In the Franchi Litigation, Mullen Federal Litigation, and Litwin Litigation, each plaintiff asserts claims against the Company and certain members of the Board under Section 14(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 14a-9 promulgated thereunder, as well as Section 20(a) of the Exchange Act. Each plaintiff alleges that the Company’s definitive proxy statement, filed with the SEC on October 11, 2019, was misleading and omitted certain information with respect to the Merger.

Each of the Merger Litigations seeks, among other things, to enjoin the Merger and recover damages, as well as an award of the plaintiffs’ attorneys’ fees and costs of the litigation. The defendants deny all such allegations and believe the Merger Litigations are without merit. Furthermore, the defendants believe that the disclosures in the Preliminary Proxy and the Proxy Statement are adequate under the law. However, to alleviate the costs, risks and uncertainties inherent in litigation and provide additional information to its stockholders, on November 6, 2019, the Company entered into a Memorandum of Understanding (“MOU”) with the plaintiffs of the Milano, Franchi, and Litwin Litigations, pursuant to which such plaintiffs agreed to voluntarily dismiss their respective complaints on or before November 11, 2019, subject to the Company’s filing of certain supplemental disclosures. On November 6, 2019, the Company filed with the SEC a Current Report on Form 8-K, which contained the supplemental disclosures as set forth in the MOU. Accordingly, the Company expects the Milano, Franchi, and Litwin Litigation plaintiffs to voluntarily dismiss their respective complaints on or before November 11, 2019.

With respect to the Mullen Federal Litigation and, if they are not voluntarily dismissed on or before November 11, 2019 in accordance with the MOU, the other Merger Litigations, the defendants plan to defend against all claims stated therein.

The Company is also 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.

Leases

The Company primarily leases land, vehicles, slot machines and certain office equipment. The Company determines if an agreement is or contains a lease at inception. Leases with an initial term of 12 months or less are not recorded on the condensed consolidated balance sheets.

ROU assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. ROU assets and liabilities are based on the estimated present value of the lease payments over the lease term and are recognized at the lease commencement date.

Since most of the Company's leases do not provide an implicit rate, we use our estimated incremental borrowing rate in determining the present value of lease payments. The estimated incremental borrowing rate is derived from information available at the lease commencement date.

The Company's lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. A limited number of the Company's lease agreements include rental payments adjusted periodically for inflation. Our lease agreements generally do not contain residual value guarantees or material restrictive covenants.

The following table represents the components of lease expenses for the three-month and nine-month periods ended September 30, 2019:



		Three months ended	Nine months ended
Lease expense	Classification	September 30, 2019	September 30, 2019
		(in thousands)	(in thousands)
Operating lease cost	Gaming expense or SG&A expense	$2,971	$8,658

Variable lease cost:	Gaming expense or SG&A expense	973	2,043
Net lease cost (1)		$3,944	$10,701

(1) Net lease cost does not include short-term leases, none of which are material.

The schedule below lists the Company's lease terms and discount rates as of September 30, 2019:



	September 30, 2019
Weighted-average remaining lease term (years)

Operating leases	13.00

Weighted-average discount rate

Operating leases	12.26	%

Supplemental condensed consolidated balance sheet information related to leases at September 30, 2019 is presented below:



Leases	Classification	September 30, 2019
Assets		(in thousands)
Operating lease ROU assets	Other assets (non-current)	$63,000

Total leased assets		$63,000

Liabilities
Operating	Other long-term liabilities	$74,518

Total lease liabilities		$74,518

The Company's lease liability maturities at September 30, 2019 were as follows:



		Operating
Period		Leases
		(in thousands)
2019 (remaining of year)		$2,213
2020		8,940
2021		8,487
2022		8,400
2023		8,400
Thereafter		353,357
Total lease payments		389,797
Less: Imputed interest		315,279
Total lease liabilities		$74,518

Supplemental cash flow and other information related to leases for the nine-month period ended September 30, 2019 is presented below:



		Nine months ended
		September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:		(in thousands)
Operating cash flows from operating leases		$(144)