Empire Industries Announces $31 million Co-venture Initiative

Co-venture attraction companies to be set up in North America and China

WINNIPEG, August 28, 2017 – Empire Industries Ltd. (TSX-V: EIL) is pleased to announce that it has entered into a letter of intent to structure and capitalize $31 million of equity in co-venture attraction companies. These co-venture attraction companies will partner with tourist-based locations to co-own and operate Empire’s proprietary Dynamic Attractions’ Flying Theatre and such other world class, proprietary attractions, at key tourist venues in North America and China.

Highlights

The parties to the letter of intent dated August 28, 2017 (the “Letter of Intent”) are Empire Industries Ltd. (“Empire” or the “Company”), Excellence Raise Overseas Ltd. (“EROL”), and Dynamic Entertainment Group Ltd. (“DEGL”). At the time of signing the Letter of Intent, each of EROL and DEGL dealt at arm’s length to Empire. The Letter of Intent calls for:

• $17 million of common share equity investment in DEGL (See the DEGL Private Placement below)
  • $12 million from Empire
  • $5 million from EROL or its assign
  • Investments to take place in two tranches
• $18 million of common share equity investments in Dynamic Technology Shanghai Company, a company to be incorporated (“DTSH”) (See the DTSH Private Placement below)
  • $14 million from EROL, or its assign (to be funded in RMB)
  • $4 million from DEGL (flowed through from the $17 million DEGL Private Placement above)
• A nominal investment, with the same ownership structure of DTSH, of common share equity in Dynamic Technology Hong Kong Company, a company to be incorporated (“DTHK”) (See the DTHK Private Placement below)

“The Co-venture business is a natural extension of Empire’s business model, from manufacturer of ride systems, to designer of turnkey media-based attractions, and now to co-own and operate some of its own world class attractions in prime locations in North America and China,” said Guy Nelson, Chief Executive Officer of Empire. “The co-venture strategy is designed to generate a recurring revenue component to our business model, augmenting the project-based business of manufacturing and selling ride systems and attractions through its wholly-owned subsidiary, Dynamic Attractions Ltd. The proposed transactions pave the way for Empire to enter this exciting and lucrative business.”

DEGL’s mission will be to partner with North American tourist venues to co-own and operate Dynamic designed and themed attractions in North American venues. The proposed capital investment in DEGL is sufficient to complete one such business venture. DTSH intends to do the same with Chinese tourist venues and will be capitalized sufficiently to complete one such business venture in China.

Empire will continue to serve its markets for ride systems and attractions through its wholly owned subsidiary Dynamic Attractions. Assuming Empire meets its investment obligations, it will own 73.5% of DEGL, which will in turn own 30% of DTSH and DTHK. DEGL will have an option to increase its ownership in DTSH and DTHK to 51.4% at an incremental cost of approximately $11.1 million. In addition, DEGL, DTHK and DTSH will benefit by being the exclusive licensee of co-venture attractions from Empire on preferential commercial terms.”

In order to fund its $12 million investment in the DEGL Private Placement, Empire intends to proceed with the following:

• $5.1 million rights offering to its shareholders (See Empire Rights Offering below)
• $3.0 million private placement to EROL (See Empire Subscription Receipt Private Placement below)
• Remaining balance through term debt, subordinated debt, liquidation of non-core assets, as required.

The series of transactions described in the Letter of Intent are subject to regulatory approval.

EROL is controlled by James Chui. Mr. Chui will be appointed to the Empire Board of Directors when the common shares of Empires are released to EROL pursuant to the Subscription Receipt Agreement (defined below). Mr. Chui has been Chairman and CEO of EROL since 2013. Mr. Chui was instrumental in arranging the private placement financing that led to the spinout of Tornado Global Hydrovacs Ltd. (TSXV:TGH) (“Tornado”) from Empire and serves as Tornado’s Executive Chairman. In 2010, Mr. Chui was the co-founder and remains an officer and Director of HIP Energy Corp., HIP Energy Resource Limited and HIP Technology Limited. He has been Chairman and President at Sino-Pacific Agency Partners (Hong Kong) Limited since 2010. He also serves as a Director of Beijing You Peng Technology Co., Ltd. which is one of the largest on-line video content (OTV) platforms in China. He is also the Chief of Business Development of United Biomedical Group Inc., and also serves as the supervisor and Director of its subsidiary United BioPharma Inc. Mr. Chui graduated from the Shanghai University of Science and Technology in 1985 with a Bachelor of Material Science.

Transaction Details

Empire Rights Offering

Empire intends to complete a rights offering for a maximum gross proceeds of $5,100,000 (the “Rights Offering”). Subject to regulatory approval, it is the intention of Empire that each Right will be exercisable into one (1) Common Share of Empire at $0.50 per Common Share (the “Subscription Price”). The closing of the Rights Offering is conditional on the prior closing of Empire Subscription Receipt Private Placement described below. Empire intends to complete the Rights Offering as soon as is practicable. A further press release will be issued once Empire has received regulatory approval for the Rights Offering and the record date for the Rights Offering has been determined.

Empire Subscription Receipt Private Placement and related matters

Pursuant to the Letter of Intent Empire has agreed to complete a private placement (the “Empire Subscription Receipt Private Placement”) of 6,000,000 subscription receipts (“Subscription Receipts”) at a price of $0.50 per Subscription Receipt for gross aggregate proceeds of $3,000,000. The Subscription Receipts shall be subscribed for by EROL pursuant to the terms of a subscription receipt agreement (the “Subscription Agreement”) to be entered into by EROL, Empire and Carscallen LLP as escrow agent. Pursuant to the terms of the Subscription Agreement, each Subscription Receipt will be automatically exchanged for one (1) Common Share of Empire and the proceeds of the Empire Subscription Receipt Private Placement will be released upon satisfaction of certain escrow release conditions (the “Escrow Release Conditions”). The Escrow Release Conditions include: (i) the closing of the Rights Offering; and (ii) confirmation that at least $6,000,000 in cash will be invested by Empire into DEGL in the first tranche of the DEGL Private Placement, all to be more particularly described in the Subscription Receipt Agreement. The parties intend to close the Empire Subscription Receipt Private Placement on or before October 6, 2017. The Subscription Receipts and the underlying Common Shares will be subject to a four month and one day hold period.

Upon successful completion of the Empire Subscription Receipt Private Placement, the Rights Offering and the DEGL Private Placement, Mr. Chui shall be appointed to the Board of Directors of Empire subject to regulatory approval.

DEGL Private Placement and related matters

Pursuant to the Letter of Intent, Empire has agreed to subscribe for $12 million of common shares of DEGL, and EROL or its assign has agreed to subscribe for $5 million of common shares of DEGL. The common shares issued pursuant to the DEGL Private Placement shall be issued at a price per common share such that Empire owns 73.5% and EROL, or its assign, owns 26.5% of the issued and outstanding shares of DEGL upon the closing of the DEGL Private Placement. The investments in DEGL by each of Empire and EROL, or its assign, will take place in two equal tranches. The first tranche is intended to close as soon as practicable after the Empire Rights Offering and the Empire Subscription Receipt Private Placement have closed. The second tranche is expected to close within 12 months of the closing of the first tranche. In the event Empire does not have sufficient funds to close all or any portion of the second tranche of the DEGL Private Placement, EROL, or its assign, shall have the right (but not the obligation) to take up the balance of Empire’s portion of the second tranche. The proceeds of the DEGL Private Placement will be used to develop the first co-venture attraction at a tourist venue in North America, and also to fund DEGL’s investment in the DTSH Private Placement and DTHK Private Placement.

Empire shall, or shall cause Dynamic Attractions Ltd. (Empire’s wholly-owned subsidiary) to, license certain intellectual property, including patents, know-how, copyrights, pre-visualization movie content, creative designs related to flying theaters, the Qin Dynasty license (the “Empire IP”) to DEGL, exclusively, to permit DEGL to execute the co-ventures at no cost to DEGL. The term of the license shall be perpetual but can be terminated by Empire if two co-venture flying theaters are not installed and operating within five (5) years of the closing of the DEGL Private Placement. DEGL shall be permitted to sublicense the Empire IP to DTHK exclusively in Asia and China so that DTHK may further sublicense the Empire IP to DTSH so that DTSH may carry out co-ventures in Asia and China.

DEGL shall be obligated to purchase all of the hardware and ride systems required for its co-ventures from Dynamic Attractions Ltd. (Empire’s wholly-owned subsidiary) at the cost of the bill of materials plus burdened labour costs plus a 15% gross margin on the selling price to cover overhead but excluding any gross margin added for profit. DEGL shall purchase the creative services required for its co-ventures from Dynamic Attractions Inc. (Empire’s wholly-owned subsidiary) all at mutually agreeable competitive pricing.

It is a condition of the investment by EROL, or its assign, that concurrent with the closing of the first tranche of the DEGL Private Placement that DEGL adopt an option plan (the “DEGL Option Plan”) pursuant to which options to purchase 15% of issued and outstanding shares of DEGL for an aggregate exercise price of $2.5 million are to be granted to the Directors and Officers of DEGL.

Concurrent with the closing of the first tranche of the DEGL Private Placement, it is a condition of the DEGL Private Placement that Mr. George Tai resign as the sole Director of DEGL and Guy Nelson, James Chui and an additional nominee of Empire shall be appointed as the new Board of Directors of DEGL. The initial executive officers of DEGL shall be: Guy Nelson, Chief Executive Officer, President and Executive Chairman; James Chui, Non-Executive Chairman; Brian Peebles, Senior Vice-President; Chuyu (Daniel) Wu, Vice President of Asia; and Allan Francis, Corporate Secretary and Treasurer.

With the recent executive announcements and promotions at Dynamic Attractions Ltd. (a wholly-owned subsidiary) previously announced by Empire on July 20, 2017, Mr. Nelson has the time necessary to serve as the Executive Chairman, CEO and President of DEGL, in addition to retaining his responsibilities as Executive Chairman and CEO of Empire.

Mr. Nelson will be acting as a Director, Executive Chairman, CEO and President of DEGL and it is anticipated that he will be compensated for his efforts including being eligible to participate in the DEGL Option Plan described above. Mr. Nelson’s anticipated compensation from DEGL constitutes a personal interest in the transactions contemplated in the Letter of Intent and may be perceived as a conflict of interest. Accordingly, Mr. Nelson disclosed the potential conflict of interest to Empire’s Board of Directors throughout the negotiation of the Letter of Intent. In response, Empire’s Board of Directors appointed Empire’s Governance and Compensation Committee, comprised of three independent Directors of Empire, Messrs. Macdonald, Quinn and Marshall (the “Independent Committee”), to consider the potential conflict interest including alternatives to the transaction, consider the impact of the transaction as negotiated on the shareholders of Empire and make a recommendation to the Board of Directors regarding the same. As part of their mandate, the Independent Committee has been authorized to obtain independent legal advice and engage an independent compensation advisor in order to assist with their recommendation to the Board of Directors. As such, the anticipated compensation payable to Mr. Nelson remains subject to the approval of the Independent Committee.

DTSH Private Placement and related matters

Pursuant to the Letter of Intent, DEGL has agreed to subscribe for $4 million of common shares of DTSH, while EROL, or its assign, has agreed to subscribe for $14 million of common shares of DTSH (payable in RMB). The common shares issued pursuant to the DTSH Private Placement shall be issued at a price per common share such that DEGL owns 30.0% and EROL, or its assign, owns 70.0% of the issued and outstanding shares of DTSH upon the closing of the DTSH Private Placement. The funds shall be used primarily to complete the development of one co-venture attraction tourist venue in China. The DTSH Private Placement shall close as soon as is practicable after the closing of the DEGL Private Placement.

DEGL will have a one year option to purchase additional shares of DTSH to increase its ownership up to 51.4% of DTSH for an additional investment of $11.1 million. If DEGL does not exercise this option, EROL, or its assign, will have a 90 day option to purchase additional shares of DTSH to increase its ownership position up to 79% of DTSH for $11.1 million.

DTHK Private Placement and related matters

Pursuant to the Letter of Intent, DEGL has agreed to subscribe for $4 thousand of common shares of DTHK and EROL, or its assign, has agreed to subscribe for $14 thousand (payable in RMB) of common shares of DTHK. DTHK will hold valuable intellectual property which will be licensed to DTSH to allow DTSH to operate Dynamic Flying Theatres and other attractions in China. The DTHK Private Placement shall close as soon as is practicable after the closing of the DEGL Private Placement.

DEGL will have a one year option to purchase additional shares of DTHK to increase its ownership up to 51.4% of DTHK for an additional investment of $11,100. If DEGL does not exercise this option, EROL, or its assign, will have a 90 day option to purchase additional shares of DTHK to increase its ownership position up to 79% of DTHK for $11,100.

About Empire Industries Ltd.

Empire focuses on designing, supplying, and installing premium theme park, media-based attractions and ride systems for the global entertainment industry. Empire also uses these same turn-key integration services for special projects such as large optical telescopes and enclosures. Through Empire’s execution of its strategy over the years, Empire owns several non-entertainment investments that it seeks to optimize and liquidate at the appropriate time. Empire’s common shares are listed on the TSX Venture Exchange under the symbol EIL.

For more information about Empire, visit www.empind.com or contact:

Reader Advisory

This news release contains forward-looking statements, within the meaning of applicable securities legislation, concerning Empire’s business and affairs. In certain cases, forward-looking statements can be identified by the use of words such as ‘‘plans’’, ‘‘expects’’ or ‘‘does not expect’’, ‘‘budget’’, ‘‘scheduled’’, ‘‘estimates’’, “forecasts’’, ‘‘intends’’, ‘‘anticipates’’ or variations of such words and phrases or state that certain actions, events or results ‘‘may’’, ‘‘could’’, ‘‘would’’, ‘‘might’’ or ‘‘will be taken’’, ‘‘occur’’ or ‘‘be achieved’’. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking statements. Although Empire believes these statements to be reasonable, no assurance can be given that these expectations will prove to be correct and such forward-looking statements included in this news release should not be unduly relied upon. Such statements include statements with respect to: (i) the closing of the Empire Subscription Receipt Private Placement, Rights Offering, DEGL Private Placement, DTSH Private Placement, and DTHK Private Placement and that the conditions for completion of the of the same including regulatory approval will be met; and (ii) the execution of the co-ventures in North America and China and the results, if any, thereof, any increase in revenue and profitability of Empire and the success of any efforts in respect thereof. Actual results could differ materially from those anticipated in these forward-looking statements as a result of prevailing economic conditions, and other factors, many of which are beyond the control of Empire. The forward-looking statements contained in this news release represent Empire’s expectations as of the date hereof, and are subject to change after such date. Empire disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise, except as may be required by applicable securities regulations. Neither the TSX Venture Exchange nor its Regulation Services Provider (as that term is defined in the policies of the TSX Venture Exchange) accepts responsibility for the adequacy or accuracy of this release.