The notes to consolidated financial statements
are an integral part of these consolidated statements.
The notes to consolidated financial statements
are an integral part of these consolidated statements.
The notes to consolidated financial statements
are an integral part of these consolidated statements.
The notes to consolidated financial statements
are an integral part of these consolidated statements.
Notes to Consolidated Financial Statements
Note 1. Description of Business and
Significant Accounting Policies
The business activities of the Company
entail the owning and leasing of EGMs placed in premier hotels and other venues in Cambodia and the Philippines, the development
and operation of casinos and gaming establishments under the Dreamworld brand in select emerging markets in the Indo-China region
and the design, manufacture and distribution of gaming chips and plaques under the Dolphin brand to major casinos primarily in
Southeast Asia and Australia. Previously, the Company was engaged in the design, manufacture and distribution of other, non-gaming
plastic products, primarily for the automotive industry. These operations were sold on March 28, 2013 and related historical revenues
and expenses have been reclassified as discontinued operations. The accounting policies of these segments are consistent with the
Company’s policies for the accompanying consolidated financial statements.
In February 2013, the FASB issued ASU 2013-02,
Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income
. The amendments do not change the current
requirements for reporting net income or other comprehensive income in financial statements. However, the amendments require an
entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition,
an entity is required to present, either on the face of the statement when net income is presented or in the notes, significant
amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount
reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For public
entities, the amendments are effective prospectively for reporting periods beginning after December 15, 2012. The Company has adopted
this update (see Note 19 – “Accumulated Other Comprehensive Income.”)
Basis of Presentation
These consolidated financial statements
are prepared pursuant to generally accepted accounting principles in the United States.
The Company effected a 1-for-4 reverse
stock split of its common shares as of June 12, 2012. All historical share amounts and share price information presented in the
financial statements and notes have been proportionally adjusted to reflect the impact of this reverse stock split, including but
not limited to basic and diluted weighted-average shares issued and outstanding.
Principles of Consolidation
These consolidated financial statements
include the accounts of Entertainment Gaming Asia Inc. and all its subsidiaries. All intercompany balances and transactions
have been eliminated in consolidation. Certain prior period amounts in the consolidated financial statements and notes thereto
have been reclassified to conform to the current period's presentation.
Use of Estimates
The Company is required to make estimates,
judgments and assumptions that it believes are reasonable based on its historical experience, contract terms, observance of known
trends in the Company and the industry as a whole, and information available from other outside sources. These estimates affect
the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. On
a regular basis, the Company evaluates its estimates, including those related to revenue recognition, product returns, long-lived
assets, inventory obsolescence, stock-based compensation, income taxes, bad debts, warranty obligations, long-term contracts, contingencies
and litigation. Actual results may differ from those estimates.
Discontinued Operations
A discontinued operation is a component
of an entity that either has been disposed of, or that is classified as held for sale, and (i) represents a separate major line
of business or geographical area of operations; and (ii) is a part of a single coordinated plan to dispose of a separate major
line of business or geographical area of operations; or (iii) is a subsidiary acquired exclusively with a view to resale.
Non-current assets held for discontinued
operations are carried at the lower of carrying amount or fair value less costs to sell. Any gain or loss from disposal of a business,
together with the results of these operations until the date of disposal, is reported separately as discontinued operations. The
financial information of discontinued operations is excluded from the respective captions in the Company's consolidated statements
of comprehensive income and related notes for all years presented.
Cash and Cash Equivalents
All highly-liquid instruments with original
maturities of three months or less are considered cash equivalents. The Company places its cash and temporary investments
with financial institutions. As of December 31, 2013, the Company had deposits with financial institutions in excess
of Federal Deposit Insurance Corporation (FDIC) insured limits by approximately $5.1 million.
Accounts Receivable and Allowance
for Doubtful Accounts
Accounts receivable are stated at face
value less any allowances for doubtful accounts. Allowances for doubtful accounts are maintained at levels determined by Company
management to adequately provide for uncollectible amounts. In determining the estimated uncollectable amounts, the Company evaluates
a combination of factors, including, but not limited to, activity in the related market, financial condition of customers, specific
customer collection experience and history of write-offs and collections. Interest income is imposed on overdue accounts receivable
after the Company evaluates a combination of factors, including but not limited to, customer collection experiences, customer relationships
and contract terms. Accounts receivable balances are written off after all collection efforts have been exhausted.
Inventories
Inventories are stated at the lower of cost, determined
using the first-in, first-out method, or market. Cost elements included in work-in-process and finished goods include raw
materials, direct labor and manufacturing overheads. Inventories included a lower of cost or market (LCM) provision of
approximately $27,000 and NIL for the years ended December 31, 2013 and 2012, respectively.
Long-Lived Assets
The Company accounts for impairment of
long-lived assets in accordance with FASB Accounting Standards Codification (“ASC”) ASC 360,
Property, Plant and
Equipment
. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. In such instances, the Company estimates the undiscounted future cash flows that result
from the use of the asset and its ultimate disposition. If the sum of the undiscounted cash flows is less than the carrying value,
the Company recognizes an impairment loss, measured as the amount by which the carrying value exceeds the fair value of the asset,
determined principally using discounted cash flows. For the year ended December 31, 2013, the Company recorded an impairment
loss of approximately $2.6 million primarily related to the write-off of the Dreamworld Casino (Pailin) facility and non-redeployable
gaming equipment. For the year ended December 31, 2012, the Company recorded an impairment loss of approximately $339,000
primarily related to the write-off of non-redeployable EGMs following the termination of slot contracts for non-performing venues
during the year.
Prepaids, Deposits and Other Assets
Prepaids, deposits and other assets consist
primarily of prepaid leases, prepaid value-added taxes in foreign countries, prepayment to suppliers, rental and utilities deposits
and restricted deposits as lease security. The Company had restricted deposits in the amounts of $NIL and $331,000 as of December 31,
2013 and 2012, respectively, in the form of certificates of deposits as security on leases.
Gaming Equipment
Gaming equipment consists primarily of
EGMs and systems. Gaming equipment is stated at cost. The Company depreciates new gaming equipment over a five-year useful life
and depreciates refurbished gaming equipment over a three-year useful life once placed in service. Depreciation of gaming equipment
of approximately $3.9 million and $4.6 million was included in cost of gaming operations in the consolidated statements of comprehensive
income for the years ended December 31, 2013 and 2012, respectively.
Property and Equipment
Property and equipment are stated at cost.
Depreciation is computed using the straight-line method over the useful lives of the assets currently estimated to be three to
twenty years, which in the case of leasehold improvements, is limited to the life of the lease and throughout the renewal period
as long as renewal is reasonably assured.
Depreciation
of property and equipment of approximately $675,000 and $133,000 was recorded in the cost of gaming operations in the consolidated
statements of comprehensive income for the years ended December 31, 2013 and 2012, respectively.
Depreciation
of property and equipment of approximately $323,000 and $91,000 was included in cost of gaming products in the consolidated statements
of comprehensive income for the years ended December 31, 2013 and 2012, respectively.
Goodwill and Intangible Assets, Including
Casino Contracts
Intangible assets consist of patents, trademarks,
technical know-how, a gaming operation agreement, casino contracts and goodwill. Intangible assets other than goodwill are amortized
on the straight-line basis over the period of time the asset is expected to contribute directly or indirectly to future cash flows,
which ranges from four to ten years. The straight-line amortization method is utilized because the Company believes there is no
more reliably determinable method of reflecting the pattern for which the economic benefits of the intangible assets are consumed
or otherwise used.
Amortization expenses related to casino
contracts were approximately $2.5 million for the years ended December 31, 2013 and 2012. Amortization expenses related to
other gaming related intangibles were approximately $252,000 and $252,000 for the years ended December 31, 2013 and 2012, respectively.
The amounts were accounted for as cost of gaming operations in the consolidated statements of comprehensive income. Amortization
expenses related to technical know-how were approximately $26,000 and $15,000 for the years ended December 31, 2013 and 2012, respectively.
The amounts were accounted for as cost of gaming products in the consolidated statements of comprehensive income. Amortization
expenses related to patents and trademarks were approximately $24,000 and $24,000 for the years ended December 31, 2013 and
2012, respectively. The amounts were accounted for as selling, general and administrative expenses in the consolidated statements
of comprehensive income.
The Company measures and tests finite-lived
intangibles for impairment when there are indicators of impairment in accordance with ASC 360-10-05,
Property, Plant and Equipment
.
The Company measures and tests Goodwill
for impairment, at least annually in accordance with ASC 350-10-05,
Intangibles — Goodwill and Other
.
Impairment testing for goodwill and other
intangibles requires judgment, including the identification of reporting units, allocation of related goodwill, assignment of corporate
shared assets and liabilities to reporting units, estimated future cash flows and determinations of fair values. While the Company
believes its estimates of future revenues and cash flows are reasonable, different assumptions could materially affect the assessment
of useful lives, recoverability and fair values. No impairment charges relating to intangible assets were recorded for the years
ended December 31, 2013 and 2012, respectively.
Additional Paid-In-Capital
For the year ended December, 31, 2013,
the increase in additional paid-in-capital account mainly represented issuance of non-cash stock option compensation.
Litigation and Other Contingencies
In the performance of its ordinary course
of business operations, the Company is subject to risks of various legal matters, litigation and claims of various types. The Company
has regular litigation reviews, including updates from corporate and outside counsel, to assess the need for accounting recognition
or disclosure of these contingencies. The status of a significant claim is summarized in Note 17.
ASC 450,
Contingencies,
requires
that liabilities for contingencies be recorded when it is probable that a liability has been incurred and that the amount can be
reasonably estimated. Significant management judgment is required related to contingent liabilities and the outcome of litigation
because both are difficult to predict. For a contingency for which an unfavorable outcome is reasonably possible and which is significant,
the Company discloses the nature of the contingency and, when feasible, an estimate of the possible loss.
Revenue Recognition
The Company recognizes revenue when all
of the following have been satisfied:
|
|
·
|
Persuasive evidence of an arrangement exists;
|
|
|
·
|
The price to the customer is fixed and determinable;
|
|
|
·
|
Delivery has occurred and any acceptance terms have been fulfilled;
|
|
|
·
|
No significant contractual obligations remain; and
|
|
|
·
|
Collection is reasonably assured.
|
Gaming Revenue and Promotional Allowances
The Company earns recurring gaming revenue
from its slot and casino operations.
For slot operations, the Company earns
recurring gaming revenue by providing customers with EGMs and casino management systems which track game performance and provide
statistics on installed EGMs owned by the Company and leased to venue owners. Revenues are recognized on the contractual terms
of the slot agreements between the Company and the venue owners and are based on the Company’s share of net winnings and
reimbursement of expenses, net of customer incentives and commitment fees.
Revenues are recognized as earned with
the exception of one of the Company’s venues in which revenues were recognized when the payment for net winnings was received
as the collections from this venue were not reasonably assured. The slot contract with this venue owner was terminated on July
31, 2012 and the Company collected the balance of payments in the fourth quarter of 2012.
Commitment fees paid to the venue owners
relating to contract amendments which are not recoverable from daily net win are capitalized as assets and amortized as a reduction
of revenue over the term of the amended contracts. The Company had commitment fee balances related to contract amendments of approximately
$234,000 and $342,000 as of December 31, 2013 and 2012, respectively.
For casino operations, the Company’s
revenues are measured by the aggregate net difference between gaming wins and losses, with liabilities recognized for funds deposited
by customers before gaming play occurs and for chips in the customers’ possession, if any. Cash discounts, other cash incentives
related to casino play and commissions rebated through junkets or tour guides, if any, to customers are recorded as a reduction
to casino revenue. Consequently, the Company’s casino revenues are reduced by discounts and commissions.
The Company does not accrue a jackpot liability
for its slot machine base and progressive jackpots because it can avoid payment of such amounts. Regulations do not prohibit removal
of gaming machines from the gaming floor without payment of such jackpots.
Promotional allowances represent goods
and services, which would be accounted for as revenue if sold, that a casino gives to customers as an inducement to gamble at that
establishment. Such goods and services include food and beverages. The Company includes the retail value of promotional allowances
in gross revenues and deducts it from gross revenues to reach net revenues on the face of the consolidated statements of comprehensive
income.
The Company also earns recurring gaming
revenue through leasing table game equipment and providing casino management services to gaming operators within their casino properties.
Revenues from table game equipment leasing
arrangements are recognized as earned over the contractual terms of the arrangement between the Company and the gaming promoters.
Gaming Products Sales
The Company recognizes revenue from the
sale of its gaming products to end users upon shipment against customer contracts or purchase orders.
The Company also recognizes revenue from
the sale of its products to end users on bill-and-hold arrangements when all of the following have been satisfied:
|
|
·
|
The risk of ownership must be passed to the buyer;
|
|
|
·
|
The customer must have a fixed commitment to purchase the goods;
|
|
|
·
|
The buyer, not the Company, must request that the transaction be on bill-and-hold basis;
|
|
|
·
|
There must be a fixed schedule for the delivery of goods;
|
|
|
·
|
The Company must not have specific performance obligations such that the earning process is not
complete;
|
|
|
·
|
The ordered goods must be segregated from the Company’s inventory and not subject to being
used to fill other orders, and;
|
|
|
·
|
The product must be complete and ready for shipment.
|
Sales related to bill-and-hold arrangements were $NIL and $1.3
million for the years ended December 31, 2013 and 2012, respectively.
Stock-Based Compensation
Under the fair value recognition provisions
of ASC 718,
Compensation-Stock Compensation
, the Company recognizes stock-based compensation expenses for all service-based
awards to employees and non-employee directors with graded vesting schedules on the straight-line basis over the requisite service
period for the entire award. Estimates are revised if subsequent information indicates that forfeitures will differ from previous
estimates, and the cumulative effect on compensation cost of a change in the estimated forfeitures is recognized in the period
of the change. For non-employee awards, the Company remeasures compensation cost each period until the service condition is complete
and recognizes compensation cost on the straight-line basis over the requisite service period. Option valuation models require
the input of highly subjective assumptions, and changes in the assumptions used can materially affect the fair value estimates.
Judgment is required in estimating stock price volatility, forfeiture rates, expected dividends, and expected terms that options
remain outstanding. For restricted stock awards with performance conditions, the Company evaluates if performance conditions are
probable in each reporting period. The compensation expense of restricted awards is recognized ratably over the implicit service
period if achieving performance conditions is probable. Cumulative catch-up adjustments are required in the event of changes in
assessment of probability. See Note 12 for additional information relating to stock-based compensation assumptions. Stock-based
compensation expense totaled approximately $789,000 and $840,000 for the years ended December 31, 2013 and 2012, respectively.
Employee Defined Contribution Plan
The Company operates a mandatory provident fund scheme (the “MPF Scheme”) under the Mandatory
Provident Fund Schemes Ordinance for its employees in Hong Kong. The assets of the MPF Scheme are held separately from those of
the Company in an independently administered fund. Contributions are made based on a percentage of the employees’ basic salaries
and are expensed as and when the contributions fall due. The Company has no legal obligation for the benefits beyond the contributions.
The total amounts of such employees, which were expenses as incurred, were approximately $75,000 and $22,000 for the years ended
December 31, 2013 and 2012, respectively.
Product Development
Product development expenses are charged
to expense as incurred. Employee-related costs associated with product development are included in product development expenses.
Product development expenses were approximately $261,000 and $395,000 for the years ended December 31, 2013 and 2012, respectively.
Leases
Leases are classified at the inception date as either a capital
lease or an operating lease. A lease is a capital lease if any of the following conditions exists:
|
|
·
|
Ownership is transferred to the lessee by the end of
the lease term;
|
|
|
·
|
There is a bargain purchase option;
|
|
|
·
|
The lease term is at least 75% of the property’s
estimated remaining economic life or
|
|
|
·
|
The present value of the minimum lease payments at the
beginning of the lease term is 90% or more of the fair value of the leased property to the lessor at the inception date.
|
A capital lease is accounted for as if
there was an acquisition of an asset and an incurrence of an obligation at the inception of the lease. All other leases are accounted
for as operating leases wherein rental payments are expensed as incurred.
Income Taxes
The Company is subject to income taxes
in the United States (including federal and state) and several foreign jurisdictions in which it operates. Deferred income tax
balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax basis
and are stated at enacted tax rates expected to be in effect when taxes are actually paid or recovered. ASC 740,
Income Taxes,
requires that deferred tax assets be evaluated for future realization and reduced by a valuation allowance to the extent the Company
believes a portion will not be realized. The Company considers many factors when assessing the likelihood of future realization
of its deferred tax assets, including its recent cumulative earnings experience and expectations of future taxable income by taxing
jurisdiction, the carry-forward periods available to the Company for tax reporting purposes, and other relevant factors.
The Company accounts for uncertain tax
positions in accordance with ASC 740, which contains a two-step approach to recognizing and measuring uncertain tax positions.
The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it
is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes,
if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely to be realized upon ultimate
settlement. The Company considers many factors when evaluating and estimating its tax positions and tax benefits, which may require
periodic adjustments and which may not accurately anticipate actual outcomes. The Company recognizes interest and penalties, if
any, related to unrecognized tax benefits in the provision for income taxes in the statements of comprehensive income.
On December 31, 2010, the Company effected
a Quasi-Reorganization. As of that date, the Company’s deferred taxes were reported in conformity with applicable income
tax accounting standards described above, net of applicable valuation allowances. Deferred tax assets and liabilities were recognized
for differences between the assigned values and the tax basis of the recognized assets and liabilities with corresponding valuation
allowances as appropriate. In accordance with the Quasi-Reorganization requirements, pre-existing tax benefits realized subsequent
to the Quasi-Reorganization are recorded directly in equity.
(Loss)/Earnings per Share
Basic (loss)/earnings per share are computed
by dividing the reported net (loss)/earnings by the weighted average number of shares of common stock outstanding during the period.
Diluted (loss)/earnings per share is computed by dividing the net income by the weighted average number of shares of common stock
and shares issuable from stock options and restricted shares during the period. The computation of diluted (loss)/earnings per
share excludes the impact of stock options and restricted shares that are anti-dilutive. There is no difference in diluted loss
per share from basic loss per share as the assumed exercise of common stock equivalents would have an anti-dilutive effect due
to losses.
Foreign Currency Translations and
Transactions
The functional currency of the Company’s
international subsidiaries, except for its operations in Cambodia whose functional currency is the U.S. dollar, is generally the
local currency. For these subsidiaries, the Company translates the assets and liabilities at exchange rates in effect at the balance
sheet date and income and expense accounts at average exchange rates during the year. Resulting currency translation adjustments
are recorded directly to accumulated other comprehensive income within stockholders’ equity. Gains and losses resulting from
transactions in non-functional currencies are recorded in the consolidated statements of comprehensive income.
Below is a summary of closing exchange
rates as of December 31, 2013 and 2012 and average exchange rates for the years ended December 31, 2013 and 2012, respectively.
|
($1 to foreign currency)
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
|
Australian dollar
|
|
|
1.13
|
|
|
|
0.96
|
|
|
Philippine peso
|
|
|
44.45
|
|
|
|
41.19
|
|
|
Hong Kong dollar
|
|
|
7.75
|
|
|
|
7.75
|
|
|
Thai baht
|
|
|
32.92
|
|
|
|
30.84
|
|
|
|
|
Years Ended December 31,
|
|
|
($1 to foreign currency)
|
|
2013
|
|
|
2012
|
|
|
Australian dollar
|
|
|
1.04
|
|
|
|
0.97
|
|
|
Philippine peso
|
|
|
42.55
|
|
|
|
42.35
|
|
|
Hong Kong dollar
|
|
|
7.76
|
|
|
|
7.76
|
|
|
Thai baht
|
|
|
30.80
|
|
|
|
31.21
|
|
Fair Value Measurements
Fair value is defined under ASC 820,
Fair
Value Measurements and Disclosures
, as the exchange price that would be received for an asset or paid to transfer a liability
(an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market
participants on the measurement date. Valuation techniques used to measure fair value under ASC 820 must maximize the use of observable
inputs and minimize the use of unobservable inputs. The standard establishes a fair value hierarchy based on three levels of input,
of which the first two are considered observable and the last unobservable.
|
|
·
|
Level 1 — Quoted prices in active markets for identical assets or liabilities. These are
typically obtained from real-time quotes for transactions in active exchange markets involving identical assets.
|
|
|
·
|
Level 2 — Input, other than quoted prices included within Level 1, which are observable for
the asset or liability, either directly or indirectly. These are typically obtained from readily-available pricing sources for
comparable instruments.
|
|
|
·
|
Level 3 — Unobservable input, where there is little or no market activity for the asset or
liability. This input reflects the reporting entity’s own assumptions of the data that participants would use in pricing
the asset or liability, based on the best information available under the circumstances.
|
As of December 31, 2013, the fair
values of cash and cash equivalents, accounts receivable and accounts payable approximate carrying values due to the short maturity
of these items.
Guarantees
The Company recognizes a guarantee at its
inception which is the greater of (i) the fair value of the guarantee and (ii) the contingent liability amount. The fair value
of a guarantee is determined by using expected present value measurement techniques. The initial liability recognized is amortized
over the guarantee period. The Company had no guarantee liabilities as of the balance sheet dates.
Recently Issued Accounting Standards
In February 2013, the FASB issued ASU 2013-02,
Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income
. The amendments do not change the current
requirements for reporting net income or other comprehensive income in financial statements. However, the amendments require an
entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition,
an entity is required to present, either on the face of the statement when net income is presented or in the notes, significant
amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount
reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For public
entities, the amendments are effective prospectively for reporting periods beginning after December 15, 2012. The Company has adopted
this update (see Note 19 – “Accumulated Other Comprehensive Income.”)
Note 2. Segments
The Company currently conducts business
in two operating segments: (i) gaming operations, which includes EGMs participation and casino operations; and (ii) gaming
products, which consist of the design, manufacture and distribution of gaming chips and plaques. Previously, the Company was also
engaged in the design, manufacture and distribution of other non-gaming plastic products, primarily for the automotive industry.
These operations were sold on March 28, 2013 and the related historical revenues and expenses have been reclassified as discontinued
operations. The accounting policies of these segments are consistent with the Company’s policies for the accompanying consolidated
financial statements.
The following table presents the financial
information for each of the Company’s operating segments.
|
|
|
Years Ended December 31,
|
|
|
(amounts in thousands)
|
|
2013
|
|
|
2012
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Gaming operations
|
|
$
|
20,870
|
|
|
$
|
20,389
|
|
|
Gaming products
|
|
|
3,424
|
|
|
|
6,454
|
|
|
Total revenues
|
|
$
|
24,294
|
|
|
$
|
26,843
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss)/income:
|
|
|
|
|
|
|
|
|
|
Gaming operations gross profit(1)
|
|
$
|
4,466
|
|
|
$
|
8,393
|
|
|
Gaming products gross (loss)/profit
|
|
|
(771
|
)
|
|
|
1,267
|
|
|
Corporate and other operating costs and expenses
|
|
|
(8,459
|
)
|
|
|
(8,510
|
)
|
|
Total operating (loss)/income
|
|
$
|
(4,764
|
)
|
|
$
|
1,150
|
|
|
|
(1)
|
Calculation of gaming operations gross margin included impairment of gaming assets of approximately
$2.6 million and $339,000 for the years ended December 31, 2013 and 2012, respectively.
|
|
|
|
December 31,
|
|
|
(amounts in thousands)
|
|
2013
|
|
|
2012
|
|
|
Identifiable assets:
|
|
|
|
|
|
|
|
|
|
Gaming operations
|
|
$
|
26,401
|
|
|
$
|
34,652
|
|
|
Gaming products
|
|
|
6,507
|
|
|
|
7,766
|
|
|
Corporate
|
|
|
722
|
|
|
|
1,300
|
|
|
Total identifiable assets
|
|
$
|
33,630
|
|
|
$
|
43,718
|
|
|
|
|
December 31,
|
|
|
(amounts in thousands)
|
|
2013
|
|
|
2012
|
|
|
Goodwill:
|
|
|
|
|
|
|
|
|
|
Gaming operations
|
|
$
|
353
|
|
|
$
|
380
|
|
|
Gaming products
|
|
|
—
|
|
|
|
—
|
|
|
Corporate
|
|
|
—
|
|
|
|
—
|
|
|
Total goodwill
|
|
$
|
353
|
|
|
$
|
380
|
|
|
|
|
Years Ended December 31,
|
|
|
(amounts in thousands)
|
|
2013
|
|
|
2012
|
|
|
Capital expenditures:
|
|
|
|
|
|
|
|
|
|
Gaming operations (1)
|
|
$
|
4,813
|
|
|
$
|
8,662
|
|
|
Gaming products
|
|
|
2,879
|
|
|
|
1,418
|
|
|
Corporate
|
|
|
332
|
|
|
|
45
|
|
|
Total capital expenditures
|
|
$
|
8,024
|
|
|
$
|
10,125
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
|
Gaming operations
|
|
$
|
7,396
|
|
|
$
|
7,629
|
|
|
Gaming products
|
|
|
423
|
|
|
|
137
|
|
|
Corporate
|
|
|
37
|
|
|
|
126
|
|
|
Total depreciation and amortization
|
|
$
|
7,856
|
|
|
$
|
7,892
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expenses and finance fees:
|
|
|
|
|
|
|
|
|
|
Gaming operations
|
|
$
|
—
|
|
|
$
|
10
|
|
|
Gaming products
|
|
|
—
|
|
|
|
6
|
|
|
Corporate
|
|
|
7
|
|
|
|
92
|
|
|
Total interest expenses and finance fees
|
|
$
|
7
|
|
|
$
|
108
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax (expenses)/benefit:
|
|
|
|
|
|
|
|
|
|
Gaming operations (2)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Gaming products
|
|
|
—
|
|
|
|
110
|
|
|
Corporate
|
|
|
(141
|
)
|
|
|
(29
|
)
|
|
Total income tax (expenses)/benefit:
|
|
$
|
(141
|
)
|
|
$
|
81
|
|
|
|
(1)
|
Includes costs related to new gaming development projects of approximately $3.6 million and $6.5
million for the years ended December 31, 2013 and 2012, respectively.
|
|
|
(2)
|
The Company is required to pay a fixed gaming obligation tax for its operations in Cambodia. The
amounts paid were approximately $227,000 and $100,000 for the years ended December 31, 2013 and 2012, respectively and were
included in selling, general and administrative expenses.
|
Geographic segment revenues for the years ended December 31,
2013 and 2012 are as follows:
|
|
|
Years Ended December 31,
|
|
|
(amounts in thousands)
|
|
2013
|
|
|
2012
|
|
|
Cambodia
|
|
$
|
17,534
|
|
|
$
|
16,757
|
|
|
Macau
|
|
|
1,012
|
|
|
|
1,503
|
|
|
Philippines
|
|
|
4,751
|
|
|
|
5,213
|
|
|
Australia
|
|
|
818
|
|
|
|
3,241
|
|
|
Other
|
|
|
179
|
|
|
|
129
|
|
|
|
|
$
|
24,294
|
|
|
$
|
26,843
|
|
For the year ended December 31, 2013,
the largest customer in the gaming operations segment represented 62% of total gaming operations revenue and the largest customer
in the gaming products segment represented 28% of total gaming products revenue. For the year ended December 31, 2012, the
largest customer in the gaming operations segment represented 69% of total gaming operations revenue and the largest customer in
the gaming products segment represented 33% of total gaming products revenue.
Long-lived assets, goodwill and intangible
assets identified by geographic segments consisted of the following:
|
|
|
December 31,
|
|
|
(amounts in thousands)
|
|
2013
|
|
|
2012
|
|
|
Cambodia
|
|
$
|
15,407
|
|
|
$
|
18,450
|
|
|
Philippines
|
|
|
2,097
|
|
|
|
3,450
|
|
|
Hong Kong
|
|
|
5,045
|
|
|
|
1,346
|
|
|
Australia
|
|
|
—
|
|
|
|
2,023
|
|
|
United States
|
|
|
160
|
|
|
|
240
|
|
|
|
|
$
|
22,709
|
|
|
$
|
25,509
|
|
Inventories consisted of the following:
|
|
|
December 31,
|
|
|
(amounts in thousands)
|
|
2013
|
|
|
2012
|
|
|
Raw materials
|
|
$
|
809
|
|
|
$
|
867
|
|
|
Work-in process
|
|
|
342
|
|
|
|
98
|
|
|
Finished goods
|
|
|
367
|
|
|
|
875
|
|
|
Spare parts
|
|
|
119
|
|
|
|
106
|
|
|
Casino inventories
|
|
|
26
|
|
|
|
101
|
|
|
|
|
$
|
1,663
|
|
|
$
|
2,047
|
|
|
|
Note 4.
|
Prepaid Expenses and Other Current Assets
|
Prepaid expenses and other current assets consisted of the following:
|
|
|
December 31,
|
|
|
(amounts in thousands)
|
|
2013
|
|
|
2012
|
|
|
Prepayments to suppliers
|
|
$
|
400
|
|
|
$
|
174
|
|
|
Restricted deposit
|
|
|
—
|
|
|
|
168
|
|
|
Prepaid leases
|
|
|
43
|
|
|
|
45
|
|
|
|
|
$
|
443
|
|
|
$
|
387
|
|
Accounts and other receivables consisted of the following:
|
|
|
December 31,
|
|
|
(amounts in thousands)
|
|
2013
|
|
|
2012
|
|
|
Trade accounts
|
|
$
|
922
|
|
|
$
|
1,856
|
|
|
Other
|
|
|
453
|
|
|
|
112
|
|
|
|
|
|
1,375
|
|
|
|
1,968
|
|
|
Less: allowance for doubtful accounts
|
|
|
—
|
|
|
|
(15
|
)
|
|
Net
|
|
$
|
1,375
|
|
|
$
|
1,953
|
|
Trade accounts receivables decreased primarily due to the sale
of the non-gaming operations of Dolphin Australia on March 28, 2013.
Gaming equipment is stated at cost less
depreciation. The major categories of gaming equipment and accumulated depreciation consisted of the following:
|
|
|
Useful
|
|
|
|
|
|
|
|
|
|
Life
|
|
December 31,
|
|
|
(amounts in thousands)
|
|
(years)
|
|
2013
|
|
|
2012
|
|
|
EGMs
|
|
3-5
|
|
$
|
17,587
|
|
|
$
|
16,222
|
|
|
Systems
|
|
5
|
|
|
1,417
|
|
|
|
1,093
|
|
|
Other gaming equipment
|
|
3-5
|
|
|
42
|
|
|
|
150
|
|
|
|
|
|
|
|
19,046
|
|
|
|
17,465
|
|
|
Less: accumulated depreciation
|
|
|
|
|
(10,875
|
)
|
|
|
(7,741
|
)
|
|
|
|
|
|
$
|
8,171
|
|
|
$
|
9,724
|
|
Depreciation expense of gaming equipment of approximately $3.9
million and $4.7 million was included in cost of gaming operations in the consolidated statements of comprehensive income for the
years ended December 31, 2013 and 2012, respectively.
|
|
Note 7.
|
Property and Equipment
|
Property and equipment are stated at cost and consisted of the
following:
|
|
|
Useful
|
|
|
|
|
|
|
|
|
|
Life
|
|
December 31,
|
|
|
(amounts in thousands)
|
|
(years)
|
|
2013
|
|
|
2012
|
|
|
Equipment, vehicles, furniture and fixtures
|
|
3-10
|
|
$
|
4,109
|
|
|
$
|
2,900
|
|
|
Land and building
|
|
20
|
|
|
2,949
|
|
|
|
2,483
|
|
|
Leasehold improvements
|
|
1-2
|
|
|
1,029
|
|
|
|
180
|
|
|
Construction in progress
|
|
N/A
|
|
|
1,112
|
|
|
|
1,477
|
|
|
|
|
|
|
|
9,199
|
|
|
|
7,040
|
|
|
Less: accumulated depreciation
|
|
|
|
|
(1,342
|
)
|
|
|
(870
|
)
|
|
|
|
|
|
$
|
7,857
|
|
|
$
|
6,170
|
|
Depreciation of property and equipment of approximately $675,000
and $133,000 was recorded in cost of gaming operations in the consolidated statements of comprehensive income for the years ended
December 31, 2013 and 2012, respectively.
Depreciation of property and equipment
of approximately $323,000 and $91,000 was included in cost of gaming products in the consolidated statement of comprehensive income
for the years ended December 31, 2013 and 2012, respectively.
|
|
Note 8.
|
Goodwill and Intangible Assets, including Casino Contracts
|
Goodwill and intangible assets are stated at cost and consisted
of the following:
|
|
|
Useful
|
|
|
|
|
|
|
|
|
|
Life
|
|
December 31,
|
|
|
(amounts in thousands)
|
|
(years)
|
|
2013
|
|
|
2012
|
|
|
Gaming operation agreement
|
|
4-5
|
|
$
|
1,178
|
|
|
$
|
1,232
|
|
|
Less: accumulated amortization
|
|
|
|
|
(567
|
)
|
|
|
(315
|
)
|
|
|
|
|
|
|
611
|
|
|
|
917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
N/A
|
|
|
353
|
|
|
|
380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents
|
|
5-6
|
|
|
114
|
|
|
|
114
|
|
|
Less: accumulated amortization
|
|
|
|
|
(62
|
)
|
|
|
(42
|
)
|
|
|
|
|
|
|
52
|
|
|
|
72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
5-9
|
|
|
26
|
|
|
|
26
|
|
|
Less: accumulated amortization
|
|
|
|
|
(10
|
)
|
|
|
(6
|
)
|
|
|
|
|
|
|
16
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technical know-how
|
|
10
|
|
|
261
|
|
|
|
259
|
|
|
Less: accumulated amortization
|
|
|
|
|
(41
|
)
|
|
|
(15
|
)
|
|
|
|
|
|
|
220
|
|
|
|
244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Casino contracts
|
|
5-6
|
|
|
12,764
|
|
|
|
12,934
|
|
|
Less: accumulated amortization
|
|
|
|
|
(7,335
|
)
|
|
|
(4,952
|
)
|
|
|
|
|
|
|
5,429
|
|
|
|
7,982
|
|
|
|
|
|
|
$
|
6,681
|
|
|
$
|
9,615
|
|
Goodwill movements during the year consisted
of the following:
|
(amounts in thousands)
|
|
2013
|
|
|
2012
|
|
|
Balance as of January 1
|
|
$
|
380
|
|
|
$
|
357
|
|
|
Goodwill acquired
|
|
|
—
|
|
|
|
—
|
|
|
Foreign currency translation adjustment
|
|
|
(27
|
)
|
|
|
23
|
|
|
Balance as of December 31
|
|
$
|
353
|
|
|
$
|
380
|
|
Amortization expenses for finite-lived
intangible assets were approximately $2.8 million for both the years ended December 31, 2013 and 2012. Annual estimated amortization
expense for each of the five succeeding years and thereafter consisted of the following:
|
(amounts in thousands)
|
|
|
2014
|
|
|
2,748
|
|
|
2015
|
|
|
2,748
|
|
|
2016
|
|
|
684
|
|
|
2017
|
|
|
29
|
|
|
2018
|
|
|
29
|
|
|
Thereafter
|
|
|
90
|
|
|
Total
|
|
$
|
6,328
|
|
|
|
Note 9.
|
Prepaids, Deposits and Other Assets
|
Prepaids, deposits and other assets consisted of the following:
|
|
|
December 31,
|
|
|
(amounts in thousands)
|
|
2013
|
|
|
2012
|
|
|
Prepaid taxes
|
|
$
|
927
|
|
|
$
|
922
|
|
|
Prepaid leases
|
|
|
222
|
|
|
|
747
|
|
|
Prepayments to suppliers
|
|
|
279
|
|
|
|
585
|
|
|
Deposits on EGM orders
|
|
|
16
|
|
|
|
257
|
|
|
Rental, utilities and other deposits
|
|
|
353
|
|
|
|
240
|
|
|
Restricted deposit
|
|
|
—
|
|
|
|
163
|
|
|
Totals
|
|
$
|
1,797
|
|
|
$
|
2,914
|
|
As of December 31, 2013, prepaid leases
consisted of land lease prepayments of approximately $222,000 for the Company’s gaming development project located in the
Kampot province of Cambodia. The decrease in prepaid leases was primarily due to the write-down of the prepaid leases related to
the Dreamworld Casino (Pailin) operations.
|
|
Note 10.
|
Accrued Expenses
|
Accrued expenses consisted of the following:
|
|
|
December 31,
|
|
|
(amounts in thousands)
|
|
2013
|
|
|
2012
|
|
|
Payroll and related costs (1)
|
|
$
|
601
|
|
|
$
|
1,292
|
|
|
Professional fees
|
|
|
312
|
|
|
|
336
|
|
|
Withholding tax expenses
|
|
|
551
|
|
|
|
514
|
|
|
Other tax expense (2)
|
|
|
482
|
|
|
|
—
|
|
|
Other
|
|
|
420
|
|
|
|
477
|
|
|
Totals
|
|
$
|
2,366
|
|
|
$
|
2,619
|
|
|
|
(1)
|
Payroll and related costs as of December 31, 2012 included accruals of approximately $726,000 related to the Company’s
prior operations in Australia. These accruals were fully settled during the three-month period ended March 31, 2013.
|
|
|
(2)
|
As of December 31, 2013, other tax expense represented an accrued tax liability related to the
Philippines operations.
|
|
|
Note 11.
|
Other Liabilities
|
Other liabilities consisted of the following:
|
|
|
December 31,
|
|
|
(amounts in thousands)
|
|
2013
|
|
|
2012
|
|
|
Other tax liabilities
|
|
$
|
659
|
|
|
$
|
555
|
|
|
Provision for long service leave (1)
|
|
|
—
|
|
|
|
369
|
|
|
Other
|
|
|
83
|
|
|
|
154
|
|
|
|
|
$
|
742
|
|
|
$
|
1,078
|
|
|
|
(1)
|
Provision for long service leave was settled during the
sale of the Dolphin non-gaming assets in March 2013.
|
|
|
Note 12.
|
Stock-Based Compensation
|
Options
The Company effected a 1-for-4 reverse
stock split of its common shares as of June 12, 2012. All historical share amounts and share price information presented in this
Note 12 have been proportionally adjusted to reflect the impact of this reverse stock split.
At the annual shareholders meeting held
on September 8, 2008, a new stock option plan, the “2008 Stock Incentive Plan” (the “2008 Plan”), was voted
on and became effective on January 1, 2009, which replaced two previous plans, the Amended and Restated 1999 Stock Option Plan
and the Amended and Restated 1999 Directors’ Stock Option Plan (the “Stock Option Plans”), thereby terminating
both of the Stock Option Plans on December 31, 2008.
The 2008 Plan allows for incentive awards
to eligible recipients consisting of:
|
|
·
|
Options to purchase shares of common stock that qualify as incentive stock options within the meaning
of the Internal Revenue Code;
|
|
|
·
|
Non-statutory stock options that do not qualify as incentive options;
|
|
|
·
|
Restricted stock awards; and
|
|
|
·
|
Performance stock awards which are subject to future achievement of performance criteria or free
of any performance or vesting.
|
The maximum number of shares reserved for
issuance under the 2008 Plan was originally 1,250,000 shares, and in July 2010 the Company’s shareholders approved an increase
in the number of shares reserved for issuance to 2,500,000 shares. At the annual shareholders meeting held on July 13, 2012, the
Company’s shareholders approved a further increase in the number of shares reserved for issuance to 3,750,000 shares. The
exercise price shall not be less than 100% of the fair market value of one share of common stock on the date of grant, unless the
participant owns more than 10% of the total combined voting power of all classes of stock of the Company or any parent or subsidiary
corporation of the Company, in which case the exercise price shall then be 110% of the fair market value. The outstanding stock
options generally vest over three years and have ten-year contractual terms.
During the year ended December 31, 2013,
stock options for the purchase of 860,000 shares of common stock were granted with a weighted average exercise price of $1.20 and
weighted average fair value of $0.69 (2012: $1.06) per share. This included options for the purchase of 500,000 shares of common
stock which were extended on December 27, 2013 for an additional five years up to December 29, 2018. The remaining stock options
will vest from six-month and one day to three-year periods. During the year ended December 31, 2013, 50,000 shares of restricted
stock awards with a fair value of $1.97 per share were issued. The shares of restricted stock shall vest, subject to and upon the
recipient’s achievement of key operational and financial performance milestones. For restricted stock awards with performance
conditions, the Company evaluates if performance conditions are probable in each reporting period. The compensation expense of
restricted awards is recognized ratably over the implicit service period if achieving performance conditions is probable. Cumulative
catch-up adjustments are required in the event of any changes in the assessment of probabilities.
During the year ended December 31, 2013,
there was no exercise of outstanding stock options.
Prior to January 1, 2009, the Company had
two stock options plans, the Amended and Restated 1999 Stock Option Plan and the Amended and Restated 1999 Directors’ Stock
Option Plan (the “Previous Stock Option Plans”), through which 3,750,000 shares and 75,000 shares were authorized,
respectively. Both Previous Stock Option Plans expired on December 31, 2008; however, options granted under the Previous Stock
Option Plans that were outstanding as of the date of termination remain outstanding and subject to termination according to their
terms.
As of December 31, 2013, stock options
for the purchase of 936,864 shares and 22,500 shares of common stock, respectively, were outstanding in relation to the Amended
and Restated 1999 Stock Option Plan and the Amended and Restated 1999 Director’s Stock Option Plan.
As of December 31, 2013, stock options
for the purchase of 2,332,374 shares of common stock were outstanding under the 2008 Plan.
As of December 31, 2013, stock options
for the purchase of 2,783,821 shares of common stock were exercisable with a weighted average exercise price of $2.18, a weighted
average fair value of $0.89 and an aggregate intrinsic value of approximately $738,000. The total fair value of shares vested during
the year ended December 31, 2013 was approximately $912,000. The total compensation cost related to unvested shares as of December
31, 2013 was approximately $295,000. The amount is expected to be recognized over 1.83 years.
A summary of all current and expired plans
as of December 31, 2013 and 2012 and changes during the years then ended is presented in the following tables.
Options
|
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted Average
Remaining
Contractual
Life
(in years)
|
|
|
Aggregate
Intrinsic Value
(in thousands)
|
|
|
Outstanding as of December 31, 2011
|
|
|
3,148,321
|
|
|
$
|
3.90
|
|
|
|
5.40
|
|
|
$
|
303
|
|
|
Granted
|
|
|
450,000
|
|
|
|
1.40
|
|
|
|
—
|
|
|
|
274
|
|
|
Exercised
|
|
|
(69,301
|
)
|
|
|
1.17
|
|
|
|
—
|
|
|
|
71
|
|
|
Forfeited or expired
|
|
|
(572,282
|
)
|
|
|
11.43
|
|
|
|
—
|
|
|
|
—
|
|
|
Outstanding as of December 31, 2012
|
|
|
2,956,738
|
|
|
|
2.13
|
|
|
|
6.13
|
|
|
|
2,293
|
|
|
Exercisable as of December 31, 2012
|
|
|
2,158,821
|
|
|
$
|
2.38
|
|
|
|
5.24
|
|
|
$
|
1,894
|
|
|
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted Average
Remaining
Contractual
Life
(in years)
|
|
|
Aggregate
Intrinsic Value
(in thousands)
|
|
|
Outstanding as of December 31, 2012
|
|
|
2,956,738
|
|
|
$
|
2.13
|
|
|
|
6.13
|
|
|
$
|
2,293
|
|
|
Granted
|
|
|
860,000
|
|
|
|
1.20
|
|
|
|
—
|
|
|
|
280
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Forfeited or expired
|
|
|
(525,000
|
)
|
|
|
0.75
|
|
|
|
—
|
|
|
|
—
|
|
|
Outstanding as of December 31, 2013
|
|
|
3,291,738
|
|
|
|
2.11
|
|
|
|
6.13
|
|
|
|
738
|
|
|
Exercisable as of December 31, 2013
|
|
|
2,783,821
|
|
|
$
|
2.18
|
|
|
|
5.74
|
|
|
$
|
738
|
|
Recognition and Measurement
The fair value of each stock-based award
to employees and non-employee directors is estimated on the measurement date which generally is the grant date while awards to
non-employees are measured at the earlier of the performance commitment date or the service completion date using the Black-Scholes-Merton
option-pricing model. Option valuation models require the input of highly subjective assumptions, and changes in assumptions used
can materially affect the fair value estimates. The Company estimates the expected life of the award by taking into consideration
the vesting period, contractual term, historical exercise data, expected volatility, blackout periods and other relevant factors.
Volatility is estimated by evaluating the Company’s historical volatility data. The risk-free interest rate on the measurement
date is based on U.S. Treasury constant maturity rates for a period approximating the expected life of the award. The Company historically
has not paid dividends and it does not expect to pay dividends in the foreseeable future and, therefore, the expected dividend
rate is zero.
Restricted Stock
|
|
|
Number of
shares
|
|
|
Weighted
Average
Fair Value at
Grant Date
|
|
|
Weighted Average
Remaining
Contractual Life
(in years)
|
|
|
Unvested balance as of December 31, 2011
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
Granted
|
|
|
194,805
|
|
|
|
0.92
|
|
|
|
—
|
|
|
Vested
|
|
|
(194,805
|
)
|
|
|
0.92
|
|
|
|
—
|
|
|
Unvested balance as of December 31, 2012
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
|
|
Number of
shares
|
|
|
Weighted
Average
Fair Value at
Grant Date
|
|
|
Weighted Average
Remaining
Contractual Life
(in years)
|
|
|
Unvested balance as of December 31, 2012
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
Granted
|
|
|
50,000
|
|
|
|
1.97
|
|
|
|
—
|
|
|
Vested(1)
|
|
|
(50,000
|
)
|
|
|
1.97
|
|
|
|
—
|
|
|
Unvested balance as of December 31, 2013
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
|
(1)
|
Vested shares included 50,000 shares of restricted common
stock issued in the year ended December 31, 2013 for which final vesting of 32,500 shares was approved by the Company’s
compensation committee in March 2014.
|
The following table summarizes the range
of assumptions utilized in the Black-Scholes-Merton option-pricing model for the valuation of stock options granted during the
years ended December 31, 2013 and 2012.
|
|
|
Years Ended December 31,
|
|
|
|
|
2013
|
|
|
2012
|
|
|
Range of values:
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Expected volatility
|
|
|
72.16
|
%
|
|
|
76.49
|
%
|
|
|
76.49
|
%
|
|
|
127.83
|
%
|
|
Expected dividends
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Expected term (in years)
|
|
|
3.73
|
|
|
|
9.70
|
|
|
|
3.73
|
|
|
|
9.97
|
|
|
Risk free rate
|
|
|
0.55
|
%
|
|
|
2.83
|
%
|
|
|
0.56
|
%
|
|
|
1.95
|
%
|
For stock-based compensation accrued to
employees and non-employee directors, the Company recognizes stock-based compensation expense for all service-based awards with
graded vesting schedules on the straight-line basis over the requisite service period for the entire award. Initial accruals of
compensation expense are based on the estimated number of shares for which requisite service is expected to be rendered. Estimates
are revised if subsequent information indicates that forfeitures will differ from previous estimates and the cumulative effect
on compensation cost of a change in the estimated forfeitures is recognized in the period of the change.
For non-employee awards, the Company re-measures
compensation cost each period until the service condition is complete and recognizes compensation cost on the straight-line basis
over the requisite service period.
The Company estimates forfeitures and recognizes
compensation cost only for those awards expected to vest assuming all awards would vest and reverses recognized compensation cost
for forfeited awards when the awards are actually forfeited.
For awards with service conditions and
graded vesting that were granted prior to the adoption of ASC 718, the Company estimates the requisite service period and the number
of shares expected to vest, and recognizes compensation expense for each tranche on the straight-line basis over the estimated
requisite service period.
|
|
Note 13.
|
Impairment of Long-Lived Assets
|
The Company reviews long-lived assets for
impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In
such instance, the Company estimates the undiscounted future cash flows (excluding interest) resulting from the use of the asset
and its ultimate disposition. If the sum of the undiscounted cash flows (excluding interest) is less than the carrying value, the
Company recognizes an impairment loss, measured as the amount by which the carrying value exceeds the fair value of the assets.
For the year ended December 31, 2013,
the Company recorded an impairment charge of approximately $2.6 million primarily related to the write-down of the building infrastructure
and related gaming assets for its Dreamworld Casino (Pailin) operations.
For the year ended December 31, 2012,
the Company recorded an impairment charge of approximately $339,000 primarily related to the write-off of non-redeployable EGMs
following the termination of slot contracts for non-performing venues during the year.
The following table reflects the components
of the impairment of long-lived assets included in the consolidated statements of comprehensive income.
|
|
|
Years ended December 31,
|
|
|
(amounts in millions)
|
|
2013
|
|
|
2012
|
|
|
Non-performing EGMs
|
|
$
|
0.1
|
|
|
$
|
0.3
|
|
|
Building infrastructure and related gaming assets
|
|
|
2.5
|
|
|
|
—
|
|
|
Total impairment charges
|
|
$
|
2.6
|
|
|
$
|
0.3
|
|
|
|
Note 14.
|
Related Party Transactions
|
Effective January 1, 2010, the Company
began sub-leasing office space from Melco Services Limited, a wholly-owned subsidiary of Melco International Development Limited,
which is also the parent of the Company’s principal shareholder, EGT Entertainment Holding. This sub-lease expired at the
end of March 2013 and, subsequently, the Company moved its principal executive office to the premises of the new Dolphin Hong Kong.
The relocation of the Company’s principal executive office serves to minimize costs and improve oversight of the gaming products
operations.
On April 21, 2008, the Company entered
into a Trade Credit Facility Agreement (the “Facility Agreement”) with Elixir International Limited, a company which
used to be a wholly-owned subsidiary of EGT Entertainment Holding, the Company’s principal shareholder. Upon entering into
the Agreement, the Company issued the first note pursuant to the terms of the Facility Agreement in the principal amount of $15.0
million. This amount extinguished a then trade payable of an equivalent amount to Elixir International with respect to EGMs
previously acquired.
As a result of the disposal of Elixir International
by EGT Entertainment Holding, Elixir International Limited assigned and novated all its rights and obligations under the Facility
Agreement and the related promissory note (as amended) to EGT Entertainment Holding in April 2010.
Subsequent to its origination, the Facility
Agreement was amended three times, mostly recently on May 25, 2010 on which date the Company issued a new note to replace
the previous terms. Under these most recent terms, the Company paid total principal and interest of approximately $6.2 million
and $143,000, respectively in equal monthly installments to EGT Entertainment Holding for the year ended December 31, 2012. As
of December 31, 2012, the notes payable to EGT Entertainment Holding were fully settled.
Significant revenues, purchases and expenses
arising from transactions with related parties consisted of the following:
|
|
|
Years ended December 31,
|
|
|
(amounts in thousands)
|
|
2013
|
|
|
2012
|
|
|
EGT Entertainment Holding
|
|
|
|
|
|
|
|
|
|
Principal and interest payments
|
|
$
|
—
|
|
|
$
|
6,354
|
|
|
|
|
|
|
|
|
|
|
|
|
Melco Crown (Macau) Ltd
|
|
|
|
|
|
|
|
|
|
Trade sales of gaming products
|
|
$
|
(941
|
)
|
|
$
|
(1,309
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Melco Services Limited
|
|
|
|
|
|
|
|
|
|
Technical services
|
|
$
|
10
|
|
|
$
|
32
|
|
|
Office rental
|
|
$
|
46
|
|
|
$
|
150
|
|
|
|
|
|
|
|
|
|
|
|
|
Golden
Future (Management Services) Ltd
|
|
|
|
|
|
|
|
|
|
Management services
|
|
$
|
146
|
|
|
$
|
—
|
|
Melco Services Limited is a wholly owned
subsidiary of Melco International Development Limited, which owns 38.1% of Entertainment Gaming Asia Inc.
Melco International Development Limited
owns 33.6% of Melco Crown Entertainment Limited, which owns 90% of Melco Crown (Macau) Limited.
Golden Future (Management Services) Limited is a wholly owned
subsidiary of Melco Crown (Macau) Limited.
The components of the provision for income
taxes consisted of the following:
|
|
|
Years ended December 31,
|
|
|
(amounts in thousands)
|
|
2013
|
|
|
2012
|
|
|
Federal — deferred
|
|
$
|
(59
|
)
|
|
$
|
(57
|
)
|
|
State
|
|
|
—
|
|
|
|
—
|
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
—
|
|
|
|
—
|
|
|
Deferred
|
|
|
(82
|
)
|
|
|
138
|
|
|
Total tax (expenses)/benefits
|
|
$
|
(141
|
)
|
|
$
|
81
|
|
The reconciliation of the statutory federal
income tax rate and the Company’s effective tax rates consisted of the following:
|
|
|
Years Ended December 31,
|
|
|
(amounts in thousands)
|
|
2013
|
|
|
2012
|
|
|
Federal tax expense at statutory rates
|
|
$
|
1,718
|
|
|
$
|
(573
|
)
|
|
Difference in jurisdictional tax rates
|
|
|
(34
|
)
|
|
|
723
|
|
|
Expense not deductible for tax
|
|
|
(46
|
)
|
|
|
(600
|
)
|
|
Income not subject to tax
|
|
|
802
|
|
|
|
1,346
|
|
|
Adjustment of provision to tax return
|
|
|
(1,029
|
)
|
|
|
(473
|
)
|
|
Change in valuation allowances
|
|
|
(965
|
)
|
|
|
(1,769
|
)
|
|
Change in unrecognized tax benefits
|
|
|
(535
|
)
|
|
|
1,362
|
|
|
Other
|
|
|
(52
|
)
|
|
|
65
|
|
|
Total tax (expenses)/benefits
|
|
$
|
(141
|
)
|
|
$
|
81
|
|
Consolidated (loss)/income from continuing
operations before taxes for domestic and international operations consisted of the following:
|
|
|
Years Ended December 31,
|
|
|
(amounts in thousands)
|
|
2013
|
|
|
2012
|
|
|
Domestic
|
|
$
|
(8,147
|
)
|
|
$
|
(3,796
|
)
|
|
International
|
|
|
3,093
|
|
|
|
5,218
|
|
|
(Loss)/income from continuing operations before income tax
|
|
$
|
(5,054
|
)
|
|
$
|
1,422
|
|
The primary tax affected components of
the Company’s deferred tax assets/(liabilities) consisted of the following:
|
|
|
December 31,
|
|
|
(amounts in thousands)
|
|
2013
|
|
|
2012
|
|
|
Deferred tax assets - current
|
|
|
|
|
|
|
|
Prepaid commission agreement
|
|
$
|
1,277
|
|
|
$
|
—
|
|
|
Depreciation and impairment
|
|
|
3,580
|
|
|
|
4,792
|
|
|
Other
|
|
|
337
|
|
|
|
450
|
|
|
Less: Valuation allowances
|
|
|
(5,194
|
)
|
|
|
(5,226
|
)
|
|
|
|
|
—
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets – non current
|
|
|
|
|
|
|
|
|
|
Net operating losses
|
|
|
60,023
|
|
|
|
59,712
|
|
|
Stock options
|
|
|
840
|
|
|
|
571
|
|
|
Less: Valuation allowances
|
|
|
(60,863
|
)
|
|
|
(60,094
|
)
|
|
|
|
|
—
|
|
|
|
189
|
|
|
Deferred tax liabilities – non current
|
|
|
|
|
|
|
|
|
|
Acquisition of intangibles
|
|
|
(183
|
)
|
|
|
(141
|
)
|
|
Other
|
|
|
(16
|
)
|
|
|
—
|
|
|
Net deferred tax (liabilities)/assets
|
|
$
|
(199
|
)
|
|
$
|
64
|
|
Domestic operating loss
carryforwards were approximately $174.2 million and $172.7 million for the years ended December 31, 2013 and 2012,
respectively, which are subject to limitations under Section 382 of the Internal Revenue Code. These domestic operating
losses began to expire in 2011. The Company expects to utilize the $174.2 million domestic operating loss to offset against
corporate income tax payable in the United States, if the domestic operating loss remains unexpired at the time when the
Company is subject to corporate income tax in the United States. Operating loss carryforwards of foreign subsidiaries were
approximately $4.6 million and $3.4 million, respectively for the years ended December, 31, 2013 and 2012. The
Company’s net operating losses have been fully reserved. These foreign operating losses began to expire in 2011 and for
Hong Kong, the operating losses can be carried forward indefinitely.
As of December 31, 2013, there
were valuation allowances of approximately $61.3 million and $4.7 million, respectively, relating to pre-Quasi-Reorganization
and post-Quasi-Reorganization periods. Valuation allowances included approximately $61.3 million for which subsequently
recognized tax benefits will be credited directly to additional paid-in capital. Valuation allowances were provided on the
domestic and foreign operating loss carry forwards and other deferred tax assets because management believes these assets did
not meet the “more likely than not” criteria for recognition under ASC 740.
Undistributed earnings of the
Company’s foreign subsidiary amounted to approximately $21.7 million as of December 31, 2013. Those earnings were
considered to be permanently reinvested; accordingly, no provision for withholding taxes has been provided thereon. Upon
repatriation of those earnings, in the form of dividends or otherwise, the Company would be subject to both U.S. income taxes
(subject to an adjustment for foreign tax credits) and withholding taxes payable to the various foreign countries.
Determination of the amount of unrecognized deferred U.S. income tax liability is not practicable due to the complexities
associated with its hypothetical calculation; however, unrecognized foreign tax credit carryforwards would be available to
reduce some portion of the U.S. liability. Withholding taxes of approximately $3.0 million would be payable upon remittance of all
previously unremitted earnings as of December 31, 2013.
A reconciliation of the beginning and ending
amounts of unrecognized tax benefits consisted of the following:
|
(amounts in thousands)
|
|
|
Balance at January 1, 2012
|
|
$
|
5,055
|
|
|
Additions based on tax positions related to the current year
|
|
|
57
|
|
|
Reductions for tax positions of
prior years
|
|
|
(1,439
|
)
|
|
Balance at December 31, 2012
|
|
$
|
3,673
|
|
|
Additions based on tax positions related to the current year
|
|
|
430
|
|
|
Reductions for tax positions of
prior years
|
|
|
(82
|
)
|
|
Balance at December 31, 2013
|
|
$
|
4,021
|
|
The amount of uncertain tax benefits as
of December 31, 2013 that would affect the effective income tax rate if recognized is approximately $282,000. It is possible
that the amount of unrecognized tax benefits will change in the next twelve months, however, an estimate of the range of the possible
changes cannot be made at this time.
The Company recognizes interest and penalties,
if any, related to unrecognized tax benefits in the provision for income taxes in the statements of comprehensive income. During
the year ended December 31, 2013, the Company recorded interest and penalties of approximately $60,000. As of December 31,
2013, the Company had interest and penalties of approximately $304,000 accrued in the consolidated balance sheet.
The Company has been subjected to income
tax examinations by tax authorities in jurisdictions in which it operates. During the years ended December 31, 2011 and 2012, the
United States Internal Revenue Service (the “IRS”) conducted an audit of the Company’s 2008 and 2009 tax returns
in the United States. On January 23, 2013, the IRS formally notified the Company that it had completed the review of the examination
of the above-mentioned years with no changes to the Company’s tax position.
The Company’s 2009 to 2013 Australian income tax returns remain open to examination by the
Australian Taxation Office. The Company’s 2010 to 2013 Cambodian income tax returns remain open to examination by the
General Department of Taxation. The Company’s 2010 to 2013 Philippines income tax returns remain open to examination
by the Philippines Bureau of Internal Revenue. The Company’s 2007 to 2013 Hong Kong income tax returns remain open to examination
by the Hong Kong Inland Revenue Department
|
|
Note 16.
|
Discontinued Operations
|
From July 2006 until March 2013, the Company
conducted the development, manufacture and sale of gaming chips and plaques from its subsidiary, Dolphin Australia. It also conducted
the development, manufacture and sale of non-gaming plastic products for a number of industries, including the automotive industry,
from the Melbourne facility.
On February 22, 2013, the Company entered
into a Share Sale Agreement with the then general manager of the Dolphin Australia operations, pursuant to which it agreed to sell
him the portion of its business dedicated to the non-gaming plastic products, mainly automotive parts. The sale was completed on
March 28, 2013. In connection with the sale of non-gaming operations, the Company relocated its gaming products operations, which
included gaming chips and plaques, from Melbourne, Australia to Hong Kong. Commercial production in the new facility commenced
in May 2013.
Prior to the completion of the sale, the
Company transferred out of Dolphin Australia to Dolphin Hong Kong, both of which are subsidiaries wholly-owned by the Company,
all inventory on hand and all assets and operations relating to the Company’s gaming chips and plaques operations, including
all trademarks, patent rights and other intellectual property.
The purchase price received pursuant to
the Share Sale Agreement was 350,000 Australian dollars (AUD). The Company also agreed to assume Dolphin Australia’s liabilities
for (i) severance under Australian labor laws for those employees to be terminated by Dolphin Australia as part of the transactions,
approximately $750,000, (ii) the lease for the Melbourne facility through the end of its present term expiring in January 2014,
net of sub-lease income, approximately $350,000, and (iii) all Dolphin Australia payables, net of receivables, relating to both
gaming and non-gaming operations up to March 28, 2013.
The buyer owed the Company $1.1 million
for the settlement of working capital related to the sale of the non-gaming Dolphin assets. As of December 31, 2013, the outstanding
balance had been fully settled.
As part of the sale transaction, the Company
also agreed to grant Dolphin Australia a non-transferable, substantially royalty-free license to utilize certain trademarks and
patent rights in connection with Dolphin Australia’s manufacture and sale of plastic products for the non-gaming industries.
The following table details selected financial
information for the discontinued operations in the consolidated statements of comprehensive income.
|
|
|
December 31,
|
|
|
(amounts in thousands)
|
|
2013
|
|
|
2012
|
|
|
Income/(loss) from operations
|
|
$
|
188
|
|
|
$
|
(25
|
)
|
|
Loss on disposal
|
|
|
(2,442
|
)
|
|
|
—
|
|
|
Other income (1)
|
|
|
146
|
|
|
|
288
|
|
|
Other expense (2)
|
|
|
(55
|
)
|
|
|
—
|
|
|
Income tax benefit (3)
|
|
|
28
|
|
|
|
—
|
|
|
(Loss)/income from discontinued operations, net of tax
|
|
$
|
(2,135
|
)
|
|
$
|
263
|
|
|
|
(1)
|
Other income represented recognized government grant income from discontinued operations.
|
|
|
(2)
|
Other expense represented a currency exchange loss from discontinued operations.
|
|
|
(3)
|
Income tax benefit represented a reversal of previously recognized uncertain tax benefits.
|
|
|
Note 17.
|
Commitments and Contingencies
|
Leases
The Company currently leases office spaces
and warehouse facilities in other locations including Hong Kong, Cambodia and the Philippines and certain office equipment under
non-cancelable operating leases with remaining terms in excess of one year.
Future minimum lease payment commitments,
net of any sublease proceeds and including scheduled escalation provisions as of December 31, 2013 under the leases were as
follows:
|
|
|
Operating
Leases
|
|
|
(amounts in thousands)
|
|
Total
Payments
|
|
|
Sublease
Proceeds
|
|
|
Net
Payments
|
|
|
2014
|
|
|
764
|
|
|
|
(17
|
)
|
|
|
747
|
|
|
2015
|
|
|
702
|
|
|
|
—
|
|
|
|
702
|
|
|
2016
|
|
|
149
|
|
|
|
—
|
|
|
|
149
|
|
|
2017
|
|
|
63
|
|
|
|
—
|
|
|
|
63
|
|
|
2018
|
|
|
60
|
|
|
|
—
|
|
|
|
60
|
|
|
Thereafter
|
|
|
105
|
|
|
|
—
|
|
|
|
105
|
|
Rent expenses on all operating leases were
approximately $448,000 and $765,000 for the years ended December 31, 2013 and 2012, respectively.
Legal Matters
Prime Mover/Strata Litigation
On March 26, 2010, a complaint (as
subsequently amended on May 28, 2010 and December 20, 2011) (the “Complaint”) was filed by certain of the Company's
shareholders including Prime Mover Capital Partners L.P., Strata Fund L.P., Strata Fund Q.P. L.P., and Strata Offshore Fund, Ltd
(collectively, the “Plaintiffs”) in the United States District Court for the Southern District of New York against
certain defendants including the Company and certain other current and former directors and officers. The case number is 12-4393.
On December 18, 2013, the Second Circuit
affirmed by Summary Order the District Court’s September 28, 2012 judgment granting the dismissal of the Plaintiffs’
Complaint. Since the Plaintiffs did not request a rehearing of the Summary Order in the permitted time, the civil action was concluded
with all claims dismissed against all parties.
|
|
Note 18.
|
(Loss)/ Earnings Per Share
|
Computation of the basic and diluted (loss)/earnings per share
from continuing operations consisted of the following:
|
|
|
Years Ended December 31,
|
|
|
|
|
2013
|
|
|
2012
|
|
(amounts in thousands, except per share
data)
|
|
Loss
|
|
|
Number of
Shares
|
|
|
Per Share
Amount
|
|
|
Income
|
|
|
Number of
Shares
|
|
|
Per Share
Amount
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/income attributable to equity shareholders
|
|
$
|
(5,195
|
)
|
|
|
30,024
|
|
|
$
|
(0.17
|
)
|
|
$
|
1,503
|
|
|
|
29,922
|
|
|
$
|
0.05
|
|
|
Effect of dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive stock options/restricted shares (1)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
885
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/income attributable to equity shareholders plus assumed conversion
|
|
$
|
(5,195
|
)
|
|
|
30,024
|
|
|
$
|
(0.17
|
)
|
|
$
|
1,503
|
|
|
|
30,807
|
|
|
$
|
0.05
|
|
|
|
(1)
|
For the year ended December 31, 2013, there were no differences in diluted loss per share from
basic loss per share as the assumed exercise of common stock equivalents would have an anti-dilutive effect due to losses.
|
Outstanding stock options
for 756,864 and 425,900 shares of common stock
were excluded from the calculation of diluted earnings per share
for the years ended December 31, 2013 and 2012, respectively as their effect would have been anti-dilutive.
|
|
Note 19.
|
Accumulated Other Comprehensive Income
|
The accumulated balances in respect of
other comprehensive income consisted of the following:
|
(amounts in thousands)
|
|
Defined Benefit
Pension Plan
|
|
|
Foreign
Currency
Translation
|
|
|
Accumulated
Other
Comprehensive
Income
|
|
|
Balances, January 1, 2012
|
|
$
|
(14
|
)
|
|
$
|
573
|
|
|
$
|
559
|
|
|
Current period other comprehensive income
|
|
|
76
|
|
|
|
294
|
|
|
|
370
|
|
|
Balances, December 31, 2012
|
|
|
62
|
|
|
|
867
|
|
|
|
929
|
|
|
Current period other comprehensive income/(loss)
|
|
|
37
|
|
|
|
(256
|
)
|
|
|
(219
|
)
|
|
Amounts reclassified from accumulated other comprehensive income to net loss on disposal of subsidiary (1)
|
|
|
—
|
|
|
|
32
|
|
|
|
32
|
|
|
Balances, December 31, 2013
|
|
$
|
99
|
|
|
$
|
643
|
|
|
$
|
742
|
|
|
|
(1)
|
Amounts represented a reclassification from accumulated other comprehensive income to net loss
from discontinued operations in Note 16 on disposal of a subsidiary.
|