Item 1. Financial
Statements
ENTERTAINMENT GAMING ASIA INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(amounts in thousands, except per share
data)
|
|
June 30, 2014
|
|
|
December 31, 2013
|
|
|
|
(unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
4,664
|
|
|
$
|
5,301
|
|
Accounts receivable, net
|
|
|
906
|
|
|
|
922
|
|
Amount due from a related party
|
|
|
—
|
|
|
|
108
|
|
Other receivables
|
|
|
103
|
|
|
|
453
|
|
Inventories
|
|
|
3,057
|
|
|
|
1,663
|
|
Assets held for sale
|
|
|
273
|
|
|
|
—
|
|
Prepaid expenses and other current assets
|
|
|
723
|
|
|
|
443
|
|
Total current assets
|
|
|
9,726
|
|
|
|
8,890
|
|
|
|
|
|
|
|
|
|
|
Gaming equipment, net
|
|
|
6,872
|
|
|
|
8,171
|
|
Casino contracts
|
|
|
4,218
|
|
|
|
5,429
|
|
Property and equipment, net
|
|
|
9,068
|
|
|
|
7,857
|
|
Goodwill
|
|
|
358
|
|
|
|
353
|
|
Intangible assets, net
|
|
|
755
|
|
|
|
899
|
|
Contract amendment fees
|
|
|
180
|
|
|
|
234
|
|
Prepaids, deposits and other assets
|
|
|
1,849
|
|
|
|
1,797
|
|
Total assets
|
|
$
|
33,026
|
|
|
$
|
33,630
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
637
|
|
|
$
|
840
|
|
Amount due to a related party
|
|
|
20
|
|
|
|
19
|
|
Accrued expenses
|
|
|
1,431
|
|
|
|
2,366
|
|
Customer deposits and other current liabilities
|
|
|
1,863
|
|
|
|
457
|
|
Total current liabilities
|
|
|
3,951
|
|
|
|
3,682
|
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
721
|
|
|
|
742
|
|
Deferred tax liability
|
|
|
199
|
|
|
|
199
|
|
Total liabilities
|
|
|
4,871
|
|
|
|
4,623
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
Common stock, $.001 par value, 75,000,000 shares authorized; 30,102,162 and 30,024,662 shares issued and outstanding
|
|
|
30
|
|
|
|
30
|
|
Additional paid-in-capital
|
|
|
33,298
|
|
|
|
33,156
|
|
Accumulated other comprehensive income
|
|
|
800
|
|
|
|
742
|
|
Accumulated losses
|
|
|
(5,974
|
)
|
|
|
(4,922
|
)
|
Total EGT stockholders’ equity
|
|
|
28,154
|
|
|
|
29,006
|
|
Non-controlling interest
|
|
|
1
|
|
|
|
1
|
|
Total stockholders’ equity
|
|
|
28,155
|
|
|
|
29,007
|
|
Total liabilities and stockholders’ equity
|
|
$
|
33,026
|
|
|
$
|
33,630
|
|
The notes to consolidated financial statements
are an integral part of these consolidated statements.
ENTERTAINMENT GAMING ASIA INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive
Income
(amounts in thousands, except per share
data)
(Unaudited)
|
|
Three-Month Periods Ended June 30,
|
|
|
Six-Month Periods Ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gaming operations
|
|
$
|
4,420
|
|
|
$
|
5,034
|
|
|
$
|
8,303
|
|
|
$
|
9,432
|
|
Gaming products
|
|
|
524
|
|
|
|
162
|
|
|
|
1,335
|
|
|
|
1,589
|
|
Total revenues
|
|
|
4,944
|
|
|
|
5,196
|
|
|
|
9,638
|
|
|
|
11,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of gaming operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gaming property and equipment depreciation
|
|
|
908
|
|
|
|
1,153
|
|
|
|
1,789
|
|
|
|
2,185
|
|
Casino contract amortization
|
|
|
612
|
|
|
|
617
|
|
|
|
1,222
|
|
|
|
1,238
|
|
Other gaming related intangibles amortization
|
|
|
63
|
|
|
|
63
|
|
|
|
126
|
|
|
|
126
|
|
Other operating costs
|
|
|
895
|
|
|
|
869
|
|
|
|
1,740
|
|
|
|
1,670
|
|
Cost of gaming products
|
|
|
925
|
|
|
|
546
|
|
|
|
2,413
|
|
|
|
2,041
|
|
Selling, general and administrative expenses
|
|
|
1,167
|
|
|
|
1,526
|
|
|
|
2,720
|
|
|
|
3,268
|
|
Gain on dispositions
|
|
|
(8
|
)
|
|
|
—
|
|
|
|
(8
|
)
|
|
|
—
|
|
Impairment of assets
|
|
|
19
|
|
|
|
—
|
|
|
|
19
|
|
|
|
—
|
|
Product development expenses
|
|
|
101
|
|
|
|
35
|
|
|
|
156
|
|
|
|
155
|
|
Depreciation and amortization
|
|
|
50
|
|
|
|
47
|
|
|
|
99
|
|
|
|
75
|
|
Total operating costs and expenses
|
|
|
4,732
|
|
|
|
4,856
|
|
|
|
10,276
|
|
|
|
10,758
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) from operations
|
|
|
212
|
|
|
|
340
|
|
|
|
(638
|
)
|
|
|
263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income/(expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense and finance fees
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
(2
|
)
|
|
|
(5
|
)
|
Interest income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4
|
|
Foreign currency gains/(losses)
|
|
|
16
|
|
|
|
(247
|
)
|
|
|
1
|
|
|
|
(172
|
)
|
Other
|
|
|
4
|
|
|
|
7
|
|
|
|
12
|
|
|
|
10
|
|
Total other income/(expenses)
|
|
|
20
|
|
|
|
(241
|
)
|
|
|
11
|
|
|
|
(163
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) from continuing operations before income tax
|
|
|
232
|
|
|
|
99
|
|
|
|
(627
|
)
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expenses
|
|
|
(15
|
)
|
|
|
(7
|
)
|
|
|
(30
|
)
|
|
|
(48
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) from continuing operations
|
|
|
217
|
|
|
|
92
|
|
|
|
(657
|
)
|
|
|
52
|
|
Net loss from discontinued operations, net of tax
|
|
|
(239
|
)
|
|
|
(378
|
)
|
|
|
(395
|
)
|
|
|
(2,846
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to EGT stockholders
|
|
$
|
(22
|
)
|
|
$
|
(286
|
)
|
|
$
|
(1,052
|
)
|
|
$
|
(2,794
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income/(loss), net of tax
|
|
|
99
|
|
|
|
(200
|
)
|
|
|
58
|
|
|
|
(217
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income/(loss) to EGT stockholders
|
|
$
|
77
|
|
|
$
|
(486
|
)
|
|
$
|
(994
|
)
|
|
$
|
(3,011
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings/(loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
|
|
$
|
—
|
|
|
$
|
(0.01
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.09
|
)
|
Earnings/(loss) from continuing operations
|
|
$
|
0.01
|
|
|
$
|
—
|
|
|
$
|
(0.02
|
)
|
|
$
|
—
|
|
Loss from discontinued operations, net of tax
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.09
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
30,013
|
|
|
|
29,975
|
|
|
|
30,016
|
|
|
|
29,975
|
|
Diluted
|
|
|
30,148
|
|
|
|
30,713
|
|
|
|
30,016
|
|
|
|
30,712
|
|
The notes to consolidated financial statements
are an integral part of these consolidated statements.
ENTERTAINMENT GAMING ASIA INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(amounts in thousands)
(Unaudited)
|
|
Six-Month Periods Ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,052
|
)
|
|
$
|
(2,794
|
)
|
Adjustments to reconcile net loss to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Foreign currency gains
|
|
|
—
|
|
|
|
(3
|
)
|
Depreciation of gaming equipment and property and equipment
|
|
|
2,277
|
|
|
|
2,614
|
|
Amortization of casino contracts
|
|
|
1,222
|
|
|
|
1,238
|
|
Amortization of intangible assets
|
|
|
151
|
|
|
|
151
|
|
Amortization of contract amendment fees
|
|
|
54
|
|
|
|
54
|
|
Impairment of property and equipment
|
|
|
19
|
|
|
|
—
|
|
Stock-based compensation expense
|
|
|
141
|
|
|
|
445
|
|
Loss on disposition of subsidiary, including property and equipment
|
|
|
—
|
|
|
|
999
|
|
Gain on disposition of gaming equipment and property and equipment
|
|
|
(3
|
)
|
|
|
—
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable and other receivables
|
|
|
360
|
|
|
|
743
|
|
Inventories
|
|
|
(1,393
|
)
|
|
|
373
|
|
Prepaid expenses and other current assets
|
|
|
(270
|
)
|
|
|
(132
|
)
|
Prepaids, deposits and other assets
|
|
|
(46
|
)
|
|
|
104
|
|
Accounts payable
|
|
|
(349
|
)
|
|
|
(1,107
|
)
|
Amount due from/to related parties
|
|
|
109
|
|
|
|
21
|
|
Accrued expenses and other liabilities
|
|
|
(1,021
|
)
|
|
|
(1,054
|
)
|
Customer deposits and other current liabilities
|
|
|
1,502
|
|
|
|
(29
|
)
|
Net cash provided by operating activities
|
|
|
1,701
|
|
|
|
1,623
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Construction/purchase of property and equipment
|
|
|
(2,027
|
)
|
|
|
(2,401
|
)
|
Purchase of gaming machines and systems
|
|
|
(359
|
)
|
|
|
(3,983
|
)
|
Addition of project costs
|
|
|
—
|
|
|
|
(1,155
|
)
|
Proceeds from sale of subsidiary related to discontinued operations
|
|
|
—
|
|
|
|
365
|
|
Proceeds from sale of gaming equipment and property and equipment
|
|
|
32
|
|
|
|
—
|
|
Net cash used in investing activities
|
|
|
(2,354
|
)
|
|
|
(7,174
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
16
|
|
|
|
(25
|
)
|
Decrease in cash and cash equivalents
|
|
|
(637
|
)
|
|
|
(5,576
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
5,301
|
|
|
|
10,365
|
|
Cash and cash equivalents at end of period
|
|
$
|
4,664
|
|
|
$
|
4,789
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
—
|
|
|
$
|
—
|
|
Income tax paid
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing/financing activities
|
|
|
|
|
|
|
|
|
Purchase of gaming machines and systems
|
|
$
|
—
|
|
|
$
|
659
|
|
The notes to consolidated financial statements
are an integral part of these consolidated statements.
ENTERTAINMENT GAMING ASIA INC. AND SUBSIDIARIES
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 electronic gaming machines (EGMs) placed in premier hotels and other venues in Cambodia and the
Philippines, the development and operation of 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.
The Company owned and operated a casino
under the Dreamworld name in the Pailin Province of Cambodia. On June 1, 2014, the Company ceased operations of the casino in Pailin
and, on June 20, 2014, entered into an agreement to sell 100% of the issued capital shares of Dreamworld Leisure (Pailin) Limited,
a wholly-owned Cambodian subsidiary of the Company established for the purpose of owning and operating the casino. In addition,
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. All related historical revenues and expenses for the casino in Pailin and
the non-gaming plastic products operations have been reclassified as discontinued operations. The accounting policies of these
discontinued operations are consistent with the Company’s policies for the accompanying consolidated financial statements.
Basis of Presentation
These consolidated financial statements
are prepared pursuant to generally accepted accounting principles in the United States for interim financial information and with
the instructions to Form 10-Q and Rule 8-03 of Regulation S-X promulgated by the Securities and Exchange Commission (“SEC”)
and reflect all adjustments, consisting of normal recurring adjustments and other adjustments, which management believes are necessary
to fairly present the financial position, results of operations and cash flows of the Company, for the respective periods presented.
The results of operations for an interim period are not necessarily indicative of the results that may be expected for any other
interim period or the year as a whole. The accompanying unaudited consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes thereto in the Company’s Annual Report on Form 10-K for the year
ended December 31, 2013, filed with the SEC on March 31, 2014. Certain previously reported amounts have been reclassified
to conform to the current period presentation.
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.
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 their carrying amount or fair value less costs to sell. Any gain or loss from disposal of
a business, together with the results of its 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 periods 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 June 30, 2014, the Company had deposits with financial institutions in excess of Federal Deposit
Insurance Corporation (FDIC) insured limits by approximately $4.4 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.
Long-Lived Assets
The Company accounts for impairment of
long-lived assets in accordance with Financial Accounting Standards Board (FASB) 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. Impairment charges of approximately $19,000 were recognized for long-lived assets for
the three-month and six-month periods ended June 30, 2014. There were no impairment charges for long-lived assets for the three-month
and six-month periods ended June 30, 2013.
Prepaids, Deposits and Other Assets
Prepaids, deposits and other assets consist
primarily of prepaid leases, prepaid value-added taxes in foreign countries, prepayments to suppliers, rental and utilities and
other deposits.
Gaming Equipment
Gaming equipment consists primarily of
EGMs and systems. Gaming equipment is stated at cost. The Company depreciates new EGMs and systems over a five-year useful life
and depreciates refurbished EGMs and systems over a three-year useful life once placed in service. Depreciation of gaming equipment
of approximately $758,000 and $1.0 million and $1.5 million and $2.0 million was included in cost of gaming operations in the consolidated
statements of comprehensive income for the three-month and six-month periods ended June 30, 2014 and 2013, 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
ten 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 $150,000 and $138,000 and $297,000 and $174,000 was included in the cost of gaming operations in the consolidated
statements of comprehensive income for the three-month and six-month periods ended June 30, 2014 and 2013, respectively.
Depreciation of property and equipment
of approximately $185,000 and $67,000 and $321,000 and $108,000 was included in cost of gaming products in the consolidated statements
of comprehensive income for the three-month and six-month periods ended June 30, 2014 and 2013, respectively.
Goodwill and Intangible Assets, Including
Casino Contracts
Intangible assets consist of patents, trademarks,
technical know-how, 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 $612,000 and $617,000 and $1.2 million and $1.2 million for the three-month and six-month periods
ended June 30, 2014 and 2013, respectively. Amortization expenses related to other gaming related intangibles were approximately
$63,000 and $63,000 and $126,000 and $126,000 for the three-month and six-month periods ended June 30, 2014 and 2013, 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 $7,000 and $7,000 and $13,000 and $13,000 for the three-month and six-month
periods ended June 30, 2014 and 2013, 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 $6,000 and $6,000
and $12,000 and $12,000 for the three-month and six-month periods ended June 30, 2014 and 2013, 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 future 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 three-month and six-month periods ended June 30, 2014 and 2013, respectively.
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. See Note 16.
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 gaming 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 unless
collection is not reasonably assured, in which case revenues are recognized when the payment for net winnings is received. All
slot operations revenues were recognized as earned during the three-month and six-month periods ended June 30, 2014 and 2013.
Commitment fees paid to the venue operators
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
$180,000 and $234,000 as of June 30, 2014 and December 31, 2013, respectively.
For the discontinued 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 jackpot liabilities
for its slot machine base and progressive jackpots as regulations do not prohibit removal of gaming machines from the gaming floor
without payment of the 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 earned recurring gaming revenue through leasing table game equipment and providing casino management services to gaming operators
within its casino property. Revenues from gaming table leasing arrangements are recognized as earned over the contractual terms
of the arrangement between the Company and the gaming promoters and are included in discontinued operations.
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.
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 expenses totaled approximately $69,000 and $198,000 and $141,000 and $445,000 for the three-month and six-month periods
ended June 30, 2014 and 2013, respectively.
Product Development
Product development expenses are expensed
as incurred. Employee related costs associated with product development are included in product development expenses. Product development
expenses were approximately $101,000 and $35,000 and $156,000 and $155,000 for the three-month and six-month periods ended June 30,
2014 and 2013, respectively. Product development expenses increased in the three-month period ended June 30, 2014 due to increased
efforts to develop new products and security features for the Company’s gaming products business in the three-month period
ended June 30, 2014. Product development expenses were essentially unchanged for the six-month period ended June 30, 2014.
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. The Company had no capital leases as of June 30, 2014
and December 31, 2013.
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.
Earnings/(Loss) per Share
Basic earnings/(loss) per share are computed
by dividing the reported net earnings/(loss) by the weighted average number of shares of common stock outstanding during the period.
Diluted 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 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 also U.S. dollars ("US$"),
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 statements of comprehensive income.
Below is a summary of closing exchange
rates as of June 30, 2014 and December 31, 2013, and average exchange rates for the three-month and six-month periods ended June
30, 2014 and 2013, respectively.
(US$1 to foreign currency)
|
|
June 30, 2014
|
|
|
December 31, 2013
|
|
Australian dollar
|
|
|
1.06
|
|
|
|
1.13
|
|
Hong Kong dollar
|
|
|
7.75
|
|
|
|
7.75
|
|
Philippine peso
|
|
|
43.77
|
|
|
|
44.45
|
|
Thai baht
|
|
|
32.52
|
|
|
|
32.92
|
|
|
|
Three-Month Periods Ended June 30,
|
|
|
Six-Month Periods Ended June 30,
|
|
(US$1 to foreign currency)
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Australian dollar
|
|
|
1.07
|
|
|
|
1.01
|
|
|
|
1.09
|
|
|
|
0.99
|
|
Hong Kong dollar
|
|
|
7.75
|
|
|
|
7.76
|
|
|
|
7.76
|
|
|
|
7.76
|
|
Philippine peso
|
|
|
44.18
|
|
|
|
41.90
|
|
|
|
44.56
|
|
|
|
41.37
|
|
Thai baht
|
|
|
32.51
|
|
|
|
29.95
|
|
|
|
32.61
|
|
|
|
29.93
|
|
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 June 30, 2014, the fair values
of cash and cash equivalents, accounts receivable and accounts payable approximate their 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 does not accrue any guarantee liabilities as of the balance sheet dates.
Recent Accounting Pronouncements
In April 2014, the FASB issued Accounting
Standards Update No. 2014-08 (ASU 2014-08) “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment
(Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity." ASU 2014-08 raises
the threshold for a disposal to qualify as a discontinued operation and requires new disclosures of both discontinued operations
and certain other disposals that do not meet the definition of a discontinued operation. It is effective for annual periods beginning
on or after December 15, 2014. Early adoption is permitted but only for disposals that have not been reported in financial statements
previously issued. We do not expect the impact of the adoption of ASU 2014-08 to be material to our consolidated financial statements.
In May 2014, the FASB issued Accounting
Standards Update No. 2014-09 (ASU 2014-09) "Revenue from Contracts with Customers." ASU 2014-09 supersedes the revenue
recognition requirements in “Revenue Recognition (Topic 605)”, and requires entities to recognize revenue when it
transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to
be entitled to in exchange for those goods or services. ASU 2014-09 is effective for annual reporting periods beginning after
December 15, 2016, including interim periods within that reporting period. Early adoption is not permitted. We are currently in
the process of evaluating the impact of the adoption of ASU 2014-09 on our consolidated financial statements.
The Company currently conducts business
in two operating segments: (i) gaming operations, which include EGM participation operations; and (ii) gaming products,
which consist of the design, manufacture and distribution of gaming chips and plaques. The Company owned and operated a casino
in the Pailin Province of Cambodia. In June 2014, the Company ceased operations of the casino and entered into an agreement to
sell 100% of the issued capital shares of Dreamworld Leisure (Pailin) Limited, a wholly-owned Cambodian subsidiary of the Company
established for the purpose of owning and operating the casino. 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. All
the related historical revenues and expenses for the casino in Pailin and non-gaming plastic products operations have been reclassified
as discontinued operations. The accounting policies of these discontinued operations are consistent with the Company’s policies
for the accompanying consolidated financial statements.
|
|
Three-Month Periods Ended June 30,
|
|
|
Six-Month Periods Ended June 30,
|
|
(amounts in thousands)
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gaming operations
|
|
$
|
4,420
|
|
|
$
|
5,034
|
|
|
$
|
8,303
|
|
|
$
|
9,432
|
|
Gaming products
|
|
|
524
|
|
|
|
162
|
|
|
|
1,335
|
|
|
|
1,589
|
|
Total revenues
|
|
$
|
4,944
|
|
|
$
|
5,196
|
|
|
$
|
9,638
|
|
|
$
|
11,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income/(loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gaming operations gross margin
|
|
$
|
1,931
|
|
|
$
|
2,332
|
|
|
$
|
3,415
|
|
|
$
|
4,213
|
|
Gaming products gross margin
|
|
|
(401
|
)
|
|
|
(384
|
)
|
|
|
(1,078
|
)
|
|
|
(452
|
)
|
Corporate and other operating costs and expenses
|
|
|
(1,318
|
)
|
|
|
(1,608
|
)
|
|
|
(2,975
|
)
|
|
|
(3,498
|
)
|
Total operating income/(loss)
|
|
$
|
212
|
|
|
$
|
340
|
|
|
$
|
(638
|
)
|
|
$
|
263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gaming operations
|
|
$
|
1,597
|
|
|
$
|
1,851
|
|
|
$
|
3,165
|
|
|
$
|
3,583
|
|
Gaming products
|
|
|
219
|
|
|
|
93
|
|
|
|
386
|
|
|
|
147
|
|
Corporate
|
|
|
8
|
|
|
|
10
|
|
|
|
19
|
|
|
|
14
|
|
Total depreciation and amortization
|
|
$
|
1,824
|
|
|
$
|
1,954
|
|
|
$
|
3,570
|
|
|
$
|
3,744
|
|
Geographic segment revenues for the three-month and six-month
periods ended June 30, 2014 and 2013 consisted of the following:
|
|
Three-Month Periods Ended June 30,
|
|
|
Six-Month Periods Ended June 30,
|
|
(amounts in thousands)
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Cambodia
|
|
$
|
3,752
|
|
|
$
|
4,264
|
|
|
$
|
6,895
|
|
|
$
|
7,726
|
|
Macau
|
|
|
137
|
|
|
|
34
|
|
|
|
497
|
|
|
|
700
|
|
Philippines
|
|
|
930
|
|
|
|
898
|
|
|
|
1,864
|
|
|
|
2,259
|
|
Australia
|
|
|
125
|
|
|
|
—
|
|
|
|
316
|
|
|
|
163
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
66
|
|
|
|
173
|
|
|
|
$
|
4,944
|
|
|
$
|
5,196
|
|
|
$
|
9,638
|
|
|
$
|
11,021
|
|
For the three-month and six-month periods
ended June 30, 2014 and 2013, in the gaming operations segment, the largest customer represented 70% and 74% and 69% and 72%,
respectively, of total gaming operations revenue. For the three-month and six-month periods ended June 30, 2014 and 2013,
in the gaming products segment, the largest customer represented 27% and 59% and 24% and 37%, respectively, of total gaming products
sales.
Inventories consisted of the following:
(amounts in thousands)
|
|
June 30, 2014
|
|
|
December 31, 2013
|
|
|
|
(Unaudited)
|
|
|
|
|
Raw materials (1)
|
|
$
|
1,717
|
|
|
$
|
809
|
|
Work-in-process (1)
|
|
|
1,182
|
|
|
|
342
|
|
Finished goods
|
|
|
31
|
|
|
|
367
|
|
Spare parts and supplies
|
|
|
127
|
|
|
|
145
|
|
|
|
$
|
3,057
|
|
|
$
|
1,663
|
|
|
(1)
|
Raw materials and work-in-process increased from December 31, 2013 to June 30, 2014 in preparation for gaming chip and plaque orders expected to be delivered in the second half of 2014.
|
|
Note 4.
|
Prepaid Expenses and Other
Current Assets
|
Prepaid expenses and other current assets consisted of the following:
(amounts in thousands)
|
|
June 30, 2014
|
|
|
December 31, 2013
|
|
|
|
(Unaudited)
|
|
|
|
|
Prepayments to suppliers
|
|
$
|
710
|
|
|
$
|
400
|
|
Prepaid leases
|
|
|
13
|
|
|
|
43
|
|
|
|
$
|
723
|
|
|
$
|
443
|
|
Accounts and other receivables consisted of the following:
(amounts in thousands)
|
|
June 30, 2014
|
|
|
December 31, 2013
|
|
|
|
(Unaudited)
|
|
|
|
|
Trade accounts
|
|
$
|
906
|
|
|
$
|
922
|
|
Other
|
|
|
103
|
|
|
|
453
|
|
|
|
|
1,009
|
|
|
|
1,375
|
|
Less: allowance for doubtful accounts
|
|
|
—
|
|
|
|
—
|
|
Net
|
|
$
|
1,009
|
|
|
$
|
1,375
|
|
Gaming equipment is stated at cost. The
major categories of gaming equipment and accumulated depreciation consisted of the following:
|
|
Useful Life
|
|
|
|
|
|
|
(amounts in thousands)
|
|
(years)
|
|
June 30, 2014
|
|
|
December 31, 2013
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
EGMs
|
|
3-5
|
|
$
|
17,731
|
|
|
$
|
17,587
|
|
Systems
|
|
5
|
|
|
1,503
|
|
|
|
1,417
|
|
Other gaming equipment
|
|
3-5
|
|
|
—
|
|
|
|
42
|
|
|
|
|
|
|
19,234
|
|
|
|
19,046
|
|
Less: accumulated depreciation
|
|
|
|
|
(12,362
|
)
|
|
|
(10,875
|
)
|
|
|
|
|
$
|
6,872
|
|
|
$
|
8,171
|
|
Depreciation expense of gaming equipment
of approximately $758,000 and $1.0 million and $1.5 million and $2.0 million was included in cost of gaming operations in the consolidated
statements of comprehensive income for the three-month and six-month periods ended June 30, 2014 and 2013, respectively.
|
Note 7.
|
Property and Equipment
|
Property and equipment are stated at cost
and consisted of the following:
|
|
Useful Life
|
|
|
|
|
|
|
(amounts in thousands)
|
|
(years)
|
|
June 30, 2014
|
|
|
December 31, 2013
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
Equipment, vehicles, furniture and fixtures
|
|
3-10
|
|
$
|
6,174
|
|
|
$
|
4,109
|
|
Land and building
|
|
5
|
|
|
2,928
|
|
|
|
2,949
|
|
Leasehold improvements
|
|
1-5
|
|
|
1,188
|
|
|
|
1,029
|
|
Construction in progress
|
|
N/A
|
|
|
581
|
|
|
|
996
|
|
System development cost
|
|
N/A
|
|
|
201
|
|
|
|
116
|
|
|
|
|
|
|
11,072
|
|
|
|
9,199
|
|
Less: accumulated depreciation
|
|
|
|
|
(2,004
|
)
|
|
|
(1,342
|
)
|
|
|
|
|
$
|
9,068
|
|
|
$
|
7,857
|
|
Depreciation expense of property and equipment
of approximately $150,000 and $138,000 and $297,000 and $174,000 was included in cost of gaming operations in the consolidated
statements of comprehensive income for the three-month and six-month periods ended June 30, 2014 and 2013, respectively.
Depreciation expense of property and equipment
of approximately $185,000 and $67,000 and $321,000 and $108,000 was included in cost of gaming products in the consolidated statement
of comprehensive income for the three-month and six-month periods ended June 30, 2014 and 2013, respectively.
|
Note 8.
|
Goodwill and Intangible
Assets, including Casino Contracts
|
Intangible assets are stated at cost and
consisted of the following:
|
|
Useful Life
|
|
|
|
|
|
|
(amounts in thousands)
|
|
(years)
|
|
June 30, 2014
|
|
|
December 31, 2013
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
Gaming operation agreement
|
|
4-5
|
|
$
|
1,184
|
|
|
$
|
1,178
|
|
Less: accumulated amortization
|
|
|
|
|
(693
|
)
|
|
|
(567
|
)
|
|
|
|
|
|
491
|
|
|
|
611
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
N/A
|
|
|
358
|
|
|
|
353
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents
|
|
5-6
|
|
|
114
|
|
|
|
114
|
|
Less: accumulated amortization
|
|
|
|
|
(72
|
)
|
|
|
(62
|
)
|
|
|
|
|
|
42
|
|
|
|
52
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
5-9
|
|
|
26
|
|
|
|
26
|
|
Less: accumulated amortization
|
|
|
|
|
(11
|
)
|
|
|
(10
|
)
|
|
|
|
|
|
15
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
Technical know-how
|
|
10
|
|
|
261
|
|
|
|
261
|
|
Less: accumulated amortization
|
|
|
|
|
(54
|
)
|
|
|
(41
|
)
|
|
|
|
|
|
207
|
|
|
|
220
|
|
|
|
|
|
|
|
|
|
|
|
|
Casino contracts
|
|
5-6
|
|
|
12,795
|
|
|
|
12,764
|
|
Less: accumulated amortization
|
|
|
|
|
(8,577
|
)
|
|
|
(7,335
|
)
|
|
|
|
|
|
4,218
|
|
|
|
5,429
|
|
|
|
|
|
$
|
5,331
|
|
|
$
|
6,681
|
|
Amortization expense for finite-lived intangible
assets was approximately $687,000 and $693,000 and $1.4 million and $1.4 million for the three-month and six-month periods ended
June 30, 2014 and 2013, respectively.
Goodwill movements during the periods consisted of the following:
(amounts in thousands)
|
|
2014
|
|
|
2013
|
|
|
|
(Unaudited)
|
|
|
|
|
Balance as of January 1
|
|
$
|
353
|
|
|
$
|
380
|
|
Foreign currency translation adjustment
|
|
|
5
|
|
|
|
(27
|
)
|
Balance as of June 30/December 31
|
|
$
|
358
|
|
|
$
|
353
|
|
|
Note 9.
|
Prepaids, Deposits and
Other Assets
|
Prepaids, deposits and other assets consisted of the following:
(amounts in thousands)
|
|
June 30, 2014
|
|
|
December 31, 2013
|
|
|
|
(Unaudited)
|
|
|
|
|
Prepaid taxes
|
|
$
|
1,014
|
|
|
$
|
927
|
|
Prepaid leases
|
|
|
217
|
|
|
|
222
|
|
Prepayments to suppliers
|
|
|
235
|
|
|
|
279
|
|
Deposits on EGM and system orders
|
|
|
92
|
|
|
|
16
|
|
Rentals, utilities and other deposits
|
|
|
291
|
|
|
|
353
|
|
|
|
$
|
1,849
|
|
|
$
|
1,797
|
|
As of June 30, 2014, prepaid leases
consisted of land lease prepayments of approximately $217,000 for a potential gaming development project located in the Kampot
Province of Cambodia.
|
Note 10.
|
Accrued Expenses
|
Accrued expenses consisted of the following:
(amounts in thousands)
|
|
June 30, 2014
|
|
|
December 31, 2013
|
|
|
|
(Unaudited)
|
|
|
|
|
Payroll and related costs
|
|
$
|
252
|
|
|
$
|
601
|
|
Professional fees
|
|
|
388
|
|
|
|
312
|
|
Withholding tax expenses
|
|
|
553
|
|
|
|
551
|
|
Other tax expenses (1)
|
|
|
—
|
|
|
|
482
|
|
Others
|
|
|
238
|
|
|
|
420
|
|
|
|
$
|
1,431
|
|
|
$
|
2,366
|
|
|
(1)
|
Other tax expenses as of December 31, 2013 represented an accrued tax liability related to the Philippines operations resulting from the finalization of the Philippines income tax return for the 2010 year. The accrual was reversed in the three-month period ended June 30, 2014.
|
|
Note 11.
|
Other Liabilities
|
Other liabilities consisted of the following:
(amounts in thousands)
|
|
June 30, 2014
|
|
|
December 31, 2013
|
|
|
|
(Unaudited)
|
|
|
|
|
Tax liabilities
|
|
$
|
689
|
|
|
$
|
659
|
|
Others
|
|
|
32
|
|
|
|
83
|
|
|
|
$
|
721
|
|
|
$
|
742
|
|
|
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 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 from six-months and one-day to over three years and have ten-year contractual terms.
During the six-month period ended June
30, 2014, stock options for the purchase of 225,000 shares of common stock were granted with a weighted average exercise price
of $1.21 and weighted average fair value of $0.67 (2013: $1.18) per share and will vest from six-month and one day to three-year
periods. During the six-month period ended June 30, 2014, 95,000 shares of restricted stock awards with a weighted average fair
value of $1.21 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 or according to the vesting period. 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 six-month period ended June
30, 2014, there were no exercises 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 June 30, 2014, stock options for
the purchase of 936,864 and 20,000 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 June 30, 2014, there were no outstanding
non-plan options to purchase common stock. All previously granted non-plan options had expired by December 31, 2012. The non-plan
options were issued to certain employees and non-employees of EGT Entertainment Holding Limited as approved by the Company’s
stockholders in September 2007 pursuant to the initial closing of the transactions under the Securities Purchase and Product Participation
Agreement dated June 12, 2007 between the Company and EGT Entertainment Holding Limited.
As of June 30, 2014, stock options for
the purchase of 2,399,038 shares of common stock were outstanding under the 2008 Plan.
As of June 30, 2014, 2,949,235 stock options
were exercisable with a weighted average exercise price of $2.12, a weighted average fair value of $0.90 and an aggregate intrinsic
value of approximately $169,000. The total fair value of shares vested during the six-month period ended June 30, 2014 was approximately
$312,000. The total compensation cost related to unvested shares as of June 30, 2014 was approximately $176,000. The amount was
expected to be recognized over 1.8 years.
A summary of all current and expired plans
as of June 30, 2014 and changes during the period then ended are presented in the following table:
Options
|
|
Number of
Options
|
|
|
Weighted Average
Exercise Price
|
|
|
Weighted Average
Remaining Contractual
Life
(in years)
|
|
|
Aggregate
Intrinsic Value
(in thousands)
|
|
Outstanding as of December 31, 2013
|
|
|
3,291,738
|
|
|
$
|
2.11
|
|
|
|
6.13
|
|
|
$
|
738
|
|
Granted
|
|
|
225,000
|
|
|
|
1.21
|
|
|
|
3.78
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Forfeited or expired
|
|
|
(160,836
|
)
|
|
|
2.04
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding as of June 30, 2014
|
|
|
3,355,902
|
|
|
|
2.05
|
|
|
|
5.83
|
|
|
|
169
|
|
Exercisable as of June 30, 2014
|
|
|
2,949,235
|
|
|
$
|
2.12
|
|
|
|
5.38
|
|
|
$
|
169
|
|
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, 2013
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
Granted
|
|
|
95,000
|
|
|
|
1.21
|
|
|
|
1.33
|
|
Vested (1)
|
|
|
(40,000
|
)
|
|
|
1.21
|
|
|
|
0.31
|
|
Unvested balance as of June 30, 2014
|
|
|
55,000
|
|
|
|
1.21
|
|
|
|
1.33
|
|
|
(1)
|
Vested shares included 25,000 shares of restricted common stock issued in 2014 for which final vesting is subject to the approval of Company’s compensation committee.
|
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 and restricted common stock with performance criteria 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, nor does it expect to pay dividends in the foreseeable
future and, therefore, the expected dividend rate is zero.
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
six-month periods ended June 30, 2014 and 2013.
|
|
Six-Month Periods Ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
Range of values:
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
Expected volatility
|
|
|
73.03
|
%
|
|
|
74.03
|
%
|
|
|
73.78
|
%
|
|
|
76.49
|
%
|
Expected dividends
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Expected term (in years)
|
|
|
3.73
|
|
|
|
9.11
|
|
|
|
3.73
|
|
|
|
9.70
|
%
|
Risk free rate
|
|
|
1.16
|
%
|
|
|
2.52
|
%
|
|
|
0.55
|
%
|
|
|
2.45
|
%
|
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 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.
The Company estimates forfeitures and recognizes
compensation cost only for those awards expected to vest assuming all awards would vest and reverse 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.
|
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 Limited. This sub-lease expired
at the end of March 2013 and the Company moved its principal executive office to the premises of the new Hong Kong Dolphin facilities
in April 2013. The relocation of the Company’s principal executive office serves to minimize costs and improve oversight
of its Dolphin operations.
Significant revenues, purchases and expenses
arising from transactions with related parties consisted of the following:
|
|
Three-Month Periods Ended June 30,
|
|
|
Six-Month Periods Ended June 30,
|
|
(amounts in thousands)
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Melco Crown (Macau) Limited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of gaming products
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
135
|
|
|
$
|
630
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MCE Leisure (Philippines) Corporation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of gaming products
|
|
$
|
98
|
|
|
$
|
—
|
|
|
$
|
98
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Melco Services Limited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technical services
|
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
1
|
|
|
$
|
10
|
|
Office rental
|
|
|
—
|
|
|
|
8
|
|
|
|
1
|
|
|
|
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Golden Future (Management Services) Ltd
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management services
|
|
$
|
90
|
|
|
$
|
21
|
|
|
$
|
148
|
|
|
$
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Melco Services Limited is a wholly-owned
subsidiary of Melco International Development Limited, which owns 38.0% of Entertainment Gaming Asia Inc.
Melco International Development Limited
owns 33.6% of Melco Crown Entertainment Limited, which owns 90.0% of Melco Crown (Macau) Limited.
Melco Crown Entertainment Limited owns
68.8% of Melco Crown (Philippines) Resorts Corporation, which owns 100% of MCE Leisure (Philippines) Corporation.
Golden Future (Management Services) Limited is a wholly-owned
subsidiary of Melco Crown (Macau) Limited.
The Company recorded income tax expenses
of $15,000 and $7,000 and $30,000 and $48,000 for the three-month and six-month periods ended June 31, 2014 and 2013, respectively.
The Company’s effective income tax rates were 6.4% and 7.6% and (4.7)% and 48.2% for the three-month and six-month periods
ended June 30, 2014 and 2013, respectively. EGT Cambodia entity and Dreamworld Casino (Pailin) are income tax exempt and only
pay a fixed monthly tax rather than a tax on income.
The fixed obligation tax arrangement is
subject to annual renewal and negotiation and the Company has renewed the fixed obligation tax arrangement for both EGT Cambodia
and Dreamworld Casino (Pailin) for 2014.
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 2011 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 15.
|
Discontinued Operations
|
From July 2006 until March 2013, the Company’s
operations included 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.
From May 2012 until June 2014, the Company
owned and operated a casino in the Pailin Province of Cambodia (“Dreamworld Casino (Pailin)”). Dreamworld Casino (Pailin)
was constructed on land leased from a local land owner and, in consideration, the land owner was entitled to receive a monthly
rental fee in the amount of $5,000 and 20% of the profit before depreciation (the total gross revenue of the casino less any payouts
paid to customers, operating expenses, and gaming and non-gaming taxes on the casino’s revenue). The initial lease term was
20 years, commencing in September 2011, and was subject to renewal by the parties in writing.
On June 1, 2014, the Company
ceased operations of Dreamworld Casino (Pailin). On June 20, 2014, the Company entered into an agreement to sell 100% of the
issued capital shares of Dreamworld Leisure (Pailin) Limited (“DWP”), a wholly-owned Cambodian subsidiary of the
Company established for the purposes of owning and operating Dreamworld Casino (Pailin), to a local Cambodian individual.
In connection with the sale of the issued capital shares of DWP, on June 20, 2014 the Company and its partner in the
operations entered into an agreement to terminate the undertaking agreement and lease agreements with the partner and all
future obligations thereunder including future lease payments owed by the Company.
The sale includes all assets of DWP with
the exception of all electronic gaming machines, certain surveillance equipment and other assets excluded in the agreement and
prohibits any use of the Dreamworld brand name by the buyer. Total consideration paid to the Company by the buyer will be $500,000,
of which $100,000 was paid at the time of entering the agreement and the balance is to be paid in sixteen $25,000 monthly installments
commencing within one month of the signed agreement. The parties expect to complete the sale transaction subject to the buyer’s
receipt of certain government approvals, which is expected within the next few months. The Company intends to recognize the anticipated
gain on the disposal of the entity when the transaction is expected to close.
In compliance with the annual valuation
review of the Dreamworld Casino (Pailin) facility and gaming assets under U.S. Generally Accepted Accounting Principles (GAAP),
the Company had recorded an impairment charge of approximately $2.5 million as of December 31, 2013 related to these operations.
The impairment charge represented the entire capital expenditure incurred by the Company for the property as of December 31, 2013,
with the exception of those assets that the Company believed could be redeployed to other existing properties.
The following table details the significant
components of revenues and loss from discontinued operations, net of income taxes.
|
|
Three-Month Periods Ended June 30,
|
|
|
Six-Month Periods Ended June 30,
|
|
(amounts in thousands)
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Revenues from casino operations
|
|
$
|
12
|
|
|
$
|
907
|
|
|
$
|
228
|
|
|
$
|
2,001
|
|
Revenues from non-gaming products
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,043
|
|
Total revenues from discontinued operations
|
|
$
|
12
|
|
|
|
907
|
|
|
$
|
228
|
|
|
|
4,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax loss from casino operations
|
|
$
|
(239
|
)
|
|
$
|
(476
|
)
|
|
$
|
(395
|
)
|
|
$
|
(765
|
)
|
Pre-tax income/(loss) from non-gaming products
|
|
|
—
|
|
|
|
98
|
|
|
|
—
|
|
|
|
(2,109
|
)
|
Benefit for income taxes related to discontinued operations
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
28
|
|
Loss from discontinued operations, net of tax
|
|
$
|
(239
|
)
|
|
$
|
(378
|
)
|
|
$
|
(395
|
)
|
|
$
|
(2,846
|
)
|
The following table details selected financial
information for the discontinued operations in the consolidated statements of comprehensive income.
|
|
Three-Month Periods Ended June 30,
|
|
|
Six-Month Periods Ended June 30,
|
|
(amounts in thousands)
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Loss from operations
|
|
$
|
(237
|
)
|
|
$
|
(432
|
)
|
|
$
|
(402
|
)
|
|
$
|
(561
|
)
|
Loss on disposal
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,442
|
)
|
Other (1)
|
|
|
(2
|
)
|
|
|
54
|
|
|
|
7
|
|
|
|
129
|
|
Income tax benefit (2)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
28
|
|
Loss from discontinued operations, net of tax
|
|
$
|
(239
|
)
|
|
$
|
(378
|
)
|
|
$
|
(395
|
)
|
|
$
|
(2,846
|
)
|
(1)
|
Other represented foreign currency exchange differentials from Dreamworld Casino (Pailin) discontinued operations and recognized government grant income from Dolphin Australia discontinued operations.
|
(2)
|
Income tax benefit represented a reversal of previously recognized uncertain tax benefits from Dolphin Australia discontinued operations.
|
|
Note 16.
|
Commitments and Contingencies
|
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 of 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 17.
|
Earnings/(Loss) Per
Share
|
Computation of the basic and diluted earnings/(loss) per share
from continuing operations consisted of the following:
|
|
Three-Month Periods Ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
(amounts in thousands, except per share data)
|
|
Income
|
|
|
Number of
Shares
|
|
|
Per Share
Amount
|
|
|
Income
|
|
|
Number of
Shares
|
|
|
Per Share
Amount
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable
to equity shareholders
|
|
$
|
217
|
|
|
|
30,013
|
|
|
|
0.01
|
|
|
$
|
92
|
|
|
|
29,975
|
|
|
$
|
—
|
|
Effect of dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive stock options/restricted
shares
|
|
|
|
|
|
|
135
|
|
|
|
|
|
|
|
|
|
|
|
738
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable
to equity shareholders plus assumed conversion
|
|
$
|
217
|
|
|
|
30,148
|
|
|
|
0.01
|
|
|
$
|
92
|
|
|
|
30,713
|
|
|
$
|
—
|
|
|
|
Six-Month Periods Ended June 30,
|
|
|
|
2014
|
|
|
2013
|
|
(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
|
|
$
|
(657
|
)
|
|
|
30,016
|
|
|
|
(0.02
|
)
|
|
$
|
52
|
|
|
|
29,975
|
|
|
$
|
—
|
|
Effect of dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive stock options/restricted
shares (1)
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
737
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/income
attributable to equity shareholders plus assumed conversion
|
|
$
|
(657
|
)
|
|
|
30,016
|
|
|
|
(0.02
|
)
|
|
$
|
52
|
|
|
|
30,712
|
|
|
$
|
—
|
|
|
(1)
|
There was 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 for the six-month period ended June 30, 2014.
|
For the three-month periods ended June 30,
2014 and 2013, outstanding stock options of 3,093,402 and 2,166,738 shares of common stock were excluded from the calculation of
diluted earnings per share as their effect would be anti-dilutive. For the six-month periods ended June 30, 2014 and 2013,
outstanding stock options of 3,093,402 and 2,166,738 shares of common stock were excluded from the calculation of diluted earnings
per share as their effect would be anti-dilutive.
|
Note 18.
|
Accumulated Other Comprehensive Income
|
The accumulated balances in respect of
other comprehensive income consisted of the following:
(amounts in thousands)
|
|
Unrealized
Actuarial
Income
|
|
|
Foreign
Currency
Translation
|
|
|
Accumulated
Other
Comprehensive
Income
|
|
Balances, January 1, 2013
|
|
$
|
62
|
|
|
$
|
867
|
|
|
$
|
929
|
|
Current period other comprehensive income/(loss)
|
|
|
37
|
|
|
|
(224
|
)
|
|
|
(187
|
)
|
Balances, December 31, 2013
|
|
|
99
|
|
|
|
643
|
|
|
|
742
|
|
Current period other comprehensive income
|
|
|
—
|
|
|
|
58
|
|
|
|
58
|
|
Balances, June 30, 2014
|
|
$
|
99
|
|
|
|
701
|
|
|
|
800
|
|
Item 2. Management’s
Discussion and Analysis of Financial Condition and Results of Operations
CAUTIONARY STATEMENT
The following discussion and analysis should
be read in conjunction with our unaudited consolidated financial statements and the related notes thereto contained elsewhere in
this report. The information contained in this quarterly report on Form 10-Q is not a complete description of our business
or the risks associated with an investment in our common stock. We urge you to carefully review and consider the various disclosures
made by us in this report and in our other reports filed with the Securities and Exchange Commission, or SEC, including our annual
report on Form 10-K for the year ended December 31, 2013, filed with the SEC on March 31, 2014 and subsequent reports
on Form 8-K, which discuss our business in greater detail.
In this report we make, and from time to
time we otherwise make, written and oral statements regarding our business and prospects, such as projections of future performance,
statements of management’s plans and objectives, forecasts of market trends, and other matters that are forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Statements containing the words or phrases “will likely result,” “are expected to,” “will continue,”
“is anticipated,” “estimates,” “projects,” “believes,” “expects,” “anticipates,”
“intends,” “target,” “goal,” “plans,” “objective,” “should”
or similar expressions identify forward-looking statements, which may appear in documents, reports, filings with the Securities
and Exchange Commission, news releases, written or oral presentations made by officers or other representatives made by us to analysts,
stockholders, investors, news organizations and others, and discussions with management and other of our representatives. For such
statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation
Reform Act of 1995.
Our future results, including results related
to forward-looking statements, involve a number of risks and uncertainties. No assurance can be given that the results reflected
in any forward-looking statements will be achieved. Any forward-looking statement speaks only as of the date on which such statement
is made. Our forward-looking statements are based upon assumptions that are sometimes based upon estimates, data, communications
and other information from suppliers, government agencies and other sources that may be subject to revision. Except as required
by law, we do not undertake any obligation to update or keep current either (i) any forward-looking statement to reflect events
or circumstances arising after the date of such statement, or (ii) the important factors that could cause our future results
to differ materially from historical results or trends, results anticipated or planned by us, or which are reflected from time
to time in any forward-looking statement.
There are several important factors that
could cause our future results to differ materially from historical results or trends, results anticipated or planned by us, or
results that are reflected from time to time in any forward-looking statement. Some of these important factors, but not necessarily
all important factors, are included in this Management's Discussion and Analysis of Financial Condition and Results of Operations
and in the section “Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2013
filed with the SEC on March 31, 2014.
We own or have rights to certain trademarks
that we used in connection with our business or products, including, but not limited to, Dolphin™. Other than this trademark,
this report also makes reference to trademarks and trade names of other companies.
Overview
This discussion is intended to provide
the reader with information that will assist in understanding our financial statements, the changes in certain key items in those
financial statements from year to year, and the primary factors that accounted for those changes, as well as how certain accounting
principles affect our financial statements. The discussion also provides information about the financial results of the various
segments of our business to provide a better understanding of how those segments and their results affect our financial condition
and results of operations as a whole. This discussion should be read in conjunction with our consolidated financial statements
and accompanying notes as of and for the three-month and six-month periods ended June 30, 2014 and 2013 included elsewhere
in this report.
We are a gaming company focused on capitalizing
on the growth opportunities in emerging gaming markets of Asia. We generate revenue in two principal ways: gaming operations and
gaming product sales. Our gaming operations comprise slot participation operations in Cambodia and the Philippines through contracts
with venue owners or the development and operations of our own venues under our Dreamworld brand. Our gaming products comprise
the manufacture and sale of gaming chips and plaques under our Dolphin brand and the distribution of gaming products in select
markets for third-party suppliers.
Our consolidated revenue for the three-month
and six-month periods ended June 30, 2014 was approximately $4.9 million and $9.6 million, of which revenue from the gaming operations
and gaming products segments comprised 89% and 11% and 86% and 14%, respectively. This compares to consolidated revenue of approximately
$5.2 million and $11.0 million for the three-month and six-month periods ended June 30, 2013, of which revenue from the gaming
operations and gaming products segments comprised 97% and 3% and 86% and 14%, respectively.
We have developed our business model with
the goal of creating growth potential and the ability to generate quality recurring cash flow. We believe that this model combined
with our established presence and relationships in our markets provide us the potential to capitalize on the growth opportunities
in our target markets in Asia. We seek to improve revenue by making our gaming properties quality leaders in their markets by providing
our customers with their favorite games, superior customer service and attractive and comfortable surroundings. We seek to increase
and expand our diversified revenue streams through our gaming products division. We seek to improve margins by focusing on operational
efficiencies and cost controls. Our long-term strategy includes responsible investment in improving and maintaining our existing
operations and selectively securing new projects that will serve to enhance our presence and build deeper brand equity for the
Dreamworld name in our markets and drive long-term growth for the Company. We intend to implement these strategies in ways that
we believe will benefit our shareholders.
Gaming Operations
Our gaming operations involve the leasing
of EGMs on a revenue sharing basis to gaming establishments. We utilize our operational experience, established market presence
and key relationships to identify and develop new gaming venues, acquire EGMs, casino management systems and other gaming peripherals
directly from manufacturers, dealers and suppliers and install the same in our contracted venues. In addition, we assist the venue
owners in brand-building and marketing promotions.
For certain of our contracts, such as with
NagaWorld Resorts, Sokha Hotels and Resorts (“Sokha”) and Dreamworld Club (Poipet) in Cambodia, we also function as
a manager of the EGM operations. In these venues, we either jointly manage with the relevant casino owner, as is the case with
NagaWorld Resorts and Sokha, or exclusively manage, as is the case with Dreamworld Club (Poipet), the slot floor operations and
design marketing programs and slot promotions for our designated gaming spaces. We also hire, train and manage the floor staff
and set high expectations on the level of customer service.
Total company-wide EGM placements can fluctuate
due to our strategic efforts to optimize average daily net wins. In the event that the EGM performance at a contracted venue does
not meet our original expectations, and to the extent permitted under the terms of the relevant contracts, we may discuss with
the venue owner withdrawing all or a portion of our EGMs from such venue for future redeployment in new or existing venues with
better performance prospects.
As of June 30, 2014, our gaming operations
were located in two countries, Cambodia and the Philippines, and totaled 1,694 EGM seats in operation in six venues. In Cambodia,
we had a total of 1,126 EGM seats in operation in three venues. In the Philippines, we had a total of 568 EGM seats in operation
in three venues.
In Cambodia, our gaming operations largely
focus on operating a substantial portion of the gaming machine area in prime casino floor locations at NagaWorld, a wholly-owned
subsidiary of Hong Kong listed NagaCorp Ltd. (HKSE: 3918). NagaWorld is a premier luxury destination gaming resort and the only
licensed full service casino in a designated area around the capital city of Phnom Penh. In December 2008, we established a relationship
with NagaCorp to place EGMs on a revenue sharing or participation basis at NagaWorld and jointly operate those EGMs with them.
Due to our successful performance, we subsequently amended our contract and expanded our relationship with NagaWorld to 670 EGM
seats under contract. Our slot operations in NagaWorld are a primary contributor to our slot revenue and cash flow.
Our current operations in NagaWorld are
governed under the Machines Operation and Participation Consolidation Agreement dated December 31, 2009, which was subsequently
amended on May 25, 2010. Under the terms of these agreements, we and NagaWorld control the operation of a total of 670 of our EGMs,
including floor staff and respective audit rights. We and NagaWorld split the win per unit per day from all the 670 EGMs and certain
operating costs related to marketing and floor staff on a respective basis of 25%/75%. Win per unit per day from all the 670 EGMs
are settled and our share is distributed daily to us. The contract term is six years commencing from March 1, 2010.
Our gaming operations in Cambodia also
include Thansur Bokor Highland Resort, a casino resort developed by leading Cambodian hotelier, Sokha, in a tourist area of the
Kampot Province. The resort officially opened in May 2012 but portions of the initial phase of the property including the entertainment
complex were not completed until early 2013. To-date, we have placed approximately 180 EGMs in this venue. Under the terms of the
agreement, we have the ability to place up to 250 EGM seats and jointly manage these slot operations in the resort. We and Sokha
split the gross win and certain operating expenses for the placed EGMs on a respective basis of 27%/73%. The contract duration
is five years commencing from May 2012. This project expanded our gaming operations in the Indo-China region with a prominent partner
who has multiple hotel and resort properties in Cambodia.
Our most recent project in Cambodia is
Dreamworld Club (Poipet). Unlike our other slot operations, we solely developed and operate this property. Dreamworld Club (Poipet)
is a standalone slot hall with approximately 300 EGM seats. It is prominently located in the established gaming market of Poipet
in the Banteay Meanchey Province of Northwestern Cambodia near the Thailand border. Dreamworld Club (Poipet) soft opened in March
2013 and the official grand opening was held in May 2013.
Dreamworld Club (Poipet) operates under
a machine operation and participation agreement with a local partner that owns and operates an existing casino in Poipet. Under
the terms of the agreement, the local partner allocated part of its land with an area of approximately 16,000 square feet to us
to develop and construct, at our own design, budget and cost, the slot venue. We and the local partner split the win per unit per
day from all the EGMs placed by us at Dreamworld Club (Poipet) and certain operating costs related to marketing and floor staff
on a respective basis of 40%/60%. The initial project term is five years beginning from the commercial launch of the slot hall
in 2013 with an option to renew for an additional five years subject to the achievement of certain financial milestones during
the initial five-year period.
Total capital expenditures for Dreamworld
Club (Poipet), which principally included the development and construction of the facility and gaming equipment, were approximately
$7.5 million, including approximately $5.0 million to source top-of-the-line EGMs. We are responsible for all capital expenditures
for Dreamworld Club (Poipet) and those expenditures have been funded through our internal cash resources.
In the Philippines, our gaming operations
comprise three venues in the greater Manila area. For these three venues, our share of the net win per unit per day ranges from
15% to 35%. The typical initial term for these contracts is five years with renewal options. The strong Philippine economy, the
interest of the government to expand gaming in the country and close geographic proximity to major markets in Asia, among other
reasons, has led to increased development of major casinos in the market. While this results in increasing competition for our
venues in this market, we remain focused on enhancing returns on assets in the Philippines through targeted marketing programs
and strategic management of the machine mix.
During the reporting periods, we operated
one casino property, Dreamworld Casino (Pailin), which opened in May 2012 and closed in June 2014. Dreamworld Casino (Pailin)
measured approximately 16,000 square feet and was located in the Pailin Province of Northwestern Cambodia next to the Thailand
border.
Dreamworld Casino (Pailin) was constructed
on land leased from a local land owner and, in consideration, the land owner was entitled to receive monthly a rental fee in the
amount of $5,000 and 20% of the profit before depreciation (the total gross revenue of the casino less any payouts paid to customers,
operating expenses, and gaming and non-gaming taxes on the casino’s revenue). The initial lease term was 20 years, commencing
in September 2011 and was subject to renewal by the parties in writing. Total capital expenditures for Dreamworld Casino (Pailin)
were approximately $2.5 million, which was paid solely by us from internal cash resources.
The performance of Dreamworld
Casino (Pailin) did not meet our expectations primarily due to an insufficient level of natural player traffic and the high
costs associated with acquiring a quality player base in this market. After exploring all avenues to improve performance,
we determined to seek strategic alternatives for the property. After careful evaluation of all other options, on June 20,
2014 we entered into an agreement to sell 100% of the issued capital shares of Dreamworld Leisure (Pailin)
Limited (“DWP”), a wholly-owned Cambodian subsidiary of the Company established for the purposes of owning and
operating Dreamworld Casino (Pailin) (“Dreamworld Pailin”), to a local Cambodian individual. In connection with
the sale of the issued capital shares of DWP, on June 20, 2014 we and our partner in the operations entered into an agreement
to terminate the undertaking agreement and lease agreements with our partner and all future obligations thereunder including
future lease payments owed by us.
The sale includes all assets of DWP with
the exception of all electronic gaming machines, certain surveillance equipment and other assets excluded in the agreement and
prohibits any use of the Dreamworld brand name by the buyer. Total consideration paid to us by the buyer will be $500,000, of which
$100,000 was paid at the time of entering the agreement and the balance is to be paid in sixteen $25,000 monthly installments commencing
within one month of the signed agreement. The parties expect to complete the sale transaction subject to the buyer’s receipt
of certain government approvals, which is expected within the next few months.
In compliance with the annual valuation
review of the Dreamworld Casino (Pailin) facility and gaming assets under U.S. Generally Accepted Accounting Principles (GAAP),
we had previously recorded an impairment charge of approximately $2.5 million as of December 31, 2013 related to these operations.
We continue to selectively pursue gaming
projects for both slot participation and casino development. For slot operations, we intend to pursue additional opportunities
in certain markets in Indo-China and place our EGMs in prime locations on the gaming floors of major casinos and/or hotels in our
target markets. For casino development, we intend to pursue projects in Indo-China and other growing gaming markets in Asia
that will enable us to expand our market presence and increase brand equity in our Dreamworld name. We intend to pursue projects
that are relatively larger in size and investment than our existing Dreamworld projects and in more established markets with a
strong level of existing natural player traffic. There is no assurance we will be successful in establishing new projects or that
any such projects will be successful.
Gaming Products
As part of our efforts to complete the
restructuring of our legacy operations, on March 28, 2013, we sold the non-gaming manufacturing portion of the operations in a
management-led buyout for total consideration of AUD350,000. In connection with the sale, in March 2013, we commenced the relocation
of our manufacturing facilities for the gaming products portion of the business, namely gaming chips and plaques, to Hong Kong
from Australia. Commercial operation of the new Hong Kong facilities, which is also our corporate headquarters, began in May 2013.
We recorded one-time cash costs associated
with the above sale and relocation, which included severance and relocation charges, of approximately $1.3 million. These costs
were all incurred during the three-month period ended March 31, 2013 and were funded from our available working capital.
We believe these actions not only enabled
us to exit a non-core, low-margin business but also better position us to secure large new orders in the growing Asian gaming markets
as well as provide for increased production capacity and economies of scale and improved R&D capabilities. In addition, it
improves our ability to expand our product mix to include other gaming products, which could add incremental revenue streams and
further enhance our competitive positioning. We have two distribution agreements with third-party suppliers for gaming accessories
and gaming systems and terminals. None of our distribution agreements require purchase commitments from us.
Discontinued Operations
On June 1, 2014, we ceased operations of
Dreamworld Casino (Pailin), a casino it developed, owned and operated in the Pailin Province of Cambodia. On June 20, 2014, we
entered into an agreement to sell 100% of the issued capital shares of Dreamworld Leisure (Pailin) Limited, a wholly-owned Cambodian
subsidiary established for the purpose of owning and operating the casino. The sale is expected to close in the next few months,
at which time we intend to recognize the anticipated gain on the disposal of the entity.
On March 28, 2013, we sold a portion of
our subsidiary, Dolphin Products Pty Limited, business dedicated to the manufacture and sale of non-gaming plastic products, mainly
automotive parts. Revenues of these non-gaming products and our gaming chips and plaques were previously consolidated under the
reporting segment “Other Products.” After the sale, we renamed “Other Products” as “Gaming Products”
and this segment now comprises our gaming chips and plaques operations and, beginning in October 2013, the distribution of third-party
gaming products to select locations in Indo-China and the Philippines.
All related historical revenues and expenses
from Dreamworld Casino (Pailin) and the non-gaming plastic products operations have been reclassified as discontinued operations.
Results of Operations for the Three-Month and Six-Month Periods
Ended June 30, 2014 and 2013
The following is a schedule summarizing
operating results on a consolidated basis and separately by each of our two operating segments, gaming operations and gaming products,
for the three-month and six-month periods ended June 30, 2014 and 2013.
On February 22, 2013, we entered into a
share sale agreement pursuant to which we agreed to sell the portion of our subsidiary Dolphin Products Pty Limited (“Dolphin
Australia”) business dedicated to the manufacture and sale of non-gaming plastic products, mainly automotive parts. As part
of the sale transaction, we also agreed to grant Dolphin Australia a non-transferable, royalty-free license to utilize certain
trademarks and patent rights in connection with its manufacture and sale of plastic products for the non-gaming industries. The
sale closed on March 28, 2013.
On June 1, 2014, we ceased the operations
of Dreamworld Casino (Pailin), a casino we developed, owned and operated in the Pailin Province of Cambodia. On June 20, 2014,
we entered into an agreement to sell 100% of the issued capital shares of Dreamworld Leisure (Pailin) Limited, a wholly-owned Cambodian
subsidiary established for the purposes of owning and operating the casino. The sale is expected to close in the next few months.
All historical revenues and expenses associated
with Dreamworld Casino (Pailin) and the non-gaming plastic products operations for the three-month and six-month periods ended
June 30, 2014 and 2013 have been reclassified as discontinued operations.
|
|
Three-Month Periods Ended June 30,
|
|
|
Six-Month Periods Ended June 30,
|
|
(amounts in thousands, except per share data)
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Total:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
4,944
|
|
|
$
|
5,196
|
|
|
$
|
9,638
|
|
|
$
|
11,021
|
|
Gross margin
|
|
$
|
1,541
|
|
|
$
|
1,948
|
|
|
$
|
2,348
|
|
|
$
|
3,761
|
|
Gross margin percentage
|
|
|
31
|
%
|
|
|
37
|
%
|
|
|
24
|
%
|
|
|
34
|
%
|
Adjusted EBITDA from continuing operations
(1)
|
|
$
|
2,136
|
|
|
$
|
2,252
|
|
|
$
|
3,097
|
|
|
$
|
4,290
|
|
Operating income/(loss) from continuing operations
|
|
$
|
212
|
|
|
$
|
340
|
|
|
$
|
(638
|
)
|
|
$
|
263
|
|
Net income/(loss) from continuing operations
|
|
$
|
217
|
|
|
$
|
92
|
|
|
$
|
(657
|
)
|
|
$
|
52
|
|
Net loss
|
|
$
|
(22
|
)
|
|
$
|
(286
|
)
|
|
$
|
(1,052
|
)
|
|
$
|
(2,794
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings/(loss) per share
from continuing operations
|
|
$
|
0.01
|
|
|
$
|
—
|
|
|
$
|
(0.02
|
)
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
30,013
|
|
|
|
29,975
|
|
|
|
30,016
|
|
|
|
29,975
|
|
Diluted
|
|
|
30,148
|
|
|
|
30,713
|
|
|
|
30,016
|
|
|
|
30,712
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gaming operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
4,420
|
|
|
$
|
5,034
|
|
|
$
|
8,303
|
|
|
$
|
9,432
|
|
Gross margin
|
|
$
|
1,942
|
|
|
$
|
2,332
|
|
|
$
|
3,426
|
|
|
$
|
4,213
|
|
Gross margin percentage
|
|
|
44
|
%
|
|
|
46
|
%
|
|
|
41
|
%
|
|
|
45
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gaming products:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
524
|
|
|
$
|
162
|
|
|
$
|
1,335
|
|
|
$
|
1,589
|
|
Gross margin
|
|
$
|
(401
|
)
|
|
$
|
(384
|
)
|
|
$
|
(1,078
|
)
|
|
$
|
(452
|
)
|
Gross margin percentage
|
|
|
(77
|
)%
|
|
|
NM
|
|
|
|
(81
|
)%
|
|
|
(28
|
)%
|
|
(1)
|
We define “Adjusted EBITDA" as earnings from continuing operations before interest, taxes, depreciation, amortization, stock-based compensation, and other non-cash operating income and expenses. Adjusted EBITDA is presented exclusively as a supplemental disclosure because our management believes that it is widely used to measure the performance, and as a basis for valuation, of gaming companies. Our management uses Adjusted EBITDA as a measure of the operating performance of its segments and to compare the operating performance of its operations with those of its competitors. We also present Adjusted EBITDA because it is used by some investors as a way to measure a company’s ability to incur and service debt, make capital expenditures and meet working capital requirements. Gaming companies have historically reported EBITDA as a supplement to financial measures in accordance with generally accepted accounting principles in the United States (“GAAP”). Adjusted EBITDA should not be considered as an alternative to operating income as an indicator of our performance, as an alternative to cash flows from operating activities as a measure of liquidity, or as an alternative to any other measure determined in accordance with GAAP. Unlike net income, Adjusted EBITDA does not include depreciation or interest expense and, therefore, does not reflect current or future capital expenditures or the cost of capital. We compensate for these limitations by using Adjusted EBITDA as only one of several comparative tools, together with GAAP measurements, to assist in the evaluation of operating performance. Such GAAP measurements include operating income, net income, cash flows from operations and cash flow data. We have significant uses of cash flows, including capital expenditures, interest payments, debt principal repayments, taxes and other non-recurring charges, which are not reflected in Adjusted EBITDA. Our calculation of Adjusted EBITDA may be different from the calculation methods used by other companies and, therefore, comparability may be limited.
|
A reconciliation of Adjusted EBITDA from
continuing operations to the net income/(loss) from continuing operations is provided below.
|
|
Three-Month Periods Ended
June 30,
|
|
|
Six-Month Periods Ended
June 30,
|
|
(amounts in thousands)
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Net income/(loss) from continuing
operations— GAAP
|
|
$
|
217
|
|
|
$
|
92
|
|
|
$
|
(657
|
)
|
|
$
|
52
|
|
Interest expense
|
|
|
—
|
|
|
|
1
|
|
|
|
2
|
|
|
|
5
|
|
Interest income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(4
|
)
|
Income tax expenses
|
|
|
15
|
|
|
|
7
|
|
|
|
30
|
|
|
|
48
|
|
Depreciation and amortization
|
|
|
1,824
|
|
|
|
1,954
|
|
|
|
3,570
|
|
|
|
3,744
|
|
Stock-based compensation expenses
|
|
|
69
|
|
|
|
198
|
|
|
|
141
|
|
|
|
445
|
|
Impairment of assets
|
|
|
19
|
|
|
|
—
|
|
|
|
19
|
|
|
|
—
|
|
Gain on dispositions
|
|
|
(8
|
)
|
|
|
—
|
|
|
|
(8
|
)
|
|
|
—
|
|
Adjusted EBITDA from
continuing operations
|
|
$
|
2,136
|
|
|
$
|
2,252
|
|
|
$
|
3,097
|
|
|
$
|
4,290
|
|
Total revenues decreased approximately
$252,000 to $4.9 million for the three-month period ended June 30, 2014 compared to approximately $5.2 million in the same
period of the prior year as lower gaming operations revenue was partially offset by higher gaming products sales. Revenue from
gaming operations decreased primarily as a result of lower average daily net win per unit from NagaWorld, as described in greater
detail below. Revenue from the gaming products division increased as a result of higher sales of gaming chips and plaques to existing
customers compared to the prior year period when the production period was shortened due to the relocation of our manufacturing
facilities from Australia to Hong Kong.
Gross profit decreased approximately $407,000
to $1.5 million for the three-month period ended June 30, 2014 compared to approximately $1.9 million in the same period of
the prior year. The decrease was primarily a result of lower gaming operations revenue from NagaWorld partially offset by a higher
gross profit for the Philippines gaming operations primarily due to lower depreciation expense as a result of the increase in fully
depreciated gaming assets for the three-month period ended June 30, 2014.
Operating income from continuing operations
decreased approximately $128,000 to $212,000 for the three-month period ended June 30, 2014 compared to approximately $340,000
in the same period of the prior year. The decrease in operating income from continuing operations was primarily a result of the
lower gross profit partially offset by lower operating expenses largely due to a benefit of approximately $448,000 related to the
reversal of a previous accrual for a Philippines tax assessment in the second quarter of 2014.
Net income from continuing operations increased
approximately $125,000 to $217,000 for the three-month period ended June 30, 2014 compared to approximately $92,000 in the same
period of the prior year. The increase in net income from continuing operations was primarily a result of a slight foreign currency
gains compared to losses in the prior year period. This positive differential of approximately $263,000 was primarily due to the
decrease in the value of U.S. dollar denominated payables for the Philippines operations as a result of favorable changes in the
peso to dollar exchange rate. The increase in net income from continuing operations was partially offset by the lower operating
income as explained above. Net loss decreased approximately $264,000 to $22,000 for the three-month period ended June 30, 2014
compared to approximately $286,000 in the same period of the prior year. The net loss for the three-month period ended June 30,
2014 included a net loss from discontinued operations of approximately $239,000 compared to a net loss from discontinued operations
of approximately $378,000 in the prior year period.
Total revenues decreased approximately
$1.4 million to $9.6 million for the six-month period ended June 30, 2014 compared to approximately $11.0 million in the same
period of the prior year due to decreases in both business divisions. Revenue from gaming operations decreased primarily as a result
of lower average daily net win per unit from NagaWorld and the Philippines, as described in greater detail below. Revenue from
the gaming products division decreased as a result of lower sales of gaming chips and plaques to existing customers compared to
the prior year period.
Gross profit decreased approximately $1.4
million to $2.4 million for the six-month period ended June 30, 2014 compared to approximately $3.8 million in the same period
of the prior year. The decrease was a result of lower gaming operations revenue from NagaWorld and a higher gross margin loss for
the gaming products division due to lower production volumes, certain production inefficiencies and under absorption of fixed costs
compared to the prior year period. This was partially offset by higher gross profit from the Philippines operations primarily due
to lower depreciation expense as a result of the increase in fully depreciated gaming assets for the six-month period ended June
30, 2014.
Operating loss from continuing operations
increased approximately $901,000 to a loss of $638,000 for the six-month period ended June 30, 2014 compared to operating
income from continuing operations of approximately $263,000 in the same period of the prior year. The increase in operating loss
from continuing operations was primarily a result of the lower gross profit partially offset by lower operating expenses primarily
due to the reversal of a prior tax accrual as mentioned above and lower stock-based compensation expense.
Net loss from continuing operations increased
approximately $709,000 to a loss of $657,000 for the six-month period ended June 30, 2014 compared to net income from continuing
operations of approximately $52,000 in the same period of the prior year. The increase in net loss from continuing operations was
primarily a result of a higher operating loss partially offset by a positive foreign currency differential of approximately $173,000
for the same reasons as stated above. Net loss decreased approximately $1.7 million to $1.1 million for the six-month period ended
June 30, 2014 compared to approximately $2.8 million in the same period of the prior year. The net loss for the six-month period
ended June 30, 2014 included a net loss from discontinued operations of approximately $395,000 compared to a net loss from discontinued
operations of approximately $2.8 million in the prior year period.
Gaming Operations
Revenues from gaming operations consisted
of our slot operations.
|
|
Three-Month Periods Ended June 30,
|
|
|
Six-Month Periods Ended June 30,
|
|
(amounts in thousands, except per unit
data)
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Net revenue to the Company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cambodia operations
|
|
$
|
3,350
|
|
|
$
|
3,975
|
|
|
$
|
6,280
|
|
|
$
|
7,218
|
|
Philippines operations
|
|
|
787
|
|
|
|
803
|
|
|
|
1,515
|
|
|
|
1,740
|
|
Service revenue(1)
|
|
|
283
|
|
|
|
256
|
|
|
|
508
|
|
|
|
474
|
|
Consolidated total
|
|
$
|
4,420
|
|
|
$
|
5,034
|
|
|
$
|
8,303
|
|
|
$
|
9,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average daily net win per unit(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cambodia operations
|
|
$
|
130
|
|
|
$
|
169
|
|
|
$
|
124
|
|
|
$
|
172
|
|
Philippines operations
|
|
$
|
76
|
|
|
$
|
74
|
|
|
$
|
73
|
|
|
$
|
80
|
|
Consolidated total
|
|
$
|
112
|
|
|
$
|
135
|
|
|
$
|
107
|
|
|
$
|
137
|
|
|
|
June 30,
|
|
|
|
2014
|
|
|
2013
|
|
EGM seats in operation
|
|
|
|
|
|
|
|
|
Cambodia operations
|
|
|
1,126
|
|
|
|
1,062
|
|
Philippines operations
|
|
|
568
|
|
|
|
570
|
|
Consolidated total
|
|
|
1,694
|
|
|
|
1,632
|
|
(1)
|
Service revenue represents reimbursements of certain expenses, which for accounting purposes, are included in the revenue and grossed up in the cost of gaming operations.
|
(2)
|
Average daily net win per unit figures exclude EGM seats in operation during venue soft opening periods, if applicable, and apply revenue recognized on a cash basis in the calculation for venues for which revenues are recognized on a cash basis. During the three-month and six-month periods ended June 30, 2014, no venues operated during a soft opening. During the three-month and six-month period ended June 30, 2013, one venue in Cambodia operated during a soft opening. Had these seats been included in the calculations, average net win per unit for the above-mentioned 2013 periods would have been $157 and $165 for Cambodia and $129 and $133, respectively, on a consolidated basis.
|
Revenue from gaming operations decreased
approximately $614,000 to $4.4 million for the three-month period ended June 30, 2014 compared to approximately $5.0 million
in the same period of the prior year. The decrease was primarily due to lower average daily net win per unit from NagaWorld partially
offset by higher revenue from Dreamworld Club (Poipet), which operated under a soft opening from March 2013 until its grand opening
in May 2013.
Gaming operations revenue for the three-month
periods ended June 30, 2014 and 2013 included approximately $283,000 and $256,000, respectively, in service revenue related to
the reimbursement of net shared costs from casino operators.
Consolidated average daily net win per
machine decreased $23 to $112 for the three-month period ended June 30, 2014 compared to $135 in the prior year period due to a
decline in the average daily net win per unit in NagaWorld.
Revenue from Cambodia decreased approximately
$625,000 to $3.4 million for the three-month period ended June 30, 2014 compared to approximately $4.0 million in the prior year
period primarily as a result of a decrease in average daily net win per unit from NagaWorld. This was partially offset by increased
revenue from Dreamworld Club (Poipet).
NagaWorld contributed approximately $2.9
million in revenue for the three-month period ended June 30, 2014, a decrease of approximately $759,000 compared to $3.7 million
in the prior year period. The decrease was primarily due to higher jackpot payouts in the three-month period ended June 30, 2014.
Cambodia average daily net win per unit
decreased $39 to $130 for the three-month period ended June 30, 2014 compared to $169 for the prior year period. The decline was
primarily due to lower average daily net win per unit in NagaWorld for the three-month period ended June 30, 2014.
Revenue from the Philippines decreased
approximately $16,000 to $787,000 for the three-month period ended June 30, 2014 compared to approximately $803,000 in the prior
year period. Philippines average daily net win per machine increased $2 to $76 for the three-month period ended June 30, 2014 compared
to $74 in the prior year period. The Philippines performance was relatively stable as we continue our efforts to improve overall
returns for these operations. These efforts include implementing, with the support of our venue owner partners, targeted marketing
programs and proactive machine mix management. With increasing competition from the development of major integrated casino resorts
in Manila, we are focused on improving player loyalty through marketing programs and providing a wide range of preferred gaming
machines and superior services to the local customer bases.
Gross profit from gaming operations decreased
approximately $390,000 to $1.9 million for the three-month period ended June 30, 2014 compared to approximately $2.3 million in
the prior year period primarily due to lower revenue from NagaWorld. This was partially offset by higher gross profit for the Philippines
due to lower depreciation expense as a result of an increase in fully depreciated gaming assets. Cost of gaming operations for
the three-month period ended June 30, 2014 included approximately $908,000 in depreciation of gaming property and equipment, $612,000
of amortization of casino contracts, $63,000 of amortization of other gaming related intangibles and $895,000 of other operating
costs. Cost of gaming operations for the three-month period ended June 30, 2013 included approximately $1.2 million of depreciation
of gaming property and equipment, $617,000 of amortization of casino contracts, $63,000 of amortization of other gaming related
intangibles and $869,000 of other operating costs.
Revenue from gaming operations decreased
approximately $1.1 million to $8.3 million for the six-month period ended June 30, 2014 compared to approximately $9.4 million
in the same period of the prior year. The decrease was primarily due to lower revenue from NagaWorld and the Philippines partially
offset by incremental revenue from Dreamworld Club (Poipet).
Gaming operations revenue for the six-month
periods ended June 30, 2014 and 2013 included approximately $508,000 and $474,000, respectively, in service revenue related to
the reimbursement of net shared costs from casino operators.
Consolidated average daily net win per
machine decreased $30 to $107 for the six-month period ended June 30, 2014 compared to $137 in the prior year period due to declines
from both the Cambodia and Philippines operations.
Revenue from Cambodia decreased approximately
$938,000 to $6.3 million for the six-month period ended June 30, 2014 compared to approximately $7.2 million in the prior year
period primarily as a result of a decrease in average daily net win per unit from NagaWorld. This was partially offset by incremental
revenue from Dreamworld Club (Poipet) and an improvement in average daily net win per unit from Thansur Bokor.
NagaWorld contributed approximately $5.5
million in revenue for the six-month period ended June 30, 2014, a decrease of approximately $1.3 million compared to $6.8 million
in the prior year period. The decrease was primarily due to lower player traffic as a result of political and labor strikes in
Phnom Penh early in the 2014 year and higher jackpot payouts during the three-month period ended June 30, 2014.
Cambodia average daily net win per unit
decreased $48 to $124 for the six-month period ended June 30, 2014 compared to $172 for the prior year period. The decline was
primarily due to lower average daily net win per unit in Nagaworld for the six-month period ended June 30, 2014 and the inclusion
of Dreamworld Club (Poipet), which has lower average daily net win per unit, in the calculation for the full six-month period ended June 30, 2014.
Revenue from the Philippines decreased
approximately $225,000 to $1.5 million for the six-month period ended June 30, 2014 compared to approximately $1.7 million in the
prior year period. Philippines average daily net win per unit decreased $7 to $73 for the six-month period ended June 30, 2014
compared to $80 in the prior year period. The decreases in revenue and average daily net win per unit were primarily due to lower
player traffic resulting from increased competition from a new integrated casino resort in Manila as well as renovation and outside
construction activity, which limited player traffic for one of our venues in the six-month period ended June 30, 2014.
Gross profit from gaming operations decreased
approximately $787,000 to $3.4 million for the six-month period ended June 30, 2014 compared to approximately $4.2 million in the
prior year period primarily due to lower revenue. This was partially offset by higher gross profit for the Philippines slot operations
due to lower depreciation expense as a result of the increase in fully depreciated gaming assets in the six-month period ended
June 30, 2014. Cost of gaming operations for the six-month period ended June 30, 2014 included approximately $1.8 million in depreciation
of gaming property and equipment, $1.2 million of amortization of casino contracts, $126,000 of amortization of other gaming related
intangibles and $1.7 million of other operating costs. Cost of gaming operations for the six-month period ended June 30, 2013 included
approximately $2.2 million of depreciation of gaming property and equipment, $1.2 million of amortization of casino contracts,
$126,000 of amortization of other gaming related intangibles and $1.7 million of other operating costs.
As of June 30, 2014, we had a total
of 1,927 EGM seats of which 233 were held in inventory and 1,694 were in operation. Of the 1,694 EGM seats in operation,
1,126 were in three venues in Cambodia and 568 were in three venues in the Philippines.
|
|
June 30, 2014
|
|
|
December 31, 2013
|
|
(amounts in thousands, except per unit data)
|
|
Units
|
|
|
Carrying Value
|
|
|
Units
|
|
|
Carrying Value
|
|
EGMs and systems used in operations (1)
|
|
|
1,694
|
|
|
$
|
6,581
|
|
|
|
1,730
|
|
|
$
|
7,862
|
|
EGMs and systems held for future use
|
|
|
233
|
|
|
|
291
|
|
|
|
204
|
|
|
|
309
|
|
Total EGMs and systems
|
|
|
1,927
|
|
|
$
|
6,872
|
|
|
|
1,934
|
|
|
$
|
8,171
|
|
|
(1)
|
EGMs and systems used in operations as of December 31, 2013
included 12 EGM seats, which were in operation on a trial basis subject to achieving certain performance objectives prior
to acceptance and, therefore, their carrying values were not included.
|
As part of our ongoing
efforts to improve the returns on the gaming operations, we seek to refine the existing operating EGM base to focus on those
venues with the greatest potential and selectively add new venues. In March 2013, we soft opened Dreamworld Club (Poipet)
in Cambodia with approximately 300 EGM seats.
Gaming Products
Gaming products revenue, which consisted
of gaming chips and plaques sales, increased approximately $362,000 to $524,000 for the three-month period ended June 30,
2014 compared to approximately $162,000 in the prior year period. The increase was mainly a result of higher sales orders and production
volumes for the three-month period ended June 30, 2014 and a shortened production period due to the relocation of our manufacturing
facilities from Australia to Hong Kong in the three-month period ended June 30, 2013.
Gross margin loss on gaming products increased
approximately $17,000 to approximately $401,000 for the three-month period ended June 30, 2014 compared to approximately $384,000
in the prior year period. The increase in gross margin loss was mainly due to production inefficiencies relating to the delay in
installation of certain new automation equipment and unexpected machinery issues.
During the three-month period ended June
30, 2014, we began production of two large gaming chip and plaque orders received earlier in the year. These orders are anticipated
to be delivered in the second half of 2014.
Gaming products revenue decreased approximately
$254,000 to $1.3 million for the six-month period ended June 30, 2014 compared to approximately $1.6 million in the same period
of the prior year mainly as a result of lower reorders from existing customers in the six-month period ended June 30, 2014.
Gross margin loss on gaming products increased
approximately $626,000 to approximately $1.1 million for the six-month period ended June 30, 2014 compared to approximately
$452,000 in the same period of the prior year. The increase in gross margin loss was mainly due to the lower production volumes
and the reasons as stated above.
Operating Expenses
The schedule of expenses on a consolidated basis consisted of
the following:
|
|
Three-Month Periods Ended June 30,
|
|
|
Six-Month Periods Ended June 30,
|
|
(amounts in thousands)
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Selling, general and administrative
|
|
$
|
1,098
|
|
|
$
|
1,328
|
|
|
$
|
2,579
|
|
|
$
|
2,823
|
|
Stock-based compensation expenses
|
|
|
69
|
|
|
|
198
|
|
|
|
141
|
|
|
|
445
|
|
Gain on dispositions
|
|
|
(8
|
)
|
|
|
—
|
|
|
|
(8
|
)
|
|
|
—
|
|
Impairment of assets
|
|
|
19
|
|
|
|
—
|
|
|
|
19
|
|
|
|
—
|
|
Product development expenses
|
|
|
101
|
|
|
|
35
|
|
|
|
156
|
|
|
|
155
|
|
Depreciation and amortization
|
|
|
50
|
|
|
|
47
|
|
|
|
99
|
|
|
|
75
|
|
|
|
$
|
1,329
|
|
|
$
|
1,608
|
|
|
$
|
2,986
|
|
|
$
|
3,498
|
|
Selling, General and Administrative Expenses
Selling, general and administrative expenses
decreased approximately $230,000 to $1.1 million for the three-month period ended June 30, 2014 compared to $1.3 million in the
same period of the prior year period. Travel and entertainment, rent, utilities and other office expenses decreased approximately
$64,000 primarily due to fewer gaming projects and various cost reduction initiatives. Other expenses decreased $448,000 primarily
as a result of a reversal in the three-month period ended June 30, 2014 of a previously accrued one-time other tax liability related
to the Philippines operations. The decreases were also a result of approximately $15,000 in gaming products sales commission in
the three-month period ended June 30, 2013. The decreases were partially offset by an increase of approximately $132,000 in salaries
and wages, advertising and investor relations primarily due to increased sales and marketing activities in relation to the expansion
of the gaming products operations. Legal, consulting and accounting expenses increased approximately $147,000 mainly as a result
of higher fees for new and completed projects. Freight, printing and office expenses increased approximately $18,000 primarily
due to the increased scale of the gaming products operations.
Selling, general and administrative expenses
decreased approximately $244,000 to $2.6 million for the six-month period ended June 30, 2014 compared to $2.8 million in the same
period of the prior year period. In addition to start-up costs of approximately $89,000 related to the soft opening of Dreamworld
Club (Poipet) in the six-month period ended June 30, 2013, travel and entertainment, rent, utilities and other office expenses
decreased approximately $137,000 primarily due to fewer gaming projects and various cost reduction initiatives. Other expenses
decreased $452,000 primarily as a result of a reversal in the three-month period ended June 30, 2014 of a previous accrued one-time
other tax liability related to the Philippines operations. The decreases were also a result of approximately $109,000 in gaming
products sales commission in the three-month period ended June 30, 2013 as the distribution agreement was terminated in mid 2013
with the replacement of in-house sales resources. The decreases were partially offset by an increase of approximately $305,000
in salaries and wages, advertising and investor relations primarily due to increased sales and marketing activities in relation
to the expansion of the gaming products operations. Legal, consulting and accounting expenses increased approximately $194,000
mainly as a result of higher fees for new and completed projects. Freight, printing and office expenses increased approximately
$44,000 primarily due to the increased scale of the gaming products operations.
Stock-Based Compensation Expense
s
Stock-based compensation expenses decreased
approximately $129,000 to $69,000 for the three-month period ended June 30, 2014 compared to approximately $198,000 in the
prior year period primarily due to a decrease in average stock prices during the three-month period ended June 30, 2014 as compared
to the prior year period.
Stock-based compensation expenses decreased
approximately $304,000 to $141,000 for the six-month period ended June 30, 2014 compared to $445,000 in the same period of
the prior year primarily due to fewer new option grants issued and the same reason as stated above.
Gain on Disposition of Assets
Gain on disposition of assets was approximately
$8,000 for the three-month and six-month periods ended June 30, 2014, which primarily related to the sale of non-performing EGMs
and systems. There were no dispositions of assets for the three-month and six-month periods ended June 30, 2013.
Impairment of Assets
Impairment charges of approximately $19,000
were recognized for long-lived assets for the three-month and six-month periods ended June 30, 2014 related to non-performing assets.
There were no impairment charges for the three-month and six-month periods ended June 30, 2013.
Product Development Expenses
Product development expenses increased
approximately $66,000 to $101,000 for the three-month period ended June 30, 2014 compared to approximately $35,000 in the
prior year period mainly as a result of increased efforts to develop new products and security features for our gaming products
business in the three-month period ended June 30, 2014.
Product development expenses increased
approximately $1,000 to $156,000 for the six-month period ended June 30, 2014 compared to approximately $155,000 in the same
period of the prior year.
Depreciation and Amortization Expenses
Total depreciation and amortization expenses
increased approximately $3,000 to $50,000 for the three-month period ended June 30, 2014 compared to approximately $47,000
in the prior year period as there was no principal changes in our fixed assets.
Total depreciation and amortization expenses
increased by approximately $24,000 to $99,000 for the six-month period ended June 30, 2014 compared to approximately $75,000
in the same period of the prior year primarily as a result of an increase in fixed assets for the new gaming products manufacturing
plant and operations in Hong Kong since April 2013.
Other Income/(Expenses)
|
|
Three-Month Periods Ended June 30,
|
|
|
Six-Month Periods Ended June 30,
|
|
(amounts in thousands)
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Interest expense and finance
fees
|
|
$
|
—
|
|
|
$
|
(1
|
)
|
|
$
|
(2
|
)
|
|
$
|
(5
|
)
|
Interest income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4
|
|
Foreign currency gains/(losses)
|
|
|
16
|
|
|
|
(247
|
)
|
|
|
1
|
|
|
|
(172
|
)
|
Other
|
|
|
4
|
|
|
|
7
|
|
|
|
12
|
|
|
|
10
|
|
Total
|
|
$
|
20
|
|
|
$
|
(241
|
)
|
|
$
|
11
|
|
|
$
|
(163
|
)
|
Interest Expense and Finance Fees
Interest expense and finance fees were
approximately $NIL and $1,000 for the three-month periods ended June 30, 2014 and 2013, respectively as there were no major
financing activities.
Interest expense and finance fees decreased
approximately $3,000 to $2,000 for the six-month period ended June 30, 2014 compared to approximately $5,000 in the same period
of the prior year for the same reason as stated above.
Interest Income
Interest income was approximately $NIL
for the three-month periods ended June 30, 2014 and 2013 primarily as a result of low bank balances.
Interest income decreased approximately
$4,000 to $NIL for the six-month period ended June 30, 2014 compared to approximately $4,000 in the same period of the prior
year for the same reason as stated above.
Foreign Currency Transactions
Foreign currency gains were approximately
$16,000 for the three-month period ended June 30, 2014 compared to losses of approximately $247,000 in the same period of
the prior year. The favorable differential was primarily due to the decrease in the value of U.S. dollar denominated payables for
the Philippines operations, where the functional currency is the Philippine peso compared to an increase in the value of U.S. denominated
payables in the same period in the prior year. In addition, in the three-month period ended June 30, 2014, the U.S. dollar had
a comparatively lower appreciation relative to the Australian dollar resulting in lower depreciation of receivables, which are
denominated in Australian dollars, related to the Dolphin Australia assets that were sold in March 2013.
Foreign currency gains were approximately
$1,000 for the six-month period ended June 30, 2014 compared to losses of approximately $172,000 for the same period in the
prior year for the same reasons as stated above.
Other
Other income was approximately $4,000 for
the three-month period ended June 30, 2014 compared to $7,000 in the same period of the prior year primarily due to miscellaneous
income received by the Philippines operations.
Other income was approximately $12,000
for the six-month period ended June 30, 2014 compared to approximately $10,000 in the prior year period primarily due to the
same reason as stated above.
Income Tax Provisions
Effective tax rates for the three-month
and six-month periods ended June 30, 2014 and 2013 were approximately 6.4% and 7.6% and (4.7)% and 48.2%, respectively. We continue
to review the treatment of tax losses and future income generated by our foreign subsidiaries to minimize taxation costs.
|
|
Three-Month Periods Ended June 30,
|
|
|
Six-Month Periods Ended June 30,
|
|
(amounts in thousands)
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Income tax provisions
|
|
$
|
15
|
|
|
$
|
7
|
|
|
$
|
30
|
|
|
$
|
48
|
|
FINANCIAL CONDITION
Liquidity and Capital Resources
As of June 30, 2014, we had total
cash and cash equivalents of approximately $4.7 million and working capital of approximately $5.8 million. Our cash and working
capital during the six-month period ended June 30, 2014 was positively impacted by the cash received from gaming operations
but was negatively impacted by the expansion of the gaming products production facilities and purchases of EGMs for the gaming
operations of a combined total of $2.4 million.
As part of our growth strategy for gaming
operations, we expect to purchase EGMs to supplement existing inventory and source future targeted deployment plans. As part
of our growth strategy for gaming products, we intend to incur costs related to increasing capacity and enhancing production efficiencies
for these operations.
We also continue to pursue new gaming projects,
however, there is no guarantee we will be successful in securing such new projects.
We
presently expect that our capital expenditures for the remainder of 2014 will be approximately $1.0 million to $1.5 million. This
includes approximately $600,000 to $800,000 for EGMs and systems purchases, upgrades and general maintenance for the gaming operations
and approximately $400,000 to $700,000 for equipment purchases and general maintenance and working capital for the gaming products
facility.
We
anticipate our available working capital, along with cash expected to be generated from operations, will allow us to meet our capital
expenditure needs through 2014.
As
noted above, however, we continue to pursue additional gaming projects. While there is no guarantee we will be successful in securing
new projects, if we were to secure new projects our capital expenditures through 2014 would increase beyond the $1.0 million to
$1.5 million currently contemplated. Where possible, we intend to fund our gaming projects from our cash flow from operations and
cash on hand. Further, we will seek to structure the development of these projects in phases to better control and pace the related
capital expenditures. However, should we commit to large projects, to the concurrent development of multiple gaming projects or
a new project requires large upfront payments, we may need to acquire additional capital. We would endeavor to obtain any required
additional capital from various financing sources including commercial debt financing and the sale of our debt or equity securities.
However, there are no commitments or arrangements in place as of the date of this report for receipt of additional capital and
there are no assurances we will be able to acquire additional capital if, and when, needed on commercially reasonable terms or
at all.
Cash Flows Summary
|
|
Six-Month Periods Ended June 30,
|
|
(amount in thousands)
|
|
2014
|
|
|
2013
|
|
Cash provided by/(used in):
|
|
|
|
|
|
|
|
|
Operations
|
|
$
|
1,701
|
|
|
$
|
1,623
|
|
Investing
|
|
|
(2,354
|
)
|
|
|
(7,174
|
)
|
Financing
|
|
|
—
|
|
|
|
—
|
|
Effect of exchange rate change in cash
|
|
|
16
|
|
|
|
(25
|
)
|
|
|
$
|
(637
|
)
|
|
$
|
(5,576
|
)
|
Operations
Cash provided by operations was approximately
$1.7 million for the six-month period ended June 30, 2014 essentially unchanged with the same period of the prior year period.
For the six-month period ended June 30, 2014, cash provided by operations primarily resulted from operating income from gaming
operations partially offset by an increase in the use of funds for working capital and operating losses incurred by Dolphin Hong
Kong. For the six-month period ended June 30, 2013, cash provided by operations primarily resulted from operating income from gaming
operations partially offset by a general cash reduction of approximately $1.0 million as part of the settlement of payable balances
related to the sale of Dolphin non-gaming assets in addition to the one-off costs for Dolphin Hong Kong, including severance, relocation
charges and contract termination fees, of approximately $1.3 million associated with the sale of the non-gaming products assets
and relocation of the gaming chips and plaques operations from Australia to Hong Kong.
Investing
Cash used in investing activities was approximately
$2.4 million for the six-month period ended June 30, 2014 compared to approximately $7.2 million in the same period of the
prior year period. The decrease in cash used in investing activities was mainly a result of the capital expenditures related
to the construction of Dreamworld Club (Poipet) as well as the purchase of a greater amount of EGMs and related systems in the
six-month period of ended June 30, 2013.
Financing
Cash used in financing activities was $NIL for the six-month
periods ended June 30, 2014 and 2013.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our consolidated financial statements were
prepared in conformity with accounting principles generally accepted in the United States. Accordingly, we are required to make
estimates incorporating judgments and assumptions we believe are reasonable based on our historical experience, contract terms,
observance of known trends in our Company and the industry as a whole, as well as information available from other outside sources.
Our estimates affect amounts recorded in the financial statements and actual results may differ from initial estimates.
We consider the following accounting estimates
to be the most critical to fully understanding and evaluating our reported financial results. They require us to make subjective
or complex judgments about matters that are inherently uncertain or variable. Senior management has discussed the development,
selection and disclosure of the following accounting estimates, particularly those considered most sensitive to changes from external
factors, with the audit committee of our board of directors.
Allowance for Doubtful Accounts Receivable
As of June 30, 2014, we had net accounts
receivable of approximately $906,000, representing 2.7% of total assets. We specifically analyze the collectability of each account
based upon the age of the account, the customer’s financial condition, collection history and any other known information,
and we provide specific allowances for aged account balances. Revenue is recognized on a cash basis for customers with doubtful
accounts receivable. Our allowance for doubtful accounts receivable was $NIL as of June 30, 2014 and December 31, 2013.
Inventory
The determination of obsolete or excess
inventory requires us to estimate the future demand for our products within specific time horizons, generally one year or less.
If we experience a significant unexpected decrease in demand for our products or a higher occurrence of inventory obsolescence
because of changes in technology or customer requirements, we could be required to increase our inventory provisions.
Gaming Equipment and Property and Equipment
As of June 30, 2014, we had gaming
equipment and property and equipment of approximately $15.9 million, representing 48% of our total assets. We depreciate gaming
equipment and property and equipment on the straight-line basis over their estimated useful lives. The estimated useful lives are
based on the nature of the assets as well as current operating strategies and legal considerations such as contractual life. Future
events, such as property expansions, property developments, trends in market demand, new competition, or technology obsolescence,
could result in a change in the manner in which we use certain assets and require changes in the estimated useful lives of such
assets.
For assets to be held and used, they are
reviewed for impairment whenever indicators of impairment exist. If an indicator of impairment exists, we first group assets at
the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities (the
“asset group”). Secondly, we estimate the undiscounted future cash flows that are directly associated with and expected
to arise from the use and eventual disposition of such asset group. If the undiscounted cash flows exceed the carrying value, no
impairment is indicated. If the undiscounted cash flows do not exceed the carrying value, then an impairment is measured based
on fair value compared to carrying value, with fair value typically based on a discounted cash flow model.
To estimate the undiscounted cash flows
of an asset group, we consider potential cash flow scenarios based on management estimates given current conditions. Determining
the recoverability of our asset groups is judgmental in nature and requires the use of significant estimates and assumptions, including
estimated cash flows, growth rates and future market conditions, among others. Future changes to our estimates and assumptions
based upon changes in macro-economic factors, regulatory environments, operating results or management’s intentions may result
in future changes to the recoverability of our asset group.
Intangible Assets, including Goodwill
and Casino Contracts
As of June 30, 2014, we had intangible
assets, including goodwill and casino contracts of $5.3 million, representing 16% of our total assets.
Goodwill is not subject to amortization
and is tested for impairment and recoverability annually or more frequently if events or circumstances indicate that the assets
might be impaired. The impairment test consists of a comparison of its fair value with its carrying amount. If the carrying amount
is not recoverable and exceeds its fair value, an impairment will be recognized in an amount equal to that excess. If its carrying
amount does not exceed the fair value, no impairment is recognized.
Finite-lived intangible assets, including
casino contracts are amortized on a straight-line basis over their estimated useful lives. The estimated useful lives are based
on the nature of the assets as well as legal considerations such as contractual life. Future events, such as technology obsolescence
could result in a change in the manner in which we use the assets and require a change in the estimated useful lives of such assets.
Finite-lived intangible assets, including casino contracts are tested for impairment and recoverability when there are indicators
of impairment. The impairment test consists of a comparison of its fair value with its carrying amount. If the carrying amount
is not recoverable and exceeds its fair value, an impairment will be recognized in an amount equal to that excess. If its carrying
amount does not exceed the fair value, no impairment is recognized.
As of June 30, 2014, we had casino
contracts and gaming operation agreement of $4.7 million, representing 88% of our total intangible assets. The fair value of our
casino contracts and gaming operation agreement was estimated using a form of the income approach known as the excess earnings
method, excess earnings were discounted to present value at rates commensurate with our capital structure and the prevailing borrowing
rates within the industry in general. Determining the fair value of the casino contracts and gaming operation agreement is judgmental
in nature and requires the use of significant estimates and assumptions, including revenue, operating expenses, growth rates, discount
rates and future market conditions, among others. Future changes to our estimates and assumptions based upon changes in macro-economic
factors, operating results or management’s intentions may result in future changes to the fair value of the casino contracts
and gaming operation agreement.
Stock-Based Compensation
We apply ASC 718,
Compensation-Stock
Compensation
, to account for stock-based compensation. Under the fair value recognition provisions of ASC 718, we recognize
stock-based compensation expense 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 costs of a change in
the estimated forfeitures is recognized in the period of the change. For non-employee awards, we remeasure compensation costs
each period until the service condition is complete and recognize compensation costs 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 estimate. 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. Initial accruals of compensation
expense are based on the estimated number of shares for which requisite service is expected to be rendered.
Stock-based compensation expense totaled
approximately $69,000 and $ 198,000 and $141,000 and $445,000 for the three-month and six-month periods ended June 30, 2014
and 2013, respectively, in the accompanying consolidated statements of comprehensive income.
Income Taxes
We are subject to income taxes in the U.S.
(including federal and state) and several foreign jurisdictions in which we operate. We record income taxes under the asset and
liability method, whereby deferred tax assets and liabilities are recognized based on the future tax consequences attributable
to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective
tax bases, and attributable to operating loss and tax credit carryforwards. Accounting standards regarding income taxes requires
a reduction of the carrying amounts of deferred tax assets by a valuation allowance, if based on the available evidence, it is
“more-likely-than-not” that such assets will not be realized. Accordingly, the need to establish valuation allowances
for deferred tax assets is assessed at each reporting period based on a “more-likely-than-not” realization threshold.
This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts
of future profitability, the duration of statutory carryforward periods, our experience with operating loss and tax credit carryforwards
not expiring, and implementation of tax planning strategies.
We recorded a valuation allowance to reduce
deferred tax assets to the amount that is believed more likely than not to be realized. Management will reassess the realization
of deferred tax assets based on the applicable accounting standards for income taxes each reporting period and consider the scheduled
reversal of deferred tax liabilities, sources of taxable income and tax planning strategies. To the extent that the financial results
of these operations improve and it becomes “more-likely-than-not” that the deferred tax assets are realizable, we will
be able to reduce the valuation allowance. For valuation allowance related to deferred tax assets generated prior to Quasi-Reorganization,
which was effected on December 31, 2010, reductions in the valuation allowance will be recorded directly in equity.
Significant judgment is required in evaluating
our tax positions and determining our provision for income taxes. During the ordinary course of business, there are many transactions
for which the tax treatment is uncertain. Accounting standards regarding uncertainty in income taxes provides 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, based solely on the technical merits, of being sustained on examinations. We consider many
factors when evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments and which may
not accurately anticipate actual outcomes. We recognize interest and penalties, if any, related to unrecognized tax benefits in
the provision of income taxes in the statements of comprehensive income.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet financing
arrangements.