The notes to consolidated financial statements
are an integral part of these consolidated statements.
The notes to consolidated financial statements
are an integral part of these consolidated statements.
The notes to consolidated financial statements
are an integral part of these consolidated statements.
Notes to Consolidated Financial Statements
|
Note 1.
|
Description of Business
and Significant Accounting Policies
|
The current business activities of the
Company entail: (i) the owning and leasing of electronic gaming machines (EGMs) placed in resorts, hotels and other venues in Cambodia
and the Philippines on a fixed lease or revenue-sharing basis with venue owners; and (ii) the development of a social gaming platform
designed for the Pan-Asian market.
During the reported periods, the Company
also operated in the gaming products business, which entailed the design, manufacture and distribution of gaming chips and plaques
as well as the distribution of third-party gaming products. On May 11, 2016, the Company sold the principal assets of these operations
and has exited this business. All related historical revenues and expenses for these 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, 2015, filed with the SEC on March 30, 2016.
The Company effected a 1-for-4 reverse
stock split of its common shares as of February 26, 2015. All historical share amounts and share price information presented in
the financial statements and notes have been proportionally adjusted to reflect the impact of this reverse stock split, including
but not limited to basic and diluted weighted-average shares issued and outstanding.
Principles of Consolidation
These consolidated financial statements
include the accounts of Entertainment Gaming Asia Inc. and all its subsidiaries. All intercompany balances and transactions
have been eliminated in consolidation.
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 (or group of components) that either has been disposed of, or that is classified as held for sale, and represents
a strategic shift that has (or will have) a major effect on the Company’s operations and financial results.
Non-current assets held for discontinued
operations are carried at the lower of carrying amount or fair value less costs to sell. Any gain or loss from disposal of a business,
together with the results of these operations until the date of disposal, is reported separately as discontinued operations. The
financial information of discontinued operations is excluded from the respective captions in the Company’s consolidated statements
of comprehensive loss/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, 2016, the Company had deposits with financial institutions in excess of Federal Deposit
Insurance Corporation (FDIC) insured limits by approximately $32.8 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 relationship
and contract terms. Accounts receivable balances are written off after all collection efforts have been exhausted.
Inventories
Inventories are stated at the lower of
cost, determined using the first-in, first-out method, or market. Cost elements included in work-in-process and finished goods
include raw materials, direct labor and manufacturing overheads. Inventories did not include lower of cost or market (LCM) write-downs
as of June 30, 2016 and 2015.
Long-Lived Assets
The Company accounts for impairment of
long-lived assets in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification or ASC, ASC
360,
Property, Plant and Equipment
. Long-lived assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. In such instances, the Company estimates the undiscounted
future cash flows that result from the use of the asset and its ultimate disposition. If the sum of the undiscounted cash flows
is less than the carrying value, the Company recognizes an impairment loss, measured as the amount by which the carrying value
exceeds the fair value of the asset, determined principally using discounted cash flows. Impairment charges for long-lived assets
of approximately $1.3 million were included in the net loss/income from discontinued operations in the consolidated statements
of comprehensive loss/income for three-month and six-month periods ended June 30, 2016. There were no impairment charges for long-lived
assets for the three-month and six-month periods ended June 30, 2015.
Prepaids, Deposits and Other Assets
Prepaids, deposits and other
assets consist primarily of prepaid value-added taxes in foreign countries, prepayment to suppliers and other receivables,
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 $335,000 and $620,000 and $760,000 and $1.3 million was included in cost of gaming operations in the consolidated
statements of comprehensive loss/income for the three-month and six-month periods ended June 30, 2016 and 2015, 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.
The Company capitalizes certain direct
and incremental costs related to the design and construction, project payroll, and applicable portions of interest incurred for
potential projects in property and equipment.
Depreciation of property and equipment
of approximately $57,000 and $162,000 and $114,000 and $321,000 was included in the cost of gaming operations in the consolidated
statements of comprehensive loss/income for the three-month and six-month periods ended June 30, 2016 and 2015, respectively.
Goodwill and Intangible Assets, Including
Casino Contracts
Intangible assets consist of patents, trademarks,
technical know-how, gaming operation agreement, casino contracts, internal-used software 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.
The Company capitalizes certain costs relating
to software developed to solely meet the Company’s internal requirements and for which there are no substantive plans to
market the software. These costs mainly include payroll and payroll-related costs for employees who are directly associated with
and who devote time to the internal-use software projects during the application development stage until the software is substantially
complete and ready for its intended use. The Company also capitalizes certain costs related to the development of the social gaming
application for marketing purposes. These costs are capitalized once technological feasibility has been established. Costs incurred
prior to the criteria met for capitalization are expensed to research and development expenses as incurred. Management has committed
the resources of developing a social gaming application, and it is probable that the social gaming application will be completed
and the software will be used as intended. Such capitalized costs are amortized on a straight-line basis over the estimated useful
life of the related assets.
Amortization expenses related to casino
contracts were approximately $94,000 and $611,000 and $528,000 and $1.2 million for the three-month and six-month periods ended
June 30, 2016 and 2015, respectively. Amortization expenses related to other gaming related intangibles were approximately $33,000
and $63,000 and $96,000 and $126,000 for the three-month and six-month periods ended June 30, 2016 and 2015, respectively. These
amounts were accounted for as cost of gaming operations in the consolidated statements of comprehensive loss/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, 2016 and 2015.
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 Operations Revenue and Promotional Allowances
The Company earns recurring gaming revenue from its gaming operations.
For gaming operations, the Company earns
recurring 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 EGM
agreements between the Company and the venue owners and are based on either a fixed lease fee or 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 is received. All slot operations revenues
were recognized as earned during the three-month and six-month periods ended June 30, 2016 and 2015.
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 $NIL
and approximately $18,000 as of June 30, 2016 and December 31, 2015, respectively.
Gaming Products Sales
For the discontinued gaming products business,
the Company recognized revenue from the sale of its gaming products and accessories to end users upon shipment against customer
contracts or purchase orders. In accordance with the criteria of ASC 605-45,
Reporting Revenue Gross as a Principal versus Net
as an Agent,
the Company recognized gross revenue when it acted as a principal, had discretion to choose suppliers and establish
selling price, assumed credit risk and provided the products or services required in the transaction. If the above criteria were
not met, in which the supplier was the primary obligor in the arrangement and bears the general inventory risk, the Company recognized
revenue net of related costs. The Company also recognized revenue for the maintenance services of gaming products on the straight
line basis over the contract term in accordance with ASC 605,
Revenue Recognition
.
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 $6,000 and $20,000 and $21,000 and $50,000 for the three-month and six-month periods
ended June 30, 2016 and 2015, respectively.
Research and Development
Research and development expenses are expensed
as incurred. Employee-related costs associated with research and development and certain costs associated with the development
of the social gaming platform are included in research and development expenses. Research and development expenses were approximately
$87,000 and $NIL and $485,000 and $NIL for the three-month and six-month periods ended June 30, 2016 and 2015, respectively.
Leases
Leases are classified at the inception
date as either a capital lease or an operating lease. A lease is a capital lease if any of the following conditions exists:
|
·
|
Ownership is transferred to the lessee by the end of
the lease term;
|
|
·
|
There is a bargain purchase option;
|
|
·
|
The lease term is at least 75% of the property’s
estimated remaining economic life; or
|
|
·
|
The present value of the minimum lease payments at the
beginning of the lease term is 90% or more of the fair value of the leased property to the lessor at the inception date.
|
A capital lease is accounted for as if
there was an acquisition of an asset and an incurrence of an obligation at the inception of the lease. All other leases are accounted
for as operating leases wherein rental payments are expensed as incurred. The Company had no capital leases as of June 30, 2016
and December 31, 2015.
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 consolidated statements of comprehensive loss/income.
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.
(Loss)/Earnings per Share
Basic (loss)/earnings per share are computed
by dividing the reported net (loss)/earnings by the weighted average number of shares of common stock outstanding during the period.
Diluted 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 was no difference in diluted loss per share from
basic loss per share for three-month and six-month periods ended June 30, 2016 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, is generally
the local currency. For these subsidiaries, the Company translates the assets and liabilities at exchange rates in effect at the
balance sheet date and income and expense accounts at average exchange rates during the year. Resulting currency translation adjustments
are recorded directly to accumulated other comprehensive income within stockholders’ equity. Gains and losses resulting from
transactions in non-functional currencies are recorded in the consolidated statements of comprehensive loss/income.
Below is a summary of closing exchange
rates as of June 30, 2016 and December 31, 2015 and average exchange rates for the three-month and six-month periods ended June
30, 2016 and 2015.
(US$1 to foreign currency)
|
|
June 30, 2016
|
|
|
December 31, 2015
|
|
Australian dollar
|
|
|
1.34
|
|
|
|
1.37
|
|
Hong Kong dollar
|
|
|
7.76
|
|
|
|
7.75
|
|
Philippine peso
|
|
|
46.96
|
|
|
|
47.17
|
|
Thai baht
|
|
|
35.15
|
|
|
|
36.07
|
|
|
|
Three-Month Period
Ended June 30,
|
|
|
Six-Month Period
Ended June 30,
|
|
(US$1 to foreign currency)
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Australian dollar
|
|
|
1.34
|
|
|
|
1.27
|
|
|
|
1.36
|
|
|
|
1.28
|
|
Hong Kong dollar
|
|
|
7.76
|
|
|
|
7.76
|
|
|
|
7.77
|
|
|
|
7.75
|
|
Philippine peso
|
|
|
46.52
|
|
|
|
44.44
|
|
|
|
46.9
|
|
|
|
44.55
|
|
Thai baht
|
|
|
35.26
|
|
|
|
32.65
|
|
|
|
35.44
|
|
|
|
32.95
|
|
Fair Value Measurement
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, 2016, the fair values of
financial assets and liabilities approximate carrying values due to the short maturity of these items.
Defined Benefit Pension Plan
The Company provides pension benefits to
all regular full-time employees in the Philippines through a defined benefit plan. A defined benefit plan is a pension plan that
defines an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such
as age, years of service and salary.
The defined benefit obligation is calculated
annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is
determined by discounting the estimated future cash outflows using interest rates of high quality corporate bonds that are denominated
in the currency in which the benefits will be paid and that have terms to maturity approximating to the terms of the related pension
liability.
The accounting guidance related to employers’
accounting for defined benefit pension plan requires recognition in the balance sheet of the present value of the defined benefit
obligation at the reporting date, together with adjustments for unrecognized actuarial gains or losses and past service costs or
credits in other comprehensive income.
There were no adjustments for unrecognized
actuarial gains or losses and past service costs or credits to equity through other comprehensive income for the three-month and
six-month periods ended June 30, 2016 and 2015.
Asset Retirement Obligations
Asset retirement obligations are legal
obligations associated with the retirement of long-lived assets resulting from the acquisition, construction, development and/or
normal use of the underlying assets. Recognition of a liability for an asset retirement obligation is required in the period in
which it is incurred at its estimated fair value. The associated asset retirement costs are capitalized as part of the carrying
amount of the underlying asset and depreciated over the estimated useful life of the asset. The liability is accreted through charges
to operating expenses. If the asset retirement obligation is settled for other than the carrying amount of the liability, the Company
recognizes a gain or loss on settlement.
The Company records all asset retirement
obligations for which we have legal obligations to remove all installation works and reinstate the manufacturing facilities to
its original state at estimated fair value. The Company recognized approximately $5,000 and $5,000 and $9,000 and $9,000 of asset
retirement obligation operating costs related to accretion of the liabilities and depreciation of the assets for the three-month
and six-month periods ended June 30, 2016 and 2015, respectively. These amounts were included in the net loss/income from discontinued
operations in the consolidated statements of comprehensive loss/income.
The Company currently conducts business
under two operating segments: (i) gaming operations, which include leasing of its owned EGMs on a fixed lease fee or revenue-sharing
basis; and (ii) the development of a social gaming platform.
During the reported periods, the Company
also operated in the gaming products business, which entailed the design, manufacture and distribution of gaming chips and plaques
as well as the distribution of third-party gaming products. On May 11, 2016, the Company sold the principal assets of the gaming
products operations and has exited this business. All related historical revenues and expenses for these operations have been reclassified
as discontinued operations. The accounting policies of the discontinued operations are consistent with the Company’s policies
for the accompanying consolidated financial statements.
The following table presents the financial
information for each of the Company’s continuing operating segments.
|
|
Three-Month Period
Ended June 30,
|
|
|
Six-Month Period
Ended June 30,
|
|
(amounts in thousands)
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gaming operations
|
|
$
|
2,275
|
|
|
$
|
4,914
|
|
|
$
|
6,125
|
|
|
$
|
8,924
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gaming operations
|
|
$
|
1,219
|
|
|
$
|
2,509
|
|
|
$
|
2,695
|
|
|
$
|
4,208
|
|
Social gaming platform
|
|
|
(87
|
)
|
|
|
—
|
|
|
|
(485
|
)
|
|
|
—
|
|
Corporate and other operating costs and expenses
|
|
|
(1,088
|
)
|
|
|
(1,170
|
)
|
|
|
(2,162
|
)
|
|
|
(2,614
|
)
|
Total operating income
|
|
$
|
44
|
|
|
$
|
1,339
|
|
|
$
|
48
|
|
|
$
|
1,594
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gaming operations
|
|
$
|
522
|
|
|
$
|
1,465
|
|
|
$
|
1,509
|
|
|
$
|
2,970
|
|
Social gaming platform
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Corporate
|
|
|
19
|
|
|
|
24
|
|
|
|
43
|
|
|
|
47
|
|
Total depreciation and amortization
|
|
$
|
541
|
|
|
$
|
1,489
|
|
|
$
|
1,552
|
|
|
$
|
3,017
|
|
Geographic segment revenues of the Company’s
continuing operation segments for the three-month and six-month periods ended June 30, 2016 and 2015 consisted of the following:
|
|
Three-Month Period
Ended June 30,
|
|
|
Six-Month Period
Ended June 30,
|
|
(amounts in thousands)
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Cambodia
|
|
$
|
1,648
|
|
|
$
|
4,246
|
|
|
$
|
4,895
|
|
|
$
|
7,570
|
|
Philippines
|
|
|
627
|
|
|
|
668
|
|
|
|
1,230
|
|
|
|
1,354
|
|
Total
|
|
$
|
2,275
|
|
|
$
|
4,914
|
|
|
$
|
6,125
|
|
|
$
|
8,924
|
|
For the three-month and six-month periods
ended June 30, 2016 and 2015, the largest gaming operations customer represented 57% and 76% and 67% and 75%, respectively, of
total gaming operations revenue.
Inventories consisted of the following:
(amounts in thousands)
|
|
June 30, 2016
|
|
|
December 31, 2015
|
|
|
|
(Unaudited)
|
|
|
|
|
Raw materials (1)
|
|
$
|
—
|
|
|
$
|
1,742
|
|
Work-in-process
|
|
|
—
|
|
|
|
80
|
|
Finished goods (2)
|
|
|
—
|
|
|
|
443
|
|
Spare parts
|
|
|
99
|
|
|
|
113
|
|
Total
|
|
$
|
99
|
|
|
$
|
2,378
|
|
|
(1)
|
Raw materials decreased from December 31, 2015 to June 30, 2016 due to Company’s sale of
its gaming products operations assets on May 11, 2016, which included raw materials.
|
|
(2)
|
Finished goods decreased from December 31, 2015 to June 30, 2016 due to the delivery of all outstanding
orders for the gaming products division in the six-month periods ended June 30, 2016.
|
|
Note 4.
|
Prepaid Expenses and
Other Current Assets
|
Prepaid expenses and other current assets consisted of the following:
(amounts in thousands)
|
|
June 30, 2016
|
|
|
December 31, 2015
|
|
|
|
(Unaudited)
|
|
|
|
|
Prepayments to suppliers
|
|
$
|
132
|
|
|
$
|
75
|
|
Prepaid insurances
|
|
|
106
|
|
|
|
220
|
|
Total
|
|
$
|
238
|
|
|
$
|
295
|
|
Accounts and other receivables consisted of the following:
(amounts in thousands)
|
|
June 30, 2016
|
|
|
December 31, 2015
|
|
|
|
(Unaudited)
|
|
|
|
|
Trade receivables
|
|
$
|
848
|
|
|
$
|
724
|
|
Other receivables (1)
|
|
|
1,565
|
|
|
|
78
|
|
|
|
|
2,413
|
|
|
|
802
|
|
Less: allowance for doubtful accounts
|
|
|
—
|
|
|
|
—
|
|
Net
|
|
$
|
2,413
|
|
|
$
|
802
|
|
|
(1)
|
Other receivables as of June 30, 2016 included approximately $1.5 million in payments due within
one year from the sale of its gaming products operations assets on May 11, 2016. The non-current balance of the future payments
receivable is included in Prepaids, Deposits and Other Assets. See Note 9.
|
Gaming equipment is stated at cost. The
major categories of gaming equipment and accumulated depreciation consisted of the following:
(amounts in thousands)
|
|
Useful Life (years)
|
|
June 30, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
EGMs
|
|
3-5
|
|
$
|
16,190
|
|
|
$
|
16,215
|
|
Systems
|
|
5
|
|
|
1,340
|
|
|
|
1,335
|
|
|
|
|
|
|
17,530
|
|
|
|
17,550
|
|
Less: accumulated depreciation
|
|
|
|
|
(15,255
|
)
|
|
|
(14,565
|
)
|
Net
|
|
|
|
$
|
2,275
|
|
|
$
|
2,985
|
|
Depreciation expenses of gaming equipment
of approximately $335,000 and $620,000 and $760,000 and $1.3 million were included in cost of gaming operations in the consolidated
statements of comprehensive loss/income for the three-month and six-month periods ended June 30, 2016 and 2015, respectively.
|
Note 7.
|
Property and Equipment
|
Property and equipment are stated at cost.
The major categories of property and equipment and accumulated depreciation consisted of the following:
(amounts in thousands)
|
|
Useful Life (years)
|
|
June 30, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
Equipment, vehicles, furniture and fixtures (1)
|
|
3-10
|
|
$
|
907
|
|
|
$
|
6,290
|
|
Land and building
|
|
5
|
|
|
1,506
|
|
|
|
1,506
|
|
Leasehold improvements (2)
|
|
1-6
|
|
|
149
|
|
|
|
1,400
|
|
|
|
|
|
|
2,562
|
|
|
|
9,196
|
|
Less: accumulated depreciation
|
|
|
|
|
(1,244
|
)
|
|
|
(3,277
|
)
|
Net
|
|
|
|
$
|
1,318
|
|
|
$
|
5,919
|
|
|
(1)
|
Equipment, vehicles, furniture and fixtures decreased from December 31, 2015 to June 30, 2016 due
to the sale of the principal assets of the gaming products operations on May 11, 2016 and the write-down of the unsold gaming products
assets, including office equipment and machinery that could not be utilized in the Company’s other operations as of June
30, 2016.
|
|
(2)
|
Leasehold improvements decreased from December 31, 2015 to June 30, 2016 due to the write-down
of leasehold improvements as of June 30, 2016 related to the discontinued gaming products operations.
|
Depreciation expenses of property and equipment
of approximately $57,000 and $162,000 and $114,000 and $321,000 were included in cost of gaming operations in the consolidated
statements of comprehensive loss/income for the three-month and six-month periods ended June 30, 2016 and 2015, respectively.
|
Note 8.
|
Goodwill and Intangible
Assets, including Casino Contracts
|
Goodwill and intangible assets are stated
at cost. The major categories of goodwill and intangible assets and accumulated amortization consisted of the following:
(amounts in thousands)
|
|
Useful Life (years)
|
|
June 30, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
Gaming operation agreement
|
|
4-5
|
|
$
|
1,166
|
|
|
$
|
1,166
|
|
Less: accumulated amortization
|
|
|
|
|
(1,166
|
)
|
|
|
(1,070
|
)
|
|
|
|
|
|
—
|
|
|
|
96
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
N/A
|
|
|
334
|
|
|
|
332
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents
|
|
5-6
|
|
|
—
|
|
|
|
114
|
|
Less: accumulated amortization
|
|
|
|
|
—
|
|
|
|
(104
|
)
|
|
|
|
|
|
—
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
5-9
|
|
|
—
|
|
|
|
26
|
|
Less: accumulated amortization
|
|
|
|
|
—
|
|
|
|
(15
|
)
|
|
|
|
|
|
—
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
Technical know-how
|
|
10
|
|
|
—
|
|
|
|
261
|
|
Less: accumulated amortization
|
|
|
|
|
—
|
|
|
|
(94
|
)
|
|
|
|
|
|
—
|
|
|
|
167
|
|
|
|
|
|
|
|
|
|
|
|
|
Casino contracts
|
|
5-6
|
|
|
—
|
|
|
|
12,637
|
|
Less: accumulated amortization
|
|
|
|
|
—
|
|
|
|
(12,109
|
)
|
|
|
|
|
|
—
|
|
|
|
528
|
|
|
|
|
|
|
|
|
|
|
|
|
Internal-use software (1)
|
|
—
|
|
|
1,144
|
|
|
|
107
|
|
|
|
|
|
|
|
|
|
|
|
|
Net carrying value
|
|
|
|
$
|
1,478
|
|
|
$
|
1,251
|
|
|
(1)
|
Internal-use software relates to the development of the social gaming platform.
|
Amortization expenses for finite-lived
intangible assets of approximately $127,000 and $674,000 and $625,000 and $1.3 million were included in cost of gaming operations
in the consolidated statements of comprehensive loss/income for the three-month and six-month periods ended June 30, 2016 and 2015,
respectively.
Goodwill movements during the periods consisted of the following:
(amounts in thousands)
|
|
2016
|
|
|
2015
|
|
|
|
(Unaudited)
|
|
|
|
|
Balance as of January 1
|
|
$
|
332
|
|
|
$
|
351
|
|
Foreign currency translation adjustment
|
|
|
2
|
|
|
|
(19
|
)
|
Balance as of June 30/December 31
|
|
$
|
334
|
|
|
$
|
332
|
|
|
Note 9.
|
Prepaids, Deposits and
Other Assets
|
Prepaids, deposits and other assets consisted of the following:
(amounts in thousands)
|
|
June 30, 2016
|
|
|
December 31, 2015
|
|
|
|
(Unaudited)
|
|
|
|
|
Rentals, utilities and other deposits
|
|
$
|
426
|
|
|
$
|
391
|
|
Other receivables (1)
|
|
|
976
|
|
|
|
—
|
|
Prepaid taxes
|
|
|
38
|
|
|
|
—
|
|
Prepayments to suppliers
|
|
|
—
|
|
|
|
34
|
|
Total
|
|
$
|
1,440
|
|
|
$
|
425
|
|
|
(1)
|
Other receivables as of June 30, 2016 included approximately
$976,000 in payments due in more than one year from the sale of assets of the gaming products operations. The current
balance of the future payments receivable is included in other receivables. See Note 5.
|
|
Note 10.
|
Accrued Expenses
|
Accrued expenses consisted of the following:
(amounts in thousands)
|
|
June 30, 2016
|
|
|
December 31, 2015
|
|
|
|
(Unaudited)
|
|
|
|
|
Payroll and related costs
|
|
$
|
161
|
|
|
$
|
626
|
|
Professional fees
|
|
|
545
|
|
|
|
339
|
|
Withholding tax expenses
|
|
|
725
|
|
|
|
549
|
|
Other tax expenses
|
|
|
44
|
|
|
|
44
|
|
Other expenses
|
|
|
90
|
|
|
|
197
|
|
Total
|
|
$
|
1,565
|
|
|
$
|
1,755
|
|
|
Note 11.
|
Other Liabilities
|
Other liabilities consisted of the following:
(amounts in thousands)
|
|
June 30, 2016
|
|
|
December 31, 2015
|
|
|
|
(Unaudited)
|
|
|
|
|
Other tax liabilities
|
|
$
|
784
|
|
|
$
|
754
|
|
Other
|
|
|
122
|
|
|
|
126
|
|
Total
|
|
$
|
906
|
|
|
$
|
880
|
|
|
Note 12.
|
Stock-Based Compensation
|
The Company effected a 1-for-4 reverse
stock split of its common shares as of February 26, 2015. All historical share amounts and share price information presented below
have been proportionally adjusted to reflect the impact of this reverse split.
At the annual shareholders meeting held
on September 8, 2008, a new stock option plan, the 2008 Stock Incentive 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, thereby terminating both of the previous 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 is 1,250,000 shares. The exercise price of options granted under the 2008 Plan shall not be less than
100% of the fair market value of one share of common stock on the date of grant, unless the participant owns more than 10% of the
total combined voting power of all classes of stock of the Company or any parent or subsidiary corporation of the Company, in which
case the exercise price shall then be 110% of the fair market value. The outstanding stock options generally vest over three years
and have ten-year contractual terms.
In the three-month and six-month periods
ended June 30, 2016, there were no grants of stock options or restricted stock awards and 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, through which 937,500 shares and 18,750 shares were authorized, respectively. Both of these previous plans expired
on December 31, 2008. However, options granted under these previous plans that were outstanding as of the date of termination remain
outstanding and subject to termination according to their terms.
As of June 30, 2016, stock options for
the purchase of 226,252 shares and 3,751 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, 2016, stock options for
the purchase of 536,848 shares of common stock were outstanding under the 2008 Plan.
As of June 30, 2016, stock options for
the purchase of 755,601 shares of common stock were exercisable with a weighted average exercise price of $7.91, a weighted average
fair value of $3.35 and an aggregate intrinsic value of approximately $36,000. The total fair value of shares vested during the
three-month period ended June 30, 2016 was $NIL. As of June 30, 2016, an aggregate of 11,250 options granted under all plans was
subject to vesting with a total compensation cost of approximately $4,000. The amount is expected to be recognized over 0.51 years.
On July 18, 2016, Company’s shareholders
approved a new 2016 Stock Incentive Plan, the 2016 Plan, which amended the 2008 Plan to bring it in alignment with the Rules Governing
the Listing of Securities on the Stock Exchange of Hong Kong Limited, to which the Company’s equity incentive plans are subject
as a result of becoming an indirect majority-owned subsidiary of Melco International Development Limited. The maximum number of
shares reserved for issuance under the 2016 Plan is 1,250,000 shares of common stock and the 2016 Plan allows for the grant of
incentive stock options, non-statutory stock options, restricted stock awards and performance stock awards. On July 18, 2016, the Company effected a voluntary stock option exchange program for its employees,
directors and certain others, which was approved by the Company’s stockholders on July 18, 2016. See Note 21.
A summary of all current and expired plans
as of June 30, 2016 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, 2015
|
|
|
767,476
|
|
|
$
|
7.90
|
|
|
|
4.28
|
|
|
$
|
34
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Forfeited or expired
|
|
|
(625
|
)
|
|
|
48.48
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding as of June 30, 2016
|
|
|
766,851
|
|
|
|
7.86
|
|
|
|
3.79
|
|
|
|
36
|
|
Exercisable as of June 30, 2016
|
|
|
755,601
|
|
|
$
|
7.91
|
|
|
|
3.73
|
|
|
$
|
36
|
|
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, 2015
|
|
|
3,750
|
|
|
$
|
4.84
|
|
|
|
0.41
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Vested
|
|
|
3,750
|
|
|
|
4.84
|
|
|
|
—
|
|
Unvested balance as of June 30, 2016
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
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, 2016 and 2015.
|
|
Six-Month Period Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
Range of values:
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
Expected volatility
|
|
|
81.78
|
%
|
|
|
90.75
|
%
|
|
|
72.84
|
%
|
|
|
80.91
|
%
|
Expected dividends
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Expected term (in years)
|
|
|
4.78
|
|
|
|
7.11
|
|
|
|
4.78
|
|
|
|
8.11
|
|
Risk free rate
|
|
|
0.98
|
%
|
|
|
1.69
|
%
|
|
|
1.13
|
%
|
|
|
2.02
|
%
|
For stock-based compensation accrued to
employees and non-employee directors, the Company recognizes stock-based compensation expenses 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
|
Significant revenues, purchases and expenses
arising from transactions with related parties consisted of the following:
|
|
Three-Month Period
Ended June 30,
|
|
|
Six-Month Period
Ended June 30,
|
|
(amounts in thousands)
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Related party transactions provided to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Melco Crown (Macau) Limited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of gaming products
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MCE Leisure (Philippines) Corporation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of gaming products
|
|
$
|
8
|
|
|
$
|
1,439
|
|
|
$
|
167
|
|
|
$
|
4,331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Melco Crown Entertainment Limited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of gaming products
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oriental Regent Limited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of gaming products
|
|
$
|
164
|
|
|
$
|
500
|
|
|
$
|
164
|
|
|
$
|
500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related party transactions provided by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Melco Services Limited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technical services
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
1
|
|
Services Agreement
|
|
$
|
58
|
|
|
$
|
—
|
|
|
$
|
116
|
|
|
$
|
—
|
|
Other
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
6
|
|
|
$
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aberdeen Restaurant Enterprises Limited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Golden Future (Management Services) Limited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
$
|
115
|
|
|
$
|
86
|
|
|
$
|
178
|
|
|
$
|
147
|
|
Melco Services Limited is a wholly-owned
subsidiary of Melco International Development Limited, which owns 64.8% of Entertainment Gaming Asia Inc.
Melco International Development Limited
owns 37.9% of Melco Crown Entertainment Limited, which owns 90% of Melco Crown (Macau) Limited and 72.9% of MCE Leisure (Philippines)
Corporation.
Golden Future (Management Services) Limited is a wholly-owned
subsidiary of Melco Crown (Macau) Limited.
Melco International Development Limited indirectly owns 86.7%
of Aberdeen Restaurant Enterprises Limited and 5% of Oriental Regent Limited.
The Company recorded income tax expenses
of $89,000 and $17,000 and $208,000 and $37,000 for the three-month and six-month periods ended June 30, 2016 and 2015, respectively.
The Company’s effective income tax rates were 1,186.2% and 1.3% and 286.0% and 2.4% for the three-month and six-month periods
ended June 30, 2016 and 2015, respectively. The EGT Cambodia entity is income tax exempt and only pays a fixed monthly tax rather
than a tax on income. The change in effective tax rate was mainly due to the inclusion of EGT Cambodia pre-tax income, which is
subject to a zero income tax liability, in the overall estimated annual effective tax rate computation.
The fixed obligation
tax arrangement is subject to annual renewal and negotiation. The Company is working to renew the fixed obligation tax arrangement
for EGT Cambodia for 2016.
The Company is subject to income tax examinations
by tax authorities in jurisdictions in which it operates. The Company’s 2010 to 2015 United States income tax returns remain
open to examination by the Internal Revenue Service. The Company’s 2009 to 2013 Australian income tax returns remain open
to examination by the Australian Taxation Office. The Company’s 2015 Cambodian income tax returns remain open to examination
by the General Department of Taxation. The Company’s 2013 to 2015 Philippines income tax returns remain open to examination
by the Philippines Bureau of Internal Revenue. The Company’s 2009 to 2015 Hong Kong income tax returns remain open to examination
by the Hong Kong Inland Revenue Department.
|
Note 15.
|
Discontinued Operations
|
On May 11, 2016, the Company entered into
an asset purchase agreement pursuant to which it sold the principal assets dedicated to the design, manufacture and distribution
of chips, plaques and layouts for gaming tables to Gaming Partners International Corporation, or GPI. The transaction under the
agreement closed on May 11, 2016.
Under the terms of the agreement, the Company
sold to GPI certain assets of its gaming products business, including fixed assets, raw materials and inventory and intellectual
property, for cash consideration of approximately $5.9 million. The consideration includes a purchase price of approximately $5.4
million and $530,000 for restrictive covenants related to a non-compete arrangement given by the Company and Mr. Clarence Chung.
The purchase price will be paid out in installments over a 24-month period after closing, with approximately $3.2 million paid
at closing and approximately $1.1 million to be paid on each of the first two anniversaries of the closing. Payment related to
the restrictive covenants was paid after closing. GPI also paid to the Company an amount equal to four months’ rental for
its factory subject to a cap of $260,000 after closing and is expected to pay a fixed sum of $520,000 for costs related to the
termination of the gaming products business employees.
In addition, GPI will make earn-out payments
to the Company. These earn-out payments include: 3% of net revenue on certain sales to specific Asian-based casinos over the next
five years subject to a cap of a total of $500 million of net revenue; and 15% of net revenues on sales to the Company’s
related party casinos for an indefinite time period for the first $10 million of net revenue and, in addition, 3% of net revenue
from these related party casino sales over the next five years subject to a cap of $30 million of net revenue. The Company shall
only be entitled to earn-out payments in excess of $900,000.
The agreement includes customary representations,
warranties and covenants by the Company and GPI, including each party’s agreement to indemnify the other against certain
claims or losses resulting from certain breaches of representations, warranties or covenants under the agreement and third-party
claims arising before and after the close. The asset sale represents our exit from the business of design, manufacture and distribution
of chips, plaques and layouts for gaming tables and, as part of the transaction, the Company has agreed with GPI not to engage
in the manufacture of gaming chips, plaques, jetons, playing cards and layouts for gaming tables in competition with GPI.
In connection with the close of the transaction
under the agreement, the Company’s wholly-owned subsidiary, DPD Limited, formerly known as Dolphin Products Limited, and
GPI settled and released each other of all claims relating to the civil actions instituted by GPI against DPD in the High Court
of the Hong Kong Special Administrative Region in December 2015.
The following table details selected financial
information for the discontinued operations in the consolidated statements of comprehensive loss/income.
|
|
Three-Month
Periods Ended June 30,
|
|
|
Six-Month
Periods Ended June 30,
|
|
(amounts in thousands)
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Revenues from gaming products
|
|
$
|
307
|
|
|
$
|
2,723
|
|
|
$
|
1,612
|
|
|
$
|
6,995
|
|
Cost of gaming products
|
|
|
(416
|
)
|
|
|
(2,328
|
)
|
|
|
(2,175
|
)
|
|
|
(5,990
|
)
|
Selling, general and administrative expenses
|
|
|
(512
|
)
|
|
|
(186
|
)
|
|
|
(1,430
|
)
|
|
|
(388
|
)
|
Gain/(loss) on disposition of assets
|
|
|
1,287
|
|
|
|
(2
|
)
|
|
|
1,287
|
|
|
|
(2
|
)
|
Impairment of assets (1)
|
|
|
(1,276
|
)
|
|
|
—
|
|
|
|
(1,276
|
)
|
|
|
—
|
|
Research and development expenses
|
|
|
(54
|
)
|
|
|
(35
|
)
|
|
|
(105
|
)
|
|
|
(70
|
)
|
Depreciation and amortization
|
|
|
(16
|
)
|
|
|
(19
|
)
|
|
|
(37
|
)
|
|
|
(38
|
)
|
Other (expenses)/income
|
|
|
(6
|
)
|
|
|
5
|
|
|
|
17
|
|
|
|
(17
|
)
|
(Loss)/income from discontinued operations, net of tax
|
|
$
|
(686
|
)
|
|
$
|
158
|
|
|
$
|
(2,107
|
)
|
|
$
|
490
|
|
|
(1)
|
In the three-month period ended June 30, 2016, the Company recorded a non-cash impairment
charge of approximately $1.3 million associated with the write-down of the remaining gaming operations assets, including certain
machinery, leasehold improvements and office equipment, which could not be utilized in its other operations.
|
|
Note 16.
|
Commitments and Contingencies
|
Legal Matters
Gaming Partners International Corporation Litigation
On December 21, 2015, Gaming Partners International
Corporation, or GPI, commenced a legal action in the High Court of the Hong Kong Special Administrative Region against DPD Limited,
formerly known as Dolphin Products Limited, or DPD, the Company’s wholly-owned subsidiary.
On May 11, 2016, GPI agreed to irrevocably
withdraw, terminate and discontinue the legal action mentioned above. On the same date, the Company agreed to sell substantially
all the principal assets of DPD to GPI and to discontinue DPD’s business of designing, manufacturing and distributing gaming
chips and plaques and distributing third-party table game products.
|
Note 17.
|
(Loss)/Earnings Per
Share
|
Computation of the basic and diluted (loss)/earnings
per share from continuing operations consisted of the following:
|
|
Three-Month Period Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
(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
|
|
$
|
(81
|
)
|
|
|
14,462
|
|
|
$
|
(0.01
|
)
|
|
$
|
1,303
|
|
|
|
14,458
|
|
|
$
|
0.09
|
|
Effect of dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive stock options/restricted shares (1)
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
19
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/income attributable to equity shareholders plus assumed conversion
|
|
$
|
(81
|
)
|
|
|
14,462
|
|
|
$
|
(0.01
|
)
|
|
$
|
1,303
|
|
|
|
14,477
|
|
|
$
|
0.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six-Month Period Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
(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
|
|
$
|
(135
|
)
|
|
|
14,461
|
|
|
$
|
(0.01
|
)
|
|
$
|
1,542
|
|
|
|
14,454
|
|
|
$
|
0.11
|
|
Effect of dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive stock options/restricted shares (1)
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
20
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/income attributable to equity shareholders plus assumed conversion
|
|
$
|
(135
|
)
|
|
|
14,461
|
|
|
$
|
(0.01
|
)
|
|
$
|
1,542
|
|
|
|
14,474
|
|
|
$
|
0.11
|
|
|
(1)
|
There were no differences in diluted loss per share from basic loss per share as the assumed exercise of common stock equivalents would have an anti-dilutive effect due to losses for the three-month and six-month periods ended June 30, 2016.
|
|
|
Three-Month Period Ended June 30,
|
|
|
Six-Month Period Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Anti-dilutive outstanding stock options excluded from computation of loss/earnings per share
|
|
|
748,268
|
|
|
|
751,538
|
|
|
|
743,982
|
|
|
|
750,618
|
|
The components of accrued retirement benefits
consisted of the following:
(amounts in thousands)
|
|
2016
|
|
|
2015
|
|
|
|
(Unaudited)
|
|
|
|
|
Balance as of January 1
|
|
$
|
23
|
|
|
$
|
29
|
|
Service cost
|
|
|
—
|
|
|
|
8
|
|
Interest cost
|
|
|
—
|
|
|
|
1
|
|
Actuarial gain and others
|
|
|
—
|
|
|
|
(15
|
)
|
Balance as of June 30/December 31
|
|
$
|
23
|
|
|
$
|
23
|
|
|
Note 19.
|
Asset Retirement Obligations
|
Reconciliations of the carrying amounts
of the Company’s asset retirement obligations are as follows:
(amounts in thousands)
|
|
2016
|
|
|
2015
|
|
|
|
(Unaudited)
|
|
|
|
|
Balance as of January 1
|
|
$
|
99
|
|
|
$
|
92
|
|
Accretion expense
|
|
|
—
|
|
|
|
7
|
|
Balance as of June 30/December 31
|
|
$
|
99
|
|
|
$
|
99
|
|
|
Note 20.
|
Accumulated Other Comprehensive
Income
|
The accumulated balances in respect of
other comprehensive income consisted of the following:
(amounts in thousands)
|
|
Defined Benefit
Pension Plan
|
|
|
Foreign
Currency
Translation
|
|
|
Accumulated
Other
Comprehensive
Income
|
|
Balances as of January 1, 2015
|
|
$
|
87
|
|
|
$
|
666
|
|
|
$
|
753
|
|
Current period other comprehensive income/(loss)
|
|
|
3
|
|
|
|
(47
|
)
|
|
|
(44
|
)
|
Balances as of December 31, 2015
|
|
|
90
|
|
|
|
619
|
|
|
|
709
|
|
Current period other comprehensive loss
|
|
|
—
|
|
|
|
(3
|
)
|
|
|
(3
|
)
|
Balances as of June 30, 2016 (Unaudited)
|
|
$
|
90
|
|
|
$
|
616
|
|
|
$
|
706
|
|
|
Note 21.
|
Subsequent Events
|
Voluntary Stock Option Exchange
On April 29, 2016, the Board of Directors
of the Company approved a voluntary stock option exchange program for its employees, directors and certain others, or the Participants.
The stock option exchange program was effected pursuant to shareholder approval of an Amended and Restated Stock Incentive Plan,
the 2016 Plan, which amended the Company’s 2008 Stock Incentive Plan, the 2008 Plan, to bring it in alignment with the Rules
Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited, to which the Company’s equity incentive plans
are subject as a result of becoming an indirect majority-owned subsidiary of Melco International Development Limited. On July 18,
2016, both the 2016 Plan and the stock option exchange program were approved by the stockholders of the Company.
Under
the terms of the stock option exchange program, the Participants had the opportunity to cancel their existing underwater outstanding
stock options (i.e., options with exercise prices that are higher than the current market trading price of the Company’s
common stock) in exchange for a replacement option grant for an equal number of shares. The replacement options have an exercise
price of $1.94, which is based on the higher of: (i) 100% of the fair market value of the Company’s common stock on the Board
approval date and (ii) 100% of the average fair market value of one share of the Company’s common stock for the five business
days immediately preceding the Board approval date.
The replacement
options have a ten-year term from the Board approval date and are subject to a new vesting schedule. They will vest over three
years, vesting 50% on the first anniversary and 25% on each of the second and third anniversaries of the Board approval date, subject
to the Participants remaining continuously in service with the Company, except in the case of replacement options issued to our
non-employee directors which will continue to vest after the termination of their service to the Company.
As of June 30,
2016, options to purchase 766,851 shares of the Company’s common stock were outstanding under the 2008 Plan and other stock
incentive plans. Options to purchase 484,781 of these shares, or approximately 3% of total shares outstanding, were eligible and
exchanged in this program. The number of shares subject to outstanding options did not change as a result of this option exchange.
The exchange
program was structured to comply with ASC 718
Compensation-Stock Compensation
. As a result of the option exchange, the
Company expects to incur non-cash compensation expense attributable to the incremental fair value of the replacement options granted
to the Participants, measured as of the date such awards were granted. The incremental compensation expense associated with the
replacement options will be recognized over the expected life of the replacement options.
Termination of Material Agreement
and EGM Dispositions
On July 6, 2016, the Lease of Machines
Agreement dated February 29, 2016 between the Company and NagaWorld Limited, or NagaWorld, was terminated and the Company ceased
leasing electronic gaming machines (EGMs) to NagaWorld effective June 30, 2016. At the same time, the Company agreed to sell to
a third-party in Cambodia all of its EGMs placed in NagaWorld for $2.5 million. The purchase price was payable by the purchaser
in full in cash on completion of the sale, which occurred on July 6, 2016. Under the Lease of Machines Agreement with NagaWorld,
which commenced March 1, 2016, the Company had leased to NagaWorld on an ongoing basis 670 EGM seats and related equipment for
a fixed fee per machine seat per day payable monthly. Prior to this, the Company had leased EGMs to NagaWorld on a participation,
or revenue-sharing basis from January 2009 until the most recent participation contract’s expiration on February 29, 2016.
On June 30, 2016, the Company’s machine
leasing agreement with Leisure World VIP Slot Club, or Leisure World, in the Philippines expired and the Company ceased leasing
EGMs to Leisure World as of the same date. On July 4, 2016, the Company agreed to sell to Leisure World all of its 154 EGMs placed
in their venue for $750,000, of which 70% was paid on July 4, 2016 and the remaining 30% was paid on August 3, 2016. The Company
had placed EGMs on a participation basis in Leisure World from June 2009 until June 2016.