FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
x |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended September 30,
2015
OR
¨ |
TRANSITION REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
.
Commission file number: 001-32161
Entertainment Gaming Asia Inc.
(Exact name of registrant as specified
in its charter)
Nevada |
|
91-1696010 |
(State or other jurisdiction
of
incorporation or organization) |
|
(I.R.S. Employer
Identification no.) |
Unit C1, Ground Floor, Koon Wah Building
No. 2 Yuen Shun Circuit
Yuen Chau Kok, Shatin
New Territories, Hong Kong SAR
(Address of principal executive offices,
including zip code)
+ 852-3147-6600
(Registrant’s telephone number, including
area code)
Not Applicable
(Former name, former address and former
fiscal year, if changed since last report)
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes x
No ¨
Indicate by check mark whether the registrant
has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for
such shorter period that the registrant was required to submit and post such files). Yes x
No ¨
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company (as defined in Rule 12b-2
of the Act):
Large
accelerated filer ¨ |
|
Accelerated
filer ¨ |
|
|
|
Non-accelerated filer
¨ |
|
Smaller reporting
company x |
(Do not check if a
smaller reporting company) |
|
|
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of November 1, 2015, 14,464,220
shares of common stock of Entertainment Gaming Asia Inc. were outstanding.
PART I — FINANCIAL INFORMATION
| Item 1. | Financial
Statements |
ENTERTAINMENT GAMING ASIA INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(amounts in thousands, except per share
data)
|
|
September
30, 2015 |
|
December 31, 2014 |
|
|
|
(Unaudited) |
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
25,310 |
|
|
$ |
17,301 |
|
Accounts receivable, net |
|
|
585 |
|
|
|
830 |
|
Amounts due from related parties |
|
|
2,437 |
|
|
|
2,112 |
|
Other receivables |
|
|
235 |
|
|
|
316 |
|
Inventories |
|
|
3,019 |
|
|
|
2,617 |
|
Prepaid expenses and other current assets |
|
|
339 |
|
|
|
1,447 |
|
Contract amendment fees |
|
|
45 |
|
|
|
— |
|
Total current assets |
|
|
31,970 |
|
|
|
24,623 |
|
|
|
|
|
|
|
|
|
|
Gaming equipment, net |
|
|
4,258 |
|
|
|
5,624 |
|
Casino contracts |
|
|
1,135 |
|
|
|
2,982 |
|
Property and equipment, net |
|
|
8,307 |
|
|
|
8,895 |
|
Goodwill |
|
|
334 |
|
|
|
351 |
|
Intangible assets, net |
|
|
359 |
|
|
|
595 |
|
Contract amendment fees |
|
|
— |
|
|
|
126 |
|
Deferred tax asset |
|
|
135 |
|
|
|
142 |
|
Prepaids, deposits and
other assets |
|
|
1,071 |
|
|
|
1,316 |
|
Total assets |
|
$ |
47,569 |
|
|
$ |
44,654 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’
EQUITY |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
437 |
|
|
$ |
645 |
|
Amounts due to related parties |
|
|
47 |
|
|
|
47 |
|
Accrued expenses |
|
|
1,482 |
|
|
|
2,009 |
|
Income tax payable |
|
|
121 |
|
|
|
— |
|
Deferred revenue |
|
|
23 |
|
|
|
— |
|
Customer deposits and other current liabilities |
|
|
319 |
|
|
|
306 |
|
Total current liabilities |
|
|
2,429 |
|
|
|
3,007 |
|
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
872 |
|
|
|
845 |
|
Deferred tax liability |
|
|
107 |
|
|
|
107 |
|
Total liabilities |
|
|
3,408 |
|
|
|
3,959 |
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity: |
|
|
|
|
|
|
|
|
Common stock, $.001 par value, 18,750,000
shares authorized; 14,464,220 and 14,471,095 shares issued and outstanding |
|
|
14 |
|
|
|
14 |
|
Additional paid-in-capital |
|
|
47,747 |
|
|
|
47,680 |
|
Accumulated other comprehensive income |
|
|
674 |
|
|
|
753 |
|
Accumulated losses
since January 1, 2011 ($386.1 million accumulated deficit eliminated) |
|
|
(4,275 |
) |
|
|
(7,753 |
) |
Total EGT stockholders’ equity |
|
|
44,160 |
|
|
|
40,694 |
|
Non-controlling interest |
|
|
1 |
|
|
|
1 |
|
Total stockholders’
equity |
|
|
44,161 |
|
|
|
40,695 |
|
Total liabilities
and stockholders’ equity |
|
$ |
47,569 |
|
|
$ |
44,654 |
|
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/Loss
(amounts in thousands, except per share
data)
(Unaudited)
| |
Three-Month
Period
Ended September 30, | | |
Nine-Month
Period Ended
September 30, | |
| |
2015 | | |
2014 | | |
2015 | | |
2014 | |
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gaming operations |
|
$ |
4,483 |
|
|
$ |
3,965 |
|
|
$ |
13,407 |
|
|
$ |
12,267 |
|
Gaming products |
|
|
3,788 |
|
|
|
437 |
|
|
|
10,783 |
|
|
|
1,772 |
|
Total revenues |
|
|
8,271 |
|
|
|
4,402 |
|
|
|
24,190 |
|
|
|
14,039 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of gaming operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gaming property and equipment depreciation |
|
|
751 |
|
|
|
892 |
|
|
|
2,352 |
|
|
|
2,681 |
|
Casino contract amortization |
|
|
608 |
|
|
|
613 |
|
|
|
1,830 |
|
|
|
1,835 |
|
Other gaming related intangibles amortization |
|
|
63 |
|
|
|
63 |
|
|
|
189 |
|
|
|
189 |
|
Other operating costs |
|
|
927 |
|
|
|
877 |
|
|
|
2,718 |
|
|
|
2,617 |
|
Cost of gaming products |
|
|
2,834 |
|
|
|
571 |
|
|
|
8,824 |
|
|
|
2,985 |
|
Selling, general and administrative expenses |
|
|
1,270 |
|
|
|
1,383 |
|
|
|
4,205 |
|
|
|
4,102 |
|
Gain on disposition of assets |
|
|
— |
|
|
|
(15 |
) |
|
|
(22 |
) |
|
|
(23 |
) |
Research and development expenses |
|
|
46 |
|
|
|
156 |
|
|
|
115 |
|
|
|
311 |
|
Depreciation and
amortization |
|
|
53 |
|
|
|
59 |
|
|
|
159 |
|
|
|
158 |
|
Total operating costs
and expenses |
|
|
6,552 |
|
|
|
4,599 |
|
|
|
20,370 |
|
|
|
14,855 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) from operations |
|
|
1,719 |
|
|
|
(197 |
) |
|
|
3,820 |
|
|
|
(816 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (expenses)/income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense and finance fees |
|
|
— |
|
|
|
— |
|
|
|
(3 |
) |
|
|
(2 |
) |
Interest income |
|
|
4 |
|
|
|
— |
|
|
|
10 |
|
|
|
1 |
|
Foreign currency losses |
|
|
(157 |
) |
|
|
(53 |
) |
|
|
(211 |
) |
|
|
(53 |
) |
Other |
|
|
9 |
|
|
|
4 |
|
|
|
28 |
|
|
|
16 |
|
Total other expenses |
|
|
(144 |
) |
|
|
(49 |
) |
|
|
(176 |
) |
|
|
(38 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) from continuing operations
before income tax |
|
|
1,575 |
|
|
|
(246 |
) |
|
|
3,644 |
|
|
|
(854 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expenses |
|
|
(129 |
) |
|
|
(15 |
) |
|
|
(166 |
) |
|
|
(45 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) from continuing operations |
|
|
1,446 |
|
|
|
(261 |
) |
|
|
3,478 |
|
|
|
(899 |
) |
Net loss from discontinued
operations, net of tax |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(414 |
) |
Net income/(loss)
attributable to EGT stockholders |
|
$ |
1,446 |
|
|
$ |
(261 |
) |
|
$ |
3,478 |
|
|
|
(1,313 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation |
|
|
(64 |
) |
|
|
(93 |
) |
|
|
(79 |
) |
|
|
(35 |
) |
Total other comprehensive loss, net of tax |
|
|
(64 |
) |
|
|
(93 |
) |
|
|
(79 |
) |
|
|
(35 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income/(loss)
attributable to EGT stockholders |
|
$ |
1,382 |
|
|
$ |
(354 |
) |
|
$ |
3,399 |
|
|
|
(1,348 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share data (basic and diluted): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings/(loss) |
|
$ |
0.10 |
|
|
$ |
(0.04 |
) |
|
$ |
0.24 |
|
|
|
(0.18 |
) |
Earnings/(loss) from continuing operations |
|
$ |
0.10 |
|
|
$ |
(0.04 |
) |
|
$ |
0.24 |
|
|
|
(0.12 |
) |
Loss from discontinued operations, net
of tax |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
(0.06 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
14,460 |
|
|
|
7,506 |
|
|
|
14,456 |
|
|
|
7,502 |
|
Diluted |
|
|
14,477 |
|
|
|
7,506 |
|
|
|
14,483 |
|
|
|
7,502 |
|
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)
|
|
Nine-Month Period Ended September
30, |
|
|
|
2015 |
|
|
2014 |
|
Cash flows provided by operating activities: |
|
|
|
|
|
|
|
|
Net income/(loss) |
|
$ |
3,478 |
|
|
$ |
(1,313 |
) |
Adjustments to reconcile net income/(loss)
to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation of gaming equipment and property and equipment |
|
|
3,313 |
|
|
|
3,447 |
|
Amortization of casino contracts |
|
|
1,830 |
|
|
|
1,835 |
|
Amortization of intangible assets |
|
|
226 |
|
|
|
226 |
|
Amortization of contract amendment fees |
|
|
81 |
|
|
|
81 |
|
Stock-based compensation expenses |
|
|
67 |
|
|
|
160 |
|
Loss on disposition of subsidiary, including property and equipment |
|
|
— |
|
|
|
20 |
|
Gain on disposition of assets |
|
|
(22 |
) |
|
|
(18 |
) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable and other receivables |
|
|
99 |
|
|
|
447 |
|
Inventories |
|
|
(405 |
) |
|
|
(3,090 |
) |
Prepaid expenses and other current assets |
|
|
1,110 |
|
|
|
(777 |
) |
Prepaids, deposits and other assets |
|
|
225 |
|
|
|
95 |
|
Accounts payable |
|
|
(144 |
) |
|
|
87 |
|
Amounts due from/to related parties |
|
|
(323 |
) |
|
|
107 |
|
Accrued expenses and other liabilities |
|
|
(471 |
) |
|
|
(928 |
) |
Income tax payable |
|
|
121 |
|
|
|
— |
|
Customer deposits and other current liabilities |
|
|
13 |
|
|
|
1,396 |
|
Net cash provided by operating activities |
|
|
9,198 |
|
|
|
1,775 |
|
|
|
|
|
|
|
|
|
|
Cash flows used in investing activities: |
|
|
|
|
|
|
|
|
Construction/purchase of property and equipment |
|
|
(932 |
) |
|
|
(2,279 |
) |
Purchases of gaming machines and systems |
|
|
(562 |
) |
|
|
(456 |
) |
Proceeds from sale of gaming equipment and property and equipment |
|
|
42 |
|
|
|
130 |
|
Proceeds from sale of subsidiary related
to discontinued operations |
|
|
200 |
|
|
|
42 |
|
Net cash used in investing activities |
|
|
(1,252 |
) |
|
|
(2,563 |
) |
|
|
|
|
|
|
|
|
|
Cash flows used in financing activities: |
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate
changes on cash |
|
|
63 |
|
|
|
(21 |
) |
Increase/(decrease) in cash and cash equivalents |
|
|
8,009 |
|
|
|
(809 |
) |
Cash and cash equivalents
at beginning of period |
|
|
17,301 |
|
|
|
5,301 |
|
Cash and cash equivalents
at end of period |
|
$ |
25,310 |
|
|
$ |
4,492 |
|
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 gaming markets
in Asia 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. In June 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 share capital of Dreamworld Leisure (Pailin) Limited,
a wholly-owned Cambodian subsidiary of the Company established for the purpose of owning and operating the casino. All related
historical revenues and expenses for the casino in Pailin 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, 2014, filed with the SEC on March 26, 2015. Certain previously reported
amounts have been reclassified to conform to the current period presentation.
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 that either has been disposed of, or that is classified as held for sale, and (i) represents a separate major line
of business or geographical area of operations; and (ii) is a part of a single coordinated plan to dispose of a separate major
line of business or geographical area of operations; or (iii) is a subsidiary acquired exclusively with a view to resale.
Non-current assets held for discontinued
operations are carried at the lower of carrying amount or fair value less costs to sell. Any gain or loss from disposal of a business,
together with the results of these operations until the date of disposal, is reported separately as discontinued operations. The
financial information of discontinued operations is excluded from the respective captions in the Company’s consolidated
statements of comprehensive income/loss 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 September 30, 2015, the Company had deposits with financial institutions in excess of Federal Deposit
Insurance Corporation (FDIC) insured limits by approximately $25.1 million.
Accounts Receivable and Allowance
for Doubtful Accounts
Accounts receivable are stated at face
value less any allowances for doubtful accounts. Allowances for doubtful accounts are maintained at levels determined by Company
management to adequately provide for uncollectible amounts. In determining the estimated uncollectable amounts, the Company evaluates
a combination of factors, including, but not limited to, activity in the related market, financial condition of customers, specific
customer collection experience and history of write-offs and collections. Interest income is imposed on overdue accounts receivable
after the Company evaluates a combination of factors, including but not limited to, customer collection experiences, customer
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. There
were no lower of cost or market (LCM) write-downs to inventories as of September 30, 2015 and 2014.
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. There were no impairment charges for long-lived assets for the three-month
and nine-month periods ended September 30, 2015 and 2014, respectively.
Prepaids, Deposits and Other Assets
Prepaids, deposits and other assets consist
primarily of prepaid lease, 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 $586,000 and $739,000 and $1.9 million and $2.2 million was included in cost of gaming operations in the consolidated
statements of comprehensive income/loss for the three-month and nine-month periods ended September 30, 2015 and 2014, respectively.
Property and Equipment
Property and equipment are stated at cost.
Depreciation is computed using the straight-line method over the useful lives of the assets currently estimated to be three to
twenty years, which in the case of leasehold improvements, is limited to the life of the lease and throughout the renewal period
as long as renewal is reasonably assured.
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 $165,000 and $153,000 and $487,000 and $450,000 was included in the cost of gaming operations in the consolidated
statements of comprehensive income/loss for the three-month and nine-month periods ended September 30, 2015 and 2014, respectively.
Depreciation of property and equipment
of approximately $282,000 and $224,000 and $819,000 and $545,000 was included in cost of gaming products in the consolidated statements
of comprehensive income/loss for the three-month and nine-month periods ended September 30, 2015 and 2014, 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 $608,000 and $613,000 and $1.8 million and $1.8 million for the three-month and nine-month periods
ended September 30, 2015 and 2014, respectively. Amortization expenses related to other gaming related intangibles were approximately
$63,000 and $189,000 for the three-month and nine-month periods ended September 30, 2015 and 2014, respectively. The amounts were
accounted for as cost of gaming operations in the consolidated statements of comprehensive income/loss. Amortization expenses
related to technical know-how were approximately $7,000 and $20,000 for the three-month and nine-month periods ended September
30, 2015 and 2014, respectively. The amounts were accounted for as cost of gaming products in the consolidated statements of comprehensive
income/loss. Amortization expenses related to patents and trademarks were approximately $6,000 and $18,000 for the three-month
and nine-month periods ended September 30, 2015 and 2014, respectively. The amounts were accounted for as selling, general and
administrative expenses in the consolidated statements of comprehensive income/loss.
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 judgments, 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 any of the three-month or nine-month periods ended September 30, 2015 and 2014.
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 its slot participation 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 payments for net winnings are received. All
slot participation operations revenues were recognized as earned during the three-month and nine-month periods ended September
30, 2015 and 2014, respectively.
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
$45,000 and $126,000 as of September 30, 2015 and December 31, 2014, respectively.
For 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 their 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 machines and progressive jackpots because the Company can avoid payment of such amounts, 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/loss.
In 2014, the Company also earned recurring
gaming revenue through leasing table game equipment and providing casino management services to gaming operators within a former
casino property. Revenues from gaming table leasing arrangements were recognized as earned over the contractual terms of the arrangements
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 and accessories to end users upon shipment against customer contracts or purchase orders. In accordance
with the criteria of EITF 99-19, the Company recognizes gross revenue when it acts as a principal, has discretion to choose suppliers
and establish selling price, bears credit risk and provides the products or services required in the transaction. If the above
criteria are not met, in which the supplier is the primary obligor in the arrangement and bears the general inventory risk, the
Company recognizes revenue net of related costs.
The Company also recognizes revenue from
the sale of its products to end users on bill-and-hold arrangements when all of the following have been satisfied:
· |
The risk
of ownership must be passed to the buyer; |
|
|
· |
The customer must have
a fixed commitment to purchase the goods; |
|
|
· |
The buyer, not the Company,
must request that the transaction be on a bill-and-hold basis; |
|
|
· |
There must be a fixed
schedule for the delivery of goods; |
· |
The Company must not have specific
performance obligations such that the earning process is not complete; |
· |
The ordered goods must be segregated
from the Company’s inventory and not subject to being used to fill other orders; and |
· |
The product must be complete and
ready for shipment. |
Sales related to bill-and-hold arrangements
were approximately $2.1 million and $NIL and $2.1 million and $NIL for
the three-month and nine-month periods ended September 30, 2015 and 2014, respectively. Payment for the bill-and-hold arrangement
in the three-month and nine-month periods ended September 30, 2015 was fully settled in October 2015.
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 $17,000 and $19,000 and $67,000 and $160,000 for the three-month and nine-month periods
ended September 30, 2015 and 2014, respectively.
Research and Development
Research and development expenses are
expensed as incurred. Employee-related costs associated with research and development are included in research and development
expenses. Research and development expenses were approximately $46,000 and $156,000 and $115,000 and $311,000 for the three-month
and nine-month periods ended September 30, 2015 and 2014, 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 September 30,
2015 or December 31, 2014.
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
income/loss.
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 due to the stock options’ exercise price exceeds
the Company’s stock price as of September 30, 2015. There were no differences in diluted loss per share from basic loss
per share for the nine-month period ended September 30, 2014 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 income/loss.
Below is a summary of closing exchange
rates as of September 30, 2015 and December 31, 2014 and average exchange rates for the three-month and nine-month periods ended
September 30, 2015 and 2014.
(US$1 to foreign currency) | |
September 30, 2015 | | |
December 31, 2014 | |
Australian dollar | |
| 1.43 | | |
| 1.23 | |
Hong Kong dollar | |
| 7.75 | | |
| 7.76 | |
Philippine peso | |
| 46.87 | | |
| 44.84 | |
Thai baht | |
| 36.44 | | |
| 32.97 | |
|
|
Three-Month Period
Ended September 30, |
|
|
Nine-Month Period
Ended September 30, |
|
(US$1 to foreign currency) |
|
2015 |
|
|
2014 |
|
|
2015 |
|
|
2014 |
|
Australian dollar |
|
|
1.38 |
|
|
|
1.08 |
|
|
|
1.31 |
|
|
|
1.09 |
|
Hong Kong dollar |
|
|
7.75 |
|
|
|
7.75 |
|
|
|
7.75 |
|
|
|
7.75 |
|
Philippine peso |
|
|
46.06 |
|
|
|
43.89 |
|
|
|
45.06 |
|
|
|
44.33 |
|
Thai baht |
|
|
35.20 |
|
|
|
32.17 |
|
|
|
33.71 |
|
|
|
32.46 |
|
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 September 30, 2015, the fair values
of financial assets and liabilities approximate carrying values due to the short maturities 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/loss.
There were no adjustments for unrecognized
actuarial gains or losses and past service costs or credits to equity through other comprehensive income/loss in any of the three-month
and nine-month periods ended September 30, 2015 and 2014. The movement for the accrued retirement obligation as of September 30,
2015 was due to foreign currency impact of exchange rate change.
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 it has legal obligations to remove all installation works and reinstate the manufacturing facilities to
its original state at its estimated fair value. For the three-month and nine-month periods ended September 30, 2015 and 2014,
the Company recognized approximately $4,000 and $NIL and $13,000 and $NIL, respectively, as asset retirement obligation operating
costs related to accretion of the liabilities and depreciation of the assets.
Recent Accounting Pronouncements
In February 2015, the FASB issued ASU
2015-02, “Amendments to the Consolidation Analysis”. The amendments in ASU 2015-02 affect reporting entities that
are required to evaluate whether they should consolidate certain legal entities. ASU 2015-02 will be effective for fiscal years
and interim periods within those fiscal years beginning after December 15, 2015, with early adoption permitted. The Company does
not expect the impact of the adoption of ASU 2015-02 to be material to its consolidated financial statements.
In April 2015, the FASB issued ASU 2015-04,
“Practical Expedient for the Measurement Date of an Employer’s Defined Benefit Obligation and Plan Assets”,
which gives an entity whose year-end does not coincide with a month end the ability to measure defined benefit plan assets and
obligations using the month end closest to the entities year end. ASU 2015-04 will be effective for fiscal years and interim periods
within those fiscal years, beginning after December 15, 2015, with early adoption permitted. The Company does not expect the impact
of the adoption of ASU 2015-04 to be material to our consolidated financial statements.
In July 2015, the FASB issued ASU 2015-11,
"Simplifying the Measurement of Inventory", which requires inventory to be recorded at the lower of cost and net realizable
value. The provisions of this update will be effective for fiscal years and interim periods within those fiscal years, beginning
after December 15, 2016, and are not expected to have a material effect on our consolidated financial statements.
In August 2015, the FASB issued ASU 2015-14,
“Deferral of the Effective Date”, which defers the effective date of ASU 2014-09, “Revenue from Contracts with
Customers” to January 1, 2018. The Company is currently in the process of evaluating the impact of the prescribed change
on our consolidated financial statements.
The Company currently conducts business
in two operating segments: (i) gaming operations, which include slot participation operations; and (ii) gaming products,
which consist of the design, manufacture and distribution of gaming chips and plaques as well as the distribution of third-party
gaming products. The Company owned and operated a casino in the Pailin Province of Cambodia. In June 2014, the Company ceased
operation of the casino and entered into an agreement to sell 100% of the issued capital shares of the Company’s wholly-owned
Cambodian subsidiary established for the purpose of owning and operating the casino. All the related historical revenues and expenses
for the casino in Pailin 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 operating segments.
|
|
Three-Month Period
Ended September 30, |
|
|
Nine-Month Period
Ended September 30, |
|
(amounts in thousands) |
|
2015 |
|
|
2014 |
|
|
2015 |
|
|
2014 |
|
|
|
(Unaudited) |
|
|
(Unaudited) |
|
|
(Unaudited) |
|
|
(Unaudited) |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gaming operations |
|
$ |
4,483 |
|
|
$ |
3,965 |
|
|
$ |
13,407 |
|
|
$ |
12,267 |
|
Gaming products |
|
|
3,788 |
|
|
|
437 |
|
|
|
10,783 |
|
|
|
1,772 |
|
Total revenues |
|
$ |
8,271 |
|
|
$ |
4,402 |
|
|
$ |
24,190 |
|
|
$ |
14,039 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income/(loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gaming operations operating income |
|
$ |
2,134 |
|
|
$ |
1,535 |
|
|
$ |
6,342 |
|
|
$ |
4,968 |
|
Gaming products operating income/(loss) |
|
|
916 |
|
|
|
(290 |
) |
|
|
1,850 |
|
|
|
(1,524 |
) |
Corporate and other
operating costs and expenses |
|
|
(1,331 |
) |
|
|
(1,442 |
) |
|
|
(4,372 |
) |
|
|
(4,260 |
) |
Total operating
income/(loss) |
|
$ |
1,719 |
|
|
$ |
(197 |
) |
|
$ |
3,820 |
|
|
$ |
(816 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gaming operations |
|
$ |
1,431 |
|
|
$ |
1,581 |
|
|
$ |
4,401 |
|
|
$ |
4,748 |
|
Gaming products |
|
|
309 |
|
|
|
257 |
|
|
|
897 |
|
|
|
642 |
|
Corporate |
|
|
24 |
|
|
|
20 |
|
|
|
71 |
|
|
|
38 |
|
Total depreciation and amortization |
|
$ |
1,764 |
|
|
$ |
1,858 |
|
|
$ |
5,369 |
|
|
$ |
5,428 |
|
Geographic segment revenues for the three-month
and nine-month periods ended September 30, 2015 and 2014 consisted of the following:
|
|
Three-Month Period
Ended September 30, |
|
|
Nine-Month Period
Ended September 30, |
|
(amounts in thousands) |
|
2015 |
|
|
2014 |
|
|
2015 |
|
|
2014 |
|
|
|
(Unaudited) |
|
|
(Unaudited) |
|
|
(Unaudited) |
|
|
(Unaudited) |
|
Cambodia |
|
$ |
3,871 |
|
|
$ |
3,201 |
|
|
$ |
11,442 |
|
|
$ |
10,096 |
|
Macau |
|
|
2,206 |
|
|
|
134 |
|
|
|
2,773 |
|
|
|
630 |
|
Philippines |
|
|
1,364 |
|
|
|
879 |
|
|
|
7,572 |
|
|
|
2,743 |
|
Russia |
|
|
786 |
|
|
|
— |
|
|
|
1,286 |
|
|
|
— |
|
Australia |
|
|
41 |
|
|
|
182 |
|
|
|
1,108 |
|
|
|
498 |
|
Other |
|
|
3 |
|
|
|
6 |
|
|
|
9 |
|
|
|
72 |
|
Total |
|
$ |
8,271 |
|
|
$ |
4,402 |
|
|
$ |
24,190 |
|
|
$ |
14,039 |
|
For the three-month and nine-month periods
ended September 30, 2015 and 2014, in the gaming operations segment, the largest customer represented 75% and 71% and 75% and
69%, respectively, of total gaming operations revenue. For the three-month and nine-month periods ended September 30, 2015 and
2014, in the gaming products segment, the largest customer represented 58% and 42% and 41% and 19%, respectively, of total gaming
products sales. The gaming products division normally experiences fluctuations in quarterly revenue due to uneven sales order
flow for its gaming chips and plaques.
Inventories consisted of the following:
(amounts in thousands) | |
September 30, 2015 | | |
December 31, 2014 | |
| |
(Unaudited) | | |
| |
Raw materials | |
$ | 1,811 | | |
$ | 1,866 | |
Work-in-process | |
| 662 | | |
| 600 | |
Finished goods (1) | |
| 439 | | |
| — | |
Spare parts | |
| 107 | | |
| 151 | |
Total | |
$ | 3,019 | | |
$ | 2,617 | |
| (1) | Finished
goods increased from December 31, 2014 to September 30, 2015 in
preparation for gaming chip and plaque orders expected to be delivered in the fourth
quarter of 2015. |
Note 4. |
Prepaid Expenses and Other
Current Assets |
Prepaid expenses and other current assets consisted of the
following:
(amounts in thousands) |
|
September
30, 2015 |
|
|
December 31, 2014 |
|
|
|
(Unaudited) |
|
|
|
|
Prepayments to suppliers (1) |
|
$ |
326 |
|
|
$ |
1,434 |
|
Prepaid leases |
|
|
13 |
|
|
|
13 |
|
Total |
|
$ |
339 |
|
|
$ |
1,447 |
|
| (1) | Prepayments
to suppliers decreased from December 31, 2014 to September 30, 2015 due to fewer new
purchases which required deposit payments in the nine-month period ended September 30,
2015. |
Accounts and other receivables consisted of the following:
(amounts in thousands) |
|
September
30, 2015 |
|
|
December 31, 2014 |
|
|
|
(Unaudited) |
|
|
|
|
Trade receivables (1) |
|
$ |
585 |
|
|
$ |
830 |
|
Other receivables |
|
|
235 |
|
|
|
316 |
|
|
|
|
820 |
|
|
|
1,146 |
|
Less: allowance for
doubtful accounts |
|
|
— |
|
|
|
— |
|
Net |
|
$ |
820 |
|
|
$ |
1,146 |
|
| (1) | Trade
receivables decreased from December 31, 2014 to September 30, 2015 due to higher collection
of receivables in the nine-month period ended September 30, 2015. |
Gaming equipment is stated at cost. The
major categories of gaming equipment and accumulated depreciation consisted of the following:
| |
| |
| | |
| |
(amounts in thousands) | |
(years) | |
September 30,
2015 | | |
December 31, 2014 | |
| |
| |
(Unaudited) | | |
| |
EGMs | |
3-5 | |
$ | 17,902 | | |
$ | 17,844 | |
Systems | |
5 | |
| 1,561 | | |
| 1,503 | |
| |
| |
| 19,463 | | |
| 19,347 | |
Less: accumulated
depreciation | |
| |
| (15,205 | ) | |
| (13,723 | ) |
Net carrying value | |
| |
$ | 4,258 | | |
$ | 5,624 | |
Depreciation expense on gaming equipment
of approximately $586,000 and $739,000 and $1.9 million and $2.2 million was included in cost of gaming operations in the consolidated
statements of comprehensive income/loss for the three-month and nine-month periods ended September 30, 2015 and 2014, 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:
| |
Useful Life | |
| | |
| |
(amounts in thousands) | |
(years) | |
September 30,
2015 | | |
December 31, 2014 | |
| |
| |
(Unaudited) | | |
| |
Equipment, vehicles, furniture
and fixtures | |
3-10 | |
$ | 7,252 | | |
$ | 6,697 | |
Land and buildings | |
0-5 | |
| 2,928 | | |
| 2,928 | |
Leasehold improvements | |
1-6 | |
| 1,606 | | |
| 1,421 | |
Construction in
progress | |
N/A | |
| 634 | | |
| 634 | |
| |
| |
| 12,420 | | |
| 11,680 | |
Less: accumulated
depreciation | |
| |
| (4,113 | ) | |
| (2,785 | ) |
Net carrying value | |
| |
$ | 8,307 | | |
$ | 8,895 | |
Depreciation expense on property and equipment
of approximately $165,000 and $153,000 and $487,000 and $450,000 was included in cost of gaming operations in the consolidated
statements of comprehensive income/loss for the three-month and nine-month periods ended September 30, 2015 and 2014, respectively.
Depreciation expense on property and equipment
of approximately $282,000 and $224,000 and $819,000 and $545,000 was included in cost of gaming products in the consolidated statement
of comprehensive income/loss for the three-month and nine-month periods ended September 30, 2015 and 2014, respectively.
| Note 8. | Goodwill
and Intangible Assets, including Casino Contracts |
Goodwill and intangible assets, if any,
are stated at cost. The major categories of goodwill and intangible assets and accumulated amortization consisted of the following:
|
|
Useful Life |
|
|
|
|
|
|
(amounts in thousands) |
|
(years) |
|
September
30, 2015 |
|
|
December 31, 2014 |
|
|
|
|
|
(Unaudited) |
|
|
|
|
Gaming operation agreement |
|
4-5 |
|
$ |
1,166 |
|
|
$ |
1,175 |
|
Less: accumulated amortization |
|
|
|
|
(1,008 |
) |
|
|
(818 |
) |
|
|
|
|
|
158 |
|
|
|
357 |
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
N/A |
|
|
334 |
|
|
|
351 |
|
|
|
|
|
|
|
|
|
|
|
|
Patents |
|
5-6 |
|
|
114 |
|
|
|
114 |
|
Less: accumulated amortization |
|
|
|
|
(98 |
) |
|
|
(83 |
) |
|
|
|
|
|
16 |
|
|
|
31 |
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks |
|
5-9 |
|
|
26 |
|
|
|
26 |
|
Less: accumulated amortization |
|
|
|
|
(15 |
) |
|
|
(12 |
) |
|
|
|
|
|
11 |
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
Technical know-how |
|
10 |
|
|
261 |
|
|
|
261 |
|
Less: accumulated amortization |
|
|
|
|
(87 |
) |
|
|
(68 |
) |
|
|
|
|
|
174 |
|
|
|
193 |
|
|
|
|
|
|
|
|
|
|
|
|
Casino contracts |
|
5-6 |
|
|
12,647 |
|
|
|
12,754 |
|
Less: accumulated amortization |
|
|
|
|
(11,512 |
) |
|
|
(9,772 |
) |
|
|
|
|
|
1,135 |
|
|
|
2,982 |
|
Net carrying value |
|
|
|
$ |
1,828 |
|
|
$ |
3,928 |
|
Amortization expenses for finite-lived
intangible assets were approximately $684,000 and $689,000 and $2.1 million
and $2.1 million for the three-month and nine-month periods ended September 30, 2015 and 2014, respectively.
Goodwill movements during the periods consisted of the following:
(amounts in thousands) | |
2015 | | |
2014 | |
| |
(Unaudited) | | |
| |
Balance as of January 1 | |
$ | 351 | | |
$ | 353 | |
Foreign currency translation adjustment | |
| (17 | ) | |
| (2 | ) |
Balance as of September 30/December 31 | |
$ | 334 | | |
$ | 351 | |
Note 9. |
Prepaids, Deposits and Other Assets |
Prepaids, deposits and other assets consisted of the following:
(amounts in thousands) | |
September 30, 2015 | | |
December 31, 2014 | |
| |
(Unaudited) | | |
| |
Prepaid taxes | |
$ | 380 | | |
$ | 323 | |
Prepaid lease (1) | |
| 204 | | |
| 211 | |
Prepayments to suppliers | |
| 162 | | |
| 454 | |
Rentals, utilities and other deposits | |
| 325 | | |
| 328 | |
Total | |
$ | 1,071 | | |
$ | 1,316 | |
| (1) | The
prepaid lease consisted of land lease prepayments for a gaming development project located
in Cambodia. |
Accrued expenses consisted of the following:
(amounts in thousands) |
|
September
30, 2015 |
|
|
December 31, 2014 |
|
|
|
(Unaudited) |
|
|
|
|
Payroll and related costs (1) |
|
$ |
254 |
|
|
$ |
723 |
|
Professional fees |
|
|
329 |
|
|
|
350 |
|
Withholding taxes |
|
|
550 |
|
|
|
583 |
|
Other tax expenses |
|
|
44 |
|
|
|
44 |
|
Other |
|
|
305 |
|
|
|
309 |
|
Total |
|
$ |
1,482 |
|
|
$ |
2,009 |
|
| (1) | Payroll
and related costs decreased from December 31, 2014 to September 30, 2015 primarily due
to the settlement of an accrued bonus in the three-month period ended June 30, 2015. |
| Note 11. | Other
Liabilities |
Other liabilities consisted of the following:
(amounts in thousands) | |
September 30, 2015 | | |
December 31, 2014 | |
| |
(Unaudited) | | |
| |
Other tax liabilities | |
$ | 739 | | |
$ | 694 | |
Other | |
| 133 | | |
| 151 | |
Total | |
$ | 872 | | |
$ | 845 | |
| 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 was originally 312,500 shares, and in July 2010 the Company’s shareholders approved an
increase in the number of shares reserved for issuance to 625,000 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 937,500 shares.
At the annual shareholders meeting held on December 12, 2014, the Company’s shareholders approved a further increase in
the number of shares reserved for issuance to 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.
During the nine-month period ended September
30, 2015, 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 September 30, 2015, stock options
for the purchase of 229,377 shares and 4,376 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 September 30, 2015, stock options
for the purchase of 536,848 shares of common stock were outstanding under the 2008 Plan.
As of September 30, 2015, stock options
for the purchase of 736,851 shares of common stock were exercisable with a weighted average exercise price of $8.12, a weighted
average fair value of $3.35 and an aggregate intrinsic value of approximately $43,000. The total fair value of shares vested during
the nine-month period ended September 30, 2015 was approximately $40,000. As of September 30, 2015, an aggregate of 33,750 options
granted under all plans were subject to vesting with a total compensation cost of approximately $23,000. The amount is expected
to be recognized over 0.73 years.
A summary of all current and expired plans
as of September 30, 2015 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, 2014 | |
| 785,032 | | |
$ | 8.02 | | |
| 5.42 | | |
$ | 46 | |
Granted | |
| — | | |
| — | | |
| — | | |
| — | |
Exercised | |
| — | | |
| — | | |
| — | | |
| — | |
Forfeited or expired | |
| (14,431 | ) | |
| 5.98 | | |
| — | | |
| — | |
Outstanding as of September 30, 2015 | |
| 770,601 | | |
| 8.06 | | |
| 4.61 | | |
| 43 | |
Exercisable as of September 30, 2015 | |
| 736,851 | | |
$ | 8.12 | | |
| 4.47 | | |
$ | 43 | |
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,
2014 |
|
|
7,500 |
|
|
$ |
4.84 |
|
|
|
1.41 |
|
Granted |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Vested |
|
|
(3,750 |
) |
|
|
— |
|
|
|
— |
|
Unvested balance as
of September 30, 2015 |
|
|
3,750 |
|
|
$ |
4.84 |
|
|
|
0.66 |
|
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
nine-month periods ended September 30, 2015 and 2014.
|
|
Nine-Month
Period Ended September 30, |
|
|
|
2015 |
|
|
2014 |
|
Range of values |
|
Low |
|
|
High |
|
|
Low |
|
|
High |
|
Expected volatility |
|
|
71.85 |
% |
|
|
80.91 |
% |
|
|
73.03 |
% |
|
|
76.27 |
% |
Expected dividends |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Expected term (in years) |
|
|
4.78 |
|
|
|
8.11 |
|
|
|
3.73 |
|
|
|
9.11 |
|
Risk-free rate |
|
|
1.13 |
% |
|
|
2.02 |
% |
|
|
1.16 |
% |
|
|
2.52 |
% |
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 September 30, |
|
|
Nine-Month Period
Ended September 30, |
|
(amounts in thousands) |
|
2015 |
|
|
2014 |
|
|
2015 |
|
|
2014 |
|
|
|
(Unaudited) |
|
|
(Unaudited) |
|
|
(Unaudited) |
|
|
(Unaudited) |
|
Related party transactions provided to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Melco Crown
(Macau) Limited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of gaming products |
|
$ |
9 |
|
|
$ |
— |
|
|
$ |
358 |
|
|
$ |
135 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MCE Leisure
(Philippines) Corporation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of gaming products |
|
$ |
129 |
|
|
$ |
63 |
|
|
$ |
4,460 |
|
|
$ |
161 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Melco Crown
Entertainment Limited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of gaming products |
|
$ |
— |
|
|
$ |
115 |
|
|
$ |
212 |
|
|
$ |
115 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oriental Regent Limited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of gaming products |
|
$ |
786 |
|
|
$ |
— |
|
|
$ |
1,286 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Studio City International Holding Limited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of gaming products |
|
$ |
2,186 |
|
|
$ |
— |
|
|
$ |
2,186 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related party transactions provided by: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Melco Services
Limited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technical services |
|
$ |
— |
|
|
$ |
1 |
|
|
$ |
1 |
|
|
$ |
2 |
|
Other |
|
|
2 |
|
|
|
1 |
|
|
|
7 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aberdeen Restaurant Enterprises Limited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
$ |
4 |
|
|
$ |
— |
|
|
$ |
5 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Golden
Future (Management Services) Limited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management services |
|
$ |
63 |
|
|
$ |
60 |
|
|
$ |
210 |
|
|
$ |
209 |
|
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 34.3% of Melco Crown Entertainment Limited, which owns 90% of Melco Crown (Macau) Limited, 68.3% of MCE Leisure (Philippines)
Corporation and 60% of Studio City International Holding Limited.
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.
Amounts due from/to related parties consisted of the following:
(amounts in thousands) | |
September 30, 2015 | | |
December 31, 2014 | |
| |
(Unaudited) | | |
| |
Amounts due from related
parties | |
$ | 2,437 | | |
$ | 2,112 | |
| |
| | | |
| | |
Amounts due to related parties | |
$ | 47 | | |
$ | 47 | |
The Company recorded income tax expenses
of approximately $129,000 and $15,000 and $166,000 and $45,000 for the three-month and nine-month periods ended September 30,
2015 and 2014, respectively. The Company’s effective income tax rates were 8.2% and (6.0)% and 4.6% and (5.2)% for the three-month
and nine-month periods ended September 30, 2015 and 2014, respectively. The change in effective tax rate was mainly due to an
increase in the consolidated pre-tax income. The EGT Cambodia entity and the Company’s subsidiary, which held its discontinued
casino operations in Pailin that were sold in October 2014, are income tax exempt. The Cambodia operations only pay a fixed monthly
tax, which is recorded under selling, general and administrative expenses, rather than a tax on income.
The fixed obligation tax arrangement for
EGT Cambodia is subject to annual renewal and negotiation and was renewed for 2015.
The Company is subject to income tax examinations
by tax authorities in jurisdictions in which it operates. The Company’s 2010 to 2014 United Status 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 2011 to 2014 Cambodian income tax returns remain open to
examination by the General Department of Taxation. The Company’s 2013 to 2014 Philippines income tax returns remain open
to examination by the Philippines Bureau of Internal Revenue. The Company’s 2008 to 2014 Hong Kong income tax returns remain
open to examination by the Hong Kong Inland Revenue Department.
| Note 15. | Discontinued
Operations |
From May 2012 until June 2014, the Company
operated Dreamworld Casino (Pailin), a casino in the Pailin Province of Cambodia. 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.
Dreamworld Casino (Pailin) was unprofitable
and after unsuccessful efforts to improve performance, in June 2014, the Company ceased operation of the casino. On June 20, 2014,
the Company entered into an agreement to sell 100% of the issued capital shares of Dreamworld Leisure (Pailin) Limited, or 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 operation entered into an agreement to terminate the previous agreements with the partner and all future
obligations thereunder including future lease payments owed by the Company.
The sale included all assets of DWP with
the exception of its EGMs, certain surveillance equipment and other assets excluded in the agreement and prohibited any use of
the Dreamworld brand name by the buyer. Total consideration to be paid to the Company by the buyer was to be $500,000, of which
$100,000 was paid at the time of entering the agreement and the balance to be paid in sixteen $25,000 monthly installments commencing
within one month of the signed agreement. The parties closed the sale transaction in October 2014. Subsequently, the related parties
agreed to amend the agreement to reduce the total consideration to be paid to $363,000, which has since been paid in full. The
Company recognized a gain of approximately $90,000 on disposal of the entity in the year ended December 31, 2014 having previously
provided for impairment as set out below.
The Company had recorded an impairment
charge of approximately $2.5 million for the year ended December 31, 2013 related to the Dreamworld Casino (Pailin) facility and
gaming assets. 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 selected financial
information for the discontinued operations in the consolidated statements of comprehensive income/loss.
|
|
Three-Month Period Ended September
30, |
|
|
Nine-Month Period Ended September
30, |
|
(amounts in thousands) |
|
2015 |
|
|
2014 |
|
|
2015 |
|
|
2014 |
|
|
|
(Unaudited) |
|
|
(Unaudited) |
|
|
(Unaudited) |
|
|
(Unaudited) |
|
Loss from operations |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(421 |
) |
Foreign currency exchange
gain |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
7 |
|
Loss from discontinued operations, net of tax |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(414 |
) |
| Note 16. | Commitments
and Contingencies |
Legal Matters
There are no pending legal proceedings,
other than routine litigation matters incidental to our business, to which the Company or its properties are subject.
| Note 17. | Earnings/(Loss)
Per Share |
The Company effected a 1-for-4 reverse
stock split of its common shares as of February 26, 2015. All historical share amounts, share price information and earnings/(loss)
per share information presented have been proportionally adjusted to reflect the impact of this reverse stock split.
Computation of the basic and diluted earnings/(loss) per share
from continuing operations consisted of the following:
|
|
Three-Month Period Ended September
30, |
|
|
|
2015 |
|
|
2014 |
|
|
|
(Unaudited) |
|
|
(Unaudited) |
|
(amounts in thousands, except
per
share data) |
|
Income |
|
|
Number of
Shares |
|
|
Per Share
Amount |
|
|
Loss |
|
|
Number of
Shares |
|
|
Per Share
Amount |
|
Basic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss)
attributable to equity shareholders |
|
$ |
1,446 |
|
|
|
14,460 |
|
|
$ |
0.10 |
|
|
$ |
(261 |
) |
|
|
7,506 |
|
|
$ |
(0.04 |
) |
Effect of dilutive securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive stock options/restricted
shares (1) |
|
|
|
|
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
Diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss)
attributable to equity shareholders plus assumed conversion |
|
$ |
1,446 |
|
|
|
14,477 |
|
|
$ |
0.10 |
|
|
$ |
(261 |
) |
|
|
7,506 |
|
|
$ |
(0.04 |
) |
|
|
Nine-Month Period Ended September
30, |
|
|
|
2015 |
|
|
2014 |
|
|
|
(Unaudited) |
|
|
(Unaudited) |
|
(amounts in thousands, except
per
share data) |
|
Income |
|
|
Number of
Shares |
|
|
Per Share
Amount |
|
|
Loss |
|
|
Number of
Shares |
|
|
Per Share
Amount |
|
Basic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss)
attributable to equity shareholders |
|
$ |
3,478 |
|
|
|
14,456 |
|
|
$ |
0.24 |
|
|
$ |
(899 |
) |
|
|
7,502 |
|
|
$ |
(0.12 |
) |
Effect of dilutive securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive stock options/restricted
shares (1) |
|
|
|
|
|
|
27 |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
Diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss)
attributable to equity shareholders plus assumed conversion |
|
$ |
3,478 |
|
|
|
14,483 |
|
|
$ |
0.24 |
|
|
$ |
(899 |
) |
|
|
7,502 |
|
|
$ |
(0.12 |
) |
| (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 three-month and nine-month
period ended September 30, 2014.
|
|
|
Three-Month Period
Ended September 30, |
|
|
Nine-Month Period
Ended September 30, |
|
|
|
2015 |
|
|
2014 |
|
|
2015 |
|
|
2014 |
|
|
|
(Unaudited) |
|
|
(Unaudited) |
|
|
(Unaudited) |
|
|
(Unaudited) |
|
Anti-dilutive outstanding stock
options excluded from computation of diluted earnings per share |
|
|
753,874 |
|
|
|
808,872 |
|
|
|
744,381 |
|
|
|
755,747 |
|
The components of accrued retirement benefits
consisted of the following:
(amounts in thousands) |
|
2015 |
|
|
2014 |
|
|
|
(Unaudited) |
|
|
|
|
Balance as of January 1 |
|
$ |
29 |
|
|
$ |
21 |
|
Service cost |
|
|
— |
|
|
|
7 |
|
Interest cost |
|
|
— |
|
|
|
1 |
|
Actuarial loss and other |
|
|
(1 |
) |
|
|
— |
|
Balance as of September
30/December 31 |
|
$ |
28 |
|
|
$ |
29 |
|
Note 19. |
Asset Retirement Obligations |
Reconciliations of the carrying amounts
of the Company’s asset retirement obligations are as follows:
(amounts in thousands) |
|
2015 |
|
|
2014 |
|
|
|
(Unaudited) |
|
|
|
|
Balance as of January 1 |
|
$ |
92 |
|
|
$ |
— |
|
Additions |
|
|
— |
|
|
|
92 |
|
Balance as of September
30/December 31 |
|
$ |
92 |
|
|
$ |
92 |
|
| 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, 2014 |
|
$ |
99 |
|
|
$ |
643 |
|
|
$ |
742 |
|
Current period other comprehensive (loss)/income |
|
|
(12 |
) |
|
|
23 |
|
|
|
11 |
|
Balances as of December 31, 2014 |
|
|
87 |
|
|
|
666 |
|
|
|
753 |
|
Current period other comprehensive loss |
|
|
— |
|
|
|
(79 |
) |
|
|
(79 |
) |
Balances as of September 30, 2015 (Unaudited) |
|
$ |
87 |
|
|
$ |
587 |
|
|
$ |
674 |
|
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, 2014, filed with the SEC on March 26, 2015 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, 2014
filed with the SEC on March 26, 2015.
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.
On February 26, 2015, we effected a 1-for-4
reverse stock split of our common stock and corresponding decrease in the number of authorized shares of common stock. All historical
share amounts and share price information presented in this report including 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. Certain reclassifications have been made to the prior periods’ financial statements to conform to
the current period’s presentation.
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 nine-month periods ended September 30, 2015 and 2014 included elsewhere
in this report.
General
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 products sales. Our gaming operations comprise slot participation operations in Cambodia and the Philippines, which when
permitted, operate 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 nine-month periods ended September 30, 2015 was approximately $8.3 million and $24.2 million, of which revenue from the gaming
operations and gaming products segments comprised 54% and 46% and 55% and 45%, respectively, of consolidated revenue. This compares
to consolidated revenue of approximately $4.4 million and $14.0 million for the three-month and nine-month periods ended September
30, 2014, of which revenue from the gaming operations and gaming products segments comprised 90% and 10% and 87% and 13%, respectively,
of consolidated revenue.
In November 2014, we completed a fully-subscribed
rights offering of our common stock, which netted us cash proceeds of approximately $14.3 million. Our largest shareholder, EGT
Entertainment Holding Limited, a wholly-owned subsidiary of Melco International Development Limited, supported the transaction
and increased its ownership position from 38.0% to 64.8%. As a result of the rights offering, we have significantly strengthened
our balance sheet and have become an indirect, majority-owned subsidiary of a respected leader in Asian gaming. As a Melco subsidiary,
we will endeavor to leverage the relationships and industry expertise of the Melco group of companies to increase our access to
a broader pool of potential growth opportunities and capital. This could provide us the potential to not only grow our existing
business lines but also to expand into new ones.
Gaming Operations
As of September 30, 2015, our gaming operations,
which comprised our slot participation business, were located in two countries, Cambodia and the Philippines, and totaled 1,564
EGM seats in operation in six venues. In Cambodia, we had a total of 1,008 EGM seats in operation in three venues. In the Philippines,
we had a total of 556 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
premier luxury destination gaming resort and the only licensed full service casino in and around the capital city of Phnom
Penh. As of September 30, 2015, we had 670 EGM seats placed at NagaWorld. We and NagaWorld split the net win per unit per
day, which represents the monies wagered less payouts to customers, from all the 670 EGMs and certain operating costs related
to marketing and floor staff on a respective basis of 25%/75%. The net win per unit per day from the 670 EGMs is settled and
our share is distributed to us on a daily basis. Our operations in NagaWorld are a primary contributor to our gaming
operations revenue and cash flow. We conduct our operations at NagaWorld pursuant to an agreement with NagaCorp Ltd., which
expires at the close of business on February 29, 2016.
Our gaming operations in Cambodia also
include Thansur Bokor Highland Resort and Dreamworld Club (Poipet). Thansur Bokor is a casino resort developed by leading Cambodian
hotelier, Sokha Hotels and Resorts, in a tourist area of the Kampot Province. As of September 30, 2015, we had 71 EGM seats placed
in this venue. Under the original agreement, we and Sokha split the net win and certain operating expenses for the placed EGMs
on a respective basis of 27%/73%. In August 2015, we and Sokha amended our agreement and adjusted the number of our EGMs placed
in this venue to 71 and the split of net win and certain operating costs to 29%/71%, respectively.
Dreamworld Club (Poipet) is a slot hall
located in the established gaming market of Poipet in the Banteay Meanchey Province of Northwestern Cambodia near the Thailand
border. As of September 30, 2015, we had 300 EGM seats placed in this venue. 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, at no expense to us, 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 are responsible for all capital expenditures
for Dreamworld Club (Poipet) and the placement of EGMs and are the sole operators of this venue. We and the local partner split
the net win 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%.
In the Philippines, our gaming operations
comprise three venues in the greater Manila area in which our share of the net win per unit per day ranges from 15% to 35%.
We intend to selectively pursue gaming
projects for both slot participation and gaming development in growing gaming markets in Asia. For slot participation, we intend
to pursue opportunities to place our EGMs in prime locations on the gaming floors of major casinos and/or hotels. When possible,
we seek to operate our slot operations under our Dreamworld brand. For gaming development, we intend to pursue projects that will
enable us to expand our market presence and increase brand equity in our Dreamworld name. We will endeavor to pursue projects
that are relatively larger in size and investment than our previous development projects and in more established markets with
higher levels of existing natural player traffic. There is no assurance we will be successful in establishing new projects with
these characteristics or that any such projects will be successful.
Gaming Products
We engage in the design, manufacture and
distribution of gaming chips and plaques under our Dolphin brand from our manufacturing facilities in Hong Kong.
Our customer base for Dolphin gaming
chips and plaques includes major casino resorts in Macau, the Philippines and Australia. We believe we have a meaningful
market share within our markets in Asia and Australia and are focused on expanding our footprint in the growing gaming
markets mainly in Asia.
In addition, in the second half of 2014,
we expanded the gaming products division to include the distribution of third-party gaming products. We have entered into three
distribution agreements. While the sales of these products have improved in the three-month and nine-month periods ended September
30, 2015, they still only represent a small amount of total gaming products revenue.
Discontinued Operations
Dreamworld Casino (Pailin), a small regional
casino we developed and operated, opened in May 2012 and closed in June 2014. Dreamworld Casino (Pailin) was located in the Pailin
Province of Northwestern Cambodia next to the Thailand border. It 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, which consisted of 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 casino measured approximately 16,000 square feet and, as of
December 31, 2013, housed 88 EGM seats and table games leased to a third-party operator.
We incurred significant operating losses
for Dreamworld Casino (Pailin) in the year ended December 31, 2013. The property’s performance was negatively impacted by
an insufficient level of player traffic and the high costs associated with acquiring a quality player base in this market. In
an effort to provide recurring revenue and reduce operating costs for these operations, in September 2013, we began to transition
to a leasing model for the table games under which third-party operators would pay a fixed monthly rental fee per table. However,
due to an inability to secure long-term third-party table game operators, along with the low level of natural player traffic and
the political unrest in Thailand, we decided to cease operation of the casino effective in June 2014.
On June 20, 2014, we entered into an agreement
to sell 100% of the issued capital shares of Dreamworld Leisure (Pailin) Limited, our wholly-owned Cambodian subsidiary established
for purposes of owning and operating Dreamworld Casino (Pailin), to a local Cambodian individual, who is a relative of our partner
in the operations. The sale closed in October 2014 and we recorded a gain of approximately $90,000 on disposal of the entity in
the year ended December 31, 2014.
In connection with our 2013 annual valuation
review of the facility and gaming assets, and as required by U.S. generally accepted accounting principles, we recorded an impairment
charge of approximately $2.5 million as of December 31, 2013 for Dreamworld Casino (Pailin), which represented our aggregate capital
expenditure for the facilities.
All related historical revenues and expenses
from Dreamworld Casino (Pailin) have been reclassified as discontinued operations.
Results of Operations for the Three-Month and Nine-Month
Periods Ended September 30, 2015 and 2014
The following table summarizes our operating
results on a consolidated basis and separately for each of the two operating segments, namely, gaming operations and gaming products
for the three-month and nine-month periods ended September 30, 2015 and 2014. All historical revenues and expenses associated
with Dreamworld Casino (Pailin), which closed in June 2014 and was sold in October 2014, have been reclassified as discontinued
operations.
| |
Three-Month Period Ended September
30, | | |
Nine-Month Period Ended September
30, | |
(amounts in thousands, except per share data) | |
2015 | | |
2014 | | |
2015 | | |
2014 | |
| |
| | |
| | |
| | |
| |
Revenues | |
$ | 8,271 | | |
$ | 4,402 | | |
$ | 24,190 | | |
$ | 14,039 | |
Gross profit | |
$ | 3,088 | | |
$ | 1,386 | | |
$ | 8,277 | | |
$ | 3,732 | |
Gross margin percentage | |
| 37 | % | |
| 31 | % | |
| 34 | % | |
| 27 | % |
Adjusted EBITDA from continuing operations
(1) | |
$ | 3,352 | | |
$ | 1,616 | | |
$ | 9,051 | | |
$ | 4,712 | |
Operating income/(loss) from continuing
operations | |
$ | 1,719 | | |
$ | (197 | ) | |
$ | 3,820 | | |
$ | (816 | ) |
Net income/(loss) from continuing
operations | |
$ | 1,446 | | |
$ | (261 | ) | |
$ | 3,478 | | |
$ | (899 | ) |
Net income/(loss) | |
$ | 1,446 | | |
$ | (261 | ) | |
$ | 3,478 | | |
$ | (1,313 | ) |
| |
| | | |
| | | |
| | | |
| | |
Basic and diluted earnings/(loss)
per share from continuing operations | |
$ | 0.10 | | |
$ | (0.04 | ) | |
$ | 0.24 | | |
$ | (0.12 | ) |
| |
| | | |
| | | |
| | | |
| | |
Weighted average common shares outstanding | |
| | | |
| | | |
| | | |
| | |
Basic | |
| 14,460 | | |
| 7,506 | | |
| 14,456 | | |
| 7,502 | |
Diluted | |
| 14,477 | | |
| 7,506 | | |
| 14,483 | | |
| 7,502 | |
| |
| | | |
| | | |
| | | |
| | |
Gaming operations: | |
| | | |
| | | |
| | | |
| | |
Revenues | |
$ | 4,483 | | |
$ | 3,965 | | |
$ | 13,407 | | |
$ | 12,267 | |
Gross profit | |
$ | 2,134 | | |
$ | 1,520 | | |
$ | 6,318 | | |
$ | 4,945 | |
Gross margin percentage | |
| 48 | % | |
| 38 | % | |
| 47 | % | |
| 40 | % |
| |
| | | |
| | | |
| | | |
| | |
Gaming products: | |
| | | |
| | | |
| | | |
| | |
Revenues | |
$ | 3,788 | | |
$ | 437 | | |
$ | 10,783 | | |
$ | 1,772 | |
Gross profit/(loss) | |
$ | 954 | | |
$ | (134 | ) | |
$ | 1,959 | | |
$ | (1,213 | ) |
Gross margin percentage | |
| 25 | % | |
| (31 | )% | |
| 18 | % | |
| (68 | )% |
|
(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, 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 EBITDA from continuing operations, as adjusted,
to the net income/(loss) from continuing operations is provided below.
| |
Three-Month Period Ended
September 30, | | |
Nine-Month Period Ended
September 30, | |
(amounts in thousands) | |
2015 | | |
2014 | | |
2015 | | |
2014 | |
Net income/(loss) from continuing
operations— GAAP basis | |
$ | 1,446 | | |
$ | (261 | ) | |
$ | 3,478 | | |
$ | (899 | ) |
Interest expense and finance fees | |
| — | | |
| — | | |
| 3 | | |
| 2 | |
Interest income | |
| (4 | ) | |
| — | | |
| (10 | ) | |
| (1 | ) |
Income tax expenses | |
| 129 | | |
| 15 | | |
| 166 | | |
| 45 | |
Depreciation and amortization | |
| 1,764 | | |
| 1,858 | | |
| 5,369 | | |
| 5,428 | |
Stock-based compensation expenses | |
| 17 | | |
| 19 | | |
| 67 | | |
| 160 | |
Gain on disposition
of assets | |
| — | | |
| (15 | ) | |
| (22 | ) | |
| (23 | ) |
Adjusted EBITDA
from continuing operations | |
$ | 3,352 | | |
$ | 1,616 | | |
$ | 9,051 | | |
$ | 4,712 | |
Total revenues increased approximately
$3.9 million to $8.3 million for the three-month period ended September 30, 2015 compared to approximately $4.4 million in the
same period of the prior year due to increases in both business divisions. Revenue from gaming operations increased primarily
as a result of higher slot operations revenue from NagaWorld partially offset by lower revenues from the Philippines operations.
Revenue from the gaming products division increased as a result of higher sales of gaming chips and plaques and third-party gaming
products in the three-month period ended September 30, 2015, which included approximately $2.2 million in revenue for a new casino
opening in Macau, compared to the prior year period.
Gross profit increased approximately $1.7
million to $3.1 million for the three-month period ended September 30, 2015 compared to approximately $1.4 million in the same
period of the prior year. The increase was primarily a result of higher slot operations revenue and an increase in sales and gross
margin for the gaming products division, as described in greater detail below, compared to the prior year period.
Operating income increased approximately
$1.9 million to $1.7 million for the three-month period ended September 30, 2015 compared to a loss of approximately $197,000
in the same period of the prior year. The increase in operating income was primarily a result of the higher gross profit, as explained
above, and lower operating expenses.
Net income increased approximately $1.7
million to $1.4 million for the three-month period ended September 30, 2015 compared to a loss of approximately $261,000 in the
same period of the prior year. The increase in net income was primarily a result of the higher operating income, as explained
above, partially offset by higher foreign currency losses and income tax expenses. There was no net income/loss from discontinued
operations for the three-month periods ended September 30, 2015 and 2014.
Total revenues increased
approximately $10.2 million to $24.2 million for the nine-month period ended September 30, 2015 compared to approximately
$14.0 million in the same period of the prior year due to increases in both business divisions. Revenue from gaming
operations increased primarily as a result of higher slot operations revenue from NagaWorld partially offset by lower revenue
from the Philippines operations. Revenue from the gaming products division increased primarily as a result of higher sales of
gaming chips and plaques for initial and follow on orders for several new casino openings and to existing customers
in the nine-month period ended September 30, 2015 compared to the prior year period.
Gross profit increased approximately $4.5
million to $8.3 million for the nine-month period ended September 30, 2015 compared to approximately $3.7 million in the same
period of the prior year. The increase was primarily a result of higher slot operations revenue and an increase in sales and gross
margin for the gaming products division, as described in greater detail below, compared to the prior year period.
Operating income from continuing operations
increased approximately $4.6 million to $3.8 million for the nine-month period ended September 30, 2015 compared to a loss of
approximately $816,000 in the same period of the prior year. The increase in operating income from continuing operations was primarily
a result of the higher gross profit and lower operating expenses.
Net income from continuing operations
increased approximately $4.4 million to $3.5 million for the nine-month period ended September 30, 2015 compared to a loss of
approximately $899,000 in the same period of the prior year. The increase in net income from continuing operations was primarily
a result of the higher operating income from continuing operations, as explained above, partially offset by higher foreign currency
losses and income tax expenses. Net income increased approximately $4.8 million to $3.5 million for the nine-month period ended
September 30, 2015 compared to a net loss of approximately $1.3 million in the same period of the prior year. There was no net
income/loss from discontinued operations for the nine-month period ended September 30, 2015. The net loss for the nine-month period
ended September 30, 2014 included a net loss of approximately $414,000 from discontinued operations.
Gaming Operations
Revenues from gaming operations consisted
of slot participation operations.
| |
Three-Month Period Ended September
30, | | |
Nine-Month Period Ended September
30, | |
(amounts in thousands, except per unit
data) | |
2015 | | |
2014 | | |
2015 | | |
2014 | |
Net revenue to the Company | |
| | | |
| | | |
| | | |
| | |
Cambodia slot operations | |
$ | 3,617 | | |
$ | 2,959 | | |
$ | 10,727 | | |
$ | 9,238 | |
Philippines slot operations | |
| 597 | | |
| 748 | | |
| 1,917 | | |
| 2,264 | |
Service revenue(1) | |
| 269 | | |
| 258 | | |
| 763 | | |
| 765 | |
Consolidated
total | |
$ | 4,483 | | |
$ | 3,965 | | |
$ | 13,407 | | |
$ | 12,267 | |
| |
| | | |
| | | |
| | | |
| | |
Average daily net win per unit | |
| | | |
| | | |
| | | |
| | |
Cambodia slot
operations | |
$ | 152 | | |
$ | 114 | | |
$ | 148 | | |
$ | 120 | |
Philippines slot
operations | |
$ | 59 | | |
$ | 72 | | |
$ | 64 | | |
$ | 73 | |
Consolidated total | |
$ | 120 | | |
$ | 100 | | |
$ | 120 | | |
$ | 104 | |
| |
September 30, | |
| |
2015 | | |
2014 | |
EGM seats in operation | |
| | | |
| | |
Cambodia slot operations | |
| 1,008 | | |
| 1,007 | |
Philippines slot operations | |
| 556 | | |
| 556 | |
Consolidated total | |
| 1,564 | | |
| 1,563 | |
|
(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. |
Revenue from gaming operations increased
approximately $518,000 to $4.5 million during the three-month period ended September 30, 2015 compared to approximately $4.0 million
in the same period of the prior year. The increase was primarily due to higher revenue from the Cambodia operations partially
offset by lower revenue from the Philippines operations.
Gaming operations revenue for the three-month
periods ended September 30, 2015 and 2014 included approximately $269,000 and $258,000, respectively, in service revenue related
to the reimbursement of net shared costs from casino operators.
Consolidated average net win per unit
per day for the consolidated slot operations increased $20 to $120 for the three-month period ended September 30, 2015 compared
to $100 for the prior year period due to increases from the Cambodia operations.
Revenue from the Cambodia slot operations
increased approximately $658,000 to $3.6 million for the three-month period ended September 30, 2015 compared to approximately
$3.0 million in the prior year period. Average net win per unit per day for Cambodia increased $38 to $152 for the three-month
period ended September 30, 2015 compared to $114 for the prior year period. The increases were primarily the result of improvement
from NagaWorld as well as from Thansur Bokor.
NagaWorld revenue was approximately $3.2
million for the three-month period ended September 30, 2015 compared to approximately $2.7 million in the prior year period and
average net win per unit per day was $218 compared to $181 in the prior year period. The increases were primarily due to improved
player traffic levels in the three-month period ended September 30, 2015 compared to the prior year period when we experienced
a temporary reduction in machine base due to NagaWorld’s casino floor renovations.
Revenue from the Philippines slot operations
decreased approximately $151,000 to $597,000 for the three-month period ended September 30, 2015 compared to approximately $748,000
in the prior year period. Average net win per unit per day for the Philippines decreased $13 to $59 for the three-month period
ended September 30, 2015 compared to $72 in the prior year period. The decreases were primarily due to increased competition in
Manila from new casino resorts, one of which opened in early 2013 and another which soft opened in December 2014. Due to the increasing
competition for our venues in the Philippines, we are focused on enhancing returns on assets in this market through targeted marketing
programs and strategic management of the machine mix.
Gross profit from gaming operations increased
approximately $614,000 to $2.1 million for the three-month period ended September 30, 2015 compared to approximately $1.5 million
in the prior year period primarily due to higher slot operations revenue and lower gaming equipment depreciation expenses. Cost
of gaming operations for the three-month period ended September 30, 2015 included approximately $751,000 in depreciation of gaming
property and equipment, $608,000 of amortization of casino contracts, $63,000 of amortization of other gaming related intangibles
and $927,000 of other operating costs. Cost of gaming operations for the three-month period ended September 30, 2014 included
approximately $892,000 of depreciation of gaming property and equipment, $613,000 of amortization of casino contracts, $63,000
of amortization of other gaming related intangibles and $877,000 of other operating costs.
Revenue from gaming operations increased
approximately $1.1 million to $13.4 million during the nine-month period ended September 30, 2015 compared to approximately $12.3
million in the same period of the prior year. The increase was primarily due to higher slot operations revenue from the Cambodia
operations partially offset by lower revenue from the Philippines operations.
Gaming operations revenue for the nine-month
periods ended September 30, 2015 and 2014 included approximately $763,000 and $765,000, respectively, in service revenue related
to the reimbursement of net shared costs from casino operators.
Consolidated average net win per unit
per day for the consolidated slot operations increased $16 to $120 for the nine-month period ended September 30, 2015 compared
to $104 for the prior year period due to increases from the Cambodia operations.
Revenue from the Cambodia slot operations
increased approximately $1.5 million to $10.7 million for the nine-month period ended September 30, 2015 compared to approximately
$9.2 million in the prior year period. Average net win per unit per day for Cambodia increased $28 to $148 for the nine-month
period ended September 30, 2015 compared to $120 for the prior year period. The increases were primarily the result of improvement
from NagaWorld partially offset by a slight decline from Thansur Bokor.
NagaWorld revenue was approximately $9.6
million for the nine-month period ended September 30, 2015 compared to approximately $8.2 million in the prior year period and
average net win per unit per day was $221 compared to $186 in the prior year period. The increases were primarily due to improved
player traffic levels.
Revenue from the Philippines slot operations
decreased approximately $347,000 to $1.9 million for the nine-month period ended September 30, 2015 compared to approximately
$2.3 million in the prior year period. Average net win per unit per day for the Philippines decreased $9 to $64 for the nine-month
period ended September 30, 2015 compared to $73 in the prior year period. The decreases were primarily due to increased competition
in Manila from new casino resorts as discussed above.
Gross profit from gaming operations increased
approximately $1.4 million to $6.3 million for the nine-month period ended September 30, 2015 compared to approximately $4.9 million
in the prior year period primarily due to higher slot operations revenue and lower gaming equipment depreciation expenses. Cost
of gaming operations for the nine-month period ended September 30, 2015 included approximately $2.4 million in depreciation of
gaming property and equipment, $1.8 million of amortization of casino contracts, $189,000 of amortization of other gaming related
intangibles and $2.7 million of other operating costs. Cost of gaming operations for the nine-month period ended September 30,
2014 included approximately $2.7 million of depreciation of gaming property and equipment, $1.8 million of amortization of casino
contracts, $189,000 of amortization of other gaming related intangibles and $2.6 million of other operating costs.
As of September 30, 2015, we had a total
of 1,857 EGM seats of which 293 were held in inventory and 1,564 were in operation. Of the 1,564 EGM seats in operation,
1,008 were in operation in three venues in Cambodia and 556 were in operation in three venues in the Philippines.
| |
September 30,
2015 | | |
December 31, 2014 | |
(amounts in thousands, except per
unit data) | |
Units | | |
Carrying Value | | |
Units | | |
Carrying Value | |
EGMs and systems used in
operations (1) | |
| 1,564 | | |
$ | 4,067 | | |
| 1,619 | | |
$ | 5,367 | |
EGMs and systems
held for future use | |
| 293 | | |
| 191 | | |
| 252 | | |
| 257 | |
Total EGMs and
systems | |
| 1,857 | | |
$ | 4,258 | | |
| 1,871 | | |
$ | 5,624 | |
|
(1) |
EGMs and systems used in operations
as of September 30, 2015 and December 31, 2014 included 32 EGM seats, which were in operation on a participation basis and,
therefore, their carrying values were not included. |
As part of our ongoing efforts to maximize
returns and minimize capital expenditures for the gaming operations, we seek to strategically manage our existing EGM base through
the redeployment of gaming assets between venues, when appropriate and possible.
Gaming Products
Revenues from gaming products consisted
of the design, manufacture and distribution of gaming chips and plaques as well as the distribution third-party gaming products.
Gaming products revenues are subject to fluctuation due to uneven sales order flow, which is normal for this business, and results
may not be indicative of the estimated results for the full fiscal year.
Gaming products revenue increased approximately
$3.4 million to $3.8 million for the three-month period ended September 30, 2015 compared to approximately $437,000 in the prior
year period. The increase was mainly a result of higher sales of gaming chips and plaques and third-party gaming products, which
comprised approximately 95% and 5% of total gaming products revenue, respectively, in the three-month period ended September 30,
2015. The three-month period ended September 30, 2015 included an initial order for a new casino opening in Macau for approximately
$2.2 million.
Gross profit on gaming products increased
approximately $1.1 million to $954,000 for the three-month period ended September 30, 2015 compared to a gross margin loss of
approximately $134,000 in the prior year period. The increase in gross profit was primarily due to higher sales volumes and improved
production efficiencies as a result of efforts to increase overall automation and increased sales of third-party gaming products,
which had higher gross margins.
Gaming products revenue increased
approximately $9.0 million to $10.8 million for the nine-month period ended September 30, 2015 compared to approximately $1.8
million in the prior year period primarily due to higher gaming chip and plaque sales for initial and follow on orders for
several new casino openings as well as to existing customers in the nine-month period ended September 30, 2015.
Gross profit on gaming products increased
approximately $3.2 million to $2.0 million for the nine-month period ended September 30, 2015 compared to a gross margin loss
of approximately $1.2 million in the prior year period. The increase in gross profit was primarily due to the reasons as stated
above and the outsourcing of certain production processes for two orders with short lead times in the three-month period ended
March 31, 2015 as demand exceeded our existing capacity during this period.
Operating Expenses
The schedule of expenses on a consolidated basis consisted
of the following:
| |
Three-Month
Period Ended September
30, | | |
Nine-Month
Period Ended September
30, | |
(amounts in thousands) | |
2015 | | |
2014 | | |
2015 | | |
2014 | |
Selling, general and administrative
expenses | |
$ | 1,253 | | |
$ | 1,364 | | |
$ | 4,138 | | |
$ | 3,942 | |
Stock-based compensation expenses | |
| 17 | | |
| 19 | | |
| 67 | | |
| 160 | |
Gain on disposition of assets | |
| — | | |
| (15 | ) | |
| (22 | ) | |
| (23 | ) |
Research and development expenses | |
| 46 | | |
| 156 | | |
| 115 | | |
| 311 | |
Depreciation and
amortization | |
| 53 | | |
| 59 | | |
| 159 | | |
| 158 | |
Total | |
$ | 1,369 | | |
$ | 1,583 | | |
$ | 4,457 | | |
$ | 4,548 | |
Selling, General and Administrative Expenses
Selling, general and administrative expenses
decreased approximately $111,000 to $1.3 million for the three-month period ended September 30, 2015 compared to approximately
$1.4 million in the same period of the prior year. Salaries and wages decreased approximately $181,000 mainly due to a lower headcount
for the gaming operations division. Advertising, office expenses and other expenses decreased approximately $9,000 primarily due
to various cost reduction initiatives. The decreases were partially offset by an increase in consulting and legal expenses of
approximately $79,000 in professional advisory fees.
Selling, general and administrative expenses
increased approximately $196,000 to $4.1 million for the nine-month period ended September 30, 2015 compared to approximately
$3.9 million in the same period of the prior year. The lower expenses in the nine-month period ended September 30, 2014 were mainly
due to the reversal of a previously accrued one-time other tax liability of approximately $485,000 related to the Philippines
operations. Consulting and legal expenses increased approximately $113,000 primarily due to professional advisory fees. The increases
were partially offset by decreases in salaries and wages, and rent expenses of approximately $291,000 mainly due to the adjustment
of an over-provision for employee bonuses for the year ended December 31, 2014 and the relocation of corporate back office support
functions to a nearby smaller rental area. In addition, advertising, office expenses and other expenses decreased approximately
$111,000 primarily due to various cost reduction initiatives.
Stock-Based Compensation Expenses
Stock-based compensation expenses decreased
approximately $2,000 to $17,000 for the three-month period ended September 30, 2015 compared to approximately $19,000 in the prior
year period primarily due to a decrease in average stock prices during the three-month period ended September 30, 2015 as compared
to the prior year period.
Stock-based compensation expenses decreased
approximately $93,000 to $67,000 for the nine-month period ended September 30, 2015 compared to approximately $160,000 in the
prior year period primarily due to no new options grants being issued in the nine-month period ended September 30, 2015 and the
same reason as stated above.
Gain on Disposition of Assets
There were no dispositions of assets for
the three-month period ended September 30, 2015. Gain on disposition of assets was approximately $15,000 for the three-month period
ended September 30, 2014 primarily due to sales of obsolete equipment that exceeded net book value.
Gain on disposition of assets was approximately
$22,000 for the nine-month period ended September 30, 2015, which was essentially unchanged compared with approximately $23,000
in the prior year period and was primarily due to the sale of non-performing EGMs and obsolete equipment that exceeded book value.
Research and Development Expenses
Research and development expenses decreased
approximately $110,000 to $46,000 for the three-month period ended September 30, 2015 compared to approximately $156,000 in the
prior year period mainly as a result of decreased activities in new product development for gaming products.
Research and development expenses decreased
approximately $196,000 to $115,000 for the nine-month period ended September 30, 2015 compared to approximately $311,000 in the
prior year period due to the same reasons as stated above.
Depreciation and Amortization Expenses
Depreciation and amortization expenses
decreased approximately $6,000 to $53,000 for the three-month period ended September 30, 2015 compared to approximately $59,000
in the prior year period primarily as a result of being more fully depreciated office equipment.
Depreciation and amortization expenses
of approximately $159,000 for the nine-month period ended September 30, 2015 were essentially unchanged compared with approximately
$158,000 in the prior year period as depreciation expenses due to new systems and computer related equipment for the corporate
office were largely offset by other fully depreciated office equipment.
Other (Expenses)/Income
Other expenses increased approximately
$95,000 to $144,000 for the three-month period ended September 30, 2015 compared to approximately $49,000 in the prior year period.
The increase in other expenses was primarily due to an increase in foreign currency losses mainly as a result of the settlement
of U.S. dollar denominated payables for the Philippines operations with an appreciated U.S. dollar compared to the prior year
period.
Other expenses increased approximately
$138,000 to $176,000 for the nine-month period ended September 30, 2015 compared to approximately $38,000 in the prior year period.
The increase in other expenses was primarily due to the same reason as stated above.
Income Tax Provisions
Effective tax rates for the three-month
and nine-month periods ended September 30, 2015 and 2014 were approximately 8.2% and (6.0)% and 4.6% and (5.2)%, respectively.
We continue to review the treatment of tax losses and future income generated by our foreign subsidiaries to minimize taxation
costs.
FINANCIAL CONDITION
Liquidity and Capital Resources
As of September 30, 2015, we had total
cash and cash equivalents of approximately $25.3 million and working capital of approximately $29.5 million. Our cash and working
capital during the nine-month period ended September 30, 2015 was positively impacted by cash flow from operating activities of
approximately $9.2 million partially offset by purchases of equipment for the gaming products division and EGMs and related systems
for the gaming operations division.
As part of our growth strategy for gaming
operations, we expect to purchase EGMs to supplement existing inventory and source any future targeted deployment plans. As
part of our growth strategy for the gaming products division, we intend to incur costs related to increasing capacity utilization
and enhancing production efficiencies for these operations. We also continue to pursue new gaming projects, including slot participation
and gaming development, and are exploring avenues to expand our operations into new gaming platforms and markets. However, there
is no guarantee we will be successful in these efforts.
We presently expect that our capital expenditures
for the remainder of 2015 will be less than $500,000, excluding the costs and expenses of any new projects or the possible renewal
of existing slot contracts. This primarily includes gaming equipment related costs for the gaming operations.
We presently expect that our capital expenditures
for 2016 will be approximately $2 million to $3 million, excluding the costs and expenses of any new projects or the possible
renewal of existing slot contracts. This primarily includes EGMs and systems purchases, upgrades and general maintenance for the
gaming operations.
We anticipate our available working capital,
along with cash expected to be generated from operating activities, will allow us to meet our capital expenditure needs through
2016, excluding the costs and expenses of any new projects.
However, as noted above, we continue to
pursue new 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 2016 would increase beyond the amounts discussed above. Where possible, we intend to fund our
new projects from our cash flow from operating activities 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. Nonetheless, we may endeavor to obtain
additional required capital from various financing sources including commercial debt financing and the sale of our debt or equity
securities should the need arise. 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
| |
Nine-Month Period Ended September
30, | |
(amount in thousands) | |
2015 | | |
2014 | |
Cash provided by/(used in): | |
| | | |
| | |
Operations | |
$ | 9,198 | | |
$ | 1,775 | |
Investing | |
| (1,252 | ) | |
| (2,563 | ) |
Financing | |
| — | | |
| — | |
Effect of exchange
rate change in cash | |
| 63 | | |
| (21 | ) |
Increase/(decrease)
in cash and cash equivalents | |
$ | 8,009 | | |
$ | (809 | ) |
Operations
Cash provided by operating activities
was approximately $9.2 million for the nine-month period ended September 30, 2015 compared to approximately $1.8 million in the
prior year period. For the nine-month period ended September 30, 2015, cash provided by operating activities primarily resulted
from operating income from both the gaming operations and gaming products divisions and a decrease in the use of funds for working
capital. For the nine-month period ended September 30, 2014, cash provided by operating activities 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 our gaming products division.
Investing
Cash used in investing activities was
approximately $1.3 million for the nine-month period ended September 30, 2015 compared to approximately $2.6 million in the same
period of the prior year. The decrease in cash used in investing activities was mainly a result of lower capital expenditures
related to the purchase of equipment for the gaming products division as well as the receipt of a settlement balance related to
the disposal of the Dreamworld Leisure (Pailin) Limited subsidiary.
Financing
Cash used in financing activities was $NIL for the nine-month
periods ended September 30, 2015 and 2014.
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 September 30, 2015, we had net accounts
receivable of approximately $585,000, representing 1% 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 September 30, 2015 and December 31, 2014.
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. Our inventory
provisions were $NIL as of September 30, 2015 and 2014.
Gaming Equipment and Property and Equipment
As of September 30, 2015, we had gaming
equipment and property and equipment of approximately $12.6 million, representing 26% 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.
Goodwill and Intangible Assets, including
Casino Contracts
As of September 30, 2015, we had intangible
assets, including goodwill and casino contracts of approximately $1.8 million, representing 4% 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 provision 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 provision 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 September 30, 2015, we had casino
contracts and a gaming operation agreement aggregating approximately $1.3 million, representing 71% of total intangible assets.
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 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 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, we evaluate 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 expenses totaled
approximately $17,000 and $19,000 and $67,000 and $160,000 for the three-month and nine-month periods ended September 30, 2015
and 2014, respectively, in the accompanying consolidated statements of comprehensive income/loss.
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 consolidated statements of comprehensive income/loss.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet financing
arrangements.
Item
3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
Item
4. Controls and Procedures
(a) Evaluation of Disclosure
Controls and Procedures.
Our management, with the participation
of our chief executive officer and chief accounting officer, has evaluated the effectiveness of the design and operation of the
Company’s disclosure controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934.
Based on this evaluation, management concluded that our disclosure controls and procedures were effective as of September 30,
2015.
(b) Changes in Internal
Control Over Financial Reporting.
There were no changes in our internal
control over financial reporting that occurred during the three-month period ended September 30, 2015 that have materially affected,
or are reasonably likely to materially affect, our internal controls over financial reporting.
PART II — OTHER INFORMATION
Item 6. Exhibits
Exhibit
No. |
|
Description |
|
Method of Filing |
10.1 |
|
Executive Employment Agreement dated August
13, 2015 entered into between Elixir Gaming Technologies (Hong Kong) Limited and Mr. Clarence Chung |
|
Incorporated by reference to the Registrant’s
Current Report on Form 8-K dated August 13, 2015
|
|
|
|
|
|
10.2 |
|
The Deed of Termination and Release dated August 13,
2015 entered into between Dreamworld Leisure Management Limited and Mr. Clarence Chung
|
|
Incorporated by reference to the Registrant’s
Current Report on Form 8-K dated August 13, 2015
|
31.1 |
|
Certifications Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002. |
|
Filed electronically herewith |
|
|
|
|
|
31.2 |
|
Certifications Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002. |
|
Filed electronically herewith |
|
|
|
|
|
32.1 |
|
Certification of Principal Executive Officer
and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350). |
|
Filed electronically herewith |
|
|
|
|
|
101.INS |
|
XBRL Instance Document |
|
Filed electronically herewith |
|
|
|
|
|
101.SCH |
|
XBRL Taxonomy Extension Schema Document |
|
Filed electronically herewith |
|
|
|
|
|
101.CAL |
|
XBRL Taxonomy Extension Calculation Linkbase
Document |
|
Filed electronically herewith |
|
|
|
|
|
101.LAB |
|
XBRL Taxonomy Extension Label Linkbase
Document |
|
Filed electronically herewith |
|
|
|
|
|
101.PRE |
|
XBRL Taxonomy Extension Presentation Linkbase
Document |
|
Filed electronically herewith |
|
|
|
|
|
101.DEF |
|
XBRL Taxonomy Extension Definition Linkbase
Document |
|
Filed electronically herewith |
SIGNATURES
In accordance with the requirements of
the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
ENTERTAINMENT GAMING ASIA INC. |
|
|
(Registrant) |
|
|
|
|
Date: |
November 13, 2015 |
By: |
/s/ Clarence Chung |
|
|
|
Clarence Chung |
|
|
Its: |
President and Chief Executive Officer |
|
|
|
|
Date: |
November 13, 2015 |
By: |
/s/ Traci Mangini |
|
|
|
Traci Mangini |
|
|
Its: |
Interim Chief Financial Officer |
EXHIBIT 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE
OFFICER
Section 302 Certification
I, Clarence Chung, certify that:
1) |
I have reviewed this quarterly report on Form 10-Q of Entertainment Gaming Asia Inc.; |
2) |
Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3) |
Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4) |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and |
|
d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fiscal quarter presented in this report that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5) |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
|
a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial data information; and |
|
b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: November 13, 2015 |
By: |
/s/ Clarence Chung |
|
|
Clarence Chung, President and Chief Executive Officer |
EXHIBIT 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL
AND ACCOUNTING OFFICER
Section 302 Certification
I, Traci Mangini, certify that:
1) |
I have reviewed this quarterly report on Form 10-Q of Entertainment Gaming Asia Inc.; |
2) |
Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3) |
Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4) |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
|
a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
c) |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and |
|
d) |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fiscal quarter presented in this report that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5) |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
|
a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial data information; and |
|
b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: November 13, 2015 |
By: |
/s/ Traci Mangini |
|
|
Traci Mangini, Interim Chief Financial Officer |
EXHIBIT 32.1
CERTIFICATION PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report
of Entertainment Gaming Asia Inc. (the “Company”) on Form 10-Q for the quarterly period ended September 30,
2015, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we, Clarence Chung, President
and Chief Executive Officer of the Company, and Traci Mangini, Interim Chief Financial Officer of the Company, certify, pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
|
1. |
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
|
2. |
The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. |
By: |
/s/ Clarence Chung |
|
Dated: |
November 13, 2015 |
|
Clarence Chung |
|
|
|
Title: |
President and Chief Executive Officer |
|
|
|
|
|
|
|
|
By: |
/s/ Traci Mangini |
|
Dated: |
November 13, 2015 |
|
Traci Mangini |
|
|
|
Title: |
Interim Chief Financial Officer |
|
|
|
This certification is made solely for the
purposes of 18 U.S.C. Section 1350, subject to the knowledge standard contained therein, and not for any other purpose.
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