UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark one)
FORM 20-F
¨ REGISTRATION
STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
x ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2014
OR
¨ TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
¨ SHELL COMPANY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report ______________
For the transition period from __________
to ___________
Commission file number 001-34804
Iao Kun Group Holding Company Limited
(Exact name of the Registrant as specified in its charter)
Cayman Islands
(Jurisdiction of incorporation or organization)
Unit 605, East Town Building
16 Fenwick Street
Wanchai, Hong Kong
Phone: 852-2111-9220
Facsimile: 852-2110-9420
(Address of principal executive offices)
Leong Siak Hung, Chief Executive Officer
Iao Kun Group Holding Company Limited
Unit 605, East Town Building
16 Fenwick Street
Wanchai, Hong Kong
Phone: 852-2111-9220
Facsimile: 852-2110-9420
(Name, Telephone, E-mail and/or Facsimile Number and Address of Company Contact Person)
with a copy to:
Mitchell S. Nussbaum
Giovanni Caruso
Loeb & Loeb LLP
345 Park Avenue
New York, New York 10154
(212) 407-4000
Fax: (212) 407-4990
Securities registered or to be registered
pursuant to Section 12(b) of the Act:
ORDINARY SHARES, PAR VALUE $0.0001
Securities registered or to be registered
pursuant to Section 12(g) of the Act:
None.
Securities for which there is a reporting
obligation pursuant to Section 15(d) of the Act:
None.
On December 31, 2014, the issuer had 60,452,314 ordinary
shares outstanding.
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.
If this report is an annual or transition report, indicate by
check mark if the registrant is required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
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.
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).
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated
filer” in Rule 12b-2 of the Exchange Act.
Large Accelerated filer ¨
Accelerated filer x
Non-accelerated filer ¨
Indicate by check mark which basis of accounting the registrant
has used to prepare the financial statements included in this filing:
| US GAAP x |
International Financial Reporting Standards as issued
by the International Accounting Standards
Board |
¨ |
Other ¨ |
If “Other” has been checked in response to the previous
question, indicate by check mark which financial statement item the registrant has elected to follow.
If this is an annual report, indicate by check mark whether
the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
TABLE OF CONTENTS
CERTAIN INFORMATION
In this Annual Report on Form 20-F (this
“Annual Report”), unless otherwise indicated, “we”, “us”, “our”, the “Company”,
“IKGH”, and “Iao Kun Group” refers to Iao Kun Group Holding Company Limited, a Cayman Islands company,
its subsidiaries and the Promotion Entities (as defined below).
On February 2, 2010, CS China Acquisition
Corp., our predecessor, consummated a business combination pursuant to which it acquired all of the outstanding capital stock
of Asia Gaming & Resort Limited (“AGRL”), a Hong Kong corporation.
References to “Promoter Companies”
or to “IKGH’s VIP gaming promoters” refer to those VIP gaming promoters and predecessors that are affiliated
with IKGH and its subsidiaries.
References to “Promotion Entities”
refer to the Promoter Companies and Mr. Lam Chou In, the Collaborator at the Oriental VIP room (defined below) and whose operations
are included in the financial statements included in this Annual Report.
References to “Collaborator Agreement”
refer to the collaborator agreement for the promotion of games of fortune and chance at the Oriental VIP Room in Le Royal Arc Casino
(“L’Arc”) in Macau between the L’Arc Promoter and the L’Arc Collaborator.
References to “Gaming Promoter Agreement(s)”
refer to, collectively or individually, the four gaming promotion agreements for the promotion of games of fortune and chance in
VIP gaming rooms at City of Dreams Hotel & Casino, Sands Cotai Central, StarWorld Hotel and Casino and Galaxy Macau Resort,
respectively, entered into between the Promoter Companies and the casino operators, as amended from time to time.
References to “Promotion Agreements”
refer the Gaming Promoter Agreements and the Collaborator Agreement.
On November 10, 2010, we acquired 100% of
the profit interest in King’s Gaming Promotion Limited (“King’s Gaming”).
On September 12, 2012, we acquired 100%
of the profit interest in Bao Li Gaming Promotion Limited (“Bao Li”).
On June 26, 2013, we acquired 100% of the
profit interest in the VIP gaming promotion business in the Oriental VIP gaming room located in Le Royal Arc Casino (“Oriental
VIP Room”).
On September 30, 2013, we changed our name
from “Asia Entertainment & Resources, Ltd.” to “Iao Kun Group Holding Company Limited.”
Unless otherwise indicated or the context
indicates otherwise, all references to “Macau” or “MSAR” refer to the Special Administrative Region of
Macau, and all references to “China” or “PRC” refer to the People’s Republic of China.
All references to Hong Kong Dollar
(“HKD$”) are to the legal currency of Hong Kong and all references to “U.S. dollars”, “dollars”,
“US$”, “$” are to the legal currency of the United States. This Report contains translations of HKD$
amounts into U.S. dollars at specified rates solely for the convenience of the reader. We make no representation that the HKD$
or U.S. dollar amounts referred to in this Report could have been or could be converted into U.S. dollars or HKD$, as the case
may be, at any particular rate or at all. On April 3, 2015, the buying rate announced by the Federal Reserve Statistical
Release was HKD$7.7516 to $1.00.
FORWARD-LOOKING STATEMENTS
This Annual Report contains “forward-looking
statements” that represent our beliefs, projections and predictions about future events. All statements other than statements
of historical fact are “forward-looking statements” including any projections of earnings, revenue or other financial
items, any statements of the plans, strategies and objectives of management for future operations, any statements concerning proposed
new projects or other developments, any statements regarding future economic conditions or performance, any statements of management’s
beliefs, goals, strategies, intentions and objectives, and any statements of assumptions underlying any of the foregoing. Words
such as “may”, “will”, “should”, “could”, “would”, “predicts”,
“potential”, “continue”, “expects”, “anticipates”, “future”, “intends”,
“plans”, “believes”, “estimates” and similar expressions, as well as statements in the future
tense, identify forward-looking statements.
These statements are necessarily subjective
and involve known and unknown risks, uncertainties and other important factors that could cause our actual results, performance
or achievements, or industry results, to differ materially from any future results, performance or achievements described in or
implied by such statements. Actual results may differ materially from expected results described in our forward-looking statements,
including with respect to correct measurement and identification of factors affecting our business or the extent of their likely
impact, the accuracy and completeness of the publicly available information with respect to the factors upon which our business
strategy is based or the success of our business.
Forward-looking statements should not be
read as a guarantee of future performance or results, and will not necessarily be accurate indications of whether, or the times
by which, our performance or results may be achieved. Forward-looking statements are based on information available at the time
those statements are made and management’s belief as of that time with respect to future events, and are subject to risks
and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the
forward-looking statements. Important factors that could cause such differences include, but are not limited to, those factors
discussed under the headings “Risk Factors”, “Operating and Financial Review and Prospects,” “Information
on the Company” and elsewhere in this Annual Report.
This Annual Report should be read in conjunction
with our audited financial statements and the accompanying notes thereto, which are included in Item 18 of this Annual Report.
Part
I
| Item 1. | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS |
Not required.
| Item 2. | OFFER STATISTICS AND EXPECTED TIMETABLE |
Not required.
| A. | Selected financial data |
The consolidated balance sheets data of
Iao Kun Group as of December 31, 2014, December 31, 2013, December 31, 2012, December 31, 2011 and December 31, 2010 and the consolidated
statements of operations data and cash flow data for the years ended December 31, 2014, 2013, 2012, 2011 and 2010 are derived from
the audited consolidated financial statements of Iao Kun Group. The audited consolidated financial statements of Iao Kun Group
as of December 31, 2014 and 2013 and for the years ended December 31, 2014, December 31, 2013 and December 31, 2012 are included
elsewhere in this Annual Report.
The information is only a summary and should
be read in conjunction with each of our historical financial statements and related notes and “Operating and Financial Review
and Prospects” contained elsewhere herein. The historical results included below and elsewhere in this Annual Report are
not indicative of our future performance.
IAO KUN GROUP HOLDING COMPANY LIMITED
SELECTED HISTORICAL CONSOLIDATED AND
COMBINED FINANCIAL INFORMATION
Statement of Operations Data
| | |
For the Year
Ended
December 31,
2014 | | |
For the Year
Ended
December 31,
2013 | | |
For the Year
Ended
December 31,
2012 | | |
For the Year
Ended
December 31,
2011 | | |
For the Year
Ended
December 31,
2010 | |
| | |
| | |
| | |
| | |
| | |
| |
| | |
(Unaudited) | | |
(Unaudited) | | |
(Unaudited) | | |
(Unaudited) | | |
(Unaudited) | |
| Revenue from VIP gaming operations | |
$ | 233,822,859 | | |
$ | 236,850,159 | | |
$ | 236,300,623 | | |
$ | 250,575,452 | | |
$ | 127,036,361 | |
| Total expenses | |
| 232,982,225 | | |
| 219,016,868 | | |
| 181,348,081 | | |
| 179,570,303 | | |
| 89,740,111 | |
| Operating income including pre-acquisition
profit | |
| 840,634 | | |
| 17,833,291 | | |
| 54,952,542 | | |
| 71,005,149 | | |
| 37,296,250 | |
| Prior owners’ interest in pre-acquisition
profit | |
| — | | |
| — | | |
| — | | |
| — | | |
| (4,329,385 | ) |
| Operating Income (Loss) Attributable to Ordinary
Shareholders before change in fair value of contingent consideration | |
$ | 840,634 | | |
$ | 17,833,291 | | |
$ | 54,952,542 | | |
$ | 71,005,149 | | |
$ | 32,966,865 | |
| Change in fair value of contingent consideration
for the acquisition of King’s Gaming, Bao Li and Oriental | |
| (60,918,569 | ) | |
| (12,445,789 | ) | |
| 15,166,700 | | |
| 6,248,361 | | |
| — | |
| Net (Loss) Income attributed to ordinary shareholders | |
| (60,077,935 | ) | |
| 5,387,502 | | |
| 70,119,242 | | |
| 77,253,510 | | |
| 32,996,865 | |
| Other Comprehensive (Loss) Income | |
| 65,092 | | |
| (76,610 | ) | |
| 669,109 | | |
| (64,634 | ) | |
| (41,534 | ) |
| Total Comprehensive (Loss) Income | |
$ | (60,012,843 | ) | |
$ | 5,310,892 | | |
$ | 70,788,351 | | |
$ | 77,188,876 | | |
$ | 32,925,331 | |
| Net (Loss) Income per share attributable to ordinary
shareholders (A) | |
| | | |
| | | |
| | | |
| | | |
| | |
| Basic | |
$ | (0.99 | ) | |
$ | 0.10 | | |
$ | 1.53 | | |
$ | 1.91 | | |
$ | 2.15 | |
| Diluted | |
$ | (0.99 | ) | |
$ | 0.10 | | |
$ | 1.53 | | |
$ | 1.85 | | |
$ | 1.74 | |
| Dividend declared per share | |
$ | 0.03 | | |
$ | 0.18 | | |
$ | 0.31 | | |
$ | 0.10 | | |
$ | — | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| (A) | Earnings per share prior to year 2013 have been adjusted to reflect the rights issue accounting. |
Balance Sheet Data
| | |
December 31,
2014 | | |
December 31,
2013 | | |
December 31,
2012 | | |
December 31,
2011 | | |
December 31,
2010 | |
| | |
(Unaudited) | | |
(Unaudited) | | |
(Unaudited) | | |
(Unaudited) | | |
(Unaudited) | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Total Current Assets | |
$ | 201,573,499 | | |
$ | 255,597,767 | | |
$ | 265,135,490 | | |
$ | 258,382,355 | | |
$ | 144,939,466 | |
| Total Assets | |
$ | 341,641,630 | | |
$ | 411,828,690 | | |
$ | 377,467,005 | | |
$ | 328,407,314 | | |
$ | 220,058,197 | |
| Total Current Liabilities | |
$ | 83,088,675 | | |
$ | 111,668,955 | | |
$ | 60,105,783 | | |
$ | 77,127,221 | | |
$ | 96,557,390 | |
| Total Liabilities | |
$ | 130,382,820 | | |
$ | 142,736,723 | | |
$ | 161,400,764 | | |
$ | 169,620,206 | | |
$ | 134,579,559 | |
| Total Equity | |
$ | 211,258,810 | | |
$ | 269,091,967 | | |
$ | 216,066,241 | | |
$ | 158,787,108 | | |
$ | 85,478,638 | |
Cash Flow Data
| | |
For the Year
Ended
December
31, 2014 | | |
For the Year
Ended
December
31, 2013 | | |
For the
Year Ended
December
31, 2012 | | |
For the Year
Ended
December 31,
2011 | | |
For the Year
Ended
December 31,
2010 | |
| | |
(Unaudited) | | |
(Unaudited) | | |
(Unaudited) | | |
(Unaudited) | | |
(Unaudited) | |
| | |
| | |
| | |
| | |
| | |
| |
| Cash flows provided by (used in) operating activities | |
$ | 60,601,543 | | |
$ | 37,906,358 | | |
$ | 46,428,105 | | |
$ | 5,280,509 | | |
$ | (76,451,485 | ) |
| Cash flows used in investing activities | |
| (290,924 | ) | |
| (20,126,974 | ) | |
| (15,146,032 | ) | |
| (27,956 | ) | |
| (9,028,590 | ) |
| Cash flows (used in) provided by financing activities | |
| (56,929,036 | ) | |
| (30,844,943 | ) | |
| (27,390,634 | ) | |
| (2,305,762 | ) | |
| 99,009,722 | |
| Net increase (decrease) in cash | |
$ | 3,381,583 | | |
$ | (13,065,559 | ) | |
$ | 3,891,439 | | |
$ | 2,946,791 | | |
$ | 13,529,647 | |
Recent Developments
On February 9, 2015, the Company was notified
by the Hong Kong Stock Exchange (the “Stock Exchange”) that based on the information provided to the Stock Exchange
that, due to the declining financial performance of the Company, the unpredictability of the Company's revenues, the overall market
conditions and the near term industrial outlook in Macau, and certain related party payments made to Pak Si, the Stock Exchange
is unable to proceed further with the Company's listing application and the Company has elected to not continue with the application
process at this time.
Exchange Rates
The following table sets forth information
concerning exchange rates between the HKD$ and the U.S. dollar for the periods indicated. On April 3, 2015, the buying rate
announced by Federal Reserve Statistical Release was HKD$7.7516 to $1.00.
| | |
Spot Exchange Rate | |
| | |
Period | | |
Average | | |
| | |
| |
| Period | |
Ended | | |
(1) | | |
Low | | |
High | |
| | |
(HKD$ per US$1.00) | |
| | |
| | |
| | |
| | |
| |
| 2010 | |
| 7.7810 | | |
| 7.7665 | | |
| 7.7515 | | |
| 7.7865 | |
| 2011 | |
| 7.7663 | | |
| 7.7793 | | |
| 7.7641 | | |
| 7.7942 | |
| 2012 | |
| 7.7508 | | |
| 7.7571 | | |
| 7.7500 | | |
| 7.7689 | |
| 2013 | |
| 7.7539 | | |
| 7.7567 | | |
| 7.7506 | | |
| 7.7596 | |
| 2014 | |
| 7.7574 | | |
| 7.7544 | | |
| 7.7492 | | |
| 7.7669 | |
| 2015 | |
| | | |
| | | |
| | | |
| | |
| January | |
| 7.7520 | | |
| 7.7530 | | |
| 7.7503 | | |
| 7.7560 | |
| February | |
| 7.7550 | | |
| 7.7548 | | |
| 7.7515 | | |
| 7.7582 | |
| March | |
| 7.7542 | | |
| 7.7579 | | |
| 7.7531 | | |
| 7.7669 | |
Source: Federal Reserve Statistical Release
| (1) | Annual averages, lows, and highs are calculated from month-end rates. Monthly averages, lows, and highs are calculated using
the average of the daily rates during the relevant period. |
| B. | Capitalization and Indebtedness |
Not required.
| C. | Reasons for the Offer and Use of Proceeds |
Not required.
An investment in our securities involves
a high degree of risk. You should consider carefully the material risks described below, which we believe represent all the material
risks related to an investment in our securities, together with the other information contained in this Annual Report, before making
a decision to invest in our securities. This annual report also contains forward-looking statements that involve risks and uncertainties.
Our actual results could differ materially from those anticipated in the forward-looking statements as a result of specific factors,
including the risks described below.
Risks Relating To Our Business
Our business is entirely dependent on the Promotion Entities,
which have limited operating histories and are subject to many uncertainties and contingencies.
Our sole source of revenue is the assigned
profits we receive from the Promotion Entities under the profit interest agreements described below. The Promotion Entities generate
their revenues from conducting VIP gaming promotion business in casinos pursuant to the Gaming Promoter Agreements and the Collaborator
Agreement. Deterioration in the Promotion Entities’ business, financial condition and results of operations may have a material
adverse effect on our business and results of operations.
Consistent with industry standards, the
terms of each of the Gaming Promoter Agreements and the Collaborator Agreement are for one year, the same term as the gaming promoter
licenses of the Promoter Companies and Mr. Chan Yan Hung (“the L’Arc Promoter”), which are subject to annual
renewal. However, the Gaming Promoter Agreements may be terminated unilaterally by the casino operators at any time upon 14 to
30 days’ advance written notice, and the Collaborator Agreement may be terminated unilaterally by the L’Arc Promoter
at any time upon three months’ advance notice, to the Promotion Entities. If the Promotion Entities’ relationship with
any of the casino operators or the L’Arc Promoter deteriorates, the casino operators or the L’Arc Promoter may terminate
or decide not to renew, at their sole discretion, the respective Gaming Promoter Agreements or the Collaborator Agreement with
or without cause. Further if the relationship between Sociedade de Jogos de Macau, S.A. (“SJM”) and the L’Arc
Promoter deteriorates, SJM may terminate or decide not to renew the gaming promoter agreement with the L’Arc Promoter, hence
discontinues the Collaborator Agreement. Any of the above events may have a material and adverse effect on our business, financial
condition and results of operations.
The operations of the Promotion Entities
are also subject to significant business, economic and regulatory uncertainties and contingencies frequently encountered by businesses
in competitive environments, many of which are beyond their control. The Promoter Companies are required to obtain and maintain
gaming promoter licenses, which are renewed annually, to enter into the Gaming Promoter Agreements and conduct gaming promoter
business in Macau. Although we have no reason to believe the renewal of the gaming promoter licenses of the Promoter Companies
or the L’Arc Promoter will not be granted, we cannot assure you that these licenses will be renewed upon expiration or at
all. If any of the Promoter Companies’ or the L’Arc Promoter’s gaming promoter license is terminated or not renewed,
we may lose a significant part of our revenue.
If we are not able to manage these risks
successfully, our business, financial condition and results of operations may be materially and adversely affected.
We are entirely dependent on our relatively limited number
of VIP gaming rooms for all of our revenue and cash flow.
Our operations are currently conducted at
five VIP gaming rooms in five casinos in Macau that are primarily focused on VIP baccarat. Therefore, we are subject to greater
risks than other gaming promoters with more VIP gaming rooms at different geographic locations. For the years ended December 31,
2012 , 2013 and 2014 revenue contributed by our largest VIP Gaming Room, accounted for 53.5%, 38.6% and 37.3% of our total revenue,
respectively. If any of the five VIP gaming rooms is not performing as expected or ceases operation due to termination of the Gaming
Promoter Agreements or the Collaborator Agreement or any other reason, our business, financial condition and results of operations
could be materially and adversely affected. We are also more susceptible to the risk of changing VIP gaming patron tastes or preferences
due to the limited scope of our business. Any negative developments in this regard could adversely affect our business, financial
condition and results of operations.
The profitability of our business depends on a variety
of factors, some of which are beyond our control.
The profitability of the gaming industry
is inherently dependent on an element of chance. No one has full control of the winning of the games. In addition, theoretical
win rates and, thus, our profitability are also affected by other factors, including amongst others, the VIP players’ skill
and experience, the financial resources of the VIP players, the spread of table limits, the number of gaming tables in the VIP
gaming rooms, the volume of bets placed by the VIP players and the amount of time VIP players spend on gaming. As a result, our
VIP rooms’ rolling chip turnover and win rates may fluctuate, causing our interim results to be volatile. These factors,
alone or in combination, may adversely impact our profitability.
Our profitability also depends on the proportion
of VIP players that are sourced by junket agents compared to direct business players sourced by our management team, as we pay
commissions to these junket agents based on the rolling chip turnover of the VIP players sourced by them, while no such commission
is paid in respect of direct business players. Therefore, if the percentage of non-negotiable chips purchased by junket agents
increases, our profit may decline. In 2012 , 2013 and 2014, rolling chip turnover generated from direct business players accounted
for 13%, 1% and 1%, of our total rolling chip turnover, respectively. Such decreasing trend may persist in the future, which will
adversely affect our profitability.
The success of our acquired Oriental VIP Room operations
at Le Royal Arc Casino is subject to the renewal or extension of the Collaborator Agreement and the rolling chip turnover achieved
by Mr. Lam Chou In and the network of junket agents under Mr. Vong Veng Im.
In June 2013, we acquired 100% of the net
operating profit generated by the Oriental VIP Room at L’Arc, which effectively gained us access to the network of junket
agents operating in this location. In November 2013, Mr. Lam Chou In became the collaborator of the Oriental VIP room. Pursuant
to the Collaborator Agreement between Mr. Lam Chou In and L’Arc Promoter, L’Arc Promoter is entitled to terminate such
agreement if Mr. Lam Chou In and Vong Veng Im’s network of junket agents fail to generate the minimum monthly rolling chip
turnover requirement. If the Collaborator Agreement is not renewed or extended upon expiration, or Mr. Lam Chou In and Vong Veng
Im’s network of junket agents fail to achieve the minimum monthly rolling chip turnover requirement, the success of our newly
acquired VIP gaming promotion operations at L’Arc and our business and prospects may be adversely affected.
Our revenue sharing model may result in greater volatility
in our revenues as compared to a fixed rate commission model. Our short-term revenue under the revenue sharing model is subject
to significant volatility and may not be indicate of our long-term results.
Beginning in September 2012, we changed
our remuneration model from a predetermined fixed rate commission of 1.25% of the rolling chip turnover to a revenue sharing model
for all of our VIP rooms. Therefore, our past performance under the fixed rate commission model may not be indicative of our future
results under the revenue sharing model. Under the revenue sharing model, we currently share 42.5% to 55% of the net gaming wins
or losses before expenses with the respective casino operators and L’Arc Promoter. In respect of Oriental VIP Room at L’Arc,
we elected to pay table rental in exchange for a higher win/loss share percentage. Our revenues under the current model may experience
significant volatility during a particular interim period and may not be indicative of our long-term results of operations. For
example, should one or more of our VIP players win or lose large sums in a given period, our short-term results of operations could
be materially impacted. The generally expected win rate for VIP baccarat, the table game played at our VIP rooms, is between 2.7%
to 3.0%. Our quarterly win rates from January 1, 2011 to December 31, 2014 ranged from 2.2% to 4.0%. Should the win rates
at one or more of our VIP rooms consistently fall below the typical range, it would adversely affect our short-term results of
operations.
We face intense competition in Macau and elsewhere.
The VIP gaming promotion business in Macau
is highly competitive. As of March 31, 2015, our VIP rooms are located at five out of approximately 35 casinos of varying sizes
in Macau and the Promotion Entities currently compete with approximately 180 other gaming promoters in Macau.
We expect competition in Macau’s VIP
gaming market to increase in the near future as numerous new hotel, casino and entertainment complex projects, which are currently
under construction or development, are due to open beginning in the second quarter of 2015. These projects are expected to include
internationally recognized hotels and significant additional gaming space. Any opening of additional casinos and hotels is likely
to result in a significant increase in the number of VIP gaming rooms, intensifying competition in Macau’s VIP gaming business
and among VIP gaming promoters.
We also face current and prospective competition
from casinos and gaming promoters located elsewhere in Asia, particularly since many countries have loosened visa restrictions
on Chinese visitors. Such casinos include Genting Highlands, a major gaming and resort destination located outside of Kuala Lumpur
in Malaysia, and other casinos located in the Philippines and Singapore. Certain countries, including the Republic of Korea, Singapore,
Malaysia, Vietnam and Cambodia, have already legalized casino gaming while others, such as Japan, Taiwan and Thailand, may legalize
gaming in the future, which could further increase regional competition. Additional competition is provided from other major gaming
centers located around the world, including Australia and Las Vegas, as well as from cruise ships in Asia (many of which are based
in Hong Kong) that offer gaming facilities. If we cannot compete effectively, our business, prospects and results of operations
may be materially and adversely affected.
We face competition for qualified and skilled employees
and depend on one service provider to provide the majority of our operational staffing. We are also dependent on our key management
and operating personnel.
Our business success depends, in large part,
on our ability and the ability of our service provider to attract, train, motivate and retain a sufficient number of qualified
and skilled employees. Although we have employed over 50 senior operational staff directly, we still depend on Pak Si Management
and Consultancy Limited (“Pak Si”), a company owned by Ms. Tam Lai Ching, who is Mr. Vong Hon Kun’s sister in
law, to supply operational staff and there can be no assurance that Pak Si will be able or willing to continue to provide us with
experienced VIP gaming related and other personnel. Macau has a relatively limited labor pool for VIP gaming operations. Our and
our sole service provider’s ability to seek employees from other jurisdictions is also restricted by labor quota restrictions
imposed by the Macau government. In addition, many employees at the VIP gaming rooms are required to possess certain gaming-related
skills, for which substantial training and experience are needed. We cannot assure you that we will be able to compete successfully
for the limited supply of qualified VIP gaming related and other personnel and to recruit, train and retain a sufficient number
of qualified employees for our Macau operations.
Increasing competition for a limited number
of qualified employees could force us and our service provider to raise the salaries of current employees or to pay higher wages
to attract new employees, which could cause labour costs to increase. During the three years ended December 31, 2012, 2013 and
2014, our labor costs, including management fee to Pak Si for hiring and managing non-senior operating staff, accounted for 3.3%,
4.6% and 5.2% of our total revenue, respectively. If we and our sole service provider are unable to attract and retain a sufficient
number of qualified employees, or if we encounter a significant increase in labor costs due to salary increases, our ability to
compete effectively with the other VIP gaming promotion participants would be hampered.
Our ability to maintain our competitive position is also
dependent to a large degree on the efforts, skills and continued service of certain key management and operating personnel
Our ability to maintain our competitive
position is also dependent to a large degree on the efforts, skills and continued service of Mr. Lam Man Pou and other key management
and operating personnel such as Mr. Vong Hon Kun, Mr. Mok Chi Hung, Mr. Lou Kan Kuong, Mr. Lam Chou In and Mr. Vong Veng Im. The
loss of any of these key management and operating personnel would likely have a material adverse effect on our business since these
individuals are instrumental in marketing our VIP rooms to the junket agents and VIP players. Therefore, if these individuals,
for whatever reason, were no longer able or willing to perform such services, our business and results of operations would be materially
and adversely affected. Our success also depends upon our ability to attract, hire and retain qualified operating, marketing, financial
and technical personnel in the future. Given the intense competition for qualified management personnel in the industry, there
can be no assurance that we will be able to continue to hire or retain such key personnel. We do not maintain any key person insurance.
If we fail to maintain an effective internal control and
accounting system, we may be unable to report our financial results accurately or detect and prevent fraud and criminal activities.
We dedicate a significant amount of management,
operational and financial resources to enhance and maintain our internal control and accounting systems, which has increased our
administrative and other operating expenses. Although we review our internal control policies and procedures on an ongoing basis,
we cannot assure you that we will be able to enhance and maintain our internal controls successfully, which may result in us being
unable to report our financial results accurately or detect and prevent fraud and criminal activities. Effectiveness of our internal
control systems and procedures may also be adversely affected by misjudgment, clerical mishandling and errors, reporting errors
or our limited resources in making accurate, complete, updated evaluations. Any deficiency in our internal controls could adversely
affect management’s ability to monitor, evaluate and manage our business and operations, or lead to substantial business
or operational risk or inaccurate financial and regulatory reporting. Therefore, a failure to implement and maintain an effective
internal control system to detect and prevent fraud and to accurately report our results could materially and adversely affect
our business, financial condition and results of operations and subject us to legal or regulatory sanctions.
We face the risk of anti-social forces influencing our
operations and cannot assure you that our anti-money laundering and anti-corruption policies will be effective in preventing the
occurrence of money laundering or other illegal activities at our VIP rooms.
The VIP gaming promotion industry faces
the risk of anti-social forces influencing its operations, including but not limited to money-laundering, terror financing and
cross-border crimes. We and the casino operators have implemented anti-money laundering and anti-corruption policies in compliance
with all applicable laws and regulations in Macau. For instance, pursuant to Regulation 7/2006, we obtain and retain identification
documents of VIP gaming patrons when presented with transactions which are suspicious due to their nature, complexity, amounts
or volume. However, we cannot assure you that such policies will be effective in preventing the VIP gaming room operations from
being exploited for money laundering purposes or by other anti-social forces. Any incidents of money laundering, accusations of
money laundering or association with anti-social forces, or regulatory investigations into possible money laundering or anti-social
activities involving us, the casino operators or their employees or our employees, service providers, junket agents or VIP players
could harm our reputation, relationship with casino operators, L’Arc Promoter and gaming regulators and results of operations.
Any serious incidents of money laundering or regulatory investigation into money laundering or other anti-social activities could
also cause a revocation or suspension of the Promotion Entities or the concessions or sub-concessions, which may cause the termination
of the Gaming Promoter Agreements with the casino operators or the Collaborator Agreement with L’Arc Promoter as a result
of the termination of the L’Arc Promoter Agreement. The Gaming Inspection and Coordination Bureau (“DICJ”), who
is responsible for monitoring money laundering activities in the gaming industry and oversees the activities of the concessionaires
and gaming promoters, may impose other regulatory sanctions as well. If any of these happens, our business, financial condition
and results of operations may be materially and adversely affected.
We face the risk of counterfeiting and cheating and may
be adversely affected by the reputation and integrity of the parties with whom we engage in business activities.
Gaming activities in VIP gaming rooms are
conducted almost exclusively with non-negotiable chips which, like real currency, are subject to the risks of alteration and counterfeiting.
Although the casino operators incorporate a variety of security and anti-counterfeit features to detect altered or counterfeit
chips, unauthorized parties may try to copy the non-negotiable chips and introduce, use and cash in altered or counterfeit non-negotiable
chips in the gaming areas. Any negative publicity arising from such incidents could also tarnish our reputation and may result
in a decline in our business, financial condition and results of operations. Although no counterfeit or altered chips have been
detected in our VIP rooms in the past, we cannot assure you that no counterfeit or altered chips will be detected in the future.
Although the casino operators have in place
surveillance and security systems designed to detect cheating at the casinos, those systems may not be able to detect all such
activities in time or at all. There is a possibility that VIP gaming patrons may successfully cheat at their games, particularly
if VIP gaming patrons collude with the casino operators’ employees. In addition, our junket agents or other persons could,
without our knowledge, enter into arrangements with VIP players to side-bet on the outcomes of the games of chance in the VIP gaming
rooms, thus depriving us of revenues and in effect operating a side gaming operation at our expense. Failure to discover such schemes
in a timely manner could result in losses in VIP gaming promotion operations which are borne between our Promotion Entities and
the L’Arc Promoter or and the concessionaire or sub-concessionaire. In addition, negative publicity related to such incidents
could harm our reputation, thereby adversely affect our business, financial condition, results of operations and prospects.
The reputation and integrity of the parties
with whom we engage in business activities, in particular, junket agents, are important to our own reputation and ability to continue
to operate in compliance with the requirements of our licenses and Macau Gaming Law. While we endeavor to ensure that our junket
agents that we work with comply with the high standards of probity and integrity required by Macau Gaming Law, we cannot assure
you that they will adhere to these standards. In addition, if we enter into a business relationship with junket agent whose probity
was in doubt, this may be considered by regulators or investors to reflect negatively on our own probity. As we are jointly liable
for the activities conducted by our employees and collaborators, if any of the junket agents who are registered as our collaborators
violate Macau gaming laws while promoting our VIP rooms, the Macau government may, at its discretion, take enforcement action against
us and/or such junket agents and we may be sanctioned and our reputation harmed. The casino operators may also terminate their
Gaming Promoter Agreements with us.
Non-compliance with the Foreign Corrupt Practices Act could
subject us to penalties and other adverse consequences.
We are subject to the United States Foreign
Corrupt Practices Act, which generally prohibits United States public companies from engaging in bribery of or making other prohibited
payments to foreign officials to obtain or retain business. While we have adopted a code of ethics which applies to all of our
directors, officers and employees and continuously educate our directors, officers and employees about the Foreign Corrupt Practices
Act, our directors, officers and employees may engage in such conduct without our knowledge, for which we might be held responsible.
If that were to occur, we could suffer penalties that may have a material adverse effect on our business, financial condition and
results of operations.
If our goodwill or other intangible assets become impaired,
our total assets and shareholder equity may be significantly reduced.
Because we have acquired a significant number
of companies and businesses in recent years, goodwill and other intangible assets represent a substantial portion of our total
assets. As at December 31, 2014, our goodwill was approximately US$17.8 million and other intangible assets (net of accumulated
amortization) were approximately US$122.0 million, accounting for 5.2% and 35.7% of our total assets, respectively. We perform
goodwill impairment tests for potential impairment, on an annual basis at a minimum. This process requires us to make significant
judgments and estimates, including assumptions about our strategic plans with regard to our operations, as well as the interpretation
of current economic indicators and market valuations. To the extent that economic conditions would affect the future operations
of our reporting units change, our goodwill and other intangible assets may be deemed to be impaired and an impairment charge could
result in a significant reduction in our shareholders’ equity. A significant impairment charge would have a material adverse
impact on our financial condition and results of operation.
We may require additional debt or equity financing to expand
our business and fund future projects, but may not be able to obtain such financing on satisfactory terms or at all.
Apart from equity financing, we have financed
our operations primarily through cash generated from our operations, lines of credit from casinos and loans from our shareholders.
We may require additional debt or equity financing in the future to expand our business and fund future projects. Our ability to
secure additional financing will depend on a variety of factors, many of which are beyond our control, including our financial
performance, economic conditions of the U.S., Hong Kong, Macau and other capital markets in which we may seek to raise funds, credit
availability, interest rates, other gaming promotion companies that may also seek funding and investors’ and lenders’
perceptions of, and demand for, debt and equity securities of gaming promotion companies. As a result, we cannot assure you that
we will be able to access capital from external sources on satisfactory terms and conditions, or at all. If we are unable to obtain
additional financing, we may not be able to expand our business as anticipated or to fund future projects, and our business, financial
condition and results of operations could be materially and adversely affected.
Our business depends on our continued access to lines of
credit granted by casino operators. Any inability to obtain credit from casino operators in the future may adversely impact our
business.
We utilize lines of credit granted by casino
operators to purchase non-negotiable chips from the casinos and provide them to VIP gaming patrons. As of December 31, 2014, we
obtained lines of credit of approximately US$59.0 million from casino operators, of which approximately US$32.4 million were outstanding
as of December 31, 2014, As required by the casino operators, these lines of credit are personally guaranteed by the shareholders
of the Promoter Companies, namely Mr. Lam, Mr. Vong and Mr. Lou Kan Kuong. We cannot assure you that we will be able to obtain
future lines of credit from casino operators without such personal guarantees. If we are unable to obtain such credit in the future
and are unable to replace it by alternative independent third party guarantees or other financing arrangements, our ability to
provide non-negotiable chips to VIP gaming patrons will be impaired, which may discourage the VIP gaming patrons from coming to
our VIP rooms, which in turn may adversely impact our business, financial condition and results of operations.
We are subject to the credit risk of our VIP gaming patrons.
In order to attract VIP players and maintain
our relationships with VIP gaming patrons, we extend gaming credit to our VIP gaming patrons from time to time directly or through
our collaborators, exposing us to the substantial credit risk of these VIP gaming patrons. Extensions of gaming credit to VIP gaming
patrons may be made with limited information or credit analysis and are often based primarily on historical gaming chip purchases.
The Promotion Entities’ limited operating history may put them at a disadvantage compared to their competitors when evaluating
credit risk of the VIP gaming patrons. Inability to collect receivables from our VIP gaming patrons could have a material adverse
impact on our business, financial condition, results of operations and prospects.
During the three years ended December 31,
2012, 2013 and 2014, there were no defaults by VIP gaming patrons and no provisions were made in relation to markers receivables
from VIP gaming patrons. During the three years ended December 31, 2012, 2013 and 2014, however, members of our management team
personally guaranteed the collection of certain markers receivables which provided credit comfort to us. We cannot assure you that
the release of these guarantees will not affect the future recoverability of these advances, which could have a material adverse
impact on our financial condition and results of operations.
Furthermore, gaming credit extended to VIP
gaming patrons in Macau is typically unsecured and the collectability of receivables from them could be negatively affected by
economic trends or conditions in the countries where they reside. Additionally, courts of many jurisdictions do not enforce gaming
debts and we may encounter courts or other forums that refuse to enforce such gaming debts. Our inability to collect gaming debts
could have a material adverse impact on our financial condition and results of operations.
Local taxation may increase and current tax exemptions
may not be extended.
We are subject to the following local taxation:
| · | We are not subject to Hong Kong profits tax because we are an investment holding company and all of our operations are performed
outside Hong Kong. Our subsidiaries are incorporated under the BVI Business Companies Act, 2004 (No. 16 of 2004) and exempted from
payment of BVI taxes. |
| · | The Promotion Entities in Macau are not subject to Macau Complementary tax, because, pursuant to the Gaming Promoter Agreements
with the casino operators, gaming revenue is received net of taxes collected by the Macau government and paid directly by the casino
operator on a monthly basis. No provision for Macau Complementary tax has been made. The Promotion Entities are subject to a tax
on the amount of non-negotiable chips played by their VIP gaming patrons in the VIP gaming rooms, which is referred to as a “rolling
tax”. The rolling tax is deducted and paid by the casino operator on a monthly basis. The rate of rolling tax is 0.01% on
the rolling chip turnover of the VIP gaming rooms and the rolling tax is deducted as a cost of revenue. The original tax rate is
a 5% withholding tax on the gross value of commissions and other remuneration paid by the casino operators to the gaming promoters.
The Macau Chief Executive may reduce or cancel this tax exemption in the future by defining, in compliance with the law, what payments
in kind are justified as forms of commission or remunerations to be exempted from taxation. |
| · | Any dividends distributed by our Macau subsidiary to us or by the Promotion Entities to our subsidiaries may be subject to
up to 12% of Complementary Tax, under the Macau Complementary Tax Law. |
A loss of any of these exemption benefits
or increases in tax rates or imposition of additional taxes may have a material adverse effect on our financial condition and results
of operations.
We are jointly liable for the activities of our employees
and collaborators within the casino premises of concessionaires and could be held responsible if such persons violated the law.
We are jointly liable for the activities
of our employees and collaborators within the casino premises and for their compliance with applicable laws and regulations. Failure
by us to fulfill our obligations under applicable regulations may result in the following consequences:
| · | the issue of a non-suitability report; |
| · | refusal to grant a new gaming promotion license or to renew an existing one; |
| · | suspension of the gaming promotion activities of gaming promoters upon notice by the concessionaire to the DICJ; or |
| · | administrative liability arising out of violation of the Gaming Promoters Regulation without prejudice of contractual liability
of the gaming promoter towards the concessionaire. |
If we are subject to any such sanctions,
our business, financial condition and results of operations may be materially and adversely affected.
If we become directly subject to the recent scrutiny involving
U.S.-listed Chinese companies, we may have to expend significant resources to investigate and/or defend the matter, which could
harm our business operations, stock price and reputation and could result in a complete loss of your investment in us.
U.S. listed companies with substantially
all of their operations in China have been the subject of intense scrutiny by investors, financial commentators and regulatory
agencies in recent years. Much of the scrutiny has centered around financial and accounting irregularities and mistakes, a lack
of effective internal controls over financial reporting and, in many cases, allegations of fraud. As a result of the scrutiny,
the publicly traded stock of many U.S.-listed China- based companies that have been the subject of such scrutiny decreased sharply
in value. Many of these companies have been subject to shareholder lawsuits and/or SEC enforcement actions that are conducting
internal and/or external investigations into the allegations. If we become the subject of any such scrutiny, regardless of the
veracity of the allegations, we may have to expend significant time and resources to investigate such allegations and/or defend
ourselves and our stock price could decline as a result of such allegations.
Our insurance coverage may not be adequate to cover all
potential losses, and our insurance costs could increase.
Our labor insurance and insurance for our
litigation risks and directors’ indemnities have certain exclusions and may not be adequate to cover all possible losses.
Furthermore, we cannot assure you that we will be able to renew our insurance policies in a timely manner, on comparable terms
or at all. The cost of coverage may become so high that we may need to further reduce our policy limits or increase deductibles,
or agree to additional exclusions from our coverage. There is also limited available insurance in Macau and our Macau insurance
companies may need to secure reinsurance in order to adequately insure our operations. Failure to renew our insurance policies
and obtain adequate coverage for our losses may materially and adversely affect our business, financial condition and results of
operations.
Under our management agreement with Pak
Si, Pak Si is liable to indemnify all losses that are incurred by their negligence or omission during the course of their employment
with us. Such indemnification covers any losses relating to the management and operation of our VIP rooms, including loss of cash,
cheques, cash chips and non-negotiable chips. Furthermore, Pak Si also takes responsibility for any damage to the facilities of
our VIP rooms that is caused by them during their employment with us. Although we have the right to recover from Pak Si and Pak
Si shall be liable to compensate us and make any repairs or restorations needed on the damaged facilities, Pak Si may lack the
financial resources to do so, which could adversely affect our business, financial condition and results of operations.
Risks Relating to the Gaming Industry in Macau
Gaming is a highly regulated industry in Macau and the
gaming and licensing authorities may exercise significant control over our operations.
Gaming is a highly regulated industry in
Macau. Our operations are contingent upon our maintaining all regulatory licenses, permits, approvals, registrations, findings
of suitability, orders and authorizations pursuant to Macau law.
In addition, the casinos’ activities
in Macau are subject to administrative review and approval by various agencies of the Macau government, including the DICJ, the
Macau Judiciary Police, Health Department, Labor Bureau, Public Works Bureau, Fire Department, Financial Services Bureau (including
the Tax Department), Macau Monetary Authority, Financial Intelligence Bureau and Macau government Tourism Office. We cannot assure
you that the casino operators will be able to obtain all necessary approvals and licenses, and their failure to do so may materially
and adversely affect our business and operations. Macau law permits redress to the courts with respect to administrative actions;
such redress is, however, largely untested in relation to gaming industry regulatory issues.
Current laws, such as licensing requirements,
tax rates and other regulatory obligations, could change or become more stringent, resulting in additional regulations being imposed
upon the gaming promotion operations or an increase in competition in the gaming industry. For example, in September 2009, the
Macau government set a cap on commission payments to gaming promoters of 1.25% of rolling chip volume, which has been enforced
since December 2009. Any failure to comply with these regulations may result in the imposition of liabilities, fines and other
penalties and may materially and adversely affect our operations.
On November 1, 2012, the Macau government
raised the minimum age required for the entrance in casinos in Macau from 18 to 21, while allowing current casino employees to
maintain their positions while in the process of reaching the minimum required age. This could adversely affect our ability and
the ability of our business associates to engage sufficient staff for our operations in the future.
Under the existing legal framework, VIP
gaming promoters must report suspicious transactions within 48 hours of becoming aware of such suspicious behaviour. Failure to
report suspicious transactions constitutes an administrative offence. Depending on the number of suspicious transactions reported,
the DICJ may at any time instruct concessionaires or sub-concessionaires to enforce stricter control of suspicious transactions
reporting. We didn’t have suspicious transaction reported. We cannot assure you that this requirement will not be more strictly
enforced in the future.
There are limited precedents interpreting
and applying the laws of Macau and regulations concerning gaming. These laws and regulations are complex and a court or administrative
or regulatory body may in the future interpret these laws and regulations in a manner that differs from our interpretation or issue
new or modified regulations, which could have a material adverse effect on our business, financial condition and results of operations.
Agreements for concessions and sub-concessions
to operate casinos in Macau are for specific periods of time and could not be renewed upon their expiration. Also, the Macau government
has the right to unilaterally terminate the concessions or sub-concessions in certain circumstances. Because we derive our rights
from agreements with the casino operators, a termination of a casino operator’s license to operate a casino will cause a
termination of our business at that casino.
The concession of SJM and the sub-concession
of MGM Grand Paradise Limited will expire on March 31, 2020, unless extended pursuant to certain provisions of Macau law. The concession
of Galaxy Casino, S.A. (“Galaxy”), the sub-concession of Venetian Macau, S.A. (“Venetian Macau”), the concession
of Wynn Resorts (Macau), S.A. (“Wynn Macau”) and the sub- concession of Melco Crown Gaming (Macau) Limited (“Melco
Crown Gaming”) will expire on June 26, 2022, unless extended pursuant to certain provisions of Macau law. Upon expiration
of these concessions and sub-concessions, all casinos, gaming assets and equipment and ownership rights to the casino properties
in Macau will revert to the Macau government without compensation to the casinos. Moreover, beginning on June 26, 2017, the fifteenth
year of the concession of Galaxy, sub-concession of Venetian Macau, the concession of Wynn Macau and the sub-concession of Melco
Crown Gaming, the Macau government may exercise its right to redeem the concessions or sub-concessions by providing the concessionaires
or sub-concessionaires with at least one-year prior written notice. SJM has been subject to this right of redemption of the Macau
government since April 1, 2009, the seventh year of SJM’s concession. We cannot assure you that the concessionaires or sub-concessionaires
will be able to renew or extend their concessions or sub-concessions on terms favourable to them or at all. If any of the concessions
or sub-concessions are not renewed or extended upon their stated expiration date, or if the Macau government exercises its early
redemption right, we will cease to generate any revenue from the affected casinos and our gaming promotion operations at the affected
casinos will cease accordingly.
The Macau government has the right to unilaterally
terminate the concession or sub-concession agreements upon the occurrence of certain events of default. The concession and sub-concession
agreements contain various general covenants and other provisions with which the concessionaires or sub-concessionaires are required
to comply. These include the obligations to submit periodic information to the Macau government, operate casinos in a fair and
honest manner and maintain certain levels of insurance. Failure to comply with the terms and conditions of the concession or sub-concession
agreements in a manner satisfactory to the Macau government could ultimately result in the termination of the concession or sub-concession
agreements. The occurrence of any event of default may, and any termination of the concession or sub-concession agreements will,
cause all of the casinos, gaming assets and equipment and ownership rights to the casino properties in Macau to be automatically
transferred to the Macau government. If this occurs, we will cease to generate any revenue from the affected casinos.
Conducting business in Macau involves certain economic
and political risks relating to changes in Macau’s and China’s political, economic and social conditions.
Conducting business in Macau involves certain
risks such as risks relating to changes in Macau’s and China’s political, economic and social conditions, changes in
Macau governmental policies, changes in Macau laws or regulations or their interpretation, changes in exchange control regulations,
potential restrictions on foreign investment and repatriation of capital, measures that may be introduced to control inflation,
such as interest rate increases, and changes in the rates or method of taxation. In addition, our operations in Macau are exposed
to the risk of changes in laws and policies that govern operations of Macau-based companies. The PRC government may continue to
adopt policy and regulatory measures aimed at curtailing the possibility of corruption in Macau’s gaming industry. Therefore,
we cannot be certain that the PRC government’s anti-corruption policies and regulatory measures will not materially and adversely
affect our business, financial condition, results of operations and prospects.
The Macau government may decide to impose more stringent
laws with respect to the practice of gaming promoters issuing gaming credit to VIP gaming patrons and any change in our operations
to comply with such laws may result in a decrease in our revenue.
The Gaming Credit Law governs the granting
of gaming credit in Macau, and forbids the assignment or transfer, in any form, of the power to grant gaming credit. For the past
20 years, it has been customary practice in Macau that casinos issue gaming credit to VIP gaming promoters in the form of non-negotiable
chips that can only be used in that gaming promoter’s VIP gaming rooms. The non-negotiable chips may not be redeemed for
cash, cash chips or other goods or services. The gaming promoters extend such gaming credit to VIP gaming patrons. However, if
the Macau government in the future imposes a more stringent law governing the extension of gaming credit to VIP gaming patrons,
we may be required to adjust our operations to comply with such law, and limit our ability to extend gaming credit which may reduce
rolling chip turnover, which in turn may materially and adversely affect our business and results of operations.
A weakening in economic and credit market conditions may
adversely affect tourism and the profitability of our business.
There can be no assurance that the recent
difficult financial conditions in the global markets will improve or that government responses to these conditions will successfully
address fundamental weakness in the global markets, restore consumer confidence or increase market liquidity. Weakness in the global
economy or in the economy of China, where a significant number of gaming patrons reside and/or generate their income, may result
in a reduction in the number of gaming patrons or the frequency of visits by these gaming patrons to our VIP rooms. Any reduction
in demand for the gaming activities that we promote would reduce our revenue.
China has imposed government restrictions on Chinese citizens
travelling from mainland China to Macau and may continue to do so in the future. If China or other countries impose additional
government restrictions on travel, the number of visitors to Macau could decline.
We intend to take part in the promotion
of additional VIP gaming rooms, based, in part, on our expectation of future visitor arrivals in Macau, particularly from China.
According to the the Direcçªo dos Serviços de Estatística e Censos (Statistics and Census Service) (“DSEC”),
2010, 2011, 2012 , 2013 and 2014 tourists from mainland China accounted for approximately 53.0%, 57.7%, 60.9%, 63.5%, and 67.4%,
respectively, of all visitors to Macau. Since May 2008, the Chinese government has imposed restrictions on travel to Macau and
may impose further restrictions in the future. In May and July 2008, the Chinese government adjusted its visa policy toward Macau
and limited the number of visits that some mainland Chinese citizens may make to Macau in a given time period. In September 2008,
it was publicly announced that mainland Chinese citizens without a Macau visa could no longer enter Macau from Hong Kong. If the
number of visitors from China and elsewhere fails to increase as anticipated, we may not be able to source enough VIP gaming patrons
to our VIP rooms to meet the minimum rolling chip turnover requirement of source of our VIP rooms, and our business, financial
condition and results of operations may be materially and adversely affected.
The level of visitor arrivals to Macau from China and elsewhere
may decline due to, or travel to Macau may be disrupted by, natural disasters, outbreaks of disease, terrorist attacks, security
alerts, military conflicts or other factors.
Macau’s subtropical climate and location
on the South China Sea subject it to extreme weather conditions, including typhoons and heavy rainstorms. For example, in 2014,
there were four typhoons that impacted areas within 800 km of Macau. Unfavourable weather conditions or other natural disasters
such as earthquakes, tsunamis or major typhoons could severely disrupt transportation to Macau and prevent gaming patrons from
travelling to Macau. Similarly, outbreaks of infectious diseases, such as H1N1, terrorist attacks, security alerts or military
conflicts could have a negative impact on travel and leisure expenditures, including lodging, gaming and tourism. Any of these,
or other factors such as riots or demonstrations, could have a negative impact on visitor arrivals to Macau from China and elsewhere.
Consolidation of junket agents in recent years has led
to increased bargaining power of junket agents, which could reduce our profits.
Over the past several years, the Macau gaming
industry has experienced a consolidation of junket agents. Although there is uncertainty as to whether such consolidation will
become a trend in Macau, any consolidation in the Macau gaming market may provide junket agents with significant leverage and bargaining
power, which could result in higher commissions paid to the junket agents, the loss of business to a competitor or the loss of
our relationships with our junket agents. There have been recent instances of higher commission paid by other gaming promoters
to junket agents in Macau. If we need to increase agent commission rates, our profits would be negatively affected.
Macau’s infrastructure may limit the development
of its gaming industry.
According to the DSEC, the year on year
visitors arrival of Macau grew at 14.8% in 2010, 12.2% in 2011, 0.3% in 2012, 4.4% in 2013 and 7.5% in 2014. Accordingly, demands
on the capacity of Macau’s transportation infrastructure have also increased. To improve Macau’s existing transportation
infrastructure, the Macau government has announced a number of infrastructure projects to facilitate travel to and within Macau.
These projects, which are in various stages of planning or development, include a further expansion of the Macau International
Airport, construction of a light rail transit system, construction of two new tunnels linking the Macau peninsula and Taipa, construction
of the Hong Kong-Zhuhai-Macau bridge and improved pedestrian walkways and border crossings. However, these projects may not be
approved or completed in a timely fashion or at all and, if completed, may not be able to alleviate the growing transportation
demand associated with the rapid expansion of Macau’s gaming industry and the related recent increase in visitor levels to
Macau. If Macau fails to adequately address the growing transportation demand, transportation infrastructure problems could limit
the number of visitors arriving in Macau, which, in turn, could have a material and adverse effect on our business, financial condition
and results of operations.
Our gaming promotion operations could be adversely affected
by restrictions on the export of the Renminbi.
Casino operators in Macau are currently
prohibited from accepting wagers in Renminbi, the currency of China. There are currently restrictions on the export of the Renminbi
outside of mainland China, including to Macau. For example, Chinese travelling abroad are only allowed to take a total of RMB 20,000
in cash plus the equivalent of up to US$5,000 of foreign currencies out of China. Further restrictions on the export of the Renminbi
may impede the flow of gaming customers from China to Macau, inhibit the growth of gaming in Macau and negatively impact our operations.
Unfavourable changes in currency exchange rates may cause
fluctuations in the value of our investment in Macau.
Our business transactions, assets and liabilities
are principally denominated in Hong Kong dollars, our functional currency, with a small portion of our revenues denominated in
Patacas. Our consolidated financial statements are presented in U.S. dollars, which is our reporting currency. The Hong Kong dollar
is linked to the U.S. dollar and the exchange rate between these two currencies has remained relatively stable over the past several
years. The Pataca, which is not a freely convertible currency, is linked to the Hong Kong dollar, and in many cases the two are
used interchangeably in Macau. The exchange linkages of the Hong Kong dollar and Pataca, and the Hong Kong dollar and the U.S.
dollar, are subject to potential changes due to, among other things, Chinese, Hong Kong and Macau governmental policies and international
economic and political developments.
In the event of unfavourable Hong Kong dollar
or Pataca exchange rate changes as against the U.S. dollar, our obligations that are denominated in U.S. dollars would increase
in Hong Kong dollar and/or Pataca terms and our results of operations may be adversely affected.
Risks Related to Our Business Structure and Securities
As a result of our status as a foreign private issuer,
publicly disseminated information about us may be limited.
In accordance with the rules applicable
to foreign private issuers, we are exempt from certain requirements under the Securities and Exchange Act of 1934, as amended (“Exchange
Act”) relating to the furnishing and content of proxy statements and certain periodic reports. As a result, the publicly
disseminated information available to our shareholders and others may not be as extensive as would be required if we did not have
such status.
We rely on the contractual arrangements, including profit
interest agreements between our subsidiaries and the Promotion Entities, for our VIP gaming promotion business in Macau, which
may not be as effective in providing operational control as direct ownership or enable us to derive economic benefits as through
ownership of controlling equity interests.
We have relied and expect to continue to
rely on the contractual arrangements for our VIP gaming promotion business in Macau and the safeguarding of our interests. Although
the contractual arrangements confer significant control and economic benefits and are enforceable under Macanese law, they may
not be as effective in providing us with operational control as direct ownership or enabling us to derive economic benefits as
through ownership of controlling equity interests. If we had direct ownership of the Promotion Entities, we would be able to exercise
our rights as a shareholder. Therefore, the contractual arrangements may not be as effective in ensuring control over our operations
in Macau as direct ownership would be and may not enable us to derive the same economic benefits as through ownership of a controlling
equity interest.
If the Macau government finds that the contractual arrangements
that establish the structure for operating our gaming promotion business in Macau do not comply with Macau governmental restrictions
on non-Macau companies directly operating a gaming promotion business in Macau, or if these restrictions or the interpretation
of these restrictions change in the future, we could be subject to severe penalties or be forced to relinquish our interest in
those operations.
Current Macau laws do not allow non-Macau
companies, such as us, to directly operate a gaming promotion business in Macau. Because of these restrictions, our corporate structure
ensures that we do not have a direct ownership interest in the entities involved in the activities in which non-Macau companies’
participation is restricted. Consequently, our gaming promotion business is operated through certain contractual arrangements,
which enable us to receive substantially all of the economic benefits and risks of the Promotion Entities and exercise effective
control over the Promotion Entities. Our Macau legal advisers have advised that the corporate structure of the Promotion Entities
and the contractual arrangements comply with all existing Macau laws. However, as there are uncertainties regarding the interpretation
and application of Macanese laws and regulations, we cannot assure you that the Macau government will not determine that our corporate
structure and the contractual arrangements do not violate Macanese laws, rules or regulations, or will not adopt any new regulations
restricting non-Macau companies from being involved in the gaming promotion business through the contractual arrangements in Macau.
If the applicable Macanese authorities invalidate these contractual arrangements for violation of Macanese law, they would have
broad discretion to impose actions against us including: (i) revoking the Promotion Entities’ business and operation licenses;
(ii) ordering us to discontinue or restrict our operations; (iii) restricting our right to collect revenues from the Prompter Companies;
(iv) requiring us to restructure our operations and corporate structure in such a way as to compel us to establish new enterprises,
re-apply operating licenses or relocate our business, staff or assets; (v) imposing additional conditions or requirements with
which we may not be able to comply; or (vi) taking other regulatory or enforcement actions against us which could be harmful to
our business, all of which in combination or isolation would adversely and materially affected our business operations or ability
to consolidate the results of the Promotion Entities and substantially decrease the value of our Shares.
If the Promotion Entities or their respective shareholders
fail to perform their obligations under the contractual arrangements, we may have to incur substantial costs to enforce our rights.
If the Promotion Entities or any of their
shareholders terminate, or purport to terminate, or fail to perform their obligations under the contractual arrangements, we may
have to incur substantial costs and resources to enforce our rights under the agreements, and rely on legal remedies under Macanese
law, including seeking specific performance or injunctive relief and claiming damages, which may not be effective. For example,
if the Promotion Entities breach their obligations under the respective profit interest agreements or their undertakings to act
in a manner in line with the wishes of the Company, or if they were otherwise to act in bad faith towards us, then we may have
to take legal action to compel them to perform their contractual obligations. In the event that we are unable to enforce these
contractual arrangements, we may not be able to exert effective control over the Promotion Entities, and our ability to conduct
our business may be adversely affected.
We are a holding company and our subsidiaries’ ability
to pay dividends is dependent upon the earnings of IKGH’s Promotion Entities and distributions by its subsidiaries.
We are a holding company incorporated under
the laws of the Cayman Islands. AGRL incorporated under the laws of the Hong Kong Special Administrative Region. All of our business
operations are conducted through IKGH’s subsidiaries and its Promotion Entities. They are currently engaged in the promotion
of five major VIP gaming rooms and are entirely dependent upon their VIP gaming rooms for all of their cash flow. IKGH’s
ability to pay dividends to us is dependent upon the earnings of IKGH’s Promotion Entities and the distributions of funds
to IKGH by its subsidiaries, primarily in the form of dividends. The ability of IKGH’s subsidiaries to make distributions
to IKGH depends upon, among other things, the profits interest assigned to them. There are currently up to 12% withholding tax
on dividends in Macau but no withholding taxes levied on dividends in Hong Kong or the Cayman Islands. Other factors such as cash
flow conditions, restrictions on distributions contained in our subsidiaries’ articles of association, withholding tax and
other arrangements will also affect IKGH’s subsidiaries’ ability to make distributions to it. These restrictions could
reduce the amount of distributions that IKGH will receive from its subsidiaries, which in turn would restrict IKGH’s ability
to fund operations and pay dividends on the shares.
As our subsidiaries are located outside of the United States,
we will be subject to a variety of additional risks that may negatively impact our operations. In addition, the laws applicable
to AGRL will likely govern all of our material agreements and we may not be able to enforce our legal rights.
Because AGRL is a Hong Kong company that
operates through subsidiaries and VIP gaming promoters in Macau, we are subject to special considerations or risks associated with
companies operating outside of the United States, including some or all of the following:
| · | rules and regulations or currency conversion or corporate withholding taxes on shareholders; |
| · | tax issues, such as tax law changes and variations in tax laws as compared to the United States; |
| · | currency fluctuations and exchange controls; |
| · | challenges in collecting accounts receivable; |
| · | cultural and language differences; and |
If we are unable to adequately address these
additional risks, our operations might suffer.
In addition, the laws of Hong Kong or Macau
will likely govern almost all of the material agreements relating to our operations. We cannot assure you that AGRL will be able
to enforce any of its material agreements or that remedies will be available in such jurisdictions. The systems of laws and the
enforcement of existing laws in such jurisdictions may not be as certain in implementation and interpretation as in the United
States. The inability to enforce or obtain a remedy under any of our future agreements could result in a significant loss of business,
business opportunities or capital. Also, substantially all of our assets will be located outside of the United States and most
of our officers and directors reside outside of the United States. As a result, it may not be possible for investors in the United
States to enforce their legal rights, to effect service of process upon our directors or officers or to enforce judgments of United
States courts predicated upon civil liabilities and criminal penalties of our directors and officers under U.S. federal securities
laws.
The shares issued in connection with the acquisitions of
King’s Gaming, Bao Li Gaming and the Oriental VIP Room in L’Arc in Macau will increase the number of shares that will
be available for resale in the public market.
The ordinary shares issuable in connection
with our acquisition of King’s Gaming upon the achievement of future incentive targets, the ordinary shares issuable in connection
with our acquisition of Bao Li Gaming upon the achievement of future incentive targets, the ordinary shares issuable in connection
with our acquisition of the Oriental VIP Room in L’Arc in Macau upon the achievement of future incentive targets will increase
the number of shares available for resale and could have an adverse effect upon the market price of the ordinary shares.
Our officers and directors have significant influence over
us and their interests may differ from those of the public shareholders.
As of March 27, 2015, our officers
and directors hold 31.7% of the total outstanding shares of our Company. As a result of their substantial equity and voting interests,
our officers and directors will, when acting together, have significant influence in, among other things, the election of a majority
of our directors, including the collective ability to nominate directors; the appointment and change of our management; our legal
and capital structure; and our day-to-day operations. They also enact influence over approving material mergers, acquisitions,
dispositions and other business combinations, as well as approving any other material transactions and financings. These actions
may be taken in many cases without the approval of the independent non-executive directors or other shareholders and the interests
of our officers and directors may conflict with the interests of the public shareholders.
We may be classified as a passive foreign investment company
(“PFIC”), which could result in adverse U.S. federal income tax consequences to U.S. investors.
In general, we will be treated as a PFIC
for any taxable year in which either (1) at least 75% of our gross income (including our pro rata share of the gross income of
certain 25% or more-owned corporate subsidiaries) is passive income or (2) at least 50% of the average value of our assets (including
our pro rata share of the assets of certain 25% or more-owned corporate subsidiaries) is attributable to assets that produce, or
are held for the production of, passive income. Passive income generally includes, without limitation, dividends, interest, rents,
royalties, and gains from the disposition of passive assets. If we are determined to be a PFIC for any taxable year (or portion
thereof) that is included in the holding period of a U.S. Holder (as defined in the section of this Annual Report captioned “Taxation—United
States Federal Income Taxation—General” under Item 10.E.) of our ordinary shares, the U.S. Holder may be subject to
increased U.S. federal income tax liability and may be subject to additional reporting requirements. Based on the composition (and
estimated values) of the assets and the nature of our income and our subsidiaries during our 2014 taxable year, we do not believe
that we will be treated as a PFIC for such year. However, because we have not performed a definitive analysis as to our PFIC status
for our 2014 taxable year, there can be no assurance in respect to our PFIC status for our 2014 taxable year. There also can be
no assurance in respect to our status as a PFIC for our current (2015) taxable year or any future taxable year. U.S. Holders of
our ordinary shares are urged to consult their own tax advisors regarding the possible application of the PFIC rules. See the discussion
in the section of this Annual Report under Item 10.E entitled “Taxation—United States Federal Income Taxation—U.S.
Holders—Passive Foreign Investment Company Rules.”
We may not make dividend payments at a similar level as
in the past or at all in the future.
Although we have authorized a semi-annual
and an annual dividend, the form, frequency and amount of future dividends on the Shares will be at the discretion of the Board
of Directors and will depend on factors such as the profitability, financial condition, business development requirements, future
prospects and cash requirements of our Company. Moreover, dividend declaration and payment, as well as the amount of dividends,
will also be subject to, amongst others, the requirements under our organizational documents and the Companies Law of the Cayman
Islands, including the approval of our Board of Directors. Therefore, there can be no assurance that we will make dividend payments
at a similar level as in the past or at all in the future.
| Item 4. | INFORMATION ON THE COMPANY |
| A. | History
and Development of the Company |
Our legal and commercial name is “Iao
Kun Group Holding Company Limited.” We are a Cayman Islands exempted company. Our principal place of business is located
at Unit 605, East Town Building, 16 Fenwick Street, Wanchai, Hong Kong, telephone number 852-2111-9220. On February 2, 2010, we
acquired all of the outstanding capital stock of AGRL, a Hong Kong company that, through “profit interest agreements”
between its subsidiaries and affiliated companies known as Promotion Entities, receive the profit streams from gaming operations
conducted by the Promotion Entities. In connection with the acquisition, we changed our name from “CS China Acquisition Corp.”
to “Asia Entertainment & Resources, Ltd.” Prior to our acquisition of AGRL, we had no operating business. On September
30, 2013, we changed our name from “Asia Entertainment & Resources, Ltd.” to “Iao Kun Group Holding Company
Limited.”
Initial Public Offering
On August 15, 2008, we consummated our initial
public offering (“IPO”) of 4,800,000 units at $6.00 per unit. On August 21, 2008, we consummated the closing of an
additional 720,000 units that were subject to the underwriters’ over-allotment option. Each unit consisted of one ordinary
share and two warrants, each entitling the holder to purchase one ordinary share at an exercise price of $5.00 until August 10,
2013. Simultaneously with the consummation of IPO, we sold an aggregate of the 3,608,000 warrants at $0.50 per warrant (for an
aggregate purchase price of $1,804,000) in a private placement to our founders. Gross proceeds from the IPO (including from the
private placement of warrants and exercise of the underwriters’ over-allotment option) were $34,924,000. We paid a total
of $1,324,800 in underwriting discounts and commissions (after deferring $993,600 that was paid to the underwriters upon the consummation
of our acquisition of AGRL) and for costs and expenses related to the IPO. After deducting the underwriting discounts and commissions
and offering expenses, the total net proceeds to us from the IPO (including the over-allotment option and the private sale) were
$33,280,880, of which $32,899,200 was deposited into the trust account and the remaining proceeds became available to be used to
provide for business, legal and accounting due diligence on prospective business combinations and continuing general and administrative
expenses.
Pursuant to the Warrant Agreement between
the Company and Continental Stock Transfer and Trust Company, our ordinary share purchase warrants were redeemed for cash at the
redemption price of $0.01 per warrant on October 28, 2010. Management did not exercise its option to require the holders of the
warrants to exercise warrants on a “cashless basis.” Accordingly, after 5:00 p.m. New York time on October 28, 2010,
the warrants not exercised were no longer exercisable for ordinary shares and the holders only have the right to receive the redemption
price.
The Acquisition
On October 6, 2009, we entered into a Stock
Purchase Agreement (the “Purchase Agreement”) with AGRL and Spring Fortune, a British Virgin Islands company, that
provided for the purchase by us from Spring Fortune of all of the outstanding capital stock of AGRL. The Purchase Agreement was
subsequently amended on November 10, 2009, December 9, 2009, January 11, 2010, and April 18, 2011 and we acquired all of the outstanding
capital stock of AGRL on February 2, 2010.
Pursuant to the Purchase Agreement, as amended,
the aggregate consideration paid by us to Spring Fortune for the shares of AGRL stock was (a) 10,350,000 ordinary shares that were
issued upon the closing of the acquisition to Spring Fortune, Kenworth Capital, Inc., a consultant of Spring Fortune, and Blum
& Co., Inc. and Nuero International Company Limited, each a designee of Kenworth Capital, Inc. and (b) 4,210,000 ordinary shares
that were issued upon the filing of the Annual Report on Form 20-F for the 2010 fiscal year. Of the upfront shares, 9,729,000 shares
were issued to Spring Fortune and subsequently distributed to its shareholder and its shareholder’s designees and an aggregate
of 621,000 shares were issued to Kenworth Capital, Inc., Blum & Co., Inc. and Nuero International Limited.
In addition to the ordinary shares described
above, Spring Fortune was entitled to receive ordinary shares for each of the years 2009, 2010, 2011, and 2012 in which AGRL has
adjusted net income that equals or exceeds the target specified for such year in the Purchase Agreement, as amended (the “Incentive
Target”), as follows:
| Year | |
Incentive Target | |
Incentive Share | |
| 2009 | |
$16,000,000 to $16,999,999 | |
| 1,150,000 | |
| | |
$17,000,000 to $17,999,999 | |
| 2,464,000 | |
| | |
$18,000,000 to $18,999,999 | |
| 3,981,000 | |
| | |
$19,000,000 to $19,999,999 | |
| 5,750,000 | |
| | |
$20,000,000 and above | |
| 7,841,000 | |
| 2010 | |
$36,800,000 to $37,799,999 | |
| 4,210,000 | |
| | |
$37,800,000 to $38,799,999 | |
| 6,300,000 | |
| | |
$38,800,000 to $39,799,999 | |
| 8,069,000 | |
| | |
$39,800,000 to $40,799,999 | |
| 9,586,000 | |
| | |
$40,800,000 to $41,799,999 | |
| 10,900,000 | |
| | |
$41,800,000 and above | |
| 12,050,000 | |
| 2011 | |
$65,000,000 and above | |
| 2,573,000 | |
| 2012 | |
$78,000,000 and above | |
| 2,573,000 | |
Also, for each of the years 2010, 2011 and
2012, Spring Fortune was entitled to receive 530,000 ordinary shares if AGRL has adjusted net income equal to or greater than $60
million, $78 million, and $94 million, respectively.
AGRL’s net income after taxes for
2009 was $15,545,463. Accordingly, the Incentive Targets for 2009 were not met and no additional shares were issued with respect
to that year. AGRL’s net income after taxes for 2010 was $41,810,004. Accordingly, the Incentive Targets for 2010 were met,
and Spring Fortune and its affiliates were issued an aggregate of 12,050,000 ordinary shares with respect to that year; however,
Spring Fortune did not earn the additional 530,000 ordinary shares for the year ended December 31, 2010. AGRL’s net income
after taxes for 2011 was $80,144,002. Accordingly, the Incentive Targets for 2011 were met, and Spring Fortune and its affiliates
were issued an aggregate of 2,573,000 ordinary shares with respect to that year; Spring Fortune also earned the additional 530,000
ordinary shares for the year ended December 31, 2011, so an aggregate of an additional 3,103,000 ordinary shares were a issued
to Spring Fortune and its affiliates. AGRL did not achieve the performance targets for the year ended December 31, 2012 and, as
a result, no incentive shares were issued to AGRL.
Acquisition of King’s Gaming Promotion Limited
On November 15, 2010, we consummated the
transactions contemplated by that certain Profit Interest Purchase Agreement dated as of November 10, 2010 (the “King’s
Gaming Purchase Agreement”) among us, King’s Gaming, Mr. Mok and Mr. Wong (collectively, the “King’s Gaming
Seller”), whom collectively own 100% of the equity interests of King’s Gaming, pursuant to which the Company acquired
100% of the profit interest in King’s Gaming (the “King’s Gaming Acquisition”). Mr. Wong is the brother
of Vong Hon Kun, our Chief Operating Officer, and owned 4% of King’s Gaming immediately prior to the acquisition.
Pursuant to the King’s Gaming Purchase
Agreement, King’s Gaming sold to us the King’s Gaming Profit Interest (as defined below) pursuant to a separate Profit
Interest Agreement entered into between King’s Gaming and Billion Boom International Limited, a company incorporated in the
British Virgin Islands and our wholly owned subsidiary. The King’s Gaming Profit Interest was assigned to us at the closing
as of November 1, 2010. Following the closing, we have the right to restructure the management and organizational structure of
King’s Gaming. For purposes of the King’s Gaming Purchase Agreement, “King’s Gaming Profit Interest”
means the right, title, interest and benefits in and to 100% of the net operating profit generated by King’s Gaming at the
VIP gaming room located at the Venetian Macao-Resort-Hotel located in Taipa, Macao. King’s Gaming moved its VIP gaming room
to Sands Cotai Central in February 2013.
We purchased the King’s Gaming Profit
Interest for an aggregate amount of up to (i) US$36,000,000, of which US$9,000,000 was paid at the closing, and (ii) 1,500,000
ordinary shares (the “King’s Gaming Purchase Price”). The balance of up to US$27,000,000 of the King’s
Gaming Purchase Price will be maintained as working capital at the cage of King’s Gaming (and shall be the sole property
of us until paid to the King’s Gaming Seller in accordance with the terms of the King’s Gaming Purchase Agreement)
and shall be paid to the King’s Gaming Seller in installments of US$9,000,000 (each, an “Installment Payment”),
subject to meeting a minimum Gross Profit (as defined below) requirement equal to US$6,150,000 (the “Minimum Gross Profit
Requirement”) for each of the three fiscal years following the closing date commencing with fiscal year 2011, which shall
be evidenced by the management prepared financial statements of King’s Gaming approved by our audit committee. In the event
King’s Gaming fails to achieve the Minimum Gross Profit Requirement in any of the three fiscal years following the closing
date, the Installment Payment shall be reduced by an amount equal to the product of (x) US$9,000,000 and (y) the quotient obtained
by dividing (A) the actual Gross Profit for such year, by (B) the Minimum Gross Profit Requirement.
In addition, as more fully set forth below,
we were required to issue to the King’s Gaming Seller (i) up to an aggregate of 1,500,000 ordinary shares in the event certain
Gross Profit targets are achieved for each of the three years following the closing date (the “Earnout Shares”), (ii)
up to an aggregate of 700,000 ordinary shares in the event certain Gross Profit targets are achieved for each of the seven years
following the third anniversary of the closing date (the “Incentive Shares”), and (iii) additional ordinary shares
in the event the Gross Profit targets for each of the ten years following the closing date are exceeded by at least US$1,000,000
(the “Additional Incentive Shares”). The King’s Gaming Seller is not entitled to any Additional Incentive Shares
on a pro rata basis for multiples of less or greater than US$1,000,000.
The Earnout Shares, the Incentive Shares
and the Additional Incentive Shares shall be released and issued to the Seller as follows:
| a. | In the event the Minimum Gross Profit Requirement for fiscal year 2011 is achieved, the Seller shall receive 500,000 Earnout
Shares and for each US$1,000,000 in which the Minimum Gross Profit Requirement for such year is exceeded, 10,000 Additional Incentive
Shares. |
| b. | In the event the Gross Profit of US$7,380,000 for fiscal year 2012 is achieved, the Seller shall receive 500,000 Earnout Shares
and for each US$1,000,000 in which the Gross Profit target for such year is exceeded, 10,000 Additional Incentive Shares. |
| c. | In the event the Gross Profit of US$8,860,000 for fiscal year 2013 is achieved, the Seller shall receive 500,000 Earnout Shares
and for each US$1,000,000 in which the Gross Profit target for such year is exceeded, 10,000 Additional Incentive Shares. |
| d. | In the event the Gross Profit of US$9,740,000 for the fiscal year 2014 is achieved, the Seller shall receive 100,000 Incentive
Shares and for each US$1,000,000 in which the Gross Profit target for such year is exceeded, 10,000 Additional Incentive Shares. |
| e. | In the event the Gross Profit of US$10,720,000 for fiscal year 2015 is achieved, the Seller shall receive 100,000 Incentive
Shares and for each US$1,000,000 in which the Gross Profit target for such year is exceeded, 10,000 Additional Incentive Shares. |
| f. | In the event the Gross Profit of US$11,790,000 for fiscal year 2016 is achieved, the Seller shall receive 100,000 Incentive
Shares and for each US$1,000,000 in which the Gross Profit target for such year is exceeded, 10,000 Additional Incentive Shares. |
| g. | In the event the Gross Profit of US$12,970,000 for fiscal year 2017 is achieved, the Seller shall receive 100,000 Incentive
Shares and for each US$1,000,000 in which the Gross Profit target for such year is exceeded, 10,000 Additional Incentive Shares. |
| h. | In the event the Gross Profit of US$14,260,000 for fiscal year 2018 is achieved, the Seller shall receive 100,000 Incentive
Shares and for each US$1,000,000 in which the Gross Profit target for such year is exceeded, 10,000 Additional Incentive Shares. |
| i. | In the event the Gross Profit of US$15,690,000 for fiscal year 2019 is achieved, the Seller shall receive 100,000 Incentive
Shares and for each US$1,000,000 in which the Gross Profit target for such year is exceeded, 10,000 Additional Incentive Shares. |
| j. | In the event the Gross Profit of US$17,260,000 for fiscal year 2020 is achieved, the Seller shall receive 100,000 Incentive
Shares and for each US$1,000,000 in which the Gross Profit target for such year is exceeded, 10,000 Additional Incentive Shares. |
King’s Gaming achieved approximately
$8.2 million of gross profit for the year ended December 31, 2011, and, accordingly, and the Seller was issued an aggregate of
520,000 Earnout Shares and Additional Incentive Shares.
King’s Gaming did not meet its 2012,
2013 and 2014 gross profit target for the years ended December 31, 2012, 2013 and 2014. Accordingly, the Seller is not entitled
to receive any Earnout Shares or Additional Incentive Shares for those periods.
Acquisition of Bao Li Gaming Promotion Limited
On September12, 2012, we consummated the
transactions contemplated by that certain Profit Interest Purchase Agreement dated as of September 5, 2012 (the “Bao Li Gaming
Purchase Agreement”) by and among the Company, Bao Li Gaming Promotion Limited, a Macau company (“Bao Li Gaming”),
Mr. Lou Kan Kuong and Mr. Lei Kam Keong (each, individually, the “Bao Li Gaming Seller” and collectively, the “Bao
Li Gaming Sellers”), whom collectively own 100% of the equity interests of Bao Li Gaming, pursuant to which we acquired 100%
of the profit interest in Bao Li Gaming (the “Bao Li Gaming Acquisition”).
Pursuant to the Bao Li Gaming Purchase Agreement,
Bao Li Gaming sold the Profit Interest to the Company (as defined below) pursuant to a separate Profit Interest Agreement (the
“Bao Li Gaming Profit Interest Agreement”) entered into between Bao Li Gaming and Jubilee Dynasty Ltd., a company incorporated
in the British Virgin Islands and a wholly owned subsidiary of the Company (“Jubilee Dynasty”). The Bao Li Gaming Profit
Interest was assigned to Jubilee Dynasty at the closing as of September 1, 2012. For purposes of the Bao Li Gaming Purchase Agreement,
“Bao Li Gaming Profit Interest” means the right, title, interest and benefits in and to 100% of the net operating profit
generated by Bao Li Gaming at the VIP gaming room located at the City of Dreams Macau at Crown Towers, City of Dreams, Estrada
do Istmo, Cotai, Macau.
We purchased the Bao Li Gaming Profit Interest
for US$15,000,000. Additionally, if Bao Li Gaming’s rolling chip turnover is at least US$2.5 billion in each of the three
years ending December 31, 2013, 2014 and 2015, in each such year it will receive an additional payment of US$13 million and 625,000
ordinary shares of the Company. Bao Li Gaming will also be entitled to additional payments of US$130,000 and 6,250 ordinary shares
of the Company (“Incremental Earnout Payment”) for each incremental US$25,000,000 in rolling chip turnover achieved
by Bao Li Gaming in excess of US$2.5 billion. Notwithstanding the foregoing, the Company is not required to make any additional
payments to Bao Li Gaming in the event that Bao Li Gaming’s rolling chip turnover exceeds US$5 billion in any year. As a
result, the maximum Incremental Earnout Payment that Bao Li Gaming may be entitled to receive in any year would be US$13,000,000
and 625,000 ordinary shares of the Company.
Bao Li achieved the minimum rolling chip
target for 2013 in May of 2013. As a result the Company paid the Bao Li Seller $13,000,000 in August 2013 and issued 625,000 Ordinary
Shares in the third quarter of 2014. Additionally, Bao Li reached the incremental earn out rolling chip target for 2013 and was
paid an additional $13,000,000 in March 2014 and was issued an additional 625,000 Ordinary Shares in the third quarter of 2014.
Bao Li achieved the minimum rolling chip
target for 2014 in July of 2014. As a result the Company will pay the Bao Li Seller $13,000,000 in April 2015 and will issue 625,000
Ordinary Shares in the second quarter of 2015. Additionally, Bao Li reached an additional incremental earn out rolling chip target
for 2014 and will be paid an additional $8,320,000 in April 2015 and will be issued an additional 400,000 Ordinary Shares in the
second quarter of 2015.
Acquisition of Oriental VIP Room
On June 26, 2013, we entered into a profit
interest purchase agreement (the “Oriental VIP Room Purchase Agreement”) among us, as purchaser, Mr. Vong Veng Im,
as seller, and Frontier Champion Limited, our wholly owned subsidiary, whereby we agreed to acquire, and Mr. Vong Veng Im agreed
to dispose of, the right, title, interest and benefit in and to 100% of the net operating profit generated by Oriental VIP Room
at the VIP gaming room located at level 1 of the Le Royal Arc Casino located in NAPE, Downtown Macau, pursuant to a separate profit
interest agreement entered into between Frontier Champion and Mr. Vong Veng Im (the “Oriental VIP Room Profit Interest”).
We closed the transactions contemplated by the Oriental VIP Room Purchase Agreement on June 26, 2013.
We purchased the Oriental VIP Room Profit
Interest for an aggregate amount of US$20,000,000, of which (i) US$10,000,000 was paid on June 26, 2013 upon satisfaction or waiver
of certain conditions pursuant to the Oriental VIP Room Purchase Agreement; and (ii) US$10,000,000 was paid on December 13, 2013,
within 3 Business Days of the satisfaction or waiver of certain conditions pursuant to the Oriental VIP Room Purchase Agreement.
Should Mr. Vong Veng Im’s network of junket agents generate at least US$2.5 billion of rolling chip turnover during each
of the 12 months periods ended June 30, 2014, 2015 and 2016, Mr. Vong Veng Im would be entitled to receive US$13,000,000 in cash
and 625,000 Ordinary Shares for each 12 month period. For each incremental US$25,000,000 in rolling chip turnover in access of
US$2.5 billion, the Company will pay an additional US$130,000 and issue an additional 6,250 Ordinary Shares. Should Mr. Vong Veng
Im achieve rolling chip turnover of at least US$15 billion during the 36 month period ended June 30, 2016, then the Company will
pay an additional US$2,500,000 for every US$1 billion in excess of US$15 billion, up to a maximum of US$12,500,000.
Pursuant to the Oriental VIP Room Purchase
Agreement, Mr. Vong Veng Im had agreed to provide a personal guaranty, for so long as he is employed by the Company providing for
the guaranty of all obligations of Oriental VIP Room and himself, including but not limited to any bad debts that his network of
junket agents may have incurred or may incur in the future.
The Oriental VIP Room achieved the minimum
rolling chip target for 12 months ended June 30, 2014 in January of 2014. As a result the Company paid the Oriental VIP Room Seller
$13,000,000 in September 2014 and issued 625,000 Ordinary Shares in the fourth quarter of 2014. Additionally, the Oriental VIP
Room reached the incremental earn out rolling chip target for 12 months ended June 30, 2014 and was paid an additional $13,000,000
in September 2014 and issued an additional 625,000 Ordinary Shares in the fourth quarter of 2014. As of December 31, 2014, the
Oriental VIP Room has not yet reached the incremental earn out rolling chip target for 12 months ended June 30, 2015.
THE MACAU GAMING INDUSTRY
Overview
Macau is a Special Administrative Region
of the PRC located on the Pearl River Delta on the southern border of Guangdong Province, one of China’s wealthiest and most
urbanized provinces. It is approximately an hour away via high-speed ferry from Hong Kong, a tourism hub in Asia, and home to China’s
only approved casino gaming region. Macau attracts visitors from Guangdong Province, which had a population of over 106.4 million
in 2014, and from the rest of China, Taiwan, Japan, South Korea, Thailand, Malaysia, Singapore, Indonesia, India and the Philippines,
which are all within a five hour flight from Macau and together with Hong Kong had a combined population of over 3.2 billion in
2014. According to the 12th Five-Year Plan (2011–2015) for National Economic and Social Development of the PRC, Macau is
designated to be developed as a “world-class tourism and leisure center.”
According to the DSEC, visitors to Macau
from mainland China and Hong Kong accounted for 67.4% and 20.4%, respectively, of arrivals in 2014. Total visitors to Macau from
China grew at a CAGR of 5.46% from 2003 to 2014. Macau’s proximity to major population centers in Asia enhances its appeal
as a popular gaming destination for foreign tourists. International visitation levels have also experienced rapid growth from 2003
to 2014. We expect to continue to benefit from the continued economic growth in China and other Asian countries.
We believe that Macau is the world’s
largest and fastest growing gaming market in terms of gross gaming revenues. It is currently the only location in Greater China
to offer legalized casino gaming. According to the DICJ, the Macau market generated US$44.1 billion in gross gaming revenues in
2014, a 2.5% decrease from 2013 and a 15.5% increase from 2012.
Macau VIP Gaming Market
VIP gaming rooms are well appointed suites
generally located within a large casino that provide luxury accommodations and privacy exclusively for gambling by high-tier gaming
patrons. VIP gaming has historically been the major component of Macau’s gaming industry. VIP gaming patrons are typically
high-stakes gaming patrons who play VIP baccarat almost exclusively in dedicated VIP gaming rooms or designated casino areas. VIP
gaming operations are generally less subject to seasonal variations than, and face limited competition from, mass market gaming
operations and non-casino gaming activities.
VIP gaming patrons are usually brought to
VIP gaming rooms by VIP gaming promoters. Marketing and promotion of VIP gaming rooms through this business model is implemented
between concessionaires that are granted licenses to operate casinos and casino games in Macau (or sub-concessionaires that operate
casinos and casino games under an administrative contract with a concessionaire) and their gaming promoters. Gaming promoters,
particularly VIP gaming promoters, are incentivized to bring VIP gaming patrons to designated VIP gaming rooms by compensation
systems based on the net-win of the VIP gaming rooms and/or the amount of non-redeemable chips sold in the VIP gaming rooms pursuant
to contracts with a concessionaire or sub-concessionaire.
Macau Mass Gaming Market
Since the granting of new concessions in
2002 and the Chinese government’s implementation of the Facilitated Individual Travel Scheme (“FITS”) by the
Macau government, Macau’s gaming industry has witnessed significant growth in mass market casino gaming operations. However,
most mass market gaming patrons are not high-stakes gaming patrons. Mass market gaming patrons’ desire to visit casinos may
be influenced by a number of factors, such as the variety and quality of services and amenities offered, the ambience, promotions
and diversity of games in the casinos, the location of and ease of transportation to the casinos, and the presence of other attractions
and gaming-related facilities. Visits to casinos by mass market gaming patrons may also be negatively affected by a worsening economic
environment while those by high-tier gaming patrons historically have been much less affected.
The following table summarizes certain information
about Macau and its gaming market from 2008 to 2014:
| | |
2008 | | |
2009 | | |
2010 | | |
2011 | | |
2012 | | |
2013 | | |
2014 | | |
2008–
2014
CAGR | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
| Macau | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Gross gaming revenues (1) (in millions of US$) | |
| 13,563 | | |
| 14,951 | | |
| 23,536 | | |
| 33,407 | | |
| 38,094 | | |
| 45,153 | | |
| 44,010 | | |
| 21.67 | % |
| VIP baccarat gross gaming revenues (in millions of US$) | |
| 9,199 | | |
| 9,999 | | |
| 16,951 | | |
| 24,460 | | |
| 26,410 | | |
| 29,855 | | |
| 26,609 | | |
| 19.37 | % |
| Number of gaming tables (2) | |
| 4,017 | | |
| 4,770 | | |
| 4,791 | | |
| 5,302 | | |
| 5,485 | | |
| 5,750 | | |
| 5,711 | | |
| 6.04 | % |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Total visitation (million) (3) | |
| 22.9 | | |
| 21.8 | | |
| 25.0 | | |
| 28.0 | | |
| 28.1 | | |
| 29.3 | | |
| 31.5 | | |
| 5.46 | % |
Sources: The DICJ and the DSEC
Notes:
| (1) | Excluding revenues derived from non-casino related gaming activities such as horse racing, greyhound racing, Chinese lottery,
instant lottery and sports lottery. |
| (2) | As at December 31, of each of the years presented. |
| (3) | Visitor arrivals have excluded non-resident workers and students, but included arrivals at the Trans Border Industrial Park. |
Demand for Gaming and Gaming-Related Services
According to the DSEC, approximately 31.5
million visitors arrived in Macau in 2014, up by about 7.5% from 2013, of which approximately 21.3 million, or 67.4%, were from
mainland China, as compared to 63.5% in 2013 in Most VIP players in the VIP segment are sourced by a network of gaming promoters
who work with various casino operators.
We believe that the increase in the number
of gaming and gaming-related facilities is likely to continue Macau’s transformation into a premier integrated gaming and
tourism centre. The completion of new world-class gaming and gaming-related facilities in Macau could attract a greater number
of gaming patrons and potentially result in an increase in total gaming revenue in Macau.
The following public policies implemented
by the Chinese government are expected to continue to have a positive influence on the development of the gaming industry of Macau:
FITS. Since July 2003, residents
of selected areas of mainland China have been allowed to visit Macau and Hong Kong under FITS, whereby approval requirements are
significantly reduced and the application process is expedited. Since the introduction of FITS, visitors to Macau from mainland
China have outnumbered visitors from Hong Kong. FITS has continued to expand since was initially introduced and, at December 31,
2014, encompassed more than 49 cities, including Beijing, Chongqing, Guangzhou, Shanghai and Tianjin.
Chinese Government Policy With Respect
to Gaming. Macau is the only region in China offering legal casino gaming and the Chinese government has strictly enforced
its regulations prohibiting domestic gaming operations and discouraging unlicensed gaming operations along China’s borders.
Chinese Government’s Relaxation
of Foreign Exchange Controls. The Chinese government has undertaken a number of measures to relax its controls on the national
currency, renminbi . Currently, each PRC resident is allowed to carry a maximum of $5,000 in a single trip abroad, and may
charge spending on their credit cards or bank charge cards in Macau although recently increasing oversight of credit cards activities
by the PRC government might slow down the spending.
The growth of Macau’s gaming industry
has correlated positively with the continued economic growth and development of mainland China. IKGH believes that the emergence
of the middle class in China represents a significant long-term growth opportunity for Macau’s gaming industry. However,
there is no guarantee that the economic growth in China will continue at its historic pace.
The following diagram sets out the annual
visitation to Macau from China from 2003 to 2014:
Annual Visitation from China
Sources: The DSEC and the National Bureau of Statistics
of China
Note: The number of visitors to Macau in 2008
was revised by the DSEC and showed a significant drop compared to previous non- revised numbers due to a methodological change.
From 2008, visitor arrivals have excluded non-resident workers and students, but included arrivals at the Trans Border Industrial
Park. The number of visitors to Macau in 2008 based on the DSEC’s previous methodology was 30,185,740, an increase of 11.8%
from 2007. Population penetration of a given year is the percentage of the number of visitors from China to Macau divided by the
total population of China.
Both VIP and mass-market gaming have benefited
from the increasing number of visitors to Macau. We expect the strong growth rate will continue because of the following factors:
Opening of New Casinos and Resorts.
The opening of new mixed-use developments, together with the entertainment business, sports events, conventions, exhibitions and
trade shows that they will bring to Macau, will attract more regional visitors and visitors from outside the Asia-Pacific region.
UNESCO World Heritage List. The MSAR
government has devoted substantial resources to marketing campaigns that promote Macau’s history, cultural heritage and hotel
and convention facilities, aiming to turn Macau into a premier integrated gaming and tourism centre. On July 15, 2005, the United
Nations Educational, Scientific and Cultural Organization (UNESCO) identified and inscribed the “Historic Centre of Macau,”
comprising eight squares and twenty-two monuments, on its prestigious World Heritage List, pursuant to the terms of the Convention
Concerning the Protection of the World Culture and Natural Heritage.
Macau is accessible by land, air and sea.
Several airlines currently fly directly to Macau International Airport, operating direct routes to Macau from countries such as
South Korea, Japan, Thailand, Malaysia, Singapore and the Philippines.
We believe that improved transportation
to and within Macau will contribute to continued growth in visitation and gaming players. A number of infrastructure projects to
facilitate travel have been recently completed or are in various stages of planning or development, such as the following:
| · | Guangzhou-Zhuhai Highway. The highway which opened in 2004 links Macau to Hengqin Island, a PRC government-mandated
strategic new zone planned for development into a commercial, residential and resort destination. |
| · | Guangzhou-Zhuhai Intercity Mass Rapid Transit. The mass rapid transit was opened in January 2011, which provides
another convenient form of transport to Macau. |
| · | Guangzhou-Zhuhai Intercity Railway. The high speed railway was partially opened in 2011 and was completed at
the end of 2012. The high speed railway reduces travel time between Guangzhou and Zhuhai, from two hours to approximately 45 minutes. |
| · | Airport capacity upgrade. With the continuous upgrade in the capacity and facilities of the Macau International
Airport, the airport is expected to accommodate up to 7.1 million passengers by 2020, according to media reports. |
| · | Taipa Ferry Terminal. Macau is expected to have a soft opening of a new ferry terminal, Taipa Ferry Terminal
in Taipa Island, in addition to its two current ferry terminals in 2015. Currently, there are two ferry terminals located at the
inner harbor and the outer harbor on the Macau Peninsula, and a temporary one on the city’s Taipa Island in operation. The
new terminal is expected to have 16 piers for boats with a capacity of up to 400 passengers and three piers for ships of 1,200
passenger berths. A heliport on the roof of the terminal is also expected to be constructed. |
| · | Macau Light Rail System. The light rail system connecting the Macau Peninsula, Taipa and Cotai via 21 different
stations is expected to be ready for use by 2015, which is expected to improve connectivity. |
| · | Hong Kong-Zhuhai-Macau Bridge. The bridge linking three areas will include a bridge with a total length of around
30 km, boundary crossing facilities, access roads and associated works. In January 2007, the local governments of Hong Kong, Zhuhai
and Macau established the Hong Kong-Zhuhai-Macau Task Force to implement the project, which is expected to open in 2017. It will
contribute to the reduction in road travel time from Hong Kong and/or Zhuhai to Macau. |
| · | Expansion of Border Gate. The expansion of the border gate checkpoint in the Portas do Cerco area in northern
Macau was completed at the end of 2012, increasing the capacity of the border from 300,000 people per day to more than 500,000
people per day. |
Travel Restrictions on Chinese Citizens
Since May 2008, the Chinese government has
imposed restrictions on travel to Macau and may impose further restrictions in the future. In May and July 2008, the Chinese government
readjusted its visa policy toward Macau and limited the number of visits that some mainland Chinese citizens may make to Macau
in a given time period. In September 2008, it was publicly announced that mainland Chinese citizens with only a Hong Kong visa
and not a Macau visa could no longer enter Macau from Hong Kong. In addition, in May 2009, China also began to restrict the operation
of “below-cost” tour groups involving low up-front payments and compulsory shopping. Due to the popularity of these
tours with mainland Chinese citizens, the number of visitors to Macau declined in 2009, but has since recovered. Further restrictions
on travel from China or other countries to Macau or any increase in prices of tours to Macau as a result of new regulations on
travel agencies or otherwise may reduce the number of visitors to Macau.
Concessionaires and Sub-Concessionaires
Six entities are currently authorized to
operate casinos in Macau as either concessionaires or sub-concessionaires:
Concessionaires:
| · | Sociedade de Jogos de Macau, S.A. (“SJM”); |
| · | Galaxy Casino, S.A. (“Galaxy”); and |
| · | Wynn Resorts (Macau), S.A. (“Wynn Macau”). |
Sub-Concessionaires:
| · | Venetian Macau, S.A. (“Venetian Macau”); |
| · | Melco PBL Gaming (Macau) Limited (“Melco PBL”); and |
| · | MGM Grand Paradise Limited (“MGM Grand Paradise”). |
These concessionaires and sub-concessionaires
have committed to invest in Macau pursuant to their respective concession and sub-concession contracts in order to develop projects
such as casinos, hotels, convention facilities and facilities for retailing, dining, entertainment and recreation. IKGH believes
that the substantial financial commitment by the concessionaires and sub-concessionaires will stimulate further revenue growth
in Macau’s gaming and tourism industries.
As at December 31, 2014, SJM operated 20
of the 35 casinos in Macau, Galaxy operated 6 casinos, Venetian Macau operated 4 casinos, Melco PBL operated 3 casinos and Wynn
Macau and MGM Grand Paradise each operated 1 casino (Source: DICJ).
Galaxy was awarded a gaming concession in
2002 and opened its six casinos between 2004 and 2012. Galaxy entered into a sub-concession with Venetian Macau in December 2002.
Venetian Macau currently operates four casinos in Macau, which opened in 2004, 2007, 2008 and 2012.
Wynn Macau was also awarded a concession
in 2002 and opened its casino in September 2006. Wynn Macau entered into a sub-concession with Melco PBL in 2006. Melco PBL operates
three casinos, of which its latest, the City of Dreams project located on the Cotai Strip, opened in 2009, and the others opened
in 2007 and 2008.
SJM was awarded its concession in March
2002 and currently operates 20 casinos. SJM entered into a sub-concession with MGM Grand Paradise on April 19, 2005. MGM Grand
Paradise opened its casino in December 2007.
With the development of Macau’s gaming
market, some of the concessionaires and sub-concessionaires have increased their investments in gaming and gaming-related facilities.
For example, construction on Macau Studio City resumed in 2012 and the resort is scheduled to open in 2015. The Galaxy Macau Phase
2 is expected to open in mid-2015 and Phases 3 and 4 in 2017. The Wynn Macau also announced in June 2012 that the construction
of its first integrated resort in Cotai is expected to be completed in 2016. MGM Grand Paradise’s second property in Macau,
the first in Cotai, made significant headway in February 2013 and is now expected to open in 2016 and in October 2012, the Macau
government awarded a land grant to SJM in Cotai, and construction on this property is expected to be completed in 2017. Sands China
expects to complete The Parisian in Cotai during 2016.
VIP Gaming Promoters
The gaming promoter system began in Las
Vegas in the mid-1950s. In those days, casino operators would hire representatives to fill a plane with qualified patrons. Typically,
the patrons might receive free airfare, free hotel accommodations, free meals and free shows in exchange for their commitment to
gamble a specific number of hours per day at an explicit average bet size. The casinos believed that the patrons would lose more
than their out of pocket expenses for bringing, housing and feeding them. Today, promoters function in a very similar way in Las
Vegas, with the number of free items a patron receives based on the number of chips that patron turns over.
VIP Gaming Promotion in Macau
Unlike in Las Vegas, the gaming promoter
system in Macau developed to promote VIP gaming operations. A VIP gaming room is an individual room within a casino specifically
designed and designated for VIP room gaming patrons’ usage only. A VIP gaming room has its own cage, which functions as a
financial vehicle between the casino and the VIP gaming promoter. All properties of the VIP gaming room belong to the casino, the
dealers and the gaming managers are employees of the casino, and the gaming operations of a VIP gaming room are run by the casino.
In effect, only the marketing efforts have been contracted out to the VIP gaming promoters, which efforts include the making of
loans to agents and collaborators. Unlike in Las Vegas, in Macau, it is this VIP room gaming segment, not the mass market, that
is driving the growth of its gaming industry. For 2014, VIP gaming operations in Macau amounted to $26.6 billion or 60.5% of the
gross revenue from casino games.
Initially, U.S. companies operating in Macau
did not emphasize the importance of VIP gaming rooms. However, these U.S. companies quickly realized the importance of VIP gaming
rooms, as demonstrated by disclosures contained in the prospectuses of a number of companies operating casinos in Macau, including
Melco Crown Entertainment Limited, SJM Holdings Limited, Wynn Macau, Limited, and Sands China Ltd. Such disclosures indicate that
the various casino operators rely on VIP gaming promoters to generate revenue. Because VIP gaming promoters play such an important
role in the Macau gaming industry, they are heavily regulated by the government.
The gaming promoter system in Macau was
developed to promote VIP gaming operations. A VIP gaming promoter enters into a gaming promoter agreement (sometimes referred to
as junket representative agreements) with the concessionaire or sub-concessionaire pursuant to which the VIP gaming promoter agrees
to provide promotional services to the concessionaire or sub-concessionaire in consideration for a commission or other forms of
remuneration, including, for example, a share of net-win or percentage of rolling chip turnover from the VIP gaming room, fees
and allowances. The VIP gaming promoters then enter into arrangements with collaborators and junket agents who have the direct
relationship with the gaming patrons and are relied upon by the VIP gaming promoters to direct gaming patrons to their VIP gaming
rooms. A concessionaire or sub-concessionaire may enter into gaming promoter agreements with multiple VIP gaming promoters for
operating at a single casino, all in competition with each other.
Under the gaming promoter agreements, VIP
gaming promoters are required to purchase non-negotiable chips from the concessionaires/sub-concessionaires and provide them to
VIP gaming patrons. The gaming promoter agreement may be terminated by (i) mutual agreement, or (ii) if any party to the agreement
cannot carry out its obligations under the agreement and this results in a material breach of the terms of the agreement. In addition,
the agreement is voidable upon the death or deregistration of the VIP gaming promoter or the bankruptcy of any party to the agreement.
Unless an agreement is terminated or notice is served by a party thirty days prior to the date on which the agreement expires,
the agreement will be automatically renewed for a period of one to five years until the end of the term of the concessionaires
or sub-concessionaires’ concessions.
Rolling Chip Turnover
Rolling chip turnover is used by casinos
to measure the volume of VIP gaming room business transacted and represents the total amount of non-negotiable chips purchased.
Bets are wagered with “non-negotiable chips” and winning bets are paid out by casinos in so-called “cash”
chips. “Non-negotiable chips” are specifically designed for VIP gaming patrons to allow casinos to calculate the commission
payable to VIP gaming promoters. Commissions are paid based on the total amount of “non-negotiable chips” purchased
by each gaming patron. VIP gaming promoters therefore require the gaming patrons to “roll,” from time to time, their
“cash chips” into “non-negotiable” chips for further betting so that they may receive their commissions
(hence the term “rolling chip turnover”). Through the VIP gaming promoters “non-negotiable chips” can be
converted back into cash at any time. Betting using rolling chips, as opposed to using cash chips, is also used by the DICJ to
distinguish between VIP table revenue and mass market table revenue.
Compensation Methods
Commissions paid to VIP gaming promoters
are calculated on a monthly basis. Generally, the different compensation methods provide VIP gaming promoters with the ability
to diversify their commission base to balance short-term volatility. Until August 2012, our VIP gaming promoters received all of
their commissions based on chip commission calculated by reference to monthly rolling chip turnover. In this arrangement, the casino
bears the risk of losses from the gaming operations.
Gaming wins are generally expressed in terms
of “net-win,” which is the difference between wins and losses from gaming to the casino operator. Win rates for VIP
gaming promoters are generally expressed as the net-win as a percentage of rolling trip turnover and depend upon a number of factors,
some beyond their control. In addition to the element of chance inherent in gaming, win rates are also affected by factors such
as the skill, experience and financial resources of the gaming patrons, the mix of games played and the amount of time spent at
the gaming tables and the volume of bets placed by the gaming patrons. Win rates may differ greatly over short time periods, such
as from quarter to quarter, resulting in volatility in periodic results of VIP game promoters. Effective from September 1, 2012,
our Promotion Entities have shifted their remuneration model to a revenue sharing model.
In July 2009, all concessionaires and sub-concessionaires
in Macau entered into an agreement among themselves to cap gaming promoter commissions. Under this agreement, commission payments
to gaming promoters based on rolling chip turnover cannot exceed 1.25% of rolling chip volumes. The cap became effective on December
1, 2009. The agreement sets forth standards for what constitutes a commission to gaming promoters, including all types of payments,
either monetary or otherwise, that are made to gaming promoters such as food and beverage, hotel and other services and allowances.
The amendment also imposes obligations on gaming promoters, concessionaires and sub-concessionaires to report regularly to the
DICJ and permits the imposition of fines or other sanctions for noncompliance with the commission cap or the monthly obligations
to report and detail the amount of commissions paid to gaming promoters.
Credit Arrangements
The parties involved in VIP gaming frequently
enter into various credit arrangements, the ultimate goal of which are to provide credit to the gaming patrons for their gaming
activities. Thus, casino concessionaires and sub-concessionaires may grant credit to VIP gaming promoters who, in turn, may extend
credit to the junket agents who have the direct relationships with the players. Such credit facilities may or may not be secured,
depending upon the creditworthiness of the borrowers and the relationship between the lender and borrower. In relatively rare circumstances,
the VIP gaming promoters may extend credit directly to the players.
OUR GAMING OPERATIONS
IKGH operates through eight wholly owned
subsidiaries that were incorporated in the British Virgin Islands, listed in the table below. The principal business activities
of the subsidiaries are to hold profit interest agreements with the Promotion Entities that assign the profit streams from the
gaming related businesses of the Promotion Entities to the subsidiaries.
|
Subsidiary |
|
Date of Incorporation |
| Foxhill Group Limited (“Foxhill”) |
|
February 15, 2007 |
| Kasino Fortune Investments Limited (“Kasino Fortune”) |
|
February 16, 2007 |
| Well Mount International Limited (“Well Mount”) |
|
November 1, 2007 |
| Link Bond International Limited (“Link Bond”) |
|
November 1, 2007 |
| Billion Boom International Limited (“Billion Boom”) |
|
November 1, 2007 |
| Super Number Limited (“Super Number”) |
|
April 11, 2011 |
| Jubilee Dynasty Ltd. (“Jubilee Dynasty”) |
|
May 18, 2012 |
| Frontier Champion Limited (“Frontier”) |
|
May 28, 2013 |
Kasino Fortune, Billion Boom, Super Number
and Jubilee Dynasty are each a party to a profit interest agreement with a VIP gaming promoter and Frontier is a party to a profit
interest agreement with a VIP gaming collaborator, as described below. Foxhill, Well Mount and Link Bond are each a party to a
profit interest agreement with a VIP gaming promoter that is inactive.
The major shareholders and management of
IKGH’s VIP gaming promoters are members of IKGH’s management team who operate the VIP gaming promoters for the benefit
of IKGH. These individuals, Messrs. Lam Man Pou, Vong Hon Kun, Leong Siak Hung, and Mok Chi Hung have extensive experience in the
gaming business and long personal and business relationships among each other, some beginning as early as 1990. See the section
entitled “Information About the Directors and Executive Officers” under Item 6.A. herein.
The following companies are the Promotion
Entities:
|
VIP Gaming
Promoter |
|
Date Formed
(Jurisdiction) |
|
Location |
|
Major Shareholder(s) |
|
IKGH Profit Interest
Agreement Party |
| |
|
|
|
|
|
|
|
|
| MACAU |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| Sang Heng Gaming Promotion Company Limited (“Sang Heng”) |
|
March 28, 2007
(Macau) |
|
Star World Hotel and Casino — Downtown Macau |
|
Lam Man Pou |
|
Kasino Fortune |
| |
|
|
|
|
|
|
|
|
| King’s Gaming Promotion Ltd. (“King’s Gaming”) |
|
April 15, 2008
(Macau) |
|
Venetian Resort Hotel — Cotai, Macau |
|
Mok Chi Hung |
|
Billion Boom |
| |
|
|
|
|
|
|
|
|
| Sang Lung Gaming Promotion Company Limited (“Sang Lung”) |
|
March 28, 2011 |
|
Galaxy Macau Resort, Macau |
|
Lam Man Pou and Vong Hon Kun |
|
Super Number |
| |
|
|
|
|
|
|
|
|
| Bao Li Gaming Promotion Ltd. (“Bao Li”) |
|
November 3, 2009
(Macau) |
|
City of Dreams Hotel & Casino—Cotai, Macau |
|
Lou Kan Kuong
Lei Kam Keong |
|
Jubilee Dynasty |
| |
|
|
|
|
|
|
|
|
|
Chan Yan Hung
(L’Arc Promoter) |
|
July 1, 2013 |
|
L’Arc Hotel & Casino –NAPE Downtown, Macau |
|
Lam Chou In (Collaborator) |
|
Frontier Champion |
Sang Heng’s gaming promoter agreement
for the operation of the VIP gaming room at the Star World Hotel and Casino in Macau was entered into with Galaxy on September
4, 2009. Iao Pou’s gaming promoter agreement for the operation of the VIP gaming room at the MGM Grand Hotel and Casino was
entered into with MGM Grand Paradise on November 9, 2009. MGM Grand Paradise is the holder of a sub-concession granted by SJM.
The agreements related to the MGM Grand Paradise terminated in June 2011 upon the closing of the VIP gaming room operated there.
King’s Gaming’s promoter agreement for the operation of the VIP gaming room at the Venetian-Resort-Hotel on the Cotai
Strip, Macau was entered into with Venetian Macau on December 9, 2010. King’s Gaming moved its VIP gaming room to Sands Cotai
Central in February 2013. Venetian Macau is the holder of a sub-concession granted by Galaxy. Sang Lung’s gaming promoter
agreement for the operation of the VIP gaming room at the Galaxy Macau Resort was entered into with Galaxy Casino Holdings Limited
(“Galaxy”) in May 2011, the concessionaire currently authorized to operate the Galaxy Resort. Bao Li’s gaming
promoter agreement for the operation of the VIP gaming room at the City of Dreams, Cotai, Macau was entered into with Melco Crown
Gaming (Macau) on February 7, 2011. L’Arc Collaborator agreement for the operation of the VIP gaming room at the L’Arc
Hotel & Casino - NAPE, Downtown Macau was entered into with L’Arc Promoter on January 1, 2013.
To carry out their promotional activities,
IKGH’s VIP gaming promoters and L’Arc Collaborator have a team of over 1,500 junket agents who have direct relationships
with VIP gaming patrons, a significant percentage of whom are mainland Chinese nationals. Junket agents compete among themselves
for VIP gaming patrons primarily through personal service. The VIP gaming promoter pays commissions to its junket agents based
on the rolling chip turnover of each individual junket agent.
Part of day-to-day management and operation
of the VIP gaming rooms is contracted by the VIP gaming promoter to a management company that is responsible for hiring and managing
all staff needed for the operation. This includes local managers and executives to provide supervision, finance and cage personnel,
public relations, drivers and other service staff (waiters, cleaners, etc.). The VIP gaming promoters have entered into such agreements
with Pak Si Management and Consultancy Limited (“Pak Si”), owned by Ms. Tam Lai Ching, Mr. Vong’s sister-in-law,
pursuant to which total expenses for Pak Si’s services were $7,156,950, $6,807,018 and $5,966,147 during the years ended
December 31, 2014, 2013 and 2012, respectively. Effective January 1, 2015, the monthly payments were revised for Sang Heng and
Sang Lung from $142,000 to $103,000 each, and Bao Li, King’s Gaming and the Oriental VIP Room were revised from $97,000 to
$65,000 each. Pak Si must pay all salaries, benefits and other expenses of operation out of such amounts. Aggregate number of Pak
Si staff for our 5 Promotion Entities, including managerial and operational personnel, is approximately 130 people. Such agreements
are for one-year terms and renewed in January of each year.
IKGH’s VIP gaming rooms are primarily
focused on high-stakes baccarat. In 2014, baccarat accounted for approximately 90.8% of total Macau casino winnings. Through August
31, 2012, the IKGH VIP gaming promoters at the Galaxy Star World Hotel Casino, Galaxy Macau Resort, and Venetian Resort Hotel in
Macau were paid on the basis of 1.25% of rolling chip turnover. Since then, they have been paid on a revenue sharing model pursuant
to which they receive a percentage of gaming wins before expenses; if there are losses during the relevant period, the Promotion
Entities will reimburse the casino operators and L’Arc Promoter in accordance with the gaming promoter agreement and collaborator
agreement respectively. IKGH’s VIP gaming promoters’ quarterly gross win rate as a percentage of rolling chips turnover
has ranged between approximately 2.2% and 4.0% for the period from January 1, 2011 to December 31, 2014.
Profit Interest Agreements
Current Macau laws do not allow non-Macau
companies such as IKGH to directly operate a gaming promotion business in Macau. Consequently, IKGH’s gaming promotion business
is operated through a series of contractual arrangements, including profits interest agreements, that enable IKGH to receive substantially
all of the economic benefits of IKGH’s Promotion Entities and exercise effective control over those Promotion Entities.
Pursuant to these arrangements, each promotion
entity enters into an agreement with the casino operator or a gaming promoter to promote a VIP gaming room in the casino. These
agreements provide that each of the promotion entities receives a commission of the type described above. Each of the promotion
entities then enters into a profit interest agreement with an IKGH subsidiary, providing for the assignment to the subsidiary of
100% of the profits derived by the promotion entity from its operation of the VIP gaming room. The manner of calculation of the
profit is set out in an exhibit to the profit interest agreement. Sang Heng, King’s Gaming, Sang Lung, Bao Li Gaming and
L’Arc Collaborator profit interest agreements to which the IKGH subsidiaries are party provided that the assignments were
effective on February 2, 2010 ( the date of the consummation of our acquisition of AGRL), November 1, 2010, July 1, 2011, September
1, 2012 and July 1, 2013 respectively.
Competition
There are a large number of VIP gaming promoters
in Macau and competition among them is intense. They first compete at the level of obtaining gaming promoter agreements with concessionaires
and sub-concessionaires. Then, because concessionaires and sub-concessionaires frequently enter into gaming promoter agreements
with a number of VIP gaming promoters to promote VIP gaming rooms in the same hotel, they compete against each other in efforts
to attract gaming patrons to their own VIP gaming rooms through their arrangements with junket agents and collaborators. Finally,
they compete with VIP gaming promoters who operate in other hotels in which they don’t have a presence.
However, with the slowdown of Gaming revenues
in Macau, VIP gaming promoters and collaborators with less financial resources have/will cease operations or become targets for
acquisition. The VIP gaming sector consolidates into fewer VIP gaming promoters with more capital and secured financial resources.
Our Strategies and Future Plans
Our goal is to become one of the leading
VIP gaming promoters in Macau by implementing the following strategies:
| · | Further expand and strengthen our relationship with junket agents |
Junket agents are integral to the continued growth
of our VIP player base and repeated business. We plan to continue to expand our network of junket agents to attract and source
more VIP players, which will increase the rolling chip turnover in our VIP Rooms and spread the win/loss rates, which in turn lowers
the volatility of our operating results. Towards that end, we have introduced a variety of incentives to increase the competitiveness
of junket agent remuneration, including allowing certain non-credit junket agents to share our overall win/loss based on their
proportionate contribution of our total rolling chip turnover in addition to receiving a fixed rate commission. Furthermore, we
intend to expand our junket agent network by selectively pursuing strategic acquisitions and through referrals from our existing
junket agents.
Furthermore, we aim to strengthen our existing relationship
with junket agents who have proven track record of rolling chip turnover and marker repayment to improve our operating results.
Our senior management and cage managers will continue to meet with the junket agents at the respective VIP gaming rooms, at least
on a monthly basis, to evaluate their rolling chip turnover, commission level and repayment history, and to gather market intelligence
based on which we adjust our business strategies from time to time.
| · | Steady expansion of business with prudent financial discipline |
In light of the tightened credit environment in the
PRC, we endeavor to adopt a prudent approach in the extension of gaming credit to gaming patrons to achieve quality growth and
financial stability. We intend to attract more non-credit junket agents who do not require gaming credit from us which we expect
will increase our market presence and lower our credit risks.
Towards that end, we plan to continue to implement
various initiatives to increasingly prioritize and enhance cooperation with non-credit junket agents. We introduced additional
incentives to attract and retain non-credit agents by paying them a higher commission rate and encouraging them to participate
in our super agent program.
| · | Expand our VIP room offerings and provide quality services to VIP gaming patrons |
Leveraging our financial position as a NASDAQ listed
company, we plan to continue expanding our presence in the Macau VIP gaming market into the Cotai Strip and optimize our service
offerings through strategic acquisition of VIP gaming room operations which complement our existing VIP room portfolio, establishing
new VIP gaming room operations at casinos where we already have a presence, or establishing new VIP gaming room operations at new
locations by collaborating with additional concessionaires in Macau.
We aim to promote at least one VIP gaming room operated
by each of the six concessionaires and sub- concessionaires to provide our VIP players a wider choice and to cater to their varying
gaming and entertainment preferences. In addition, we plan to further improve the functionality of our existing VIP rooms and will
expand the service team at each of our VIP rooms to provide services to our VIP gaming patrons. We believe this will increase the
overall rolling chip turnover and improve our operating results.
| · | Further enhance our brand name |
We recognize the importance of enhancing our reputation
and improving our brand awareness, which we believe can further increase our profitability and strengthen the relationships with
various parties that we work with. We will continue to promote and develop our “Iao Kun” brand built on a proven track
record and market-wide recognition in the Macau VIP gaming segment. We intend to intensify our marketing campaigns through major
media channels, including social media, in the near future. For instance, in 2014 we placed commercials on billboards and taxi
side doors in Macau.
Marketing
Our sales and marketing channels consist
of our network of junket agents, the collaborators as well as our management team. Junket agents and the collaborators typically
maintain relationships with VIP players they bring to our VIP rooms by arranging the VIP players’ transportation, accommodations,
food and entertainment. As of September 30, 2014, we had established a network of over 1,500 junket agents. Direct business
VIP players are mostly VIP players whom our management team served when they were acting as junket agents before they joined our
Group and have built long-term relationships with over the years.
Until January 1, 2013, we provided allowances
to our agents to encourage them to provide complimentary tickets, entertainment and hotel accommodation to the VIP players they
bring, which in turn incentivized the VIP players to play in our VIP Gaming Rooms. The amount expensed from such allowances provided
to junket agents for the year ended December 31, 2012 was US$6.7 million. The expenses are offset by allowances earned based upon
a percentage of Rolling Chip Turnover and issued as credits by the casino operators or are paid on a monthly basis. Since January
1, 2013, we have been paying higher commission to junket agents in lieu of such allowances.
GOVERNMENT REGULATION
The operation of casino games or other games
authorized by the Macau government is subject to general administrative, civil and criminal laws and to the specific gaming laws.
Law No. 16/2001 (the “Macau Gaming Law”) established the legal framework and the principal rules for the operation
of casino games and sets out the regulatory framework for casino operations in Macau.
Article 52 of the Macau Gaming Law provides
that the government is responsible for further supplementing the Macau Gaming Law with necessary regulations to control and monitor
the operations of the casino business. These supplementary regulations, including but not limited to the Gaming Credit Law, Law
on Illicit Gaming and Gaming Promoters Regulation, govern the operation of gaming rooms and the activities of all major participants
in the casino business in Macau. In order to better address the needs of the existing concession regime and to facilitate the modernisation
of the gaming industry in Macau, the Macau government and its Legislative Assembly have been revising the existing gaming regulations
and are expected to enact new legislation or amend existing legislation to strengthen the legal framework on gaming activities.
DICJ
The DICJ is the primary regulator and supervisory
institution of Macau’s gaming industry.
Among other requirements, concessionaires
and sub-concessionaires are required to submit to the DICJ for record or inspection all significant documentation and periodic
reports regarding their business and operation, as well as all matters requiring the Macau government’s approval or authorisation
as required by laws and/or the concession or sub-concession contracts, as applicable (such as changes in shareholding structure,
control, directorship and key employees, gaming equipment and other matters related to the operation of casino games).
In addition, the DICJ is responsible for
assessing the taxes and other amounts payable by concessionaires and sub-concessionaires to the Macau government. The DICJ continuously
monitors concessionaires’ and sub- concessionaires’ daily operations and tabulation of net-win generated from casino
games including casino table games and slot machines through various control procedures conducted in the casinos.
Macau Gaming Commission
The Macau Gaming Commission was created
by the Chief Executive’s Dispatch No. 120/2000 on 4 July 2000, which was further amended by Dispatch No. 38/2010. The Gaming
Commission is a specialised commission that directly reports to and presided over by the Chief Executive of the Macau government.
It is responsible for formulating policies and facilitating the development of Macau’s gaming operations and relevant regulatory
framework.
Macau Gaming Law
The Macau Gaming Law established the legal
framework and principal rules for the operation of casino games in Macau. The main objectives of the Macau Gaming Law are (i) concessionaires
and sub-concessionaires carry on adequate operation of casino games or other forms of gaming, (ii) parties involved in the operation,
management and supervision of casino games or other forms of gaming function adequately and undertake respective responsibilities,
(iii) operation of casino games or other forms of gaming is performed in a just and honest manner without criminal influences and
(iv) Macau’s public interests relating to special gaming tax and other contributions are well protected by maintaining effective
controls and procedures. It further sets forth principal rules for the concession regime and provides for obligations of the concessionaires
including submitting their accounts and records and special gaming tax to the Macau government.
The Macau Gaming Law further sets forth
principal rules for the concession regime and obligations of the concessionaires and sub-concessionaires. The concession regime
restricts the operation of casino games to private companies incorporated in Macau that have concessions granted by the Macau government
pursuant to the concession contracts and applicable gaming laws and regulations. Pursuant to the Macau Gaming Law, the Macau government
granted concessions to SJM, Wynn Macau and Galaxy under an international public tender. It is provided under the concession contracts
that the concessionaires are prohibited from entering into sub-concessions without the authorisation of the Macau government. The
Macau government has authorized three sub-concessions, one by Galaxy to Venetian Macau, one by SJM to MGM Grand Paradise and one
by Wynn Macau to Melco Crown Gaming. The Macau government has stated in public announcements that only three sub-concessions will
be permitted.
Gaming Credit Law
Law No. 5/2004, enacted on 14 June 2004
(the “Gaming Credit Law”) governs the granting of gaming credit in Macau and authorizes the (i) concessionaires, (ii)
sub-concessionaires and (iii) VIP gaming promoters who enter into a contract with a concessionaire or sub-concessionaire to grant
gaming credit. Pursuant to the Gaming Credit Law, the granting of gaming credit is limited to the following three circumstances:
(i) a concessionaire or a sub-concessionaire as a creditor may grant gaming credit to a VIP gaming patron as a borrower; (ii) an
authorized gaming promoter as a creditor may grant gaming credit to a gaming patron as a borrower; or (iii) a concessionaire or
a sub-concessionaire as a creditor may grant gaming credit to an authorized gaming promoter as a borrower. It also forbids the
assignment or transfer in any form of the power to grant gaming credit. The Gaming Credit Law thus effectively prohibits the assignment
of the gaming creditors’ position. However, for the past 20 years, it has been customary practice in Macau that casinos issue
gaming credit to VIP gaming promoters in the form of non-negotiable chips that can only be used by VIP gaming patrons in that casinos’
VIP gaming rooms. The VIP gaming promoters then extend such gaming credit, or their own gaming credit, to VIP players either directly
or through their collaborators in the form of non- negotiable chips. Junket agents may also borrow the non-negotiable chips at
cage of the VIP gaming room and transfer the non-negotiable chips to other gaming patrons. Therefore, the credits extended by VIP
gaming promoters to junket agents at the cage are actually gaming credit extended to the VIP players under the Gaming Credit Law.
Our Macau legal advisors have advised us that there is no legal restriction on the transfer of the non-negotiable chips (whether
obtained as gaming credit or purchased with cash from the gaming promoters or their designated collaborators) between VIP gaming
patrons, provided the non-negotiable chips are not lent from one VIP patron to the other with an intent of economic advantage.
The Gaming Credit Law provides for the obligations of the credit grantors towards the DICJ and the scope of the DICJ’s supervision.
Specifically, the granting of gaming credit is enforceable as a civil debt pursuant to Article 4 of the Gaming Credit Law. Therefore,
debts arising from credit for casino gaming extended by gaming promoters can be judicially enforced in Macau courts.
Law on Illicit Gaming
Law No. 8/96/M, enacted on 22 July 2002
(the “Law on Illicit Gaming”) prohibits all forms of operation, promotion or assistance to gaming outside the authorized
areas, as well as any fraudulent gaming in authorized areas, or any unlicensed granting of loans or gaming credits to gaming patrons.
The Gaming Promoters Regulation
Macau Administrative Regulation No. 6/2002
(as amended by Macau Administrative Regulation No. 27/2009) (the “Gaming Promoters Regulation”) restricts gaming promotion
operation to licensed corporate entities, commercial partnerships or individuals that are registered as entrepreneurs with the
Finance Department of Macau and meet the relevant requirements promulgated by the DICJ.
Administrative Regulation No. 27/2009
In July 2009, all concessionaires and sub-concessionaires
in Macau entered into an agreement among themselves to cap gaming promoter commissions. Under this agreement, commission payments
to gaming promoters based on rolling chip turnover cannot exceed 1.25% of rolling chip volume, which is the aggregate amount of
non-negotiable chips wagered in the VIP gaming rooms in a given period.
As a result of the amendments made to the
Gaming Promoters Regulation by the Administrative Regulation 27/ 2009 dated August 10, 2009, the Secretary of Economy and Finance
of the Macau government now has the authority to issue a dispatch implementing the 1.25% gaming promoter commission cap, as agreed
between all concessionaires and sub-concessionaires.
The commission cap became effective on December
1, 2009. The amendments set forth standards for what constitutes a commission to VIP gaming promoters, including all types of payments,
either monetary or otherwise, that are made to VIP gaming promoters such as food and beverage, hotel and other services and allowances.
The amendments also impose obligations on VIP gaming promoters, concessionaires and sub-concessionaires to report regularly to
the DICJ and impose fines or other sanctions for non-compliance with the commission cap or the monthly obligations to report and
detail the amount of commissions paid to VIP gaming promoters.
Compulsory Licensing And Registration Requirements For
VIP Gaming Promoters
As required by the DICJ pursuant to the
Gaming Promoters Regulation, gaming promoters in Macau are required to obtain and maintain gaming promotion licenses. A letter
of intent from a concessionaire or sub-concessionaire who intends to work with the gaming promoter is typically required in order
to obtain a gaming promoter license. After obtaining their gaming promoter license, gaming promoters would enter into a contract
with the concessionaire or sub- concessionaire. Gaming promoters are required to be registered with at least one concessionaire
or sub-concessionaire, unless otherwise restricted by the contract.
In order to obtain a license for gaming
promotion, the applicant must submit its application for suitability assessment by the DICJ, which includes assessment of the suitability
of the gaming promoters’ key employees. When the gaming promoter is a commercial partnership or a company, the suitability
of the gaming promoter’s directors and shareholders holding 5% or more of the share capital is also assessed. Suitability
must be maintained for as long as the gaming promoter remains active. A gaming promoter license is valid until December 31 in the
year it is granted and can be renewed each year upon submission of an application to the DICJ. The renewal application includes
a signed declaration by the legal representative of the relevant concessionaire that it is the intention of the concessionaire
to work with such gaming promoter in the following year. Gaming promoters that are sole proprietors are subject to compulsory assessment
of their suitability every three years, and gaming promoters that are commercial partnerships or companies are subject to compulsory
assessment every six years. Extraordinary suitability assessments may also be conducted by the DICJ.
Concessionaires and sub-concessionaires
are jointly liable to the Macau government for the activities conducted by the gaming promoters, gaming promoters’ employees
and collaborators within their respective casino premises. Gaming promoters are jointly liable for the activities of their employees
and collaborators within the casino premises of concessionaires and sub-concessionaires and for their compliance with applicable
laws and regulations. Failure by the gaming promoters or the concessionaires or sub-concessionaires to fulfill their major obligations
under the Gaming Promoters Regulation may result in the following consequences:
| · | the issue of a non-suitability report; |
| · | refusal to grant a new gaming promotion license or to renew an existing license; |
| · | upon notice by the concessionaire or sub-concessionaire to the DICJ, suspension of gaming promotion activities; and |
| · | administrative liability arising out of violation of the Gaming Promoters Regulation without prejudice of contractual liability
of the gaming promoter towards the concessionaire. |
Major Obligations Of Gaming Promoters
VIP gaming promoters in Macau are required
by to fulfill the following obligations:
| · | to register with concessionaires or sub-concessionaires and operate under the terms agreed in a written contract submitted
to the DICJ (including, in particular, the amount and payment method of commissions or other agreed remunerations, the nature of
their activities in the casinos, including the designation of any gaming rooms or other premises within the casinos, the amounts
and forms of required securities and guarantees and the waiver indicating that concessionaires or sub-concessionaires and gaming
promoters agree to submit to the exclusive jurisdiction of the Macau courts and defer to Macau Laws); |
| · | to execute written contracts with their collaborators and submit copies of such contracts to the DICJ; |
| · | to submit annually, through concessionaires or sub-concessionaires, a list containing the identification of their chosen collaborators
for the following year, and copies of their identification documents and no criminal record certificates or equivalent documents
to the DICJ for approval; |
| · | to comply with laws and regulations relating to gaming promoters and gaming promoter related announcements and instructions
issued by the DICJ; |
| · | to accept auditing carried out by the DICJ and the Finance Department of Macau; |
| · | to make all books and records available for the inspection and review by the DICJ and the Finance Department of Macau and provide
any additional information and materials upon their request; |
| · | to perform all contractual obligations, especially obligations to gaming patrons; |
| · | to comply with the reasonable instructions issued by the concessionaires or sub-concessionaires to the extent that such instructions
do not interfere with the gaming promoters’ autonomy; |
| · | to perform all contractual obligations stipulated in the written contracts with concessionaires or sub- concessionaires; and |
| · | to comply with all legal and regulatory requirements required by the laws and regulations of Macau. |
Anti-Money Laundering Regulations
Macau has been a member of the Asia/Pacific
Group on Money Laundering (“APG”) since 2000. As a member of APG, Macau undertook, between 1990 and 2004, to implement
the 40 recommendations and nine special recommendations of the Financial Action Task Force on Money Laundering (“FATF”),
an inter-governmental body created in 1989 to develop and promote policies to combat money laundering and terrorist financing.
As at July 24,2007, the APG and Offshore Group of Banking Supervisors (“OGBS”), in their “Mutual Evaluation Report
on Macau, China Against the FATF 40 Recommendations (2003) and 9 Special Recommendations,” determined that, despite non-
compliance with Special Recommendation 9 relating to cross-border declaration and disclosure, Macau had demonstrated a strong commitment
towards implementing laws and institutional bodies to enhance its compliance with international anti-money laundering standards.
The Legislative Assembly of Macau approved a new anti-money laundering law on March 23, 2006 to combat money laundering by further
strengthening the record-keeping and reporting requirements relating to suspicious activities.
The following are the pertinent laws and
regulations relating to the anti-money laundering regulations in Macau that have recently been enacted:
Law No. 2/2006, Published in Macau Official
Gazette No. 14 of 3 April 2006. This law requires casino operators, concessionaires, sub-concessionaires, gaming promoters
and other entities such as financial institutions, insurance companies, exchange houses, money remittance companies and professionals
to assist the Macau government in its efforts to combat money laundering activities. Corporate entities and associations are responsible
and liable for money laundering when the crime is committed in their name and corporate interest by either (i) their corporate
bodies or representatives or (ii) a person under their authority, when the crime became possible by virtue of an unlawful breach
of the vigilance or control duties pending on such corporate entity.
Section 34 of the Macau Gaming Law.
This section imposes a duty on the external auditors of the concessionaires, sub-concessionaires and managing companies of gaming
operations to inform the DICJ and the Finance Department about any facts that may give rise to a suspicion of that entity, the
members of that relevant corporate body or their employees of being involved in money laundering.
Section 30 of the Gaming Promoters Regulation.
This section provides that the concessionaires and sub- concessionaires must inform the relevant authorities about any fact indicating
gaming promoters and their collaborators are involved in acts of money laundering.
Regulation 7/2006. This regulation
sets out a number of preventive measures in respect of money laundering and terror financing, establishes identification and verification
systems and prescribes sanctions for noncompliance with these provisions. It sets forth a list of authorities that are responsible
for monitoring money laundering activities in different professional and business sectors. The DICJ is responsible for monitoring
money laundering activities in the gaming industry and oversees the activities of the concessionaires and sub-concessionaires,
their gaming service providers and gaming promoters. This regulation also requires the concessionaires and sub-concessionaires,
their gaming service providers and gaming promoters to request their respective contracting parties, clients and gaming patrons
(collectively, the “Contracting Parties”) to provide identification documents when they are presented with transactions
which, due to their nature, complexity, amounts, volume or other unusual features, are suspicious. If any of the Contracting Parties
is suspected as acting for or on behalf of another entity, that other entity shall also be identified. All identification documents
shall be kept by the concessionaires and sub-concessionaires, their gaming service providers, and gaming promoters for five years
and all such transactions shall be recorded in writing with particulars of the nature and purpose of the transaction, the amount
involved and the method of payment used. The relevant transaction may not proceed if the requirements for identification documents
and written records of the transaction are not satisfied.
A breach of the provisions of Regulation
7/2006 may attract fines. Where the benefit derived from the prohibited activity exceeds half of the relevant fine limit, such
limit shall increase to double the amount of such benefit. The sanctions under Regulation 7/2006 are without prejudice to criminal
liability (if any) with respect to the offenses under Law No. 2/2006.
Complementary tax
Income received in Macau is taxable under
Macau’s Complementary Tax provisions, irrespective of the beneficiary being an individual or a corporation, its particular
line of business, its nationality or domiciliation, without prejudice to the particular deductions and allowances each taxpayer
enjoys.
Companies are required to declare their
annual profit and such profit is subject to Complementary Tax. If dividend is declared, taxable profit is based on taxable profit
(after dividends have been paid). Law No. 17/2012 (the 2013 Budget Law) extends the exempted portion of income to MOP200,000 and
determines that the excess of taxable income be taxed at the relevant brackets (9% from MOP200,000 to MOP300,000 and 12% on the
excess). These measures implemented through the 2013 Budget Law are extraordinary and there can be no assurances that the exemption
limit will increase, decrease or stay at its present level.
These rates apply to the declared taxable
profit (gross income less allowable deductions) from all income generating sources, except professional tax and property income,
taxed separately under different regulations. Accordingly, dividends received by individuals or corporate shareholders constitute
income for the purposes of complementary tax and, likewise, will be subject to the above complementary tax. The Company has not
recorded income taxes applicable to undistributed earnings of Macau VIP rooms because it is the present intention of management
to reinvest the undistributed earnings indefinitely in Macau.
Non-Macau residents and companies not incorporated
in Macau that do not conduct business activities in Macau will usually not be registered with the Macau Financial Services Bureau
as taxpayers and therefore will not submit their income tax returns in Macau. The accuracy of income statements may be challenged
by the Macau taxation authorities, which will then compute the amounts due on the basis of prior results or estimations. In such
event, appeals are available for unsatisfied parties.
Environmental Regulations
All organizations in Macau have to comply
with the environmental principles of the environmental protection policy according to the Macau Ordinance, namely in respect of
noise, pollution and construction nuisance. IKGH does not believe that it is in violation of any environmental laws.
Labor and Safety Regulations
Pursuant to Macau laws and regulations,
Macau employers must register their employees under the mandatory Social Security Fund, make social security contributions for
each of its employees and contract insurance to protect the rights and interests of their employees in the event of working accident
and/or professional disease. IKGH believes that it is in compliance with all such regulations.
New Smoking Regulations in Macau
The Macau Legislative Assembly has approved
a new Smoking Prevention and Tobacco Control law. Under this new law, smoking is not permitted on casino premises except for a
separated area of up to 50% of the casino which is open to the public and complies with other requirements to be determined. Casinos
had to comply with the smoking ban by January 1, 2013.
SEASONALITY
Typically, holiday periods in China, such
as the New Year, the National Day, the Labour Day and the Mid-Autumn Festival, when many people in China take vacations, show peaks
in gambling activity.
LEGAL PROCEEDINGS
We are not involved in any legal proceedings
that are anticipated to have a significant effect on our business, financial position, results of operations or liquidity, nor
are we aware of any proceedings that are pending or threatened that may have a significant effect on our business, financial position,
results of operations or liquidity. From time to time, we are subject to legal proceedings and claims in the ordinary course of
business, certain of which would be covered by insurance. Such claims, even if lacking merit, could result in the expenditure of
significant financial and managerial resources.
| C. | Organizational Structure |
The following diagram illustrates our corporate structure and
the relationships with IKGH’s Promotion Entities that are currently active:
* Sang Heng Gaming Promotion Company Limited, Sang
Lung Gaming Promotion Company Limited, Bao Li Gaming Promotion Limited, King’s Gaming Promotion Limited and Oriental VIP
Room are treated as Variable Interest Entities of IKGH, their financial results are consolidated into the Group’s financial
statements. The Promotion Entities engage a company named Pak Si Management and Consultancy Limited for provision of administrative
services to the VIP gaming rooms.
| D. | Property, plant and equipment |
We lease an office suite located at Alameda
Drive, Carlos d’Assumpcao; No. 181-187 Centro Commercial; c/o Grupo Brilhantismo; 12 Andar; Macau, which we use for our administrative
offices. Rent is approximately $2,965 per month. We also lease an office suite located at Unit 605 East Town Building, 16 Fenwick
Street, Wanchai, Hong Kong. Rent is approximately $3,650 per month.
| ITEM 4A. | UNRESOLVED STAFF COMMENTS |
None.
| Item 5. | OPERATING AND FINANCIAL REVIEW AND PROSPECTS |
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis contains
forward-looking statements about our plans and expectations of what may happen in the future. Forward-looking statements are based
on a number of assumptions and estimates that are inherently subject to significant risks and uncertainties, and our results could
differ materially from the results anticipated by our forward-looking statements as a result of many known and unknown factors.
You should read the following management
discussion and analysis (“MD&A”) in conjunction with the audited consolidated financial statements and related
footnotes thereto included in this annual report. All capitalized terms in this MD&A that are not defined shall have the meaning
ascribed to them in the Notes to the Consolidated Financial Statements included herewith.
OVERVIEW
We are a Cayman Islands company listed on
the NASDAQ. We conduct VIP gaming promotion business at five VIP gaming rooms located in major casinos in Macau through the Promotion
Entities, which include the Promoter Companies and the L’Arc Collaborator who are licensed gaming promoters and DICJ registered
gaming collaborator respectively in Macau. The principal business activities of our subsidiaries are to hold profit interest agreements
with the Promotion Entities that confer upon us the right to enjoy all the economic benefits of the Promotion Entities, exercise
effective control over the structure and the underlying assets and net worth of the Promotion Entities. Since September 1, 2012,
we have generated revenue by sharing a pre-determined percentage of the net gaming win/loss of the VIP Rooms with the respective
Casino Operators and L’Arc Promoter. Prior to that, except for the MGM Iao Kun VIP room, which was under a revenue sharing
model with the casino, we generated revenue by receiving a pre-determined fixed rate commission of not more than 1.25% of the rolling
chip turnover in the VIP Rooms from the Casino Operators. Virtually all of the Promotion Entities’ revenue is ultimately
generated by VIP players who are brought to the VIP Rooms by our management team and junket agents.
BASIS OF PRESENTATION
The Financial Information has been prepared
in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for annual
financial reporting.
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
(All figures are in thousands except earnings (loss) per share)
Statements of operations data
| | |
For the year ended
December 31, 2014 | | |
For the year
ended December
31, 2013 | | |
For the year ended
December 31, 2012 | |
| | |
| | |
| | |
| |
| Revenue | |
$ | 233,823 | | |
$ | 236,850 | | |
$ | 236,301 | |
| Expenses | |
| | | |
| | | |
| | |
| Commission to junket agents | |
| (188,448 | ) | |
| (182,639 | ) | |
| (154,570 | ) |
| Selling, general and administrative expenses | |
| (26,506 | ) | |
| (21,486 | ) | |
| (18,341 | ) |
| Special rolling tax | |
| (1,663 | ) | |
| (1,705 | ) | |
| (1,815 | ) |
| Amortization of intangible assets | |
| (16,365 | ) | |
| (13,187 | ) | |
| (6,622 | ) |
| Operating income before change in fair value of contingent consideration | |
| 841 | | |
| 17,833 | | |
| 54,953 | |
| Change in Fair value of Contingent Consideration for the acquisitions | |
| (60,919 | ) | |
| (12,446 | ) | |
| 15,166 | |
| | |
| | | |
| | | |
| | |
| Net (loss) income before tax | |
| (60,078 | ) | |
| 5,387 | | |
| 70,119 | |
| Income tax expense | |
| — | | |
| — | | |
| — | |
| Net (loss) income for the period attributable to Ordinary Shareholders | |
| (60,078 | ) | |
| 5,387 | | |
| 70,119 | |
| Other comprehensive income (loss) after tax | |
| 65 | | |
| (77 | ) | |
| 669 | |
Total comprehensive (loss) income for
the period attributable to Ordinary Shareholders | |
$ | (60,013 | ) | |
$ | 5,310 | | |
$ | 70,788 | |
| Net (loss) earnings per share | |
| | | |
| | | |
| | |
| Basic | |
$ | (0.99 | ) | |
$ | 0.10 | | |
$ | 1.53 | |
| Diluted | |
$ | (0.99 | ) | |
$ | 0.10 | | |
$ | 1.53 | |
Balance sheet data
| | |
December 31, | | |
December 31, | |
| | |
2014 | | |
2013 | |
| | |
| | |
| |
| Current assets | |
$ | 201,573 | | |
$ | 255,598 | |
| Non-current assets | |
$ | 140,068 | | |
$ | 156,231 | |
| Current liabilities | |
$ | 83,089 | | |
$ | 111,669 | |
| Non-current liabilities | |
$ | 47,294 | | |
$ | 31,068 | |
| Total shareholders’ equity | |
$ | 211,258 | | |
$ | 269,092 | |
Cash flow data
| | |
For the year
ended December
31, 2014 | | |
For the year
ended December
31, 2013 | | |
For the year
ended December
31, 2012 | |
| | |
| | |
| | |
| |
| Net cash provided by operating activities | |
$ | 60,602 | | |
$ | 37,906 | | |
$ | 46,428 | |
| Net cash used in investing activities | |
| (291 | ) | |
| (20,127 | ) | |
| (15,146 | ) |
| Net cash used in financing activities | |
| (56,929 | ) | |
| (30,845 | ) | |
| (27,391 | ) |
| Net increase (decrease) in cash and cash equivalents | |
$ | 3,382 | | |
$ | (13,066 | ) | |
$ | 3,891 | |
SIGNIFICANT FACTORS AFFECTING OUR RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
Growth of Macau’s gaming and tourism markets
Our business is and will be influenced most
significantly by the growth of the gaming and tourism markets in Macau. Rapid growth in the Macau gaming market commenced with
the decision to grant new gaming concessions by the Macau Government in late 2001, and this growth has been facilitated by a number
of drivers and initiatives which include, among others, favorable population demographics and economic growth across each of our
Asian tourism source markets, substantial capital investment made by concessionaires in the development of branded and diversified
destination resort properties, and the demonstrated commitment by central and local governments to improve or develop infrastructure
connecting Macau with the rest of Greater China. From 2008 to 2014, gross gaming revenues in Macau increased at a compound annual
growth rate (“ CAGR”) of 21.67% and the number of hotel guests staying in Macau
increased at a CAGR of 5.0%, according to the Gaming Inspection and Coordination Bureau (“DICJ”) and the Directhe dos
ServiSer de Estatstatip e Censos (Statistics and Census Service) (“DSEC”), respectively. In 2011, 2012, 2013 and 2014,
gross gaming revenues in Macau reached US$33.4 billion, US$38.0 billion, US$45.2 billion and US$44.1 billion, respectively, according
to the DICJ. In the years ended December 31, 2011, 2012, 2013 and 2014, the total number of hotel guests staying in Macau was approximately
8.6 million, 9.5 million, 10.7 million and 10.7 million, respectively, according to the DSEC.
The total number of visitors to Macau increased
at a CAGR of 5.46% from 2008 to 2014 according to the DSEC. In 2011, 2012, 2013 and 2014, there were approximately 28.0 million,
28.1 million, 29.3 million and 31.5 million visitors to Macau, respectively, according to the DSEC. A majority of these visitors
come from Greater China. Continued and stable progress in the economic expansion of the domestic economy in China and further development
of policy measures designed to advance economic cooperation between the Pearl River Delta, Hong Kong and Macau are key to the future
development of our business opportunities. The number of visitors to Macau, particularly visitors from China’s Guangdong
province where most visitors to Macau come from, however, despite the current up trend, may possibly decline due to Chinese government
policies or regulatory factors.
According to the DICJ, gross gaming
revenues in Macau increased by 13.4% from 2011 to 2012, and by 18.6% from 2012 to 2013 and decreased by 2.5% from 2013 to
2014, as compared to an increase of 42.2% from 2010 to 2011, primarily due to the slower revenue growth of VIP baccarat
since 2012, which accounted for 73.2%, 69.3%, 66.1% and 60.5% of total gross gaming revenue in Macau in 2011, 2012, 2013
and 2014, respectively. Such slowdown was primarily a result of slower economic growth in parts of mainland China
and continued tightening of credit by the Chinese government in recent years. The continued economic slowdown in mainland
China may adversely affect the Macau gaming industry and our results of operations.
Our credit extension policies
The availability of cage capital and our
credit extension policies have significant impact on our revenue. Our cage capital mainly consists of retained earnings, lines
of credit from Casino Operators and temporary credit from certain shareholders. As of December 31, 2014, we had an aggregate of
US$59.3 million in total available lines of credit from the Casino Operators, and the Casino Operators may extend temporary credit
in excess of this amount to us from time to time.
In light of the deceleration in the revenue
growth of VIP baccarat, the casino game offered in the VIP Rooms, as well as the slower growth of China’s economy in recent
years, we have adopted a prudent approach in the extension of gaming credit since May 2012 by (i) tightening gaming credit to VIP
gaming patrons; and (ii) taking steps to closely monitor the collection of outstanding markers. As a result, our total rolling
chip turnover in 2012, 2013 and 2014 were adversely impacted.
To effectively mitigate the adverse impact
such tightening of credit had on our operating results, we have been pursuing strategic acquisitions to enlarge our junket agent
base, such as the Bao Li Acquisition in 2012 and the Oriental VIP Room Acquisition in 2013. In addition, we believe that VIP Gaming
Promoters and Collaborators with less financial resources will either cease operations or be targets for acquisition as the VIP
Gaming sector consolidates into fewer, more financially secure VIP Gaming Promoters. As a result of our conservative extension
of credit, we believe we are well positioned to expand our operations as part of this consolidation. While we have not identified
specific VIP Gaming Promoters and Collaborators for acquisition that may result in increased Rolling Chip Turnover, we continue
to evaluate the sector and the potential expansion opportunities.
We also offered higher fixed commission
rates to non-credit agents since January 2013 and implemented a super agent program in September 2012 which provides certain non-credit
agents an option to participate in sharing our overall win/loss each month based on their proportionate contribution of our total
rolling chip turnover of the previous month in addition to receiving a fixed rate commission. We intend to continue such initiatives
in an effort to attract a higher proportion of non-credit agents who have the financial resources to purchase non-negotiable chips
from us rather than relying on gaming credit extended by us, which in turn increases the number of VIP players and rolling chip
turnover without additional credit risk.
Our network of junket agents
Virtually all our revenue is ultimately
generated by VIP players brought to the VIP Rooms by our management team and junket agents. With the overall growth of VIP gaming
in Macau, the competition for services provided by junket agents has increased. Our network of junket agents, our ability to maintain
good relationships with them and our ability to continue to develop relationships with new junket agents will continue to have
a significant impact on our results of operations.
Our revenue model
Beginning September 1, 2012, we changed
our remuneration model from a fixed rate commission of not more than 1.25% of rolling chip turnover (except for the MGM Iao Kun
VIP Room, which we closed on June 15, 2011 and was under a win/loss revenue sharing model with the casino) to a revenue sharing
model where we currently share 42.5% to 55% of the net gaming win/loss before expenses with the respective Casino Operators and
L’Arc Promoter. In respect of the Oriental VIP Room, we elected to pay a fixed amount of table rental to the L’Arc
Promoter in exchange for a higher percentage of net gaming win/loss.
Such a shift in revenue model was affected
primarily taking into consideration the following:
| · | the industry trend of shifting from a fixed rate commission model to a revenue sharing model, which is currently the standard
model of compensating gaming promoters and is believed to be preferred by the concessionaires who prefer a less volatile earnings
stream provided by the revenue sharing model; |
| · | depending on the win/loss of the VIP Rooms, we may generate higher revenue under a revenue sharing model; |
| · | our expansion into five VIP gaming rooms following the acquisitions in 2012 and 2013 provided us with more tables and enabled
us to spread the risk of fluctuation in our operating results; |
| · | our increased cage capital; |
| · | a revenue sharing model gains us access to additional casinos which operate exclusively under such model; and |
| · | a revenue sharing model increases our competitiveness in attracting non-credit agents. |
The results of VIP gaming is more volatile
than other forms of gaming as it involves higher wagers placed and various factors beyond our control, such as the VIP players’
skill and experience. The financial resources of the VIP player can also influence both the rolling chip turnover and the win rate.
VIP players with less financial resources are less likely to continue to wager should they experience gaming losses. This may result
in lower rolling chip turnover and therefore lower commissions as a percentage of rolling chip turnover as well as higher than
the generally expected win rate, which increases our revenues as well as our net income. VIP players with greater financial resources
may continue to wager even when experiencing gaming losses, therefore increasing commissions as a percentage of rolling chip turnover
and may result in overall lower than generally expected win rates. Our decision to reduce our extension of credit resulted in lower
rolling chip turnover, but may result in a higher than the generally expected win rates.
Our operating results under the revenue
sharing model directly correlate with the win/loss rate in the VIP Rooms and are therefore subject to higher fluctuation as compared
to a fixed rate commission model. As a result, our short-term results may be materially affected by the win/loss variances in the
VIP Rooms and may not be indicative of our future performance. As a result of the shift in revenue model, our revenue as a percentage
of rolling chip turnover increased from 1.26% in 2011 to 1.30% in 2012, and 1.39% in 2013 to 1.41% in 2014. However, according
to Union Gaming, the generally expected win rate for VIP baccarat, the table game played at the VIP Rooms, is between 2.7% to 3.0%
and our quarterly win rates from January 1, 2011 to December 31, 2014 ranged from 2.2% to 4.0%, which is consistent with the industry
norm.
Since our change in revenue model, we have
increased commission payments to non-credit agents and have allowed super agents to participate in sharing our overall win/loss,
which contributed to an overall higher percentage of commission paid to junket agents in relation to rolling chip turnover. As
our network of non-credit agents and super agent program expand, we expect a higher percentage of commission to junket agents in
relation to rolling chip turnover.
Hong Kong Stock Exchange Listing
The decision of the Hong Kong Stock Exchange
to no longer proceed with their review of our listing application for the time being and consequentially the Company has elected
not to continue with the application process at this time. With such a decision the management of the Company can allocate its
resources to explore further business expansion opportunities, including but not limited to finding VIP rooms in new locations
and strategic investments, in order to maximize the shareholders' return in due course.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company prepares its consolidated financial
statements in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
The preparation of these consolidated financial statements requires the use of estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements
and the reported amount of revenues and expenses during the reporting periods. On a regular basis, we review the accounting policies,
assumptions, estimates and judgments to ensure that our consolidated financial statements are presented fairly and in accordance
with U.S. GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ
from our assumptions and estimates, and such differences could be material.
Our significant accounting policies are
discussed in Note 2, Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements, included in
Item 18, Financial Statements and Supplementary Data, of this Annual Report on Form 20-F. We believe that the following accounting
estimates are the most critical to aid in fully understanding and evaluating our reported financial results, and they require our
most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are
inherently uncertain.
Except where noted, we have not made any
material changes to the accounting methodologies for the areas described below.
Allowance for doubtful accounts to marker receivable
The Company regularly evaluates the allowance
for uncollectible marker receivable based on a specific review of junket agent accounts as well as management’s prior experience
with collection trends in the casino industry and current economic and business conditions. We recognize an allowance for doubtful
accounts in an amount equal to anticipated future write-offs. Management believes that an allowance for uncollectible markers receivable
is not necessary under current conditions; however, unexpected, significant deterioration in any of the factors mentioned above
or in general economic conditions could materially change these expectations.
Long-Lived Assets
Long-lived assets other than goodwill are
evaluated for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable.
When evaluating long-lived assets for potential
impairment, we first compare the carrying value of the asset to the asset's estimated future cash flows (undiscounted and without
interest charges). If the sum of the estimated future cash flows is less than the carrying value of the asset, we calculate an
impairment loss. The impairment loss calculation compares the carrying value of the asset to the asset's estimated fair value,
which is based on estimated discounted cash flows. We recognize an impairment loss if the amount of the asset's carrying value
exceeds the asset's estimated fair value. The impairment loss would be measured on a location by location basis by comparing the
fair value of the asset with its carrying amount. If we recognize an impairment loss, the adjusted carrying amount of the asset
becomes its new cost basis. For a depreciable long-lived asset, the new cost basis will be depreciated over the remaining useful
life of that asset.
The assumptions and estimates used to determine
future values and remaining useful lives of our intangible and other long-lived assets are complex and subjective. They can be
affected by various factors, including external factors such as industry and economic trends, and internal factors such as changes
in our business strategy and our forecasts for future expansion development. Based on our impairment assessment, no impairment
has been recognized.
Goodwill
Goodwill is recorded when the purchase price
for an acquisition exceeds the estimated fair value of the net tangible and identified intangible assets acquired. Reporting units
may be operating segments as a whole or an operation one level below an operating segment, referred to as a component. The Company
currently has only one reporting unit, the gaming promotion business in Macau.
We perform an annual impairment assessment
in the fourth quarter of each year, or more frequently if indicators of potential impairment exist, to determine whether it is
more likely than not that the fair value of a reporting unit in which goodwill resides is less than its carrying value. If this
assessment concludes that it is more likely than not that the fair value is more than its carrying value, goodwill is not considered
impaired and we are not required to perform the two-step goodwill impairment test. Qualitative factors considered in this assessment
include industry and market considerations, overall financial performance, and other relevant events and factors affecting the
reporting unit.
If the impairment assessment concludes that
it is more likely than not that the fair value is less than its carrying value, we perform the first step of the goodwill impairment
test, which compares the fair value of the reporting unit to its carrying value. If the fair value of the reporting unit exceeds
the carrying value of the net assets assigned to that unit, goodwill is not considered impaired and we are not required to perform
additional analysis. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting
unit, then we must perform the second step of the goodwill impairment test to determine the implied fair value of the reporting
unit’s goodwill. If we determine during the second step that the carrying value of a reporting unit’s goodwill exceeds
its implied fair value, we record an impairment loss equal to the difference.
Determining the fair value of a reporting
unit involves the use of significant estimates and assumptions. Our goodwill impairment test uses a weighting of the income
and the market approaches to estimate reporting unit’s fair value.
We used a probability-weighted discounted
cash flow (“DCF”) technique, a variation of the income approach, in the valuation process of the reporting unit, considered
as a whole. Under this method, forecasted net cash flow (“NCF”) of our business was developed and then discounted
to the present value at a discount rate commensurate with the risks involved in the ultimate realization of those returns.
This income approach employs the following key projection estimates: (i) rolling chip turnover (“RCT”) and/or expected
growth rates in RCT; (ii) win rates; (iii) operating costs and operating profit; (iv) NCF; and, (v) the determination of an appropriate
discount rate (i.e., a rate of return) based on the reporting unit's deemed weighted average cost of capital (“WACC”).
The WACC considers observable market rates and yields and comparable company return data. As the name implies, probability-weighted
DCF analysis involves the development of several forecasted NCF scenarios that are then probability-weighted to yield an overall
indication of reporting unit value. Assumptions used in DCF analysis gave consideration to historical financial and operating data,
various internal estimates, and economic and market data as derived from a variety of external sources. These estimates are
developed as part of our routine short-term management procedures and long-range strategic planning process. In addition, we test
the reasonableness of the assumption inputs and outcomes of our DCF analysis against available comparable market data.
Under the market approach, the fair value
of a business unit is derived by reference to the Company’s market capitalization at the valuation date (i.e., its stock
market price per share times the number of common shares outstanding). In the appraisal process, the predominate weight was
afforded to the DCF approach reflecting its greater relevancy and reliability as an indicator of fair value.
For the annual impairment assessment in
2014, considering the operation results with decreasing total rolling chips turnover and the decrease of market capitalization
during fourth quarter of 2014, we performed the first step of goodwill impairment test and determined and concluded that the fair
value of our reporting unit exceeded the carrying value. As of December 31, 2014, 2013 and 2012, we have completed our annual impairment
assessments and concluded that goodwill was not impaired in any of these years. We do not believe there is a reasonable likelihood
that there will be a material change in the future estimates or assumptions we use to test for impairment losses on goodwill. However,
if actual results are not consistent with our estimates or assumptions, we may be exposed to an impairment charge that could be
material.
Contingent Purchase Price Obligations for Acquisitions
Contingent purchase price liability was
recognized for the estimated acquisition fair value of the contingent consideration based on the probability of the achievement
of the Gross Profit targets or the achievement of the rolling chip turnover targets at the acquisition date. Any change in the
fair value of the acquisition-related contingent consideration subsequent to the acquisition date, including changes from events
after the acquisition date, such as changes in the Company’s estimate of the gross profit or rolling chip turnover expected
to be achieved, will be recognized in earnings in the period that estimated fair value changes.
On a quarterly basis, Management evaluates
contingent purchase price liability for each acquisition assuming probability-weighted gross profits or rolling chip turnover targets
are achieved over the earn-out period. The Company also utilizes the Monte Carlo Method to determine the average simulated share
prices which are used to determine the estimated contingent liabilities for shares to be earned. A change in the fair value of
the acquisition-related contingent consideration could have a material impact on the Company’s statement of operations and
financial position in the period of change in estimate. Fluctuations in the market value of the Company's Ordinary Shares
and subsequent performance will cause the fair value to increase or decrease and the resulting change will be recognized in earnings.
Contingent purchase price liability is described in Note 9, 10 and 11 of the Notes to Consolidated Financial Statements.
CERTAIN STATEMENTS OF OPERATIONS ITEMS
Revenue from VIP gaming promotion operations
Our source of revenue is primarily commissions
received from the Casino Operators and the L’Arc Promoter from VIP gaming promotion operations. We also received a small
amount of service revenues which are disbursement income from junket agents for providing transportation, accommodation, food and
beverage and other complimentary services to them starting from 2013. The profits derived from our VIP gaming promotion operations
depend on the gaming volumes and win rate in the VIP Rooms. Revenue from VIP gaming promotion operations is recorded based on our
share of the gaming win/loss, and prior to September 2012, primarily as a fixed percentage of rolling chip turnover in the VIP
Rooms, except for the period of our operation at MGM Macau Casino which was under a win/loss revenue sharing model.
The following table sets out the breakdown
of our revenue source for the periods indicated. (All figures are in thousands.)
| | |
For the year
ended
December
31, 2014 | | |
For the year
ended
December
31, 2013 | | |
For the year
ended
December
31, 2012 | |
| | |
| | |
| | |
| |
| Casino Operator A | |
| | | |
| | | |
| | |
| VIP Room A-1 | |
$ | 87,207 | | |
$ | 91,362 | | |
$ | 87,717 | |
| VIP Room A-2 | |
| 85,612 | | |
| 89,253 | | |
| 126,311 | |
| Sub-total | |
| 172,819 | | |
| 180,615 | | |
| 214,028 | |
| Casino Operator B | |
| | | |
| | | |
| | |
| VIP Room B | |
| 20,212 | | |
| 27,307 | | |
| 10,260 | |
| Casino Operator C | |
| | | |
| | | |
| | |
| VIP Room C | |
| 21,176 | | |
| 17,610 | | |
| 12,013 | |
| L’Arc Promoter | |
| | | |
| | | |
| | |
| Oriental VIP Room at L’Arc | |
| 17,337 | | |
| 9,482 | | |
| - | |
| Disbursement income from junket agents | |
| 2,279 | | |
| 1,836 | | |
| - | |
| Total | |
$ | 233,823 | | |
$ | 236,850 | | |
$ | 236,301 | |
Commission to junket agents
We pay commissions to junket agents typically
based on their rolling chip turnover. We do not pay commissions with respect to direct business VIP players sourced by our management
team. We implemented a super agent program in September 2012 which allowed certain non-credit agents to participate in sharing
overall win/loss with us in addition to receiving a fixed rate commission. During the years ended December 31, 2014, 2013 and 2012,
the junket agents who participated in such super agent program received more commissions than they would have under the fixed rate
commission model.
During the reporting periods, we experienced
a decrease in the rolling chip turnover contributed by our direct business, which we expect will remain at a low level as our management
will increasingly focus on the overall management of our business and cease to bring in direct business VIP players. We expect
such decreasing trend may have a negative impact on our profit margin and an increase of our overall commission to junket agents
as a percentage of rolling chip turnover.
Selling, general and administrative expenses
Selling, general and administrative expenses
consist of legal and professional fees, management salaries and director fees, management fees associated with the administration
of the VIP gaming rooms, staff costs (excluding directors’ remuneration), VIP room operating costs and other expenses.
The following table sets out the breakdown
of our selling, general and administrative expenses for the periods indicated. (All figures are in thousands.)
| | |
For the
year
ended
December
31, 2014 | | |
For the
year
ended
December
31, 2013 | | |
For the
year
ended
December
31, 2012 | |
| | |
| | |
| | |
| |
| Legal and professional fees | |
$ | 1,324 | | |
$ | 2,391 | | |
$ | 1,551 | |
| Management salaries and director fees | |
| 2,776 | | |
| 2,452 | | |
| 1,745 | |
| Management fees | |
| 7,157 | | |
| 6,807 | | |
| 5,966 | |
| Staff costs excluding directors’ remuneration | |
| 2,309 | | |
| 1,746 | | |
| 143 | |
| VIP room operating costs(1) | |
| 5,205 | | |
| 2,218 | | |
| 6,703 | |
| Other (2) | |
| 4,698 | | |
| 3,560 | | |
| 2,233 | |
| Hong Kong Listing Expenses | |
| 3,037 | | |
| 2,312 | | |
| - | |
| Total | |
$ | 26,506 | | |
$ | 21,486 | | |
$ | 18,341 | |
Note:
| (1) | VIP room operating costs in 2012 include the cost of complimentary services provided to Junket Agents, which beginning in 2013
were no longer complimentary and were reflected as net revenues. |
| (2) | Other mainly includes entertainment expenses, investor relations fees, advertising expenses and overseas travelling expenses
by management. |
RESULTS OF OPERATIONS
Year ended December 31, 2014 Compared to the Year ended December
31, 2013
The following table sets forth certain information
regarding our results of operations for the years ended December 31, 2014 and 2013 (all figures are in thousands except ratios
and percentages).
| | |
Year
Ended December 31,
2014 | | |
Year
Ended December 31,
2013 | | |
% change
from 2013
to 2014 | |
| Revenue from VIP gaming promotion | |
$ | 233,823 | | |
$ | 236,850 | | |
| (1 | )% |
| | |
| | | |
| | | |
| | |
| Commission to junket agents | |
$ | 188,448 | | |
$ | 182,639 | | |
| 3 | % |
| | |
| | | |
| | | |
| | |
| Selling, general and administrative expenses | |
$ | 26,506 | | |
$ | 21,486 | | |
| 23 | % |
| | |
| | | |
| | | |
| | |
| Operating income after amortization of intangible assets and before change in fair value of contingent consideration | |
$ | 841 | | |
$ | 17,833 | | |
| (95 | )% |
| | |
| | | |
| | | |
| | |
| Percentage of operating income after amortization of intangible assets and before change in fair value of contingent consideration/Revenue from VIP gaming promotion | |
| 0.36 | % | |
| 7.53 | % | |
| | |
Non-GAAP Financial Results
The following Non-GAAP financial results
for the years ended December 31, 2014 and 2013 are used by management to evaluate our financial performance prior to the deduction
of amortization of intangible assets and change in fair value of contingent consideration related to the acquisitions of
King's Gaming, Bao Li Gaming and Oriental VIP Room (all figures are in thousands except ratios and percentages) (see Non-GAAP
Financial Measures beginning on page 55.)
| | |
Year
Ended December
31,
2014 | | |
Year
Ended December
31,
2013 | | |
% change
from 2013
to 2014 | |
| Non-GAAP income before amortization of intangible assets and change in fair value of contingent consideration | |
$ | 17,206 | | |
$ | 31,020 | | |
| (45 | )% |
| | |
| | | |
| | | |
| | |
| Percentage of Non-GAAP income before amortization of intangible assets and change in fair value of contingent consideration/Revenue from VIP gaming promotion | |
| 7.36 | % | |
| 13.10 | % | |
| | |
Rolling Chip Turnover Ratios
Rolling Chip Turnover is used by casinos
to measure the volume of VIP gaming room business transacted and represents the aggregate amount non-negotiable chips exchanged
by VIP gaming patrons. Bets are wagered with ‘‘non-negotiable chips’’ and winning bets are paid out by
casinos in so-called ‘‘cash’’ chips. If a player continues to make bets, they have to change the cash chips
to non-negotiable chips.
Rolling Chip Turnover ratios are calculated
as percentages of Rolling Chip Turnover, and represent the changes in revenue, expenses and income in comparison to the change
in gaming volume which investors and management use to assess the operating efficiencies of the Promotion Entities.
The following table sets forth certain information
regarding our results relating to our Rolling Chip Turnover and certain performance ratios for the years ended December 31,
2014 and 2013 (all figures are in thousands except for ratios and percentages).
| | |
Year
Ended December 31,
2014 | | |
Year
Ended December 31,
2013 | | |
% change
from 2013 to
2014 | |
| Rolling Chip Turnover | |
$ | 16,627,093 | | |
$ | 17,048,596 | | |
| (2 | )% |
| | |
| | | |
| | | |
| | |
| Revenue from VIP gaming promotion/Rolling Chip Turnover | |
| 1.41 | % | |
| 1.39 | % | |
| 1 | % |
| | |
| | | |
| | | |
| | |
| Commission to junket agents/Rolling Chip Turnover | |
| 1.13 | % | |
| 1.07 | % | |
| 6 | % |
| | |
| | | |
| | | |
| | |
| Gross margin (Revenue less commissions and special rolling tax)/Rolling Chip Turnover | |
| 0.26 | % | |
| 0.31 | % | |
| (15 | )% |
| | |
| | | |
| | | |
| | |
| Selling, general and administrative expenses/Rolling Chip Turnover | |
| 0.16 | % | |
| 0.13 | % | |
| 26 | % |
| | |
| | | |
| | | |
| | |
| Operating income after amortization of intangible assets and before change in fair value of contingent consideration/Rolling Chip Turnover | |
| 0.01 | % | |
| 0.10 | % | |
| (95 | )% |
Below is a quarterly analysis of the win
rate in our VIP gaming rooms from January 1, 2013 to December 31, 2014:
| Period | |
Win Rate % | |
| | |
| |
| Q1 2013 | |
| 3.29 | % |
| Q2 2013 | |
| 3.06 | % |
| Q3 2013 | |
| 3.18 | % |
| Q4 2013 | |
| 2.39 | % |
| Q1 2014 | |
| 3.60 | % |
| Q2 2014 | |
| 2.18 | % |
| Q3 2014 | |
| 2.53 | % |
| Q4 2014 | |
| 3.95 | % |
Revenue from VIP gaming promotion operations
was US$234 million for the year ended December 31, 2014, as compared to US$237 million for the year ended December 31, 2013, representing
an decrease of 1.3%, whereas revenue as a percentage of rolling chip turnover increased from 1.39% for the year ended December
31, 2013 to 1.41% in 2014, representing an increase of 1.2%. Such increases were primarily a result of (i) a win rate of 2.98%
for the year ended December 31, 2014, which is within the statistical average win rate range, compared to a win rate of 2.97% for
the year ended December 31, 2013; (ii) slower revenue growth of VIP baccarat as consistent with the overall growth of gaming revenue
in Macau; and (iii) the economic downturn and tightening of credit in mainland China, where the majority of our VIP gaming patrons
come from. The reduction in amounts of gaming credit we make available to VIP gaming patrons adversely impacted the growth in our
total rolling chip turnover in 2012, 2013 and 2014. If the Chinese economy improves and demonstrates sustainable momentum, we may
consider relaxing our credit extension policy.
During the fourth quarter of 2014,
we experienced a significant decrease in our Rolling Chip Turnover compared to the same period in 2013. Our Rolling
Chip Turnover in the fourth quarter was $2.9 billion and $4.4 billion in 2014 and 2013, respectively, a 34% decrease. Our
Rolling Chip Turnover was significantly impacted by:
| · | a higher than the statistical average win rate, which results in lower Rolling Chip Turnover; |
| · | certain players are being deterred by a variety of factors including tighter visa policies
for mainland Chinese visitors, increased oversight of credit cards that many gamblers use to access funds in Macau, and new smoking
restrictions at casinos; |
| · | a lack of demand from high rollers primarily due to recent anti-corruption enforcement act by PRC government; and |
| · | our tightening policy to provide gaming credit. |
The commission paid to junket agents increased
by US$5.8 million, or 3.2%, to US$188 million for the year ended December 31, 2014 as compared to the year ended December 31, 2013,
primarily as a result of our network of non credit agents and super agents program expand compared to the prior period. The commission
paid to junket agents as a percentage of rolling chip turnover was 1.13% for the year ended December 31, 2014, up from 1.07% for
the year ended December 31, 2013, an increase of 5.8%. Beginning in January 2013, we began an upward adjustment in commission rates
to stay competitive in the Macau VIP gaming industry and to compensate our junket agents for no longer providing any complimentary
hotel and casino services to them from January 2013 as well as higher commission paid to non-credit agents and super agents and
a decrease in the percentage of revenue generated from direct business where we do not pay commission.
Selling, general and administrative expenses
increased by US$5 million, or 23.4%, to US$26.5 million for the year ended December 31, 2014 as compared to the year ended December
31, 2013. Selling, general and administrative expenses as a percentage of rolling chip turnover was 0.16% for the year ended December
31, 2014, up from 0.13% for the year ended December 31, 2013, representing an increase of 26.5% due to the increased expenses described
below. Staff costs increased by US$0.6 million as a result of an increase in the number of employees and increased management fees
of US$0.3 million due to the full year of operations of the Oriental VIP Room. We continue to directly hire employees to reduce
our reliance on Pak Si and our monthly management fees have been reduced accordingly. Legal and professional fees decreased by
US$1.1 million from the year ended December 31, 2013 to the year ended December 31, 2014; the costs were higher in 2013 primarily
related to the acquisition of the Oriental VIP Room in June 2013. VIP gaming room operating costs increased by US$3 million during
the year ended December 31, 2014 as a result of the additional gaming table rental costs for the Oriental VIP Room. We pay a monthly
rent of US$0.4 million for gaming tables in the Oriental VIP Room to the L’Arc Promoter. Hong Kong Exchange listing fee expenses
increased by US$0.7 million. We do not currently anticipate additional listing fees as a result of the Hong Kong Exchanges decision
to no longer proceed with the Company’s listing application.
The special rolling tax decreased by US$0.04
million, or 2.5%, to US$1.7 million for the year ended December 31, 2014 from the year ended December 31, 2013 as a result of the
decrease in rolling chip turnover. The percentage of the special rolling tax to revenue from VIP gaming promotion remained 0.7%
in the year ended December 31, 2014 and 2013.
Amortization of intangible assets for the
year ended December 31, 2014 was US$16.4 million as compared to US$13.2 million as a result of a full year of amortization expense
for the intangible assets acquired in the Oriental VIP Room acquisition, completed in June 2013.
Operating income, after amortization of
intangible assets and before change in the fair value of contingent consideration payables was US$0.8 million for the year ended
December 31, 2014, as compared to operating income of US$18 million for the year ended December 31, 2013, representing a decrease
of 95%, primarily as a result of (i) decrease in revenues as a result of lower average win rate; (ii) an increase in commission
expense to junket agents; and (iii) an increase in selling, general and administrative expenses.
There was an increase to the fair value
of the contingent consideration liability in respect of the Bao Li Acquisition and Oriental VIP Room acquisition of US$60.9 million,
primarily resulting from the acquired networks of junket agents achieving better rolling chip turnover results than forecasted
at the time of the acquisitions in September 2012 and June 2013 and revisions to the forecasted results in the remaining years
of the purchase period to meet or exceed the rolling chip turnover targets. There was no fair value change of the contingent consideration
payable in respect of the King’s Acquisition for the year ended December 31, 2014 as the forecasted gross profit level of
King’s resulted in no additional earn-out shares expected to be earned by the King’s seller. As required by U.S. GAAP,
any change in the fair value of the acquisition-related contingent consideration subsequent to the acquisition date, including
changes from events after the acquisition date, such as changes in our estimate of the gross profit and rolling chip turnover expected
to be achieved, will be recognized in earnings in the period that estimated fair value changes. A change in the fair value of the
acquisition-related contingent consideration could have a material impact on our statement of operations and financial position.
As a result of the above, a decrease in
our operation results by US$65.5 million from net income of US$5.4 million for the year ended December 31, 2013 down to a
net loss of US$(60.1) million for the year ended December 31, 2014.
Basic and diluted loss per share for the
year ended December 31, 2014 was US$0.99 based upon the weighted average share count of 60,781,915.
RESULTS OF OPERATIONS
Year ended December 31, 2013 Compared to the Year
ended December 31, 2012
The following table sets forth certain information
regarding our results of operations for the years ended December 31, 2013 and 2012 (all figures are in $ thousands except ratios
and percentages).
| | |
Year
Ended December
31, 2013 | | |
Year
Ended December 31,
2012 | | |
% change
from 2012
to 2013 | |
| Revenue from VIP gaming promotion | |
$ | 236,850 | | |
$ | 236,301 | | |
| 0 | % |
| | |
| | | |
| | | |
| | |
| Commission to agents | |
$ | 182,639 | | |
$ | 154,570 | | |
| 18 | % |
| | |
| | | |
| | | |
| | |
| Selling, general and administrative expenses | |
$ | 21,486 | | |
$ | 18,341 | | |
| 17 | % |
| | |
| | | |
| | | |
| | |
| Operating income after amortization of intangible assets and before change in fair value of contingent consideration | |
$ | 17,833 | | |
$ | 54,953 | | |
| (68 | )% |
| | |
| | | |
| | | |
| | |
| Percentage of operating income after amortization of intangible assets and before change in fair value of contingent consideration/Revenue from VIP gaming promotion | |
| 7.53 | % | |
| 23.26 | % | |
| | |
Non-GAAP Financial Results
The following Non-GAAP financial results
for the years ended December 31, 2013 and 2012 are used by management to evaluate our financial performance prior to the deduction
of amortization of intangible assets and change in fair value of contingent consideration related to the acquisitions of
King's Gaming, Bao Li Gaming and Oriental VIP Room (all figures are in $ thousands except ratios and percentages) (see Non-GAAP
Financial Measures on page 55.)
| | |
Year
Ended December
31, 2013 | | |
Year
Ended December 31,
2012 | | |
% change
from 2012
to 2013 | |
| Non-GAAP income before amortization of intangible assets and change in fair value of contingent consideration | |
$ | 31,020 | | |
$ | 61,575 | | |
| (50 | )% |
| | |
| | | |
| | | |
| | |
| Percentage of Non-GAAP income before amortization of intangible assets and change in fair value of contingent consideration/Revenue from VIP gaming promotion | |
| 13.10 | % | |
| 26.06 | % | |
| | |
Rolling Chip Turnover Ratios
Rolling Chip Turnover is used by casinos
to measure the volume of VIP gaming room business transacted and represents the aggregate amount nonnegotiable chips exchanged
by VIP gaming patrons. Bets are wagered with ‘‘non-negotiable chips’’ and winning bets are paid out by
casinos in so-called ‘‘cash’’ chips. If a player continues to make bets, they have to change the cash chips
to non-negotiable chips.
Rolling Chip Turnover ratios are calculated
as percentages of Rolling Chip Turnover, and represent the changes in revenue, expenses and income in comparison to the change
in gaming volume which investors and management use to assess the operating efficiencies of the Promotion Entities.
The following table sets forth certain information
regarding our results relating to our Rolling Chip Turnover and certain performance ratios for the years ended December 31, 2013
and 2012 (all figures are in $ thousands except for ratios and percentages).
| | |
Year
Ended December
31, 2013 | | |
Year
Ended December 31,
2012 | | |
% change
from 2012 to
2013 | |
| Rolling Chip Turnover | |
$ | 17,048,596 | | |
$ | 18,149,348 | | |
| (6 | )% |
| | |
| | | |
| | | |
| | |
| Revenue from VIP gaming promotion/Rolling Chip Turnover | |
| 1.39 | % | |
| 1.30 | % | |
| 7 | % |
| | |
| | | |
| | | |
| | |
| Commission to agents/Rolling Chip Turnover | |
| 1.07 | % | |
| 0.85 | % | |
| 26 | % |
| | |
| | | |
| | | |
| | |
| Gross margin (Revenue less commissions and special rolling tax)/Rolling Chip Turnover | |
| 0.31 | % | |
| 0.44 | % | |
| (30 | )% |
| | |
| | | |
| | | |
| | |
| Selling, general and administrative expenses/Rolling Chip Turnover | |
| 0.13 | % | |
| 0.10 | % | |
| 30 | % |
| | |
| | | |
| | | |
| | |
| Operating income after amortization of intangible assets and before change in fair value of contingent consideration/Rolling Chip Turnover | |
| 0.10 | % | |
| 0.30 | % | |
| (67 | )% |
Below is a quarterly analysis of the win rate in our VIP gaming
rooms from January 1, 2012 to December 31, 2013:
| Period | |
Win Rate % | |
| | |
| |
| Q1 2012 | |
| 2.93 | % |
| Q2 2012 | |
| 3.08 | % |
| Q3 2012 | |
| 3.14 | % |
| Q4 2012 | |
| 3.00 | % |
| Q1 2013 | |
| 3.29 | % |
| Q2 2013 | |
| 3.06 | % |
| Q3 2013 | |
| 3.18 | % |
| Q4 2013 | |
| 2.39 | % |
Revenue from VIP gaming promotion was US$237
million for the year ended December 31, 2013, as compared to US$ 236 million for the year ended December 31, 2012, an increase
of US$0.5 million or 0.23%, principally as a result of (i) the win rate of 2.97% for the year ended December 31, 2013, in the range
of the statistical average of 2.7%-3.0%, despite a 6% reduction in Rolling Chip Turnover; (ii) the change in remuneration model
from the fixed commission model of 1.25% on Rolling Chip Turnover to the revenue sharing model in September 2012; (iii) the acquisition
of the profit rights derived by Bao Li Gaming during September 2012 and the Oriental VIP Room in June 2013; and (iv) the additional
net services revenues received from junket agents.
Revenue from VIP gaming promotion, as a
percentage of Rolling Chip Turnover, increased 0.09% to 1.39% during the year ended December 31, 2013, from 1.30% during the year
ended December 31, 2012 as a result of changing our remuneration model from a fixed commission of 1.25% on Rolling Chip Turnover
to a revenue sharing model beginning in September 2012, win rate at the statistical average and the impact of net services revenues.
All of our VIP gaming rooms now operate under the revenue sharing model. Prior to the change, the VIP gaming rooms in the Star
World Hotel and Casino, the Venetian Hotel and Casino and the Galaxy Resort Macau all operated under the fixed commission model
of 1.25% on Rolling Chip Turnover.
As of December 31, 2013, the total available
lines of credit from the casino operators were an aggregate of approximately US$59 million, and the casino operators may extend
temporary credit in excess of this amount. As of December 31, 2012, the total available lines of credit were an aggregate of approximately
US$59 million Additional cage capital is available as a result of retained profits. Since September 1, 2012, all of our revenue
is derived from the revenue sharing model, which has a higher risk of volatility than revenue earned under the fixed commission
model. With the increase in cage capital, the number of rooms and the number of gaming tables available to us, management believes
the risk of loss is lower than in prior periods. Due to the slowdown of China’s economy, we reduced the amounts of markers
made available to VIP gaming patrons and took steps to collect outstanding markers. The reduction in amounts made available to
VIP gaming patrons negatively impacted the growth in our total Rolling Chip Turnover during the last six quarters. As a result,
we continue our marketing efforts to increase our Rolling Chip Turnover by working with junket agents who can provide their own
capital (“non-credit junket agents”). Rolling Chip Turnover is correlated with the availability of cage capital and
the win rate in the VIP gaming room. In order to reduce the effects of the policy of tightening credit to VIP gaming patrons, management
continues to explore ways to enlarge its network of junket agents, including through the acquisition of Bao Li Gaming and the Oriental
VIP Room, and to implement a more attractive commission program for junket agents as we have the flexibility after changing our
remuneration model from a fixed commission of 1.25% on Rolling Chip Turnover to a revenue sharing model. If the Chinese economy
improves and demonstrates sustainable momentum, we may consider relaxing our credit extension policy.
The commission paid to junket agents increased
by US$28 million or 18.16%, during the year ended December 31, 2013, as compared to the same period in 2012, as a result of higher
commission rates. The commission paid to junket agents, as a percentage of Rolling Chip Turnover, was 1.07% for the year ended
December 31, 2013, up from 0.85% for the year ended December 31, 2012, as a result of greater non-credit commission paid and less
direct business in relation to total Rolling Chip Turnover as a result of the tightening of credit to VIP gaming patrons in 2013,
and the upward adjustment to commission rates as a result of the Company compensating its junket agents for no longer providing
complimentary hotel and casino services and to increase the market competitiveness. Previously, the junket agents received hotel
and casino services on a complimentary basis. In order to attract more non-credit junket agents, beginning on September 1, 2012,
the Company provided an option for large non-credit junket agents to share the wins and losses under the revenue sharing model
based on their proportionate contribution of total Rolling Chip Turnover. This also resulted in a higher percentage of commission
paid to junket agents in relation to Rolling Chip Turnover.
Selling, general and administrative expenses
increased by approximately US$3 million or 17.15%, while revenue increased by 0.23%, during the year ended December 31, 2013 as
compared to 2012. Legal and professional fees increased by approximately US$0.8 million as a result of costs related to the acquisition
of the Oriental VIP Room of approximately US$1.3 million offset by reduced compliance costs. VIP gaming room operating costs decreased
approximately US$4.5 million as a result of netting services revenues with service expenses during the current period while in
the prior period we provided these services on a complimentary basis, offset by an increase in entertainment costs of approximately
US$1.4 million and table rental costs of approximately US$2.1 million in the Oriental VIP Room. We pay a monthly rental of approximately
US$425,000 in order to have a greater percentage of revenue sharing, which we believe will be a recurring operating cost. Costs
associated with our planned Hong Kong listing of approximately US$2.5 million which were expensed based upon management’s
decision to not offer new Ordinary Shares. Salaries increased by approximately US$2.3 million as a result of an increase in the
number of employees and direct employment of employees from Pak Si and increased salary for certain officers. Management fees increased
by approximately US$0.8 million, primarily as a result of the addition of Bao Li Gaming beginning in September 2012 and the Oriental
VIP Room beginning in July 2013. These increases were partially offset by a decrease in management fees due to direct employment
of some employees from Pak Si.
The special rolling tax decreased by US$0.1
million, or 6.09%, during the year ended December 31, 2013 as compared to the same period in 2012 as a direct result of the decrease
in Rolling Chip Turnover. The percentage of the rolling tax to revenue from VIP gaming promotion remained consistent at approximately
0.7%.
Operating income, after amortization of
intangible assets and before change in the fair value of contingent consideration for the acquisitions of King's Gaming, Bao Li
Gaming and the Oriental VIP Room, was US$17.8 million for the year ended December 31, 2013, as compared to operating income of
US$55 million for the year ended December 31, 2012, a decrease of approximately 67.55%, principally as a result of higher commission
rate paid to the junket agents, and additional amortization associated with intangible assets acquired in the Bao Li Gaming and
the Oriental VIP Room acquisitions. Operating income was 7.53% as a percentage of revenue from VIP gaming promotion, was lower
than in prior periods. In order to attract more non-credit junket agents, beginning on September 1, 2012, we provided an option
for large non-credit junket agents to share the wins and losses under the revenue sharing model based on their proportionate contribution
of total Rolling Chip Turnover. The additional sharing that the junket agents received as a result of higher win rate during the
year ended December 31, 2013 resulted in a higher percentage of commission paid to junket agents in relation to Rolling Chip Turnover.
Non-GAAP income, before amortization of
intangible assets and change in fair value of contingent consideration related to the acquisitions of King's Gaming, Bao Li Gaming
and Oriental VIP Room, as a percentage of revenue from VIP gaming promotion was 13.10% for the year ended December 31, 2013, as
compared to 26.1% for the year ended December 31, 2012. The decrease as a percentage of revenue from VIP gaming promotion was due
to higher commissions, higher management fees paid, and the increase in the number of direct employees.
There was no change in the fair value of
the contingent consideration for King’s Gaming as the forecasted gross profit level of King’s Gaming resulted in no
additional earn-out shares expected to be earned by the King’s Gaming Sellers. Additionally, there was a net increase to
the contingent consideration liability for Bao Li Gaming and the Oriental VIP Room of US$12.4 million due primarily to a decrease
in the market value of our Ordinary Shares offset by an increase in the forecasted Rolling Chip Turnover performance of Bao Li.
As required by FASB ASC Topic 805 on business combinations, any change in the fair value of the acquisition-related contingent
consideration subsequent to the acquisition date, including changes from events after the acquisition date, such as changes in
our estimate of the gross profit and Rolling Chip Turnover expected to be achieved, will be recognized in earnings in the period
that estimated fair value changes. The fair value estimate assumes probability-weighted gross profit and Rolling Chip Turnover
are achieved over the earn-out period. Actual achievement of gross profit range and Rolling Chip Turnover Target for this assumed
earn-out period could reduce the liability to zero. A change in the fair value of the acquisition-related contingent consideration
could have a material impact on our statement of operations and financial position in the period of change in estimate.
Earnings per share (“EPS”) attributable
to ordinary shareholders for the year ended December 31, 2013 was $0.10, for basic and fully diluted based upon the basic and fully
diluted weighted average share counts of 53,030,405 (basic) and 53,210,571 (fully diluted).
Non-GAAP EPS before amortization of intangible
assets and change in the fair value of contingent consideration for the year ended December 31, 2013 was $0.58 for basic and fully
diluted based upon the basic and fully diluted weighted average share counts of 53,030,405 (basic) and 53,210,572 (fully diluted).
Non-GAAP Financial Measures
Our calculation of Non-GAAP income (operating
income before amortization of intangible assets and change in fair value of contingent consideration) and Non-GAAP EPS differs from EPS based on net income because it does not include amortization of intangible
assets and change in fair value of contingent consideration. We use this information internally in evaluating our operations
and believe this information is important to investors because it provides users of our financial information with additional useful
information in evaluating operating performance for the periods and is more consistently comparable to the prior periods.
Notwithstanding the foregoing, Non-GAAP income and EPS should not be considered an alternative to, or more meaningful than, net
income and EPS as determined in accordance with GAAP. The following is a reconciliation of our net income to Non-GAAP income
and GAAP EPS to our Non-GAAP EPS:
| | |
For the
Year
Ended
December
31, 2014 | | |
For the
Year
Ended
December
31, 2013 | | |
For the
Year
Ended
December
31, 2012 | |
| | |
| | |
| | |
| |
| Net (Loss) Income attributable to ordinary shareholders | |
$ | (60,077,935 | ) | |
$ | 5,387,502 | | |
$ | 70,119,242 | |
| | |
| | | |
| | | |
| | |
| Amortization of intangible assets | |
| 16,365,034 | | |
| 13,187,006 | | |
| 6,622,238 | |
| | |
| | | |
| | | |
| | |
| Change in fair value of contingent consideration | |
| 60,918,569 | | |
| 12,445,789 | | |
| (15,166,700 | ) |
| | |
| | | |
| | | |
| | |
| Non-GAAP income (before amortization of intangible assets and change in fair value of contingent consideration) | |
$ | 17,205,668 | | |
$ | 31,020,297 | | |
$ | 61,574,780 | |
| | |
| | | |
| | | |
| | |
| Weighted Average Shares Outstanding | |
| | | |
| | | |
| | |
| | |
| | | |
| | | |
| | |
| Basic | |
| 60,781,915 | | |
| 53,030,405 | | |
| 45,752,743 | |
| Diluted | |
| 61,002,086 | | |
| 53,210,572 | | |
| 45,752,922 | |
| | |
For the Year Ended
December 31, 2014 | | |
For the Year Ended
December 31, 2013 | | |
For the Year Ended
December 31, 2012 | |
| | |
Basic | | |
Fully
Diluted | | |
Basic | | |
Fully
Diluted | | |
Basic | | |
Fully
Diluted | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
| Net (Loss) Income per share attributable to ordinary shareholders | |
$ | (0.99 | ) | |
$ | (0.99 | ) | |
$ | 0.10 | | |
$ | 0.10 | | |
$ | 1.53 | | |
$ | 1.53 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Amortization of intangible assets | |
| 0.27 | | |
| 0.27 | | |
| 0.25 | | |
| 0.25 | | |
| 0.14 | | |
| 0.14 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Change in fair value of contingent consideration | |
| 1.00 | | |
| 1.00 | | |
| 0.23 | | |
| 0.23 | | |
| (0.33 | ) | |
| (0.33 | ) |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Non-GAAP earnings per share (before amortization of intangible assets and change in fair value of contingent consideration) | |
$ | 0.28 | | |
$ | 0.28 | | |
$ | 0.58 | | |
$ | 0.58 | | |
$ | 1.34 | | |
$ | 1.34 | |
TAXATION
Cayman Islands
We are incorporated in the Cayman Islands.
Under the current laws of the Cayman Islands, we are not subject to income or capital gain tax. In addition, payment by us to our
shareholders is not subject to withholding tax in the Cayman Islands.
United States
We are not incorporated nor do we engage
in any trade or business in the United States and are, therefore, not subject to United States federal income taxes.
Hong Kong
We are not subject to Hong Kong profits
tax because all of our operations are performed outside Hong Kong, and Hong Kong adopts a territorial tax regime under which only
Hong Kong-sourced income is subject to the profit tax.
British Virgin Islands
All of our BVI subsidiaries are incorporated
under the BVI Business Companies Act, 2004 (No. 16 of 2004) and are exempt from payment of BVI taxes.
Macau
The Promoter Companies, Sang Heng, King’s,
Bao Li, Iao Pou and Sang Lung, and L’Arc Collaborator are not subject to Macau Complementary Tax, because their gaming revenue
is received net of taxes collected by the Macau Government which are paid directly by the Casino Operators on a monthly basis.
As a result, no provision for Macau Complementary Tax has been made.
The exemption from Macau Complementary Tax,
however, does not apply to the dividends to be distributed by the Company’s Macau subsidiaries. We are, therefore, subject
to Macau Complementary Tax at a progressive rate of up to maximum of 12% for dividends we receive from Macau subsidiaries. Accordingly,
we are required to recognize deferred tax liabilities for taxable temporary differences associated with its investments in Macau
subsidiaries except where we will be able to control the timing of the reversal of the temporary differences and it is probable
that the temporary differences will not reverse in the foreseeable future.
During the reporting period, no liability
was recognized in respect of these differences because we were in a position to control the timing of reversal of the temporary
differences and it is probable that such differences will not reverse in the foreseeable future.
The Promotion Entities are subject to special
rolling tax which is deducted and withheld by each Casino Operator and L’Arc Promoter on a monthly basis. The rate of special
rolling tax is 0.01% on the rolling chip turnover of the VIP gaming room, and the special rolling tax is deducted as a cost of
operation.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2014, our total available
cage capital was US$200 million, consisting of markers receivable of US$189 million and cash and cash chips on hand of US$11 million.
As of December 31, 2014, we had a total
cash and cash equivalents balance of US$11 million, compared to cash and cash equivalents of US$7 million as of December 31, 2013.
The increase is mainly as a result of collections of markers receivable offset by the settlement of the outstanding consideration
for the acquisitions of the Oriental VIP Room, Bao Li Gaming and King’s Gaming in 2014. Our credit risk is primarily attributable
to markers receivable.
As of December 31, 2014, we had available
lines of credit of US$59 million from Casino Operators excluding temporary credits, of which US$32 million were outstanding as
of December 31, 2014. If the Casino Operators decide not to renew the lines of credit in any given month, our rolling chip turnover
may be reduced as a result of reduced credit extended to our VIP gaming patrons. As a result, our gaming revenue from the Casino
Operators and L’Arc Promoter and our net operating income could also be reduced.
As of December 31, 2014, we had interest
free loans from shareholders of US$2.6 million which are temporary credit extended to us from time to time as part of our cage
capital to meet additional gaming credit demand by our VIP gaming patrons. Going forward, we intend to reduce such loans from shareholders.
Our expected sources of repayment of the
lines of credit extended by the Casino Operators and our shareholders are the repayment of markers receivable from our VIP gaming
patrons as well as receivables due from the Casino Operators and L’Arc Promoter.
In June 2011, we adopted a share repurchase
plan, or the 2011 Repurchase Plan, to purchase up to two million of Shares on the open market at prices to be determined by our
management. We purchased an aggregate of 26,300 Shares for an aggregate purchase price of US$0.1 million under the 2011 Repurchase
Plan, which expired on June 30, 2012. The Shares repurchased under the 2011 Repurchase Plan have been retired and the purchase
price was allocated to ordinary shares and additional paid in capital. In 2012, we repurchased an aggregate of 1,273,947 Shares
for an aggregate purchase price of US$4.2 million pursuant to the 2012 Repurchase Plan. In the first three months of 2013, we repurchased
the remaining 726,053 Shares available under the 2012 Repurchase Plan for an aggregate purchase price of US$2.7 million. The Shares
have been retired and the purchase price was allocated to ordinary shares and additional paid in capital. In March 2013, the Board
of Directors established the 2013 Repurchase Plan, which authorized us to purchase up to four million of Shares on the open market
at prices to be determined by our management. During the year ended December 31, 2013 we repurchased an aggregate of 732,900 Shares
for an aggregate purchase price of US$2.3 million pursuant to the 2013 Repurchase Plan. During the year ended December 31, 2014,
we repurchased an aggregate of 1,415,300 Shares for an aggregate purchase price of US$4.2 million pursuant to the 2013 Repurchase
Plan. The Shares repurchased under the 2013 Repurchase Plan were retired and the purchase price was allocated to ordinary shares
and additional paid in capital. The 2013 Repurchase Plan, which remains effective until terminated by our officers who are authorized
to discontinue such plan at any time in their discretion.
Working capital
We believe that we have sufficient working
capital available for the next twelve months.
Cash flow
Historically, we have financed our working
capital and other capital requirements primarily through cash generated from our operations and shareholder loans. The following
table sets forth a summary of our cash flows for the periods indicated. (All figures are in thousands.)
| | |
For the year
ended December
31, 2014 | | |
For the year
ended December
31, 2013 | | |
For the year
ended December
31, 2012 | |
| | |
| | |
| | |
| |
| Net cash provided by operating activities | |
$ | 60,602 | | |
$ | 37,906 | | |
$ | 46,428 | |
| Net cash used in investing activities | |
| (291 | ) | |
| (20,127 | ) | |
| (15,146 | ) |
| Net cash used in financing activities | |
| (56,929 | ) | |
| (30,845 | ) | |
| (27,391 | ) |
| Net increase (decrease) in cash and cash equivalents | |
$ | 3,382 | | |
$ | (13,066 | ) | |
$ | 3,891 | |
Cash flow generated from operating activities
The increase in net cash provided by operating
activities for the year ended December 31, 2014 compared to the year ended December 31, 2013 was primarily due to an increase in
cash provided by markers receivable offset by repayments of lines of credit. The increase in cash provided by marker receivable
was due primarily to the efforts to collect marker receivables. Other fluctuations in cash from operating activities were due primarily
to miscellaneous timing differences.
Cash flow used in investing activities
The decrease in net cash used in investing
activities for the year ended December 31, 2014 compared to the year ended December 31, 2013 was primarily due to no material payments
related to acquisition transactions during the year ended December 31, 2014. During the year ended December 31, 2013, the Company
paid US$20.0 million for the Oriental VIP room acquisition. In 2014, the cash used in investing activities was primarily used for
purchasing the property and equipment.
Cash flow used in financing activities
The increase in net cash used in financing
activities for the year ended December 31, 2014 compared to the year ended December 31, 2013 was primarily due to (1) payout of
US$26 million of contingent consideration for the Oriental VIP Room acquisition; (2) less repayment to shareholder loans; and (3)
a decrease in dividend payout due to decrease in earnings. Also, there was no material cash provided by financing activities for
the year ended December 31, 2014; the major increase in cash provided by financing activities for the year ended December 31, 2013
was the approximately $29.4 million received from a rights offering completed in June 2013.
Future sources and uses of cash
We generally funded our operations from
cash generated from operating activities.
We expect that our future liquidity and
capital requirements will be affected by:
| · | capital requirements related to prior and future acquisitions; |
| · | cash flow from prior and future acquisitions; |
| · | working capital requirements; |
| · | repurchase of outstanding shares; |
| · | funds raised through the issuance of our securities; and |
| · | earnings accumulated and reinvested. |
Off-Balance Sheet Arrangements
None.
Contractual Obligations
We have the following long term debt, capital
lease obligations, operating lease obligations, purchase obligations or other long term liabilities as of December 31, 2014:
| | |
Payments due by period | |
| | |
| | |
Less than 1 | | |
| | |
| | |
More than 5 | |
| | |
Total | | |
year | | |
1-3 years | | |
3-5 years | | |
years | |
| | |
| | |
| | |
| | |
| | |
| |
| Shareholder Loans | |
$ | 2,612,490 | | |
$ | 2,612,490 | | |
$ | - | | |
$ | - | | |
$ | - | |
| Operating Lease Obligations | |
| 68,445 | | |
| 68,445 | | |
| - | | |
| - | | |
| - | |
| Management Agreements | |
| 4,797,091 | | |
| 4,797091 | | |
| - | | |
| - | | |
| - | |
| Employment Agreements | |
| 1,573,592 | | |
| 723,592 | | |
| 850,000 | | |
| - | | |
| - | |
| Contingent Consideration | |
| 83,695,657 | | |
| 36,401,512 | | |
| 47,294,145 | | |
| - | | |
| - | |
| | |
$ | 92,747,275 | | |
$ | 44,,603,130 | | |
$ | 48,144,145 | | |
$ | - | | |
$ | - | |
Other Events
On April 1, 2015, the Company issued
a press release announcing 2014 financial results. A copy of the press release is attached as Exhibit 99.1.
| Item 6. | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES |
| A. | Directors and senior management |
Our board of directors consists of nine
(9) directors divided into three classes, each of which serves for a term of three years, with only one class of directors being
elected in each year. All of the current directors other than João Manuel Santos Ferreira, George Chui Vai Hou, Yeung Lun
Allan, and Peter Li were initially elected by the shareholders at the time of the acquisition of AGRL. Messrs. Ferreira, Chui and
Yeung were initially appointed by the existing directors on April 7, 2010. Peter Li was initially elected by the shareholders at
our 2011 annual meeting on December 13, 2011. The directors serve as follows:
| · | in the class to stand for reelection in 2015: Leong Siak Hung, James R. Preissler and João Manuel Santos Ferreira; |
| · | in the class to stand for reelection in 2016: Lam Man Pou, Vong Hon Kun and George Chui Vai Hou; and |
| · | in the class to stand for reelection in 2017: Peter Li, Raymond Li Chun Ming, and Yeung Lun Allan; |
Our executive officers are:
|
Name |
|
Position |
| Lam Man Pou |
|
Chairman and Chief Marketing Officer |
| Leong Siak Hung |
|
Chief Executive Officer |
| Raymond Li Chun Ming |
|
Chief Financial Officer |
| Vong Hon Kun |
|
Chief Operating Officer |
| Sylvia Lee |
|
Executive Vice President |
Our executive officers other than Ms. Lee
also hold the same positions with AGRL.
The following pages set forth the names,
ages and director start dates of the directors and director nominees, their respective principal occupations or brief employment
history for the past five years and the names of other publicly-held companies of which each serves or has served as a director
during the past five years.
Lam Man Pou, age 51, has been the chairman and
chief marketing officer and a director of the Company since February 2010 and has been the chairman, chief marketing officer and
a director of AGRL since its inception in May 2007. He is responsible for the overall direction and development of the Company,
its subsidiaries and VIP gaming promoters. He is also responsible for developing IKGH’s and its VIP gaming promoters’
marketing programs. Mr. Lam is a citizen of Macau, China and has been involved in the gaming industry in Macau for over 20 years.
He had served as junket agent for various VIP gaming rooms in SJM casinos and Waldo Casino before setting up his own gaming promotion
business in May 2006. From May 2006 to early July 2007, he was the sole proprietor of Sang Heng and Spring. From March 1990 to
May 2002, Mr. Lam was a junket agent for the Casinos of Sociedade de Turismo e Diversoes de Macau, S.A. From June 2002 through
May 2005, Mr. Lam was a junket agent for Casino New Century. From July 2004 through May 2006 Mr. Lam was a junket agent for Waldo
Casino. He is a member of the Macau Gaming Industry General Association of Administrators and VIP Gaming Promoters. Mr. Lam’s
business address is Unit 605, East Town Building, 16 Fenwick Street, Wanchai, Hong Kong.
Leong Siak Hung, age 44, has served as the Chief
Executive Officer and a director of the Company since February 2010 and has served as the chief executive officer and a director
of AGRL since its formation and is responsible for the direct general administration of the Company and the Company’s strategic
planning and expansion. Mr. Leong is a citizen of Macau, China and has over 17 years of active management with various industrial
and real property companies in Macau, Hong Kong and China. From November 2001 through June 2003, he was chief executive officer
of National Craft Industrial Co. Ltd, a toys manufacturing company in China. From July 2003 to June 2006, he was chief executive
officer of Idea Kids Toy Co. Ltd. and Genesis Industrial Co. Ltd. Since July 2006, he has been chairman of Idea Kids Toy Co., Ltd,
a toy manufacturing company in China, and also has been chairman of Genesis Industrial Co., Ltd, a toy manufacturing company in
Macau. From July 2006 to December 31, 2009, he was chairman of Zhuhai Zhongzhu Real Estate Development Company Ltd, a real property
developer. He has acted as management advisor for Mr. Lam in respect of general administration and human resources management for
VIP gaming rooms since May 2006. Mr. Leong’s business address is Unit 605, East Town Building, 16 Fenwick Street, Wanchai,
Hong Kong.
Li Chun Ming, Raymond, age 57, has served as the
chief financial officer and a director of the Company since February 2010 and has served as chief financial officer and a director
of AGRL since its formation and is responsible for the accounting and finance of the Company. Mr. Li is a citizen of Hong Kong,
China and is a practicing Certified Public Accountant and a member of the Hong Kong Institute of Certified Public Accountants.
He is also an associate of the Hong Kong Taxation Institute and the Association of International Accountants. He is a graduate
of Hong Kong Polytechnic University, Department of Accounting. From July 1984 through July 2005 he worked as senior manager for
Tony C. M. Yau & Company, Certified Public Accountant, in Hong Kong, where he was engaged in auditing, accounting and corporate
services. From August 2005 through July 2006 he worked as a consultant for K Li Business Consultancy Limited, where he was engaged
in the provision of corporate and financial advisory services. Since August 2006 he has been an executive director of Klis &
Associates CPA Limited, Certified Public Accountants, in Hong Kong. In September 2004, he was appointed as an independent non-executive
director of Benefun International Holding Limited, a Hong Kong publicly listed company engaged in the sales of plantation products,
property development, garment manufacturing and retailing, and held such position until May 2009. He has acted as an advisor to
Mr. Lam in respect of the financial management of the VIP gaming rooms since May 2006. Mr. Li’s business address is Unit
605, East Town Building, 16 Fenwick Street, Wanchai, Hong Kong.
Vong Hon Kun, age 49, has served as the chief
operating officer and a director of the Company since February 2010 and has served as chief operating officer and a director of
AGRL since its formation and is responsible for the day-to-day operation of the Company and developing the VIP gaming patron market
in mainland China and the junket agent network throughout that country. Mr. Vong is a citizen of Macau, China. Mr. Vong has spent
over 20 years in the gaming industry and had served as junket agent for various VIP gaming rooms in SJM casinos and Waldo Casino
before joining Lam Man Pou for promoting gaming business in May 2006. From July 1990 to May 2002, Mr. Vong was a junket agent for
the Casinos of Sociedade de Turismo e Diversoes de Macau, S.A. From June 2002 through May 2005, Mr. Vong was a junket agent for
Casino New Century. From July 2004 through May 2005 Mr. Vong was a junket agent for Waldo Casino. Before he joined the gaming industry,
Mr. Vong had worked as a civil servant for six years. He is a member of the Macau Gaming Industry General Association of Administrators
and VIP Gaming Promoters. Mr. Vong’s business address is Unit 605, East Town Building, 16 Fenwick Street, Wanchai, Hong Kong.
James R. Preissler, age 43, has served as a director
of CS China Acquisition Corp. (“CS China”), the Company’s corporate predecessor, from June 2008 and served as
chief financial officer and secretary of the Company from June 2008 until the Company’s acquisition of AGRL on February 2,
2010. Since November 2006, Mr. Preissler has served as a managing partner of Panthera Capital Group, an advisory firm for Chinese
companies. From November 2004 until November 2006, Mr. Preissler served as the chief financial officer and secretary for China
Unistone Acquisition Corp., a blank check company that subsequently merged with a target in China to form Yucheng Technologies
(Nasdaq: YTEC), a provider of financial technologies and solutions to banks in China. Mr. Preissler has served as an investment
advisor to Yucheng Technologies since its merger in November 2006. From March 2003 until September 2005, Mr. Preissler served as
the associate director of research for Majestic Research, a New York-based independent research boutique firm focused on proprietary
research for hedge funds and institutional investors. From March 2002 to February 2003, he served as a head of the digital media
research group of Investec, an investment bank specializing on mid-cap growth companies in the United States and Europe. Mr. Preissler
received a Bachelor of Arts degree from Yale University and currently holds Series 7, 24, 63, and 79 securities licenses. Mr. Preissler’s
business address is 50 Old Route 25A, Fort Salonga, New York.
João Manuel Santos Ferreira, age 61, has
served as a director of the Company since April 7, 2010. Mr. Ferreira is an attorney at law in Macau. From 1996 to July 2008, he
was a practicing solicitor at the Macau Jurisdiction Court. From 1975 to 1996, he served in various positions with Macau public
departments, including the Macau Inspection Gaming Bureau (DICJ), where he was a Gaming Inspector from 1989 to 1996. He holds a
Bachelor’s degree in law from the University of Macau. Mr. Ferreira’s business address is Suite G, 2/F, 26 Rua Dr.
Pedro Jose Lobo, Macau.
Yeung Lun Allan , age 57, has served as a director
of the Company since April 7, 2010. Since 1982, Mr. Yeung has had extensive experience in the manufacturing industry in China.
Since June 2008, he has been the operation manager of Yen Hing Leather Works Factory, which operates a manufacturing plant of 3,500
employees in Dongguang, China. From 1982 to 1985, he was with Sun Chung Precision Metal Industry Limited, where he was General
Manager at the time he left that company. From 1995 to March 2007, as general manager or deputy general manager, he managed 5 other
manufacturing plants in China having thousands of employees. From April 2007 to March 2009, he was an assistant operations manager
for High-Tech Industrial (HK) Ltd. Mr. Yeung holds a Bachelor’s degree in Electrical Engineering from Aichi Institute of
Technology in Japan. Mr. Yeung’s business address is 27/F, Yen Sheng Centre, 64 Hoi Yuen Road, Kwun Tong, Kowloon, Hong Kong.
George Chui Vai Hou, age 47, has served as a director
of the Company since April 7, 2010. Mr. Chui has been Executive Director of Wai Luen Import & Export Company Limited in Macau
since 1998. Since December 2008, he has also been Executive Director of Ieng Tat Investment & Development Company Limited,
a Macau company engaged in investment activities. From December 2000 to June 2006, he was also Executive Director of Tai Chong
Ip (Group) Company Limited, a real estate trading company in Macau. Mr. Chui has also been invited and serves as a Member of the
9th, 10th and 11th Guangzhou Committees of the Chinese People’s Political Consultative Conference of China, which are consultative
committees for the Conference. He received a Bachelor’s degree in Social Sciences with First Class Honours, majoring in accounting
and statistics, from the University of Southampton in the United Kingdom and also holds a Master of Science degree in International
Banking and Financial Studies from the same university. Mr. Chui’s business address is 13A Seng Vo Kok, 405 Rua De Amizade,
Macau.
Peter Li, age 50, has served as our director since
December 2011. Mr. Li served as a director of CS China from June 2008 until the Company’s acquisition of AGRL on February
2, 2010. Mr. Li is currently chief financial officer of Hollysys Automation Technologies (NASDAQ: HOLI), a leading automation technology
and product provider to industrial, rail, and nuclear sectors in China. Mr. Li is an independent director and audit committee chairman
for China Valves Technology, Inc. (NASDAQ: CVVT) and Yuhe International Inc.(PK.YUII). Prior to working at Hollysys, Mr. Li was
CFO of Yucheng Technologies (NASDAQ: YTEC), a leading IT service provider to banking industry in China. Mr. Li was Internal Controller
with Lenovo, a leading PC maker in China, before he joined Yucheng Technologies. Mr. Li graduated from Beijing Foreign Studies
University with a B.A. and received a Master of Education from University of Toronto. Mr. Li is a Certified General Accountant
in Ontario, Canada.
Sylvia Lee , age 50, became our executive vice
president in April 2010. She served as the president, chief financial officer and secretary of CS China from its inception until
June 2008 and as a director of the Company from February to April 2010. Ms. Lee is a founding member, and has served as the vice
chairman and chief financial officer of CS Capital USA since August 2004. She has also been a director of SK Development since
May 2006. Ms. Lee is a founding member and has been the executive vice president of Lee Holdings Company, Inc. since August 1989.
From November 1994 to January 2001, Ms. Lee served as the president and was a co-founder of Unique Domain, Inc., an interior design
firm and furniture trade showroom chain store in Florida. From June 1993 to September 1997, Ms. Lee was a member and also served
as the treasurer of the Arts and Design Village Development Council of Buena Vista, Inc., a non-profit organization which had helped
revitalize the mid-town Miami area and the Miami Design District. From August 1989 to August 1995, Ms. Lee served as the vice president
of City Homes, Inc. Ms. Lee received a Master of Science degree. from Florida International University and a Bachelor of Arts degree
from the University of Hawaii. Ms. Lee’s business address is 4100 N.E. Second Avenue, Suite 318, Miami, Florida 33137.
There are currently no family relationships
among our directors and executive officers.
Compensation Committee Interlocks and Insider Participation
No member of our compensation committee
has at any time been our officer or employee, or our subsidiaries. No interlocking relationship exists between our board of directors
or compensation committee and the board of directors or compensation committee of any other company, nor has any interlocking relationship
existed in the past.
During the last fiscal year, none of our
officers and employees, and none of our former officers participated in deliberations of our Board of Directors or our compensation
committee concerning executive officer compensation.
Benchmarking of Cash and Equity Compensation
We believe it is important when making compensation-related
decisions to be informed as to current practices of similarly situated publicly held companies. We expect to stay apprised of the
cash and equity compensation practices of publicly held companies in the gaming industry through the review of such companies’
public reports and other resources. It is expected that any companies chosen for inclusion in any benchmarking group would have
business characteristics comparable to us, including revenues, financial growth metrics, stage of development, employee headcount
and market capitalization. While benchmarking may not always be appropriate as a stand-alone tool for setting compensation due
to the aspects of our business and objectives that may be unique to us, we generally believe that gathering this information will
be an important part of our compensation-related decision-making process.
Compensation Components
Base Salary . Generally,
we set executive base salaries for our executives and those of AGRL at levels comparable with those of executives in similar positions
and with similar responsibilities at comparable companies. We seek to maintain base salary amounts at or near the industry norms
while avoiding paying amounts in excess of what we believe is necessary to motivate executives to meet corporate goals. Base salaries
will generally be reviewed annually, subject to terms of employment agreements, and we will seek to adjust base salary amounts
to realign such salaries with industry norms after taking into account individual responsibilities, performance and experience.
Incentive Bonuses . We
may design and utilize cash incentive bonuses for our executives and those of AGRL to focus them on achieving key operational and
financial objectives within a yearly time horizon. It is expected that such bonuses will be based on the standards include objective
standards for job specific matters and subjective standards based on diligence, improvement of skills and company loyalty, decisiveness
and an appropriate service mind-set. Improvement over the prior year is considered highly important. No cash bonuses have been
granted to date.
Equity-Based Awards. We
may also use equity-based awards, such as stock options and stock grants, as part of our compensation packages. As of the date
of this annual report, we have not adopted any plans or policies regarding such awards. As part of her annual compensation, Sylvia
Lee, our executive vice president, receives $20,000 of our ordinary shares, as further described under “—Officer Compensation;
Employment Agreements” below.
Officer Compensation; Employment Agreements
The following table sets forth all compensation
paid to our executive officers (not including amounts paid in connection with their services as directors, which is described below)
during 2014:
| Name and Principal Position | |
Fees Earned
or Paid in
Cash
(US$) | | |
Ordinary
Shares
(US$) | | |
Total
(US$) | |
| Lam Man Pou, Chairman and Chief Marketing Officer | |
| 201,168 | | |
| — | | |
| 201,168 | |
| Leong Siak Hung, Chief Executive Officer | |
| 278,541 | | |
| — | | |
| 278,541 | |
| Raymond Li Chun Ming, Chief Financial Officer | |
| 232,117 | | |
| — | | |
| 232,117 | |
| Vong Hon Kun, Chief Operating Officer | |
| 201,168 | | |
| — | | |
| 201,168 | |
| Sylvia Lee, Executive Vice President | |
| 30,000 | | |
| 20,000 | | |
| 50,000 | |
(1) Our board of directors determined that the valuation price
of our ordinary shares with respect to the 2014 equity compensation was $1.79.
AGRL has employment agreements with two
of its executive officers. The following table sets forth certain information about these employment agreements as of December
31, 2014.
| Officer | |
Position | |
Termination Date | |
Annual Salary | |
| Lam Man Pou | |
Chief Marketing Officer | |
Expired, pending renewal* | |
$ | 201,189 | |
| Vong Hon Kun | |
Chief Operating Officer | |
Expired, pending renewal* | |
$ | 201,189 | |
*These agreements are expected to renew
in May 2015.
Each officer is entitled to paid vacation
in accordance with AGRL’s policies. Each officer is also entitled to reasonable use of company-provided automobiles, with
the officer to be reimbursed for all reasonable expenses related to the use and operation of such automobiles. However, no automobiles
are currently being provided and we currently have no plan in place to provide automobiles.
The employment agreements provide that the
executive, during a period of five years following the termination of his employment shall not compete with AGRL or solicit any
of its employees.
The agreements contain provisions prohibiting
the executives, during their respective terms of employment, from selling, hypothecating or otherwise transferring more than 20%
of any ordinary shares that may be transferred to them by Spring Fortune from shares it received or receives as a result of the
acquisition. If an executive’s employment is terminated for any reason prior to the expiration of the employment term, or
if the executive breaches the confidentiality and non-competition and non-solicitation provisions of his employment agreement,
the executive is obligated to transfer and assign to us all securities then held by him and all rights to receive securities in
the future, which securities will be canceled.
Director Compensation
All of our directors presently receive annual
compensation of $30,000 in cash and $20,000 in our ordinary shares, valued at the average of the closing prices of the ordinary
shares over the three-month period preceding the end of each fiscal year. The directors of the Company are entitled to receive
an aggregate of 111,730 ordinary shares for fiscal 2014. The chairman of the audit committee receives additional annual cash compensation
of $10,000 and the other members of the audit committee each receive additional annual cash compensation of $5,000. The chairman
of the compensation and nominating committees each receive additional annual cash compensation of $5,000 and the other members
of these committees each receive additional annual cash compensation of $3,000. Each director receives $1,000 for each board or
committee meeting that he or she attends (whether in person or telephonically) that is at least an hour in duration and $500 for
each board or committee meeting he or she attends that is less than an hour in duration.
The following table sets forth information
regarding compensation provided to our directors for their service on the board of directors in 2014.
| Name | |
Fees Earned
or Paid in
Cash
(US$) | | |
Ordinary
Shares(1)
(US$) | | |
Total
(US$) | |
| Raymond Li Chun Ming | |
| 35,000 | | |
| 20,000 | | |
| 55,000 | |
| Yeung Lun Allan | |
| 38,000 | | |
| 20,000 | | |
| 58,000 | |
| Lam Man Pou | |
| 30,000 | | |
| 20,000 | | |
| 50,000 | |
| Vong Hon Kun | |
| 30,000 | | |
| 20,000 | | |
| 50,000 | |
| George Chui Vai Hou | |
| 38,000 | | |
| 20,000 | | |
| 58,000 | |
| Leong Siak Hung | |
| 30,000 | | |
| 20,000 | | |
| 50,000 | |
| James R. Preissler | |
| 40,000 | | |
| 20,000 | | |
| 60,000 | |
| Manuel Santos Ferreira | |
| 38,000 | | |
| 20,000 | | |
| 58,000 | |
| Peter Li | |
| 38,000 | | |
| 20,000 | | |
| 58,000 | |
| (1) | Our board of directors determined that the valuation price of our ordinary shares with respect to the 2014 directors’
equity compensation was $1.79. |
Incentive Plan
On December 13, 2011, our shareholders approved
the the Iao Kun Group Holding Company Limited 2011 Omnibus Securities and Incentive Plan (the “2011 Incentive Plan”).
The purpose of the 2011 Incentive Plan is to assist us to attract, retain and provide incentives to key management employees and
nonemployee directors of, and nonemployee consultants, to us and our affiliates, and to align the interests of such employees,
nonemployee directors and nonemployee consultants with those of our shareholders. Awards under the 2011 Incentive Plan are limited
in the aggregate to 200,000 ordinary shares. As of the date of this Annual Report, there are 28,200 ordinary available for issuance
under the 2011 Incentive Plan. We plan to issue 111,730 ordinary shares for the equity portion of 2014 compensation upon approval
of a shareholders meeting for a revised Incentive Plan and approval from the Board of Directors.
General Description of the 2011 Incentive Plan
The following is a summary of the material
provisions of the 2011 Incentive Plan and is qualified in its entirety by reference to the complete text of the 2011 Incentive
Plan, a copy of which is attached as an exhibit hereto.
Administration . The 2011 Incentive
Plan is administered by a committee (the “Committee”) designated by the Board of Directors, which shall consist solely
of three (3) or more Directors who are each (i) “outside directors” (“Outside Directors”) within the meaning
of Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”), (ii) “non-employee directors”
within the meaning of Rule 16b-3 (“Non-Employee Directors”) and (iii) ”independent” for purposes of
any applicable listing requirements; provided, however, that the Board of Directors or the Committee may delegate to a committee
of one or more members of the Board of Directors who are not (x) Outside Directors, the authority to grant awards to eligible persons
who are not (A) then “covered employees” within the meaning of Section 162(m) of the Code and are not expected to be
“covered employees” at the time of recognition of income resulting from such award, or (B) persons with respect to
whom the Company wishes to comply with the requirements of Section 162(m) of the Code, and/or (y) Non-Employee Directors, the authority
to grant awards to eligible persons who are not then subject to the requirements of Section 16 of the Exchange Act. Our Compensation
Committee serves as this Committee. If a member of the Committee shall be eligible to receive an award under the Plan, such Committee
member shall have no authority hereunder with respect to his or her own award. Among other things, the Committee has complete discretion,
subject to the terms of the 2011 Incentive Plan, to determine the employees, non-employee directors and non-employee consultants
to be granted an award under the 2011 Incentive Plan, the type of award to be granted, the number of ordinary shares subject to
each award, the exercise price under each option and base price for each SAR (as defined below), the term of each award, the vesting
schedule for an award, whether to accelerate vesting, the value of the ordinary shares underlying the award, and the required withholdings,
if any. The Committee is also authorized to construe the award agreements, and may prescribe rules relating to the 2011 Incentive
Plan.
Grant of Awards; Shares Available for
Awards . The 2011 Incentive Plan provides for the grant of awards which are distribution equivalent rights, incentive share
options, non-qualified share options, performance shares, performance units, restricted shares, restricted share units, share appreciation
rights (“SARs”), tandem share appreciation rights, unrestricted shares or any combination of the foregoing, to key
management employees and nonemployee directors of, and nonemployee consultants of, the Company or any of its subsidiaries (each
a “participant”) (however, solely employees of the Company or its subsidiaries are eligible for awards which are incentive
share options). We have reserved a total of 200,000 shares for issuance as or under awards to be made under the 2011 Incentive
Plan. To the extent that an award lapses, expires, is canceled, is terminated unexercised or ceases to be exercisable for any reason,
or the rights of its holder terminate, any shares subject to such award shall again be available for the grant of a new award.
The 2011 Incentive Plan shall continue in effect, unless sooner terminated, until the tenth (10th) anniversary of the date on which
it is adopted by the Board of Directors (except as to awards outstanding on that date). The Board of Directors in its discretion
may terminate the 2011 Incentive Plan at any time with respect to any shares for which awards have not theretofore been granted;
provided, however, that the 2011 Incentive Plan’s termination shall not materially and adversely impair the rights of a holder
with respect to any award theretofore granted without the consent of the holder. The number of shares for which awards which are
options or SARs may be granted to a participant under the 2011 Incentive Plan during any calendar year is limited to 10,000.
Future new hires, non-employee directors
and additional non-employee consultants would be eligible to participate in the 2011 Incentive Plan as well. The number of awards
to be granted to officers, non-employee directors, employees and non-employee consultants cannot be determined at this time as
the grant of awards is dependent upon various factors such as hiring requirements and job performance.
Options . The term of each option
shall be as specified in the option agreement; provided, however, that except for options which are incentive share options (“ISOs”)
granted to an employee who owns or is deemed to own (by reason of the attribution rules applicable under Code Section 424(d)) more
than 10% of the combined voting power of all classes of stock of the Company or the parent or a subsidiary of the Company (a “ten
percent shareholder”), no option shall be exercisable after the expiration of ten (10) years from the date of its grant.
The price at which an ordinary share may
be purchased upon exercise of an option shall be determined by the Committee; provided, however, that such option price (i) shall
not be less than the fair market value of an ordinary share on the date such option is granted, and (ii) shall be subject to adjustment
as provided in the 2011 Incentive Plan. The Committee or the Board of Directors shall determine the time or times at which or the
circumstances under which an option may be exercised in whole or in part, the time or times at which options shall cease to be
or become exercisable following termination of the option holder’s employment or upon other conditions, the methods by which
such exercise price may be paid or deemed to be paid, the form of such payment, and the methods by or forms in which ordinary shares
will be delivered or deemed to be delivered to participants who exercise options.
Options which are ISOs shall comply in all
respects with Section 422 of the Code. In the case of ISOs granted to a ten percent shareholder, the per share exercise price under
such ISO (to the extent required by the Code at the time of grant) shall be no less than 110% of the fair market value of a Share
on the date such ISO is granted. The term of an ISO may not exceed 10 years (5 years in the case of an ISO granted to a ten percent
shareholder). ISOs may solely be granted to employees. In addition, the aggregate fair market value of the Shares subject to an
ISO (determined at the time of grant) which are exercisable for the first time by an employee during any calendar year may not
exceed $100,000.
Restricted Share Awards . A restricted
share award is a grant or sale of ordinary shares to the participant, subject to such restrictions on transferability, risk of
forfeiture and other restrictions, if any, as the Committee or the Board may impose, which restrictions may lapse separately or
in combination at such times, under such circumstances (including based on achievement of performance goals and/or future service
requirements), in such installments or otherwise, as the Committee or the Board of Directors may determine at the date of grant
or purchase or thereafter. Except to the extent restricted under the terms of the 2011 Incentive Plan and any agreement relating
to the restricted share award, a participant who is granted or has purchased restricted shares shall have all of the rights of
a shareholder, including the right to vote the restricted shares and the right to receive dividends thereon (subject to any mandatory
reinvestment or other requirement imposed by the Committee or the Board of Directors). During the restricted period applicable
to the restricted shares, subject to certain exceptions, the restricted shares may not be sold, transferred, pledged, hypothecated,
or otherwise disposed of by the participant.
Unrestricted Share Awards . Pursuant
to the terms of the applicable unrestricted share award agreement, a holder may be awarded (or sold) ordinary shares which are
not subject to restrictions, in consideration for past services rendered thereby to us or an affiliate or for other valid consideration.
Restricted Share Units Awards . The
Committee shall set forth in the applicable restricted share unit award agreement the individual service-based or performance-based
vesting requirement which the holder would be required to satisfy before the holder would become entitled to payment and the number
of units awarded to the Holder. Such payment shall be subject to a “substantial risk of forfeiture” under Section 409A
of the Code. At the time of such award, the Committee may, in its sole discretion, prescribe additional terms and conditions or
restrictions. The holder of a restricted share unit shall be entitled to receive a cash payment equal to the fair market value
of an ordinary share, or one (1) ordinary share, as determined in the sole discretion of the Committee and as set forth in the
restricted share unit award agreement, for each restricted share unit subject to such restricted share unit award, if and to the
extent the applicable vesting requirement is satisfied. Such payment shall be made no later than by the fifteenth (15th) day of
the third (3rd) calendar month next following the end of the calendar year in which the restricted share unit first becomes vested.
Performance Unit Awards . The Committee
shall set forth in the applicable performance unit award agreement the performance goals and objectives (and the period of time
to which such goals and objectives shall apply) which the holder and/or the Company would be required to satisfy before the holder
would become entitled to payment, the number of units awarded to the holder and the dollar value assigned to each such unit. Such
payment shall be subject to a “substantial risk of forfeiture” under Section 409A of the Code. At the time of such
award, the Committee may, in its sole discretion, prescribe additional terms and conditions or restrictions. The holder of a performance
unit shall be entitled to receive a cash payment equal to the dollar value assigned to such unit under the applicable performance
unit award agreement if the holder and/or the Company satisfy (or partially satisfy, if applicable under the applicable performance
unit award agreement) the performance goals and objectives set forth in such performance unit award agreement. If achieved, such
payment shall be made no later than by the fifteenth (15th) day of the third (3rd) calendar month next following the end of the
Company’s fiscal year to which such performance goals and objectives relate.
Performance Share Awards . The Committee
shall set forth in the applicable performance share award agreement the performance goals and objectives (and the period of time
to which such goals and objectives shall apply) which the holder and/or the Company would be required to satisfy before the holder
would become entitled to the receipt of ordinary shares pursuant to such holder’s performance share award and the number
of ordinary shares subject to such performance share award. Such payment shall be subject to a “substantial risk of forfeiture”
under Section 409A of the Code and, if such goals and objectives are achieved, the distribution of such ordinary shares shall be
made no later than by the fifteenth (15th) day of the third (3rd) calendar month next following the end of the Company’s
fiscal year to which such goals and objectives relate. At the time of such award, the Committee may, in its sole discretion, prescribe
additional terms and conditions or restrictions. The holder of a performance share award shall have no rights as a shareholder
of the Company until such time, if any, as the holder actually receives ordinary shares pursuant to the performance share award.
Distribution Equivalent Rights .
The Committee shall set forth in the applicable distribution equivalent rights award agreement the terms and conditions, if any,
including whether the holder is to receive credits currently in cash, is to have such credits reinvested (at fair market value
determined as of the date of reinvestment) in additional ordinary shares or is to be entitled to choose among such alternatives.
Such receipt shall be subject to a “substantial risk of forfeiture” under Section 409A of the Code and, if such award
becomes vested, the distribution of such cash or ordinary shares shall be made no later than by the fifteenth (15th) day of the
third (3rd) calendar month next following the end of the Company’s fiscal year in which the holder’s interest in the
award vests. Distribution equivalent rights awards may be settled in cash or in ordinary shares, as set forth in the applicable
distribution equivalent rights award agreement. A distribution equivalent rights award may, but need not be, awarded in tandem
with another award, whereby, if so awarded, such distribution equivalent rights award shall expire, terminate or be forfeited by
the holder, as applicable, under the same conditions as under such other award. The distribution equivalent rights award agreement
for a distribution equivalent rights award may provide for the crediting of interest on a distribution rights award to be settled
in cash at a future date (but in no event later than by the fifteenth (15th) day of the third (3rd) calendar month next following
the end of the Company’s fiscal year in which such interest was credited), at a rate set forth in the applicable distribution
equivalent rights award agreement, on the amount of cash payable thereunder.
Share Appreciation Rights . A SAR
provides the participant to whom it is granted the right to receive, upon its exercise, the excess of (A) the fair market value
of the number of ordinary shares subject to the SAR on the date of exercise, over (B) the product of the number of ordinary shares
subject to the SAR multiplied by the base value under the SAR, as determined by the Committee or the Board. The base value of a
SAR shall not be less than the fair market value of an ordinary share on the date of grant. If the Committee grants a share appreciation
right which is intended to be a tandem SAR, additional restrictions apply.
Recapitalization or Reorganization
. Subject to certain restrictions, the 2011 Incentive Plan provides for the adjustment of ordinary shares underlying awards previously
granted if, and whenever, prior to the expiration or distribution to the holder of ordinary shares underlying an award theretofore
granted, the Company shall effect a subdivision or consolidation of the ordinary shares or the payment of an ordinary share dividend
on ordinary shares without receipt of consideration by the Company. If the Company recapitalizes or otherwise changes its capital
structure, thereafter upon any exercise or satisfaction, as applicable, of a previously granted award, the holder shall be entitled
to receive (or entitled to purchase, if applicable) under such award, in lieu of the number of ordinary shares then covered by
such award, the number and class of shares and securities to which the holder would have been entitled pursuant to the terms of
the recapitalization if, immediately prior to such recapitalization, the holder had been the holder of record of the number of
ordinary shares then covered by such award. The 2011 Incentive Plan also provides for the adjustment of shares underlying awards
previously granted by the Board of Directors in the event of changes to the outstanding ordinary shares by reason of extraordinary
cash dividend, reorganization, mergers, consolidations, combinations, split ups, spin offs, exchanges or other relevant changes
in capitalization occurring after the date of the grant of any award, subject to certain restrictions.
Amendment and Termination . The 2011
Incentive Plan shall continue in effect, unless sooner terminated pursuant to its terms, until the tenth (10th) anniversary of
the date on which it is adopted by the Board of Directors (except as to awards outstanding on that date). The Board of Directors
may terminate the 2011 Incentive Plan at any time with respect to any shares for which awards have not theretofore been granted;
provided, however, that the 2011 Incentive Plan’s termination shall not materially and adversely impair the rights of a holder
with respect to any award theretofore granted without the consent of the holder. The Board of Directors shall have the right to
alter or amend the 2011 Incentive Plan or any part hereof from time to time; provided, however, that without the approval by a
majority of the votes cast at a meeting of shareholders at which a quorum representing a majority of the ordinary shares of the
Company entitled to vote generally in the election of directors is present in person or by proxy, no amendment or modification
of the 2011 Incentive Plan may (i) materially increase the benefits accruing to holders, (ii) except as otherwise expressly provided
in the 2011 Incentive Plan, materially increase the number of ordinary shares subject to the 2011 Incentive Plan or the individual
award agreements, (iii) materially modify the requirements for participation, or (iv) amend, modify or suspend certain repricing
prohibitions or amendment and termination provisions as specified therein. In addition, no change in any award theretofore granted
may be made which would materially and adversely impair the rights of a holder with respect to such award without the consent of
the holder (unless such change is required in order to cause the benefits under the 2011 Incentive Plan to qualify as “performance-based”
compensation within the meaning of Section 162(m) of the Code or to exempt the 2011 Incentive Plan or any Award from Section 409A
of the Code).
Certain U.S. Federal Income Tax Consequences of
the 2011 Incentive Plan
The following is a general summary of the
U.S. federal income tax consequences under current tax law to the Company, were it subject to U.S. federal income taxation on a
net income basis, and to participants under the 2011 Incentive Plan who perform services for the Company and who are individual
citizens or residents of the United States for U.S. federal income tax purposes (“U.S. participants”) of options, which
include ISOs and non-qualified share options, SARs, restricted shares, performance shares, performance units, restricted share
units, dividend equivalent rights and unrestricted shares. It does not purport to cover all of the special rules that may apply,
including special rules relating to limitations on the ability of the Company, to deduct certain compensation for U.S. federal
income tax purposes, special rules relating to deferred compensation, golden parachutes, participants subject to Section 16(b)
of the Exchange Act and the exercise of a share option with previously-acquired ordinary shares of the Company. This summary does
not address the application of the passive foreign investment company rules of the Code to U.S. participants, which are discussed
generally in Item 10.E below. In addition, this summary does not address the foreign, state or local income or other tax consequences,
or any U.S. federal non-income tax consequences, inherent in the acquisition, ownership, vesting, exercise, termination or disposition
of an award under the 2011 Incentive Plan or ordinary shares issued pursuant thereto. Participants are urged to consult their own
tax advisors concerning the tax consequences to them of an award under the 2011 Incentive Plan or ordinary shares issued pursuant
thereto.
A U.S. participant generally does not recognize
taxable income upon the grant of an option. Upon the exercise of a non-qualified share option, the participant generally recognizes
ordinary income in an amount equal to the excess, if any, of the fair market value of the ordinary shares acquired on the date
of exercise over the exercise price therefor, and the Company would be entitled to a deduction for such amount at that time. If
the U.S. participant later disposes the ordinary shares acquired under a non-qualified share option, the U.S. participant generally
recognizes a long-term or short-term gain or loss, depending upon the period for which the ordinary shares were held thereby. A
long-term capital gain generally is subject to more favorable tax treatment than ordinary income or a short-term capital gain.
The deductibility of capital losses is subject to certain limitations. Upon the exercise of an ISO, a U.S. participant generally
does not recognize taxable income. If the U.S. participant disposes of the ordinary shares acquired pursuant to the exercise of
an ISO more than two years after the date of grant and more than one year after the transfer of the shares to the U.S. participant,
the U.S. participant generally recognizes a long-term capital gain or loss, and the Company would not be entitled to a deduction.
However, if the U.S. participant disposes of such ordinary shares prior to the end of the required holding period, all or a portion
of the gain is treated as ordinary income, and the Company, generally would be entitled to deduct such amount.
In addition to the U.S. federal income tax
consequences described above, the U.S. participant may be subject to the alternative minimum tax (“AMT”), which is
payable to the extent it exceeds the U.S. participant’s regular income tax. For this purpose, upon the exercise of an ISO,
the excess of the fair market value of the ordinary shares for which the ISO is exercised over the exercise price for such ordinary
shares is a preference item for purposes of the AMT. In addition, the U.S. participant’s basis in such ordinary shares is
increased by such excess for purposes of computing the gain or loss on the disposition of the ordinary shares for AMT purposes.
If a U.S. participant is required to pay any AMT, the amount of such tax which is attributable to deferral preferences (including
any ISO adjustment) generally may be allowed as a credit against the participant’s regular income tax liability (and, in
certain cases, may be refunded to the participant) in subsequent years. To the extent the credit is not used, it may be carried
forward.
A U.S. participant who receives a grant
of restricted ordinary shares or who purchases restricted ordinary shares, which ordinary shares, in either case, are subject to
a substantial risk of forfeiture and certain transfer restrictions, generally does not recognize income on the receipt of the grant
or the purchased restricted ordinary shares and generally recognizes ordinary compensation income at the time the restrictions
lapse in an amount equal to the excess, if any, of the fair market value of the shares at such time over any amount paid by the
U.S. participant for the ordinary shares. Alternatively, the U.S. participant may elect to be taxed upon receipt of the restricted
ordinary shares based on the value of the ordinary shares at the time of receipt. The Company generally would be entitled to deduct
such amount at the same time as ordinary compensation income is required to be included by the U.S. participant and in the same
amount. Dividends received with respect to restricted ordinary shares generally are treated as compensation, unless the U.S. participant
elects to be taxed on the receipt (rather than the vesting) of the restricted ordinary shares.
A U.S. participant generally does not recognize
income upon the grant of an SAR. The U.S. participant recognizes ordinary compensation income upon the exercise of the SAR equal
to the increase in the value of the underlying ordinary shares, and the Company generally would be entitled to a deduction for
such amount.
A U.S. participant generally does not recognize
income on the receipt of a performance shares award, performance units award, restricted share units award, unrestricted shares
award, or dividend equivalent right award until a payment is received under the award. At such time, the U.S. participant recognizes
ordinary compensation income equal to the amount of any cash payments and the fair market value of any ordinary shares received,
and the Company generally would be entitled to deduct such amount at such time.
Indemnification
Cayman Islands law provides that a corporation
may indemnify its directors and officers as well as its other employees and junket agents against judgments, fines, and amounts
paid in settlement and expenses, including attorneys’ fees, in connection with various proceedings, except where there has
been fraud or dishonesty or willful neglect or willful default. Our Second Amended and Restated Memorandum and Articles of Association
provide that each member of our board of directors, officer and agent shall be indemnified out of our assets against any liability
incurred by him or her as a result of any act or failure to act in carrying out his or her functions other than such liability
(if any) that he or her may incur by his or her own fraud or willful default and that no such director, agent or officer shall
be liable to us for any loss or damage in carrying out his or her functions unless that liability arises through the fraud or willful
default of such director, officer or agent. Our Second Amended and Restated Memorandum and Articles of Association do not eliminate
any of our director’s fiduciary duties. The inclusion of the foregoing provision may, however, discourage or deter shareholders
or management from bringing a lawsuit against directors even though such an action, if successful, might otherwise have benefited
us and our shareholders. This provision, however, will not eliminate or limit liability arising under United States federal securities
laws.
Insofar as indemnification for liabilities
arising under the Securities Act of 1933, as amended (the “Securities Act”) may be permitted to directors, officers
or persons controlling the registrant pursuant to the foregoing provisions, we have been informed that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as expressed in that act and is therefore unenforceable.
It should be noted, however, that the opinion of the SEC is not binding on courts and courts, particularly those of jurisdictions
other than the United States, may determine otherwise.
We have entered into indemnification agreements
separately with each of our current directors and officers that provide, in consideration of the director or officer continuing
to serve us in his current capacity, for us to indemnify, and advance expenses to, him or her to the fullest extent permitted by
law in effect on the date of execution of the agreements or to such greater extent as applicable law may thereafter permit. The
rights of indemnification apply if, by reason of such person’s position as an officer or director of us or any of our subsidiaries,
he or she was or is threatened to be made, a party to any threatened, pending or completed legal proceeding. With respect to proceedings
other than one brought by or in our right ( i.e., a shareholders’ derivative proceeding), the indemnification covers
expenses, judgments, penalties, fines and amounts paid in settlement actually and reasonably incurred by the indemnified person
or on his or her behalf in connection with any such proceeding or any claim, issue or matter therein, if he or she acted in good
faith and in a manner he or she reasonably believed to be in or not opposed to our best interests, and, with respect to any criminal
proceeding, had no reasonable cause to believe his or her conduct was unlawful. With respect to proceedings brought by or in our
right, the indemnification covers expenses and amounts paid in settlement (such settlement amounts not to exceed, in the judgment
of our board of directors, the estimated expense of litigating the proceeding to conclusion) actually and reasonably incurred by
him or her or on his or her behalf in connection with any such proceeding if he or she acted in good faith and in a manner he or
she reasonably believed to be in or not opposed to our best interests. However, no indemnification against such expenses or amounts
paid in settlement shall be made in respect of any claim, issue or matter in any such proceeding as to which indemnified person
has been adjudged to be liable to us if applicable law prohibits such indemnification unless the court in which such proceeding
shall have been brought, was brought or is pending, shall determine that indemnification against expenses or amounts paid in settlement
may nevertheless be made by us. We will advance an indemnified person reasonable and substantiated expenses, judgments, penalties
and fines and amounts paid in settlement in advance of a final determination of liability upon such person agreeing to repay amounts
advanced in the event of an ultimate determination that he or she is not entitled to be indemnified with respect to the amounts
advanced. The rights of the indemnitees under the agreements are not deemed exclusive of any other rights they may be entitled
to under applicable law, our memorandum and articles of association, any agreement, vote of shareholders or resolution of directors
or otherwise. Each agreement will remain in effect until the later of ten years after the date the indemnitee shall have ceased
to serve as a director or officer or the final determination of all pending proceedings.
Term of Office and Benefits
Our board of directors is divided into three
classes, each of which serves a term of three years, with only one class of directors being elected in each year. Please refer
to the disclosure under Item 6.A. herein for further information about the term of our directors.
Board Operations
The positions of principal executive officer
and chairman of the Board of Directors are held by different persons. The chairman of the Board of Directors chairs Board of Director
and shareholder meetings and participates in preparing their agendas.
The Board of Directors is responsible for
overall supervision of our risk oversight efforts as they relate to the key business risks facing the organization. Management
identifies, assesses, and manages the risks most critical to the Company’s operations on a day-to-day basis and routinely
advises the Board of Directors on those matters as the CEO and CFO have access to the Board of Directors, attend regular meetings
as well as the audit committee meetings. The Board’s role in risk oversight is consistent with our leadership structure,
with senior management having responsibility for assessing and managing our risk exposure, and the Board and its Committees, providing
oversight as necessary in connection with those efforts.
Independence of Directors
Messrs. James Preissler, João Manuel
Santos Ferreira, Yeung Lun Allan, Peter Li and George Chui Vai Hou, who constitute a majority of our board of directors, meet the
standards for independence that are required by the Nasdaq Stock Market. The Nasdaq Stock Market’s listing standards define
an “independent director” generally as a person, other than an officer of a company, who does not have a relationship
with the company that would interfere with the director’s exercise of independent judgment.
Code of Ethics
In August 2008, our board of directors adopted
a code of ethics that applies to our directors, officers and employees as well as those of our subsidiaries and is described in
the section of this Annual Report entitled “ Code of Ethics and Related Person Policy “ under Item 7.B. herein.
Copies of the code of ethics are available free of charge upon request. Requests for copies of the code of ethics should be sent
in writing to Iao Kun Group Holding Company Limited, Unit 605, East Town Building, 16 Fenwick Street, Wanchai, Hong Kong.
Committee Information
Audit Committee
On March 10, 2010, the Board of Directors
formed the Audit Committee and adopted a written charter. The Audit Committee is established in accordance with Section 3(a)(58)(A)
of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). James R. Preissler (Chairman), Yeung Lun Allan
and George Chui Vai Hou currently serve on this committee. So that we meet the Nasdaq Stock Exchange and other stock exchange listing
requirements, the audit committee will now at all times be composed exclusively of “independent directors” who are
“financially literate” as defined under the Nasdaq Stock Exchange listing standards. The definition of “financially
literate” generally means being able to read and understand fundamental financial statements, including a company’s
balance sheet, income statement and cash flow statement. Messrs. Preissler, Yeung and Chui meet the standards for independence
and financial literacy that are required by the Nasdaq Stock Market and other exchanges and Mr. Preissler also meets the standards
for an “Audit Committee Financial Expert” required by SEC rules and current stock exchange listing standards.
The audit committee’s duties, which
are specified in our audit committee charter, include, but are not limited to:
| · | reviewing and discussing with management and the independent auditor the annual audited financial statements, and recommending
to the board whether the audited financial statements should be included in our Annual Report on Form 20-F; |
| · | discussing with management and the independent auditor significant financial reporting issues and judgments made in connection
with the preparation of our financial statements; |
| · | discussing with management major risk assessment and risk management policies; |
| · | monitoring the independence of the independent auditor; |
| · | verifying the rotation of the lead (or coordinating) audit partner having primary responsibility for the audit and the audit
partner responsible for reviewing the audit as required by law; |
| · | inquiring and discussing with management our compliance with applicable laws and regulations; |
| · | pre-approving all audit services and permitted non-audit services to be performed by our independent auditor, including the
fees and terms of the services to be performed; |
| · | appointing or replacing our independent auditor; |
| · | determining the compensation and oversight of the work of our independent auditor (including resolution of disagreements between
management and the independent auditor regarding financial reporting) for the purpose of preparing or issuing an audit report or
related work; |
| · | establishing procedures for the receipt, retention and treatment of complaints received by us regarding accounting, internal
accounting controls or reports which raise material issues regarding our financial statements or accounting policies; and |
| · | reviewing and approving any related party transactions we may enter into. The audit committee will consider all relevant factors
when determining whether to approve a related party transaction, including whether the related party transaction is on terms no
less favorable than terms generally available to an unaffiliated third-party under the same or similar circumstances and the extent
of the related party’s interest in the transaction. |
Nominating Committee
On April 7, 2010, the Board of Directors
formed the Nominating Committee and adopted a written charter. Manuel Santos Ferreira (Chairman), George Chui Vai Hou and Peter
Li, each of whom is independent as defined in Rule 5605(a)(2) of the Nasdaq Listing Rules, currently serve on this committee. The
nominating committee is responsible for overseeing the selection of persons to be nominated to serve on our board of directors.
The nominating committee considers persons identified by its members, management, shareholders and others. The guidelines for selecting
nominees, which are specified in the nominating committee charter, generally provide that persons to be nominated:
| · | should have demonstrated notable or significant achievements in business, education or public service; |
| · | should possess the requisite intelligence, education and experience to make a significant contribution to the board of directors
and bring a range of skills, diverse perspectives and backgrounds to its deliberations; and |
| · | should have the highest ethical standards, a strong sense of professionalism and intense dedication to serving the interests
of the shareholders. |
The nominating committee will consider a
number of qualifications relating to management and leadership experience, background and integrity and professionalism in evaluating
a person’s candidacy for membership on the board of directors. The nominating committee may require certain skills or attributes,
such as financial or accounting experience, to meet specific board needs that arise from time to time. The nominating committee
does not distinguish among nominees recommended by shareholders and other persons. The procedures by which security holders may
recommend nominees to our board of directors have not been changed by the formation of the nominating committee.
Compensation Committee
On April 7, 2010, the Board of Directors
formed a Compensation Committee and adopted a written charter. Peter Li (Chairman), Manuel Santos Ferreira, and Yeung Lun Allan,
each of whom is independent as defined in Rule 5605(a)(2) of the Listing Rules, currently serve on this committee. The charter
sets forth responsibilities, authority and specific duties of the Compensation Committee. The principal functions of the compensation
committee are to evaluate the performance of our officers, to review any compensation payable to our directors and officers, to
prepare compensation committee reports, and to administer the issuance of any common stock or other equity awards issued to our
officers and directors.
The table below provides information as
to the total number of employees at the end of the last three fiscal years. We have no contracts or collective bargaining agreements
with labor unions and have never experienced work stoppages. We consider our relations with our employees to be good. The majority
of our employees are located in Macau. The significant increase in the number of employees is because we directly hired certain
key personnel in our VIP rooms from Pak Si (defined below).
| | |
2012 | | |
2013 | | |
2014 | |
| Number of Employees | |
| 17 | | |
| 53 | | |
| 76 | |
Part of the day-to-day management and operation of the VIP gaming
rooms is contracted by the VIP gaming promoter to a management company that is responsible for hiring and managing certain staff
needed for the operation. This includes local managers and executives to provide supervision, finance and cage personnel, public
relations, drivers and other service staff (waiters, cleaners, etc.). The VIP gaming promoters have entered into such agreements
with Pak Si Management and Consultancy Limited (“Pak Si”), owned by Ms. Tam Lai Ching, Mr. Vong’s sister-in-law.
Pak Si must pay all salaries, benefits and other expenses of operation out of such amounts. Such agreements are for one-year terms.
See Item 7, below.
| Item 7. | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS |
The following table sets forth information
regarding the beneficial ownership of our ordinary shares as of March 27, 2015 by:
| · | each person known by us to be the beneficial owner of more than 5% of our outstanding ordinary shares; |
| · | each of our current executive officers and directors; and |
| · | all of our current executive officers and directors as a group. |
Unless otherwise indicated, we believe that
all persons named in the table have sole voting and investment power with respect to all ordinary shares beneficially owned by
them. Our major shareholders do not have different voting rights than our non-majority shareholders. Percentages of ownership are
based on 60,452,314 ordinary shares outstanding as of March 27, 2015. Ordinary shares which an individual or group has a right
to acquire within 60 days pursuant to the exercise or conversion of options, warrants or other convertible securities are deemed
to be outstanding for the purpose of computing the percentage ownership of such individual or group, but are not deemed to be outstanding
for the purpose of computing the percentage ownership of any other person shown in the table.
| Name and Address of
Beneficial Owner | |
Amount
and Nature
of
Beneficial
Ownership | | |
Percent of
Class | |
| Sylvia Lee(1) | |
| 2,434,566 | (2) | |
| 4.0 | % |
| Vong Hon Kun(3) | |
| 8,386,122 | | |
| 13.9 | % |
| Lam Chou In(3) | |
| 6,771,875 | | |
| 11.2 | % |
| Lam Man Pou(3) | |
| 6,513,265 | | |
| 10.8 | % |
| Chui Vai Hou, George(3) | |
| 12,140 | | |
| * | |
| James R. Preissler(4) | |
| 228,197 | | |
| * | |
| Leong Siak Hung(5) | |
| 1,321,757 | | |
| 2.2 | % |
| Li Chun Ming, Raymond(3) | |
| 20,825 | | |
| * | |
| Peter Li | |
| 183,413 | | |
| * | |
| Joao Manuel Santos Ferreira(3) | |
| 17,304 | | |
| * | |
| Yeung Lun, Allan(3) | |
| 17,304 | | |
| * | |
| | |
| | | |
| | |
| All of our directors and
executive officers as a group (10 individuals) | |
| 19,134,893 | | |
| 31.7 | % |
| | |
| | | |
| | |
| All of our directors, executive
officers and 5% stockholders who are our employees as a group. | |
| 25,906,768 | | |
| 42.9 | % |
| (1) | The business address of Mrs. Lee is 4100 N.E. Second Avenue, Suite 318, Miami, Florida 33137. |
| (2) | Represents 115,849 ordinary shares owned jointly by Mrs. Lee and her husband, 20,825 ordinary shares owned by Mrs. Lee and
2,297,892 ordinary shares held by CS Capital USA, LLC, an affiliate of Mrs. Lee and her husband. |
| (3) | Each of these persons maintains a business address at 605 East Town Building, 16 Fenwick Street, Wanchai, Hong Kong. |
| (4) | The business address of James R. Preissler is 50 Old Route 25A, Fort Salonga, NY 11768. |
| (5) | 1,300,932 of such shares are held by Legend Global International Limited, of which Leong Siak Hung, director, has sole voting
and dispositive power over the shares owned by it, which shares constitute all of the shares beneficially owned by Mr. Leong. The
business address of Legend Global International Limited is Flat G, 37/F, Block 3, Island Harbourview, Tai Kok Tsui, Kowloon, Hong
Kong. |
As of March 27, 2015, we believe that
11 holders of record of approximately 43.5% of our outstanding ordinary shares reside in the United States.
| B. | Related Party Transactions |
Code of Ethics and Related Person Policy
Our Code of Ethics requires us to avoid,
wherever possible, all related party transactions that could result in actual or potential conflicts of interest, except under
guidelines approved by the board of directors (or the audit committee, if one exists at the time). Related-party transactions are
defined as transactions in which (1) the aggregate amount involved will or may be expected to exceed $120,000 in any calendar year,
(2) we or any of our subsidiaries is a participant, and (3) any (a) executive officer, director or nominee for election as a director,
(b) greater than 5 percent beneficial owner of our ordinary shares, or (c) immediate family member, of the persons referred to
in clauses (a) and (b), has or will have a direct or indirect material interest (other than solely as a result of being a director
or a less than 10 percent beneficial owner of another entity). A conflict of interest situation can arise when a person takes actions
or has interests that may make it difficult to perform his or her work objectively and effectively. Conflicts of interest may also
arise if a person, or a member of his or her family, receives improper personal benefits as a result of his or her position. We
are not prohibited from entering into related-party transactions with our directors and officers.
Our board of directors is responsible for
reviewing and approving related-party transactions to the extent we enter into such transactions. The board of directors will consider
all relevant factors when determining whether to approve a related party transaction, including whether the related party transaction
is on terms no less favorable than terms generally available to an unaffiliated third-party under the same or similar circumstances
and the extent of the related party’s interest in the transaction. No director may participate in the approval of any transaction
in which he is a related party, but that director is required to provide the other members of the board of directors with all material
information concerning the transaction. Additionally, we require each of our directors and executive officers to complete a directors’
and officers’ questionnaire that elicits information about related party transactions. These procedures are intended to determine
whether any such related party transaction impairs the independence of a director or presents a conflict of interest on the part
of a director, employee or officer.
Related Person Transactions of the Company
Because IKGH and its subsidiaries are not
able to directly operate as VIP gaming promoters, IKGH’s management has technical ownership of IKGH’s VIP gaming promoters,
but each such VIP gaming promoter has entered into an agreement with a subsidiary of IKGH providing that 100% of the profits of
each VIP gaming promoter be paid to a subsidiary of IKGH. None of the members of IKGH’s management team receive compensation
for being the owners of IKGH’s VIP gaming promoters. The following table shows the relationships of IKGH’s management
team to its Promotion Entities:
|
Entity Name |
|
Management Team Member Owning
Entity |
| Sang Heng |
|
Lam Man Pou, Vong Hon Kun and Leong Siak Hung |
| Doowell Limited |
|
Lam Man Pou, Vong Hon Kun and Leong Siak Hung |
| Iao Pou |
|
Lam Chou In |
| King’s Gaming |
|
Mok Chi Hung |
| Sang Lung |
|
Lam Man Pou and Vong Hon Kun |
| Bao Li |
|
Lou Kan Kuong and Lei Kam Keong |
| Oriental |
|
Lam Chou In and Vong Veng Im |
The following is a summary of related party
transaction and balances as of and for the years ended December 31, 2014, 2013 and 2012:
| | |
2014 | | |
2013 | | |
2012 | |
| | |
| | |
| | |
| |
| Loans payable to Mr. Lam Man Pou and Mr. Vong Hon Kun | |
$ | 2,612,490 | | |
$ | 5,809,075 | | |
$ | 62,214,078 | |
| | |
| | | |
| | | |
| | |
| Loan payments made to Mr. Lam Man Pou and Mr. Vong Hon Kun in cash | |
$ | 3,196,222 | | |
$ | 25,802,070 | | |
$ | 671,071 | |
| | |
| | | |
| | | |
| | |
| Contingent consideration payable to Mr. Mok Chi Hung | |
$ | - | | |
$ | 9,000,000 | | |
$ | 18,000,000 | |
| | |
| | | |
| | | |
| | |
| Contingent consideration paid to Mr. Mok Chi Hung in cash | |
$ | 9,000,000 | | |
$ | 9,000,000 | | |
$ | 9,000,000 | |
| | |
| | | |
| | | |
| | |
| Contingent consideration payable to Mr. Lou Kan Kuong and Mr. Lei Kam Keong | |
$ | 42,291,631 | | |
$ | 33,027,050 | | |
$ | 32,294,981 | |
| | |
| | | |
| | | |
| | |
| Contingent consideration paid to Mr. Lou Kan Kuong and Mr. Lei Kam Keong | |
$ | 13,000,000 | | |
$ | 13,000,000 | | |
$ | 15,146,032 | |
| | |
| | | |
| | | |
| | |
| Contingent consideration payable to Mr. Vong Veng Im | |
$ | 41,404,026 | | |
$ | 36,528,269 | | |
$ | - | |
| | |
| | | |
| | | |
| | |
| Contingent consideration paid to Mr. Vong Veng Im | |
$ | 26,000,000 | | |
$ | 20,000,000 | | |
$ | - | |
| | |
| | | |
| | | |
| | |
| Payable to Pak Si for management services | |
$ | 573,897 | | |
$ | 619,042 | | |
$ | 567,684 | |
| | |
| | | |
| | | |
| | |
| Total expense for Pak Si for management services | |
$ | 7,156,950 | | |
$ | 6,807,018 | | |
$ | 5,966,147 | |
| | |
| | | |
| | | |
| | |
| Entertainment expense paid to restaurant owned by Mr. Lam Man Pou, Mr. Vong Hon Kun and Mr. Leong Siak Hung | |
$ | 727,298 | | |
$ | 779,224 | | |
$ | - | |
Star World Hotel and Casino has extended
a credit line of $27.2 million to Sang Heng which is guaranteed by Mr. Lam. Galaxy Macau Resort has extended a credit line of $25.6
million to Sang Lung which is guaranteed by Mr. Lam. These credit lines are used to advance funds to VIP gaming patrons so that
the VIP gaming patrons can purchase non-negotiable chips on credit at the Iao Kun VIP Rooms operated by Sang Heng at the Star World
Hotel and Casino and by Sang Lung at the Galaxy Macau Resort. The credit lines are non-interest bearing, and Mr. Lam is not compensated
by AGRL for the guarantee.
The Sands Cotai Central has extended a credit
line of $3.85 million to King’s Gaming, which is guaranteed by Mr. Vong and Mr. Mok. The credit line is used to advance funds
to VIP gaming patrons so that theVIP gaming patrons can purchase non-negotiable chips on credit at the Wenzhou VIP gaming room
promoted by King’s Gaming at the Venetian Resort Hotel. The credit line is non-interest bearing and Mr. Vong and Mr. Mok
are not compensated by AGRL for the guarantees.
From time to time, Mr. Lam and Mr. Vong
Hon Kun make small loans to AGRL for operational purposes. Such loans do not bear interest and Mr. Lam is not otherwise compensated
for making such loans.
City of Dreams Hotel & Casino has extended
a credit line of $3.9 million to Bao Li Gaming, which is guaranteed by Mr. Lou. The credit line is used to advance funds to VIP
gaming patrons so that the VIP gaming patrons can purchase non-negotiable chips on credit at the VIP gaming room promoted by Bao
Li Gaming at City of Dreams Hotel & Casino. The credit line is non-interest bearing and Mr. Lou is not compensated by AGRL
for the guarantee.
Messrs. Lam and Vong have agreed to extend
credit to AGRL to lend funds to its VIP gaming promoters so that they in turn can extend credit to their VIP gaming patrons. Such
loans by Messrs. Lam and Vong are non-interest bearing. See the section entitled “AGRL’s Gaming Operations—Profit
Interest Agreements” under Item 4.B. herein for further information regarding these arrangements.
Part of day-to-day management and operation
of the VIP gaming rooms is contracted by the VIP gaming promoter to a management company that is responsible for hiring and managing
staff needed for the operation. This includes local managers and executives to provide supervision, finance and cage personnel,
public relations, drivers and other service staff (waiters, cleaners, etc.). The VIP Gaming Entities have entered into such agreements
with Pak Si Management and Consultancy Limited (“Pak Si”), owned by Ms. Tam Lai Ching, Mr. Vong’s sister-in-law.
Such agreements are for one-year terms. Effective July 1, 2014, the monthly payments were revised for Sang Heng and Sang Lung from
US$155,000 to approximately $142,000 each; and Bao Li, King’s Gaming and the Oriental VIP Room from US$103,000 to approximately
$97,000 each. Effective January 1, 2015, the monthly payments were revised for Sang Heng and Sang Lung from $142,000 to $103,000
each, and Bao Li, King’s Gaming and the Oriental VIP Room were revised from $97,000 to $65,000 each.
| C. | Interests of Experts and Counsel |
Not required.
| Item 8. | FINANCIAL INFORMATION |
| A. | Consolidated Statements and Other Financial Information. |
See Item 18.
None
| Item 9. | THE OFFER AND LISTING |
| A. | Offer and Listing Details |
The following table sets forth the range
of high and low closing bid prices for the ordinary shares and warrants for the periods indicated since the ordinary shares and
warrants commenced separate public trading on September 5, 2008. It also sets forth the range of high and low closing bid prices
for our units (each consisting of one ordinary share and two warrants; symbol: CSACF) for such periods until the units were separated
into their component shares and warrants and ceased trading separately on February 19, 2010. The over-the-counter market quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily reflect actual transactions.
Our unexercised warrants were redeemed for cash at the redemption price of $0.01 on October 28, 2010. Accordingly,
there are currently no warrants outstanding. Our ordinary shares currently trade on the Nasdaq Stock Market.
| | |
Ordinary Shares | | |
Warrants | | |
Units | |
| | |
High $ | | |
Low $ | | |
High $ | | |
Low $ | | |
High $ | | |
Low $ | |
| Annual Highs and Lows | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| 2015* | |
| 1.76 | | |
| 1.08 | | |
| — | | |
| — | | |
| — | | |
| — | |
| 2014 | |
| 3.51 | | |
| 1.22 | | |
| — | | |
| — | | |
| — | | |
| — | |
| 2013 | |
| 4.68 | | |
| 2.78 | | |
| — | | |
| — | | |
| — | | |
| — | |
| 2012 | |
| 6.56 | | |
| 2.30 | | |
| — | | |
| — | | |
| — | | |
| — | |
| 2011 | |
| 10.87 | | |
| 4.60 | | |
| — | | |
| — | | |
| — | | |
| — | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Quarterly Highs and Lows | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| 2015 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| First Quarter | |
| 1.76 | | |
| 1.08 | | |
| — | | |
| — | | |
| — | | |
| — | |
| Second Quarter* | |
| 1.70 | | |
| 1.55 | | |
| — | | |
| — | | |
| — | | |
| — | |
| 2014 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| First Quarter | |
| 3.51 | | |
| 2.60 | | |
| — | | |
| — | | |
| — | | |
| — | |
| Second Quarter | |
| 3.49 | | |
| 2.93 | | |
| — | | |
| — | | |
| — | | |
| — | |
| Third Quarter | |
| 3.26 | | |
| 2.30 | | |
| — | | |
| — | | |
| — | | |
| — | |
| Fourth Quarter | |
| 2.29 | | |
| 1.22 | | |
| — | | |
| — | | |
| — | | |
| — | |
| 2013 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| First Quarter | |
| 4.77 | | |
| 3.19 | | |
| — | | |
| — | | |
| — | | |
| — | |
| Second Quarter | |
| 5.09 | | |
| 3.42 | | |
| — | | |
| — | | |
| — | | |
| — | |
| Third Quarter | |
| 4.25 | | |
| 3.77 | | |
| — | | |
| — | | |
| — | | |
| — | |
| Fourth Quarter | |
| 3.96 | | |
| 2.78 | | |
| — | | |
| — | | |
| — | | |
| — | |
| Monthly Highs and Lows | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| March 2015 | |
| 1.76 | | |
| 1.50 | | |
| — | | |
| — | | |
| — | | |
| — | |
| February 2015 | |
| 1.43 | | |
| 1.10 | | |
| — | | |
| — | | |
| — | | |
| — | |
| January 2015 | |
| 1.26 | | |
| 1.08 | | |
| — | | |
| — | | |
| — | | |
| — | |
| December 2014 | |
| 1.72 | | |
| 1.22 | | |
| — | | |
| — | | |
| — | | |
| — | |
| November 2014 | |
| 2.07 | | |
| 1.86 | | |
| — | | |
| — | | |
| — | | |
| — | |
| October 2014 | |
| 2.29 | | |
| 1.88 | | |
| — | | |
| — | | |
| — | | |
| — | |
| September 2014 | |
| 3.01 | | |
| 2.30 | | |
| — | | |
| — | | |
| — | | |
| — | |
* Through April 10, 2015
The closing bid price for our ordinary shares
on March 31, 2015 was $1.66.
Holders of ordinary shares should obtain
current market quotations for their securities. The market price of the ordinary shares could vary at any time.
Not Applicable.
Our ordinary shares have traded on the Nasdaq
Stock Market since July 3, 2010. From July 3, 2010 until October 2, 2013, they traded under the symbol AERL. Since October 2, 2013,
they have traded under the symbol IKGH. Our warrants traded on the NASDAQ Stock Market under the symbol AERLW from July 3, 2010
until October 28, 2010, when they ceased trading. From February 22, 2010 until July 2, 2010, the ordinary shares and warrants traded
on the OTC Bulletin Board under the symbols AERCF and AERLF, respectively. Prior to February 22, 2010, the ordinary shares and
the warrants traded under the symbols CSAQF and CSAXF, respectively.
Not Applicable.
Not Applicable.
Not Applicable.
| Item 10. | ADDITIONAL INFORMATION |
Not Applicable.
| B. | Memorandum and Articles of Association |
The information required by Item 10.B. of
Form 20-F is included in the section titled “Description of Securities—Memorandum and Article of Association”
in our Post-Effective Amendment on Form F-3 to Registration Statement on Form F-1 initially filed with the SEC on October 20, 2010,
as amended (File No. 333-166860), which section is incorporated herein by reference.
Our only long term liabilities are the management
agreements between IKGH’s Promotion Entities and Pak Si Management and Consultancy Limited of Macau, pursuant to which that
company is responsible for the hiring and management of staff at the VIP gaming rooms promoted by the VIP gaming promoters in Macau.
Each of the management agreements is for a one-year term, subject to renewal. The total obligations of IKGH’s Promotion Entities
for year 2015 are approximately US $4,797,000. See the section entitled “IKGH’s Gaming Operations” under Item
4.B. herein.
On October 6, 2009, we entered into a Stock
Purchase Agreement with AGRL and Spring Fortune, a British Virgin Islands company, that provided for the purchase by us from Spring
Fortune of all of the outstanding capital stock of AGRL. The Purchase Agreement was subsequently amended on November 10, 2009,
December 9, 2009, January 11, 2010 and April 18, 2011. For further details about such agreement, please refer to the section titled
“The Acquisition” under Item 4.A. herein.
On November 15, 2010, we consummated the
transactions contemplated by that certain Profit Interest Purchase Agreement dated as of November 10, 2010 among us, King’s
Gaming, Mr. Mok Chi Hung and Mr. Wong Hon Meng, pursuant to which we acquired 100% of the profit interest in King’s Gaming.
For further details about such agreement, please refer to the section titled “Acquisition of King’s Gaming Promotion
Limited” under Item 4.A. herein.
On September 12, 2012, we consummated the
transactions contemplated by that certain Profit Interest Purchase Agreement dated as of September 12, 2012, among us, Bao Li Gaming,
Mr. Lou Kan Kuong and Mr. Lei Kam Keong, pursuant to which we acquired 100% of the profit interest in Bao Li Gaming. For further
details about such agreement, please refer to the section titled “Acquisition of Bao Li Gaming Promotion Limited” under
Item 4.A. herein.
On June 26, 2013, we entered into a profit
interest purchase agreement (the “Oriental VIP Room Purchase Agreement”) among us, as purchaser, Mr. Vong Veng Im,
as seller, and Frontier Champion Limited, our wholly owned subsidiary, whereby we agreed to acquire, and Mr. Vong Veng Im agreed
to dispose of, the right, title, interest and benefit in and to 100% of the net operating profit generated by Oriental VIP Room
at the VIP gaming room located at level 1 of the Le Royal Arc Casino located in NAPE, Downtown Macau, pursuant to a separate profit
interest agreement entered into between Frontier Champion and Mr. Vong Veng Im (the “Oriental VIP Room Profit Interest”).
We closed the transactions contemplated by the Oriental VIP Room Purchase Agreement on June 26, 2013. For further details about
such agreement, please refer to the section titled “Acquisition of Oriental VIP Room” under Item 4.A. herein.
On June 4, 2013, the Company entered into
a Dealer Manager Agreement (the “Dealer Manager Agreement”) with Sterne, Agree & Leach, Inc. (“Sterne Agee”)
pursuant to which Sterne Agee acted as exclusive dealer manager in connection with the our Rights Offering. Pursuant to the Dealer
Manager Agreement, we agreed to pay Sterne Agee a fee equal to 2.5% of the gross proceeds received in connection with the Rights
Offering and the standby purchase, as described below, upon successful completion of the Rights Offering, and to reimburse Sterne
Agee for its out-of-pocket expenses incurred in connection with the Rights Offering whether or not the Rights Offering is completed.
In connection with the Rights Offering,
the Company also entered into a standby purchase agreement (the “Standby Purchase Agreement”), dated as of June 4,
2013, with certain persons, including Lam Man Pou, the Company’s chairman, Vong Hon Kun, the Company’s chief operating
officer, Lam Chou In, Zheng An Ting, So Kam Tai, Au Chun Yin, Chan Fok Hoi, Chan Kai Ian, Sin Kam Chan, Leong Wai Meng and Cheung
Mee Mo (the “Standby Purchasers”), whereby the Standby Purchasers agreed to purchase a number of ordinary shares having
a value equal to the aggregate subscription price we would have received with respect to the shares underlying all rights not exercised
by all holders in the rights offering, referred to as the standby purchase, upon the same terms as the other holders, except the
subscription price for 34% of such shares with respect to purchases made by Messrs. Lam Man Pou and Vong Hon Kun was $4.50 per
share. On June 21, 2013, the closing date of the offering, a total of 19,527,950 ordinary shares were issued. The Company incurred
offering costs of $2,067,809.
The parties to the Standby Purchase Agreement
also entered into a Registration Rights Agreement (the “Registration Rights Agreement”) dated as of June 4, 2013, whereby
the Company granted demand and piggyback registration rights to the Standby Purchasers.
Messrs. Lam and Vong have agreed to extend
credit to AGRL to lend funds to its VIP gaming promoters so that they in turn can extend credit to their VIP gaming patrons. Such
loans by Messrs. Lam and Vong are non-interest bearing. See the section entitled “IKGH’s Gaming Operations—Profit
Interest Agreements” under Item 4.B. herein for further information regarding these arrangements.
There is no exchange control legislation
under Cayman Islands law and accordingly there are no exchange control regulations imposed under Cayman Islands law.
The following summary sets forth the material
Cayman Islands and U.S. federal income tax consequences of the acquisition, ownership and disposition of our ordinary shares covered
by this Annual Report, based upon laws and relevant interpretations thereof in effect as of the date of this Annual Report, all
of which are subject to change. This summary does not deal with all possible tax consequences relating to an investment in our
ordinary shares, such as the tax consequences under state, local and other tax laws. As used in this discussion, references to
“we,” “our,” “us,” or “the company” refer only to Iao Kun Group Holding Company
Limited.
Cayman Islands Taxation
The government of the Cayman Islands will
not, under existing legislation, impose any income, corporate or capital gains tax, estate duty, inheritance tax, gift tax or withholding
tax upon the company or its shareholders. The Cayman Islands are not party to any double taxation treaties that are applicable
to payments made to or by us.
No Cayman Islands stamp duty will be payable
by you in respect of the issue or transfer of shares. However, an instrument transferring title to a share, if brought to or executed
in the Cayman Islands, would be subject to Cayman Islands stamp duty.
We have received an undertaking from the
Governor-in-Cabinet of the Cayman Islands that, in accordance with section 6 of the Tax Concessions Law (Revised) of the Cayman
Islands, for a period of 20 years from the date of the undertaking, no law which is enacted in the Cayman Islands imposing any
tax to be levied on profits, income, gains or appreciations shall apply to us or our operations and, in addition, that no tax to
be levied on profits, income, gains or appreciations or which is in the nature of estate duty or inheritance tax shall be payable
(i) on or in respect of the shares, debentures or other obligations, of the company or (ii) by way of the withholding in whole
or in part of a payment of a dividend or other distribution of income or capital by the company to its shareholders or a payment
of principal or interest or other sums due under a debenture or other obligation of the company.
United States Federal Income Taxation
General
The following is a summary of the material
U.S. federal income tax consequences of the acquisition, ownership and disposition of our ordinary shares. The discussion below
of the U.S. federal income tax consequences to “U.S. Holders” will apply to a beneficial owner of our ordinary shares
that is for U.S. federal income tax purposes:
| · | an individual citizen or resident of the United States; |
| · | a corporation (or other entity treated as a corporation) that is created or organized (or treated as created or organized)
in or under the laws of the United States, any state thereof or the District of Columbia; |
| · | an estate whose income is includible in gross income for U.S. federal income tax purposes regardless of its source; or |
| · | a trust if (i) a U.S. court can exercise primary supervision over the trust’s administration and one or more U.S. persons
are authorized to control all substantial decisions of the trust, or (ii) it has a valid election in effect under applicable U.S.
Treasury regulations to be treated as a U.S. person. |
A beneficial owner of our ordinary shares
that is described above is referred to herein as a “U.S. Holder.” If a beneficial owner of our ordinary shares is not
described as a U.S. Holder and is not an entity treated as a partnership or other pass-through entity for U.S. federal income tax
purposes, such owner will be considered a “Non-U.S. Holder.” The material U.S. federal income tax consequences applicable
specifically to Non-U.S. Holders are described below under the heading “Non-U.S. Holders.”
This summary is based on the Internal Revenue
Code of 1986, as amended (the “Code”), its legislative history, Treasury regulations promulgated thereunder, published
rulings and court decisions, all as currently in effect. These authorities are subject to change or differing interpretations,
possibly on a retroactive basis.
This discussion does not address all aspects
of U.S. federal income taxation that may be relevant to any particular holder based on such holder’s individual circumstances.
In particular, this discussion considers only holders that own and hold our ordinary shares as capital assets within the meaning
of Section 1221 of the Code, and does not discuss the potential application of the alternative minimum tax or the U.S. federal
income tax consequences to holders that are subject to special rules, including:
| · | financial institutions or financial services entities; |
| · | persons that are subject to the mark-to-market accounting rules under Section 475 of the Code; |
| · | governments or agencies or instrumentalities thereof; |
| · | regulated investment companies; |
| · | real estate investment trusts; |
| · | certain expatriates or former long-term residents of the United States; |
| · | persons that actually or constructively own 5% or more of our voting shares; |
| · | persons that acquired our ordinary shares pursuant to an exercise of employee options, in connection with employee incentive
plans or otherwise as compensation; |
| · | persons that hold our ordinary shares as part of a straddle, constructive sale, hedging, conversion or other integrated transaction; |
| · | persons whose functional currency is not the U.S. dollar; |
| · | controlled foreign corporations; or |
| · | passive foreign investment companies. |
This discussion does not address any aspect
of U.S. federal non-income tax laws, such as gift or estate tax laws, or state, local or non-U.S. tax laws or, except as discussed
herein, any tax reporting obligations applicable to a holder of our ordinary shares. Additionally, this discussion does not consider
the tax treatment of partnerships or other pass-through entities or persons who hold our ordinary shares through such entities.
If a partnership (or other entity classified as a partnership for U.S. federal income tax purposes) is the beneficial owner of
our ordinary shares, the U.S. federal income tax treatment of a partner in the partnership generally will depend on the status
of the partner and the activities of the partnership. This discussion also assumes that any distribution made (or deemed made)
in respect of our ordinary shares and any consideration received (or deemed received) by a holder in connection with the sale or
other disposition of such ordinary shares will be in U.S. dollars.
We have not sought, and will not seek, a
ruling from the Internal Revenue Service (“IRS”) or an opinion of counsel as to any U.S. federal income tax consequence
described herein. The IRS may disagree with the description herein, and its determination may be upheld by a court. Moreover, there
can be no assurance that future legislation, regulations, administrative rulings or court decisions will not adversely affect the
accuracy of the statements in this discussion.
THIS DISCUSSION IS ONLY A SUMMARY OF
THE MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF OUR ORDINARY SHARES. IT IS NOT
TAX ADVICE. EACH HOLDER OF OUR ORDINARY SHARES IS URGED TO CONSULT ITS OWN TAX ADVISOR IN RESPECT TO THE PARTICULAR TAX CONSEQUENCES
TO SUCH HOLDER OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF OUR ORDINARY SHARES, INCLUDING THE APPLICABILITY AND EFFECT OF
ANY STATE, LOCAL, AND NON-U.S. TAX LAWS, AS WELL AS U.S. FEDERAL TAX LAWS AND ANY APPLICABLE TAX TREATIES.
U.S. Holders
Taxation of Cash Distributions Paid on
Ordinary Shares
Subject to the passive foreign investment
company (“PFIC”) rules discussed below, a U.S. Holder generally will be required to include in gross income as ordinary
income the amount of any cash dividend paid on our ordinary shares. A cash distribution on such ordinary shares generally will
be treated as a dividend for U.S. federal income tax purposes to the extent the distribution is paid out of our current or accumulated
earnings and profits (as determined for U.S. federal income tax purposes). Such dividend generally will not be eligible for the
dividends-received deduction generally allowed to U.S. corporations in respect of dividends received from other U.S. corporations.
The portion of such cash distribution, if any, in excess of such earnings and profits will be applied against and reduce (but not
below zero) the U.S. Holder’s adjusted tax basis in our ordinary shares. Any remaining excess generally will be treated as
gain from the sale or other taxable disposition of such ordinary shares.
With respect to non-corporate U.S. Holders,
any such dividends may be subject to U.S. federal income tax at the lower applicable regular long term capital gains tax rate (see
“ — Taxation on the Disposition of Ordinary Shares” below) provided that (1) our ordinary shares are readily
tradable on an established securities market in the United States, (2) we are not a PFIC, as discussed below, for either the taxable
year in which such dividend was paid or the preceding taxable year, and (3) certain holding period requirements are met. Under
published IRS authority, ordinary shares are considered for purposes of clause (1) above to be readily tradable on an established
securities market in the United States only if they are listed on certain exchanges, which presently include the Nasdaq Global
Market. Although our ordinary shares are currently listed on the Nasdaq Global Market, U.S. Holders nevertheless should consult
their own tax advisors regarding the availability of the lower rate for any dividends paid in respect to our ordinary shares.
Taxation on the Disposition of Ordinary
Shares
Upon a sale or other taxable disposition
of our ordinary shares, and subject to the PFIC rules discussed below, a U.S. Holder generally will recognize capital gain or loss
in an amount equal to the difference between the amount realized and the U.S. Holder’s adjusted tax basis in the ordinary
shares.
The regular U.S. federal income tax rate
on capital gains recognized by U.S. Holders generally is the same as the regular U.S. federal income tax rate on ordinary income,
except that long-term capital gains recognized by non-corporate U.S. Holders generally are subject to U.S. federal income tax at
a maximum regular rate of 20%. Capital gain or loss will constitute long-term capital gain or loss if the U.S. Holder’s holding
period for the ordinary shares exceeds one year. The deductibility of capital losses is subject to various limitations.
Passive Foreign Investment Company Rules
A foreign (i.e., non-U.S.) corporation will
be a PFIC if either (a) at least 75% of its gross income in a taxable year of the foreign corporation, including its pro rata share
of the gross income of any corporation in which it is considered to own at least 25% of the shares by value, is passive income,
or (b) at least 50% of its assets in a taxable year of the foreign corporation, ordinarily determined based on fair market value
and averaged quarterly over the year, including its pro rata share of the assets of any corporation in which it is considered to
own at least 25% of the shares by value, are held for the production of, or produce, passive income. Passive income generally includes
dividends, interest, rents and royalties (other than certain rents or royalties derived from the active conduct of a trade or business),
and gains from the disposition of passive assets.
Based on the composition (and estimated
values) of the assets and the nature of our income and our subsidiaries during our 2014 taxable year, we do not believe that we
will be treated as a PFIC for such year. However, because we have not performed a definitive analysis as to our PFIC status for
our 2014 taxable year, there can be no assurance in respect to our PFIC status for our 2014 taxable year. There also can be no
assurance in respect to our status as a PFIC for our current (2015) taxable year or any future taxable year.
If we are determined to be a PFIC for any
taxable year (or portion thereof) that is included in the holding period of a U.S. Holder of our ordinary shares, and such U.S.
Holder did not make either a timely qualified electing fund (“QEF”) election for our first taxable year as a PFIC in
which the U.S. Holder held (or was deemed to hold) our ordinary shares, a QEF election along with a purging election or a mark-to-market
election, each as described below, such holder generally will be subject to special rules for regular U.S. federal income tax purposes
in respect to:
| · | any gain recognized by the U.S. Holder on the sale or other disposition of its ordinary shares; and |
| · | any “excess distribution” made to the U.S. Holder (generally, any distributions to such U.S. Holder during a taxable
year of the U.S. Holder that are greater than 125% of the average annual distributions received by such U.S. Holder in respect
of the ordinary shares during the three preceding taxable years of such U.S. Holder or, if shorter, such U.S. Holder’s holding
period for the ordinary shares). |
Under these rules,
| · | the U.S. Holder’s gain or excess distribution will be allocated ratably over the U.S. Holder’s holding period for
the ordinary shares; |
| · | the amount allocated to the U.S. Holder’s taxable year in which the U.S. Holder recognized the gain or received the excess
distribution, or to the period in the U.S. Holder’s holding period before the first day of our first taxable year in which
we qualified as a PFIC, will be taxed as ordinary income; |
| · | the amount allocated to other taxable years (or portions thereof) of the U.S. Holder and included in its holding period will
be taxed at the highest tax rate in effect for that year and applicable to the U.S. Holder; and |
| · | the interest charge generally applicable to underpayments of tax will be imposed in respect of the tax attributable to each
such other taxable year of the U.S. Holder. |
In general, if we are determined to be a
PFIC, a U.S. Holder may avoid the PFIC tax consequences described above in respect to our ordinary shares by making a timely QEF
election (or a QEF election along with a purging election). Pursuant to the QEF election, a U.S. Holder will be required to include
in income its pro rata share of our net capital gains (as long-term capital gain) and other earnings and profits (as ordinary income),
on a current basis, in each case whether or not distributed, in the taxable year of the U.S. Holder in which or with which our
taxable year ends. A U.S. Holder may make a separate election to defer the payment of taxes on undistributed income inclusions
under the QEF rules, but if deferred, any such taxes will be subject to an interest charge.
The QEF election is made on a shareholder-by-shareholder
basis and, once made, can be revoked only with the consent of the IRS. A U.S. Holder generally makes a QEF election by attaching
a completed IRS Form 8621 (Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund),
including the information provided in a PFIC annual information statement, to a timely filed U.S. federal income tax return for
the taxable year to which the election relates. Retroactive QEF elections generally may be made only by filing a protective statement
with such return and if certain other conditions are met or with the consent of the IRS.
In order to comply with the requirements
of a QEF election, a U.S. Holder must receive certain information from us. Upon request from a U.S. Holder, we will endeavor to
provide to the U.S. Holder no later than 90 days after the request such information as the IRS may require, including a PFIC annual
information statement, in order to enable the U.S. Holder to make and maintain a QEF election. However, there is no assurance that
we will have timely knowledge of our status as a PFIC in the future or of the required information to be provided.
If a U.S. Holder has made a QEF election
in respect to our ordinary shares, and the special tax and interest charge rules do not apply to such ordinary shares (because
of a timely QEF election for our first taxable year as a PFIC in which the U.S. Holder holds (or is deemed to hold) such shares
or a QEF election along with a purge of the PFIC taint pursuant to a purging election, as described below), any gain recognized
on the sale or other taxable disposition of such ordinary shares generally will be taxable as capital gain and no interest charge
will be imposed. As discussed above, for regular U.S. federal income tax purposes, U.S. Holders of a QEF are currently taxed on
their pro rata shares of the QEF’s earnings and profits, whether or not distributed. In such case, a subsequent distribution
of such earnings and profits that were previously included in income generally should not be taxable as a dividend to such U.S.
Holders. The adjusted tax basis of a U.S. Holder’s ordinary shares in a QEF will be increased by amounts that are included
in income, and decreased by amounts distributed but not taxed as dividends, under the above rules. Similar basis adjustments apply
to property if by reason of holding such property the U.S. Holder is treated under the applicable attribution rules as owning ordinary
shares in a QEF.
Although a determination as to our PFIC
status will be made annually, an initial determination that we are a PFIC generally will apply for subsequent years to a U.S. Holder
who held our ordinary shares while we were a PFIC, whether or not we meet the test for PFIC status in those subsequent years. A
U.S. Holder who makes the QEF election discussed above for our first taxable year as a PFIC in which the U.S. Holder holds (or
is deemed to hold) our ordinary shares, however, will not be subject to the PFIC tax and interest charge rules discussed above
in respect to such ordinary shares. In addition, such U.S. Holder will not be subject to the QEF inclusion regime in respect to
such ordinary shares for any of our taxable years that end within or with a taxable year of the U.S. Holder and in which we are
not a PFIC. On the other hand, if the QEF election is not effective for each of our taxable years in which we are a PFIC and during
which the U.S. Holder holds (or is deemed to hold) our ordinary shares, the PFIC rules discussed above will continue to apply to
such shares unless the holder files on a timely filed U.S. income tax return (including extensions) a QEF election and a purging
election to recognize under the rules of Section 1291 of the Code any gain that it would otherwise recognize if the U.S. Holder
sold shares for their fair market value on the “qualification date.” The qualification date is the first day of our
tax year in which we qualify as a QEF with respect to such U.S. Holder. The purging election can only be made if such U.S. Holder
held shares on the qualification date. The gain recognized by the purging election generally will be subject to the special tax
and interest charge rules treating the gain as an excess distribution, as described above. As a result of the purging election,
the U.S. Holder generally will increase the adjusted tax basis in its shares by the amount of gain recognized and will also have
a new holding period in the shares for purposes of the PFIC rules.
Alternatively, if a U.S. Holder, at the
close of its taxable year, owns ordinary shares in a PFIC that are treated as marketable stock, the U.S. Holder may make a mark-to-market
election in respect to such ordinary shares for such taxable year. If the U.S. Holder makes a valid mark-to-market election for
the first taxable year of the U.S. Holder in which the U.S. Holder holds (or is deemed to hold) our ordinary shares and for which
we are determined to be a PFIC, such holder generally will not be subject to the PFIC rules described above in respect to its ordinary
shares. Instead, in general, the U.S. Holder will include as ordinary income each year the excess, if any, of the fair market value
of its ordinary shares at the end of its taxable year over the adjusted tax basis in its ordinary shares. The U.S. Holder also
will be allowed to take an ordinary loss in respect of the excess, if any, of the adjusted tax basis of its ordinary shares over
the fair market value of its ordinary shares at the end of its taxable year (but only to the extent of the net amount of previously
included income as a result of the mark-to-market election). The U.S. Holder’s adjusted tax basis in its ordinary shares
will be adjusted to reflect any such income or loss amounts, and any further gain recognized on a sale or other taxable disposition
of the ordinary shares will be treated as ordinary income.
The mark-to-market election is available
only for stock that is regularly traded on a national securities exchange that is registered with the Securities and Exchange Commission,
including the Nasdaq Global Market, or on a foreign exchange or market that the IRS determines has rules sufficient to ensure that
the market price represents a legitimate and sound fair market value. Although our ordinary shares are currently listed on the
Nasdaq Global Market, U.S. Holders nevertheless should consult their own tax advisors regarding the availability and tax consequences
of a mark-to-market election in respect to our ordinary shares.
If we are a PFIC and, at any time, have
a foreign subsidiary that is classified as a PFIC, a U.S. Holder of our ordinary shares generally should be deemed to own a portion
of the shares of such lower-tier PFIC, and generally could incur liability for the deferred tax and interest charge described above
if we receive a distribution from, or dispose of all or part of our interest in, or the U.S. Holder were otherwise deemed to have
disposed of an interest in, the lower-tier PFIC. Upon request, we will endeavor to cause any lower-tier PFIC to provide to a U.S.
Holder no later than 90 days after the request the information that may be required to make or maintain a QEF election in respect
to the lower-tier PFIC. However, there is no assurance that we will have timely knowledge of the status of any such lower-tier
PFIC or will be able to cause the lower-tier PFIC to provide the required information. A mark-to-market election generally would
not be available in respect to such a lower-tier PFIC. U.S. Holders are urged to consult their own tax advisors regarding the tax
issues raised by lower-tier PFICs.
A U.S. Holder that owns (or is deemed to
own) ordinary shares in a PFIC during any taxable year of the U.S. Holder may have to file an IRS Form 8621 (whether or not a QEF
election or mark-to-market election is or has been made) with such U.S. Holder’s U.S. federal income tax return and provide
such other information as may be required by the U.S. Treasury Department.
The rules dealing with PFICs and with the
QEF and mark-to-market elections are very complex and are affected by various factors in addition to those described above. Accordingly,
U.S. Holders of our ordinary shares should consult their own tax advisors concerning the application of the PFIC rules to our ordinary
shares under their particular circumstances.
Additional Taxes
U.S. Holders that are individuals, estates
or trusts and whose income exceeds certain thresholds generally will be subject to a 3.8% Medicare contribution tax on unearned
income, including, without limitation, dividends on, and gains from, the sale or other taxable disposition of, our ordinary shares,
subject to certain limitations and exceptions. Under recently issued regulations, in the absence of a special election, such unearned
income generally would not include income inclusions under the QEF rules discussed above under “— Passive Foreign Investment
Company Rules,” but would include distributions of earnings and profits from a QEF. U.S. Holders should consult their own
tax advisors regarding the effect, if any, of such tax on their ownership and disposition of our ordinary shares.
Non-U.S. Holders
Cash dividends paid to a Non-U.S. Holder
in respect to our ordinary shares generally will not be subject to U.S. federal income tax unless such dividends are effectively
connected with the Non-U.S. Holder’s conduct of a trade or business within the United States (and, if required by an applicable
income tax treaty, are attributable to a permanent establishment or fixed base that such holder maintains or maintained in the
United States).
In addition, a Non-U.S. Holder generally
will not be subject to U.S. federal income tax on any gain attributable to a sale or other taxable disposition of our ordinary
shares unless such gain is effectively connected with its conduct of a trade or business in the United States (and, if required
by an applicable income tax treaty, is attributable to a permanent establishment or fixed base that such holder maintains or maintained
in the United States) or the Non-U.S. Holder is an individual who is present in the United States for 183 days or more in the taxable
year of such sale or other disposition and certain other conditions are met (in which case, such gain from U.S. sources generally
is subject to U.S. federal income tax at a 30% rate or a lower applicable tax treaty rate).
Cash dividends and gains that are effectively
connected with the Non-U.S. Holder’s conduct of a trade or business in the United States (and, if required by an applicable
income tax treaty, are attributable to a permanent establishment or fixed base in the United States) generally will be subject
to regular U.S. federal income tax that such holder maintains or maintained at the same regular U.S. federal income tax rates as
applicable to a comparable U.S. Holder and, in the case of a Non-U.S. Holder that is a corporation for U.S. federal income tax
purposes, may also be subject to an additional branch profits tax at a 30% rate or a lower applicable tax treaty rate.
Backup Withholding and Information Reporting
In general, information reporting for U.S.
federal income tax purposes will apply to cash distributions made on our ordinary shares within the United States to a U.S. Holder
(other than an exempt recipient) and to the proceeds from sales and other dispositions of our ordinary shares by a U.S. Holder
(other than an exempt recipient) to or through a U.S. office of a broker. Payments made (and sales and other dispositions effected
at an office) outside the United States will be subject to information reporting in limited circumstances. In addition, certain
information concerning a U.S. Holder’s adjusted tax basis in its ordinary shares and adjustments to that tax basis and whether
any gain or loss with respect to such ordinary shares is long-term or short-term also may be required to be reported to the IRS,
and certain holders may be required to file an IRS Form 8938 (Statement of Specified Foreign Financial Assets) to report their
interest in our ordinary shares.
Moreover, backup withholding of U.S. federal
income tax at a rate of 28%, generally will apply to cash dividends paid on our ordinary shares to a U.S. Holder (other than an
exempt recipient) and the proceeds from sales and other dispositions of our ordinary shares by a U.S. Holder (other than an exempt
recipient), in each case who:
| · | fails to provide an accurate taxpayer identification number; |
| · | is notified by the IRS that backup withholding is required; or |
| · | in certain circumstances, fails to comply with applicable certification requirements. |
A Non-U.S. Holder generally may eliminate
the requirement for information reporting and backup withholding by providing certification of its foreign status, under penalties
of perjury, on a duly executed applicable IRS Form W-8 or by otherwise establishing an exemption.
Backup withholding is not an additional
tax. Rather, the amount of any backup withholding will be allowed as a credit against a U.S. Holder’s or a Non-U.S. Holder’s
U.S. federal income tax liability and may entitle such holder to a refund, provided that certain required information is timely
furnished to the IRS. Holders are urged to consult their own tax advisors regarding the application of backup withholding and the
availability of and procedures for obtaining an exemption from backup withholding in their particular circumstances.
| F. | Dividends and paying agents |
Not required.
Not required.
Documents concerning us that are referred
to in this document may be inspected at Unit 605, East Town Building, 16 Fenwick Street, Wanchai, Hong Kong.
In addition, we file annual reports and
other information with the Securities and Exchange Commission. We file annual reports on Form 20-F and submit other information
under cover of Form 6-K. As a foreign private issuer, we are exempt from the proxy requirements of Section 14 of the Exchange Act
and our officers, directors and principal shareholders will be exempt from the insider short-swing disclosure and profit recovery
rules of Section 16 of the Exchange Act. Annual reports and other information we file with the Commission may be inspected at the
public reference facilities maintained by the Commission at Room 1024, 100 F. Street, N.E., Washington, D.C. 20549, and copies
of all or any part thereof may be obtained from such offices upon payment of the prescribed fees. You may call the Commission at
1-800-SEC-0330 for further information on the operation of the public reference rooms and you can request copies of the documents
upon payment of a duplicating fee, by writing to the Commission. In addition, the Commission maintains a web site that contains
reports and other information regarding registrants (including us) that file electronically with the Commission which can be assessed
at http://www.sec.gov.
Not required.
| Item 11. | QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISK |
Foreign Currency Risk
We do not currently have any foreign exchange
exposure as our promotion income and expenses are predominantly denominated in HKD$. However, in the future, it is possible
that a proportion of our promotion income and expenses may be denominated in other currencies if we expand into
overseas markets. In such circumstances, we anticipate our primary market risk, if any, to be related to fluctuations in exchange
rates. Exchange rate risk may arise if the we are required to use different currencies for various aspects of our
operations.
| Item 12. | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES |
Not required.
Part
II
| Item 13. | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES |
There has been no default of any indebtedness
nor is there any arrearage in the payment of dividends.
| Item 14. | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS
AND USE OF PROCEEDS |
There were no material modifications to
the rights of our shareholders during fiscal year 2014.
There are no restrictions on working capital
and no removal or substitution of assets securing any class of our registered securities.
| Item 15. | CONTROLS AND PROCEDURES |
Disclosure Controls and Procedures
An evaluation was performed under the supervision
and with the participation of our management, including our Chief Executive Officer, who is our principal executive officer, and
Chief Financial Officer, who is our principal financial officer, regarding the effectiveness of the design and operation of our
disclosure controls and procedures as of December 31, 2014. Based on that evaluation, our management, including our Chief Executive
Officer and Chief Financial Officer, have concluded that our disclosure controls and procedures as of December 31, 2014 were effective.
Disclosure controls and procedures are designed
to provide that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.
Management’s annual report on internal
control over financial reporting
Our management is responsible for establishing
and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is a process
designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer and effected by our management
and other personnel to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of
our financial statements for external reporting purposes in accordance with U.S. GAAP. Internal control over financial reporting
includes policies and procedures that pertain to the maintenance of records that in reasonable detail accurately reflect the transactions
and dispositions of our assets; provide reasonable assurance that transactions are recorded as necessary to permit preparation
of our financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures
are being made only in accordance with the authorization of our board of directors and management; and provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material
effect on our financial statements.
Because of inherent limitations, internal
control over financial reporting may not prevent or detect misstatement. Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree
of compliance with our policies and procedures may deteriorate.
Under the supervision and with the participation
of our management, including our Chief Executive Officer and Chief Financial Officer, management conducted an evaluation of the
effectiveness of our internal control over financial reporting based on the criteria established in Internal Control—Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management has concluded that
our internal control over financial reporting was effective as of December 31, 2014. The Company’s independent registered
public accounting firm has issued an audit report on the Company’s internal control over financial reporting as of December
31, 2014.
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Iao Kun Group Holding Company Limited (F/K/A AERL)
We have audited Iao Kun Group Holding Company Limited (F/K/A
AERL) and its subsidiaries’ (the “Company”) internal control over financial reporting as of December 31, 2014,
based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying
Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting
is a process designed 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. A company’s internal control
over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject
to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies
or procedures may deteriorate.
In our opinion, Iao Kun Group Holding Company Limited (F/K/A
AERL) and its subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December
31, 2014, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the consolidated balance sheets and the related consolidated statements
of operations and comprehensive income, changes in shareholders’ equity, and cash flows of Iao Kun Group Holding Company
Limited (F/K/A AERL) and its subsidiaries, and our report dated April 13, 2015 expressed an unqualified opinion.
/s/ UHY LLP
New York, New York
April 13, 2015
Changes in Internal Controls over Financial Reporting
There were no changes in our internal control
over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the year ended December 31, 2014
that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
It should be noted that while our management
has taken and will continue to take steps to improve our disclosure controls and procedures, our management does not expect
that our disclosure controls and procedures or internal financial controls will prevent all errors or fraud. A control system,
no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control
system are met.
| Item 16A. | AUDIT COMMITTEE FINANCIAL EXPERT. |
The Company’s Board of Directors has
determined that Mr. James Preissler is an audit committee financial expert, and “independent” as that term is defined
in the NASDAQ listing standards.
We have adopted a Code of Business Conduct
and Ethics that applies to our directors, officers and employees, including our principal executive officer, principal financial
officer, and principal accounting officer. Copies of the code of ethics are available free of charge upon request. Requests for
copies of the code of ethics should be sent in writing to Iao Kun Group Holding Company Limited, Unit 605, East Town Building,
16 Fenwick Street, Wanchai, Hong Kong.
| ITEM 16C. | PRINCIPAL ACCOUNTANT FEES AND SERVICES. |
Independent Auditors
The firm of UHY LLP has acted since our
inception as our principal independent registered public accounting firm. UHY LLP is a registered firm with the Public Company
Accounting Oversight Board and is a member of the American Institute of Certified Public Accountants.
The business address of UHY LLP is 19 West
44th Street, New York, New York 10036.
The following is a summary of fees paid
or to be paid by us to UHY LLP for services rendered as the principal accountant.
| | |
Year Ended
December 31,
2013 | | |
Year Ended
December 31,
2014 | |
| Audit Fees | |
$ | 342,153 | | |
$ | 391,901 | |
| Audit-Related Fees | |
| 170,557 | | |
| 151,955 | |
| Tax Fees | |
| - | | |
| - | |
| All Other Fees | |
| - | | |
| - | |
Audit fees billed by UHY LLP during the
fiscal years ended December 31, 2013 and 2014 related to professional services rendered in connection with the audits of our annual
financial statements included in our Annual Reports on Form 20-F for those fiscal periods, the review of our financial information
included in semi-annual Reports of Foreign Private Issuer on Form 6-K, and our registration statements and proxy statement filings.
Audit Committee Pre-Approval
Our Audit Committee pre-approves all auditing
services and permitted non-audit services to be performed for us by our independent auditor, including the fees and terms thereof
(subject to the de minimums exceptions for non-audit services described in Section 10A(i)(l)(B) of the Exchange Act that are approved
by our Audit Committee prior to the completion of the audit). All of the services described above were approved by our Audit Committee
pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X promulgated by the SEC.
| ITEM 16D. | EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES. |
None.
| ITEM 16E. | PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
PURCHASERS. |
None.
| ITEM 16F. | CHANGES IN REGISTRANT’S CERTIFYING ACCOUNTANT. |
None.
| ITEM 16G. | CORPORATE GOVERNANCE. |
There are no material differences in the
Company’s corporate governance practices from those of U.S. domestic companies under listing standards of NASDAQ.
| Item 17. | FINANCIAL STATEMENTS |
We have elected to provide financial statements
pursuant to Item 18.
| Item 18. | FINANCIAL STATEMENTS |
The financial statements are filed as part
of this annual report beginning on page F-1.
| Exhibit No. |
|
Description |
| 2.1 |
|
Stock Purchase Agreement (Restated as Amended), dated October 6, 2009, as amended November 10, 2009, December 9, 2009 and January 11, 2010 among CS China Acquisition Corp., Asia Gaming & Resort Limited (“AGRL”), and Spring Fortune Investment Ltd (included as Annex A to the Proxy Statement filed as Exhibit 10.1 to the Report of Foreign Private Issuer on Form 6-K filed on January 19, 2010 and incorporated herein by reference) |
| 2.2 |
|
Amendment No. 4 to Stock Purchase Agreement, dated April 18, 2011, among Iao Kun Group Holding Company Limited, AGRL, and Spring Fortune Investment Ltd(8) |
| 2.3 |
|
Profit Interest Purchase Agreement, dated November 10, 2010, by and among Iao Kun Group Holding Company Limited and King’s Gaming Promotion Limited, Mr. Mok Chi Hung and Mr. Wong Hon Meng(5) |
| 2.4 |
|
Profit Interest Purchase Agreement, dated September 5, 2012, by and among Iao Kun Group Holding Company Limited and Bao Li Gaming Promotion Limited, Mr. Lou Kan Kuong and Mr. Lei Kam Keong(13) |
| 3.1 |
|
Form of Second Amended Memorandum and Articles of Association (included as Annex D to the Proxy Statement filed as Exhibit 10.1 to the Report of Foreign Private Issuer on Form 6-K filed on January 19, 2010 and incorporated herein by reference) |
| 4.1 |
|
Specimen Unit Certificate(1) |
| 4.2 |
|
Specimen Ordinary Share Certificate(2) |
| 4.3 |
|
Specimen Warrant Certificate(1) |
| 4.4 |
|
Form of Unit Purchase Option granted to EarlyBirdCapital, Inc.(1) |
| 4.5 |
|
Form of Warrant Agreement between Continental Stock Transfer & Trust Company and registrant(1) |
| 10.1 |
|
Form of Escrow Agreement among CS China Acquisition Corp., Spring Fortune Investment Ltd, Spring Fortune Investment Ltd Designee(s) and Continental Stock Transfer & Trust Company(3) |
| 10.2 |
|
Employment Agreement, dated October 6, 2009 between AGRL and Leong Siak Hung(3) |
| 10.3 |
|
Amendment to Employment Agreement, dated February 16, 2012, between the Company and Leong Siak Hung (13) |
| 10.4 |
|
Employment Agreement, dated October 6, 2009 between AGRL and Raymond Li Chun Ming(3) |
| 10.5 |
|
Amendment to Employment Agreement, dated February 16, 2012, between the Company and Raymond Li Chun Ming (13) |
| 10.6 |
|
Employment Agreement, dated October 6, 2009 between AGRL and Lam Man Pou(3) |
| 10.7 |
|
Amendment to Employment Agreement, dated February 16, 2012, between the Company and Lam Man Pou (13) |
| 10.8 |
|
Employment Agreement, dated October 6, 2009 between AGRL and Vong Hon Kun(3) |
| 10.9 |
|
Amendment to Employment Agreement, dated February 16, 2012, between the Company and Vong Hon Kun (13) |
| 10.10 |
|
Employment Agreement, dated November 10, 2010, between the Company and Wong Hon Meng (7) |
| 10.11 |
|
Amendment to Employment Agreement, dated February 16, 2012, between the Company and Wong Hon Meng (13) |
| 10.12 |
|
Employment Agreement, dated February 2, 2010, between the Company and Lam Chou In(13) |
| 10.13 |
|
Amendment to Employment Agreement, dated February 16, 2012, between the Company and Lam Chou In (13) |
| 10.14 |
|
Employment Agreement, dated November 2010, between the Company and Mok Chi Hung(13) |
| 10.15 |
|
Amendment to Employment Agreement, dated February 16, 2012, between the Company and Mok Chi Hung (13) |
| 10.16 |
|
Management Service Contract dated January 1, 2010 between Iao Pou Gaming Promotion Limited and Pak Si Management and Consultancy Limited(3) |
| 10.17 |
|
Management Service Contract dated January 1, 2010 between Sang Heng Gaming Promotion Company Limited and Pak Si Management and Consultancy Limited(3) |
| 10.18 |
|
VIP Junket Promotion Agreement, dated January 18, 2008 between Gillmann Investments Asia, Ltd. and Doowell Limited(3) |
| 10.19 |
|
VIP Gaming Promotion Agreement, dated November 14, 2008 between Unicorn Incorporation and Champion Lion Limited(3) |
| 10.20 |
|
Gaming Promotion Agreement between Galaxy Casino S.A. and Sang Lung Gaming Promotion Company Limited(13) |
| 10.21 |
|
Profit Interest Agreement, dated February 2, 2010 between Well Mount International Limited and Doowell Limited(3) |
| 10.22 |
|
Profit Interest Agreement, dated February 2, 2010 between Link Bond International Limited and Champion Lion Limited(3) |
| 10.23 |
|
Profit Interest Agreement, dated February 2, 2010 between Foxhill Group limited and Iao Pou Gaming Promotion Limited(3) |
| 10.24 |
|
Profit Interest Agreement, dated February 2, 2010 between Kasino Fortune Investments Limited and Sang Heng Gaming Promotion Company Limited(3) |
| 10.25 |
|
Form of Share Purchase Agreement (included Exhibit 10.1 to the Report of Foreign Issuer on Form 6-K filed on January 29, 2010 and incorporated herein by reference) |
| 10.26 |
|
Letter Agreement among registrant, EarlyBirdCapital, Inc. and Chien Lee(1) |
| 10.27 |
|
Letter Agreement among registrant, EarlyBirdCapital, Inc. and Sylvia Lee(2) |
| 10.28 |
|
Letter Agreement among registrant, EarlyBirdCapital, Inc. and Michael Zhang(2) |
| 10.29 |
|
Form of Investment Management Trust Agreement between Continental Stock Transfer & Trust Company and registrant(1) |
| 10.30 |
|
Form of Stock Escrow Agreement between registrant, Continental Stock Transfer & Trust Company and the Initial Shareholders(1) |
| 10.31 |
|
Form of Letter Agreement between registrant and CS Capital USA, LLC regarding administrative support(2) |
| 10.32 |
|
Form of Registration Rights Agreement among registrant and the Initial Shareholders(2) |
| 10.33 |
|
Form of Subscription Agreement among registrant, EarlyBirdCapital, Inc., Graubard Miller and each of CS Capital USA, LLC, Bill Haus, James Preissler, Peter Li and William B. Heyn(1) |
| 10.34 |
|
Letter Agreement among registrant, EarlyBirdCapital, Inc. and Bill Haus(1) |
| 10.35 |
|
Letter Agreement among registrant, EarlyBirdCapital, Inc. and Jim Preissler(1) |
| 10.36 |
|
Letter Agreement among registrant, EarlyBirdCapital, Inc. and Peter Li(1) |
| 10.37 |
|
Letter Agreement among registrant, EarlyBirdCapital, Inc. and William B. Heyn(1) |
| 10.38 |
|
Form of Indemnification Agreement between registrant and, separately, each of its directors and executive officers(6) |
| 10.39 |
|
Loan Agreement and Guaranty dated as of February 2, 2010 between Lam Man Pou and Vong Hon Kun and AGRL(6) |
| 10.40 |
|
Form of Amendment to Profit Interest Agreements(6) |
| 10.41 |
|
Convertible Term Note issued by the Company to Lam Man Pou dated April 18, 2011(8) |
| 10.42 |
|
Convertible Term Note issued by the Company to Vong Hon Kun dated April 18, 2011(8) |
| 10.43 |
|
Lock-up Agreement by and among the Company and Lam Man Pou dated April 18, 2011(8) |
| 10.44 |
|
Lock-up Agreement by and among the Company and Vong Hon Kun dated April 18, 2011(8) |
| 10.45 |
|
Lock-up Agreement by and among the Company and Lam Chou In dated April 18, 2011(8) |
| 10.46 |
|
Lock-up Agreement by and among the Company and Legend Global International Limited dated April 18, 2011(8) |
| 10.47 |
|
Gaming Promotion Agreement, dated December 9, 2010 between Venetian Macau S.A. and Sociedad de Promocao de Jogos Imperador, Limitada (portions of this exhibit have been omitted pursuant to a request for confidential treatment on file with the Securities and Exchange Commission)(9) |
| 10.48 |
|
Star World Hotel and Casino Gaming Promoter Loan Contract dated June 30, 2008 by and among Galaxy Casino Holdings Limited, Sang Heng Gaming Promotion Limited and Lam Man Pou (10) |
| 10.49 |
|
Venetian Macau Limited Junket Credit Agreement dated March 29, 2011 by and between Kasino Fortune Investments Limited and Sang Heng Gaming Promotion Limited.(10) |
| 10.50 |
|
Profit Interest Agreement by and between Super Number and Sang Lung dated as of July 1, 2011(12) |
| 10.51 |
|
Gaming Promotion Agreement between Galaxy Casino S.A. and Sang Heng Gaming Promotion Company Limited(13) |
| 10.52 |
|
Star World Casino Gaming Promoter Loan Contract dated February 9, 2010 by and among Galaxy Casino Holdings Limited, Sang Heng Gaming Promotion Limited and Vong Hon Kun(10) |
| 10.53 |
|
Lease, dated September 6, 2011, between AGRL and Hong Yip Service Company Limited(13) |
| 10.54 |
|
Employment Agreement, dated April 7, 2010, between the Company and Sylvia Lee(13) |
| 10.55 |
|
Employment Agreement, dated September 5, 2012, between the Company and Lei Kam Keong (14) |
| 10.56 |
|
Employment Agreement, dated September 5, 2012, between the Company and Lou Kan Kuong (14) |
| 10.57 |
|
Non-Exclusive Gaming Promotion Agreement dated February 7, 2011 by and between Bao Li Gaming Promotion Limited and Melco Crown Gaming (Macau) Limited (14) |
| 10.58 |
|
Revised Exhibit A dated September 3, 2012 to the Gaming Promotion Agreement, dated December 9, 2010 between Venetian Macau S.A. and Sociedad de Promocao de Jogos Imperador, Limitada (14) |
| 10.59 |
|
Gaming Promotion Agreement between Starworld Gaming and Sang Heng Gaming Promotion Company Limited (14) |
| 10.60 |
|
Dealer Manager Agreement, dated as of June 4, 2013, between the Company and Sterne, Agree & Leach, Inc. (15) |
| 10.61 |
|
Standby Purchase Agreement, dated as of June 4, 2013, among the Company and the standby purchasers named therein (15) |
| 10.62 |
|
Registration Rights Agreement, dated as of June 4, 2013, among the Company and the standby purchasers name therein (15) |
| 10.63 |
|
Profit Interest Purchase Agreement dated June 26, 2013 among the company, Mr. Vong Veng Im, and Frontier Champion Limited (16) |
| 10.64 |
|
Collaborator Agreement dated January 1, 2014 between Chan Yan Hung and Lam Chou In (16) |
| 12.1 |
|
Certification of the Chief Executive Officer (Principal Executive Officer) pursuant to Rule 13a-14(a) of the Securities Exchange Act, as amended |
| 12.2 |
|
Certification of the Chief Financial Officer (Principal Financial Officer) pursuant to Rule 13a-14(a) of the Securities Exchange Act, as amended |
| 13.1 |
|
Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| 15.1 |
|
Consent of UHY LLP, independent registered public accounting firm |
| 21.1 |
|
Subsidiaries (incorporated by reference to page 39 of this Annual Report on Form 20-F) |
| 99.1 |
|
Audit Committee Charter (4) |
| 99.2 |
|
Nominating Committee Charter (4) |
| 99.3 |
|
Compensation Committee Charter (4) |
| 99.4 |
|
Iao Kun Group Holding Company Limited 2011 Omnibus Securities and Incentive Plan (11) |
| 101.1 |
|
Interactive Data Files |
| (1) | Filed as an exhibit to Amendment No. 5 to registrant’s Registration Statement on Form S-1 filed on July 8, 2008. |
| (2) | Filed as an exhibit to Amendment No. 2 to registrant’s Registration Statement on Form S-1 filed on January 31, 2008. |
| (3) | Filed as an exhibit to the Company’s Shell Company Report on Form 20-F filed on February 8, 2010. |
| (4) | Filed as an exhibit to the Company’s Report of Foreign Private Issuer on Form 6-K filed April 23, 2010. |
| (5) | Filed as Appendix A to Exhibit 99.1 to the Report on Form 6-K filed on November 10, 2010. |
| (6) | Filed as an exhibit to the Company’s Registration Statement on Form F-1 originally filed on May 14, 2010 (File No.: 333-166860). |
| (7) | Filed as an exhibit to the Company’s Registration Statement on Form F-3 filed on April 8, 2011. |
| (8) | Filed as an exhibit to the Company’s Registration Statement on Form F-3 filed on May 3, 2011. |
| (9) | Filed as an exhibit to the Company’s Registration Statement on Form F-3 filed on July 29, 2011. |
| (10) | Filed as an exhibit to the Company’s Registration Statement on Form F-3 filed on May 31, 2011. |
| (11) | Filed as Annex A to Exhibit 99.1 to the Report on Form 6-K filed on November 3, 2011. |
| (12) | Filed as an exhibit to the Company’s Report on Form 6-K filed on August 22, 2011. |
| (13) | Filed as an exhibit to the Company’s Registration Statement on Form F-3 filed on December 31, 2012. |
| (14) | Filed as an exhibit to the Company’s Annual Report on Form 20-F for the year ended December 31, 2012. |
| (15) | Filed as Annex A to Exhibit 99.1 to the Report on Form 6-K filed on June 4, 2013. |
| (16) | Filed as an exhibit to the Company’s Annual Report on Form 20-F for the year ended December 31, 2014. |
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Iao Kun Group Holding Company Limited (F/K/A AERL)
We have audited the
accompanying consolidated balance sheets of Iao Kun Group Holding Company Limited (F/K/A AERL) and its subsidiaries
(the “Company”) as of December 31, 2014, and 2013, and the related consolidated statements of operations
and comprehensive income, changes in shareholders’ equity, and cash flows for each of the years in the three-year
period ended December 31, 2014. The Company’s management is responsible for these consolidated financial statements.
Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated
financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of Iao Kun Group Holding Company Limited (F/K/A
AERL) and its subsidiaries as of December 31, 2014, and 2013, and the results of their operations and their cash flows
for each of the years in the three-year period ended December 31, 2014 in conformity with accounting principles generally accepted
in the United States of America.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December
31, 2014, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report dated April 13, 2015, expressed an unqualified opinion.
/s/ UHY LLP
New York, New York
April 13, 2015
IAO KUN GROUP HOLDING COMPANY
LIMITED
F/K/A ASIA ENTERTAINMENT &
RESOURCES LTD.
CONSOLIDATED BALANCE SHEETS
| | |
December 31, 2014 | | |
December 31, 2013 | |
| | |
| | |
| |
| ASSETS | |
| | | |
| | |
| CURRENT ASSETS | |
| | | |
| | |
| Cash and Cash Equivalents | |
$ | 11,146,534 | | |
$ | 7,563,097 | |
| Accounts Receivable, Net | |
| 1,529,052 | | |
| 5,182,352 | |
| Markers Receivable | |
| 188,549,136 | | |
| 242,350,301 | |
| Prepaid Expenses and Other Assets | |
| 348,777 | | |
| 502,017 | |
| Total Current Assets | |
| 201,573,499 | | |
| 255,597,767 | |
| | |
| | | |
| | |
| Intangible Assets (net of accumulated amortization of $42,105,966 and $25,739,786 at December 31, 2014 and December 31, 2013, respectively) | |
| 121,968,648 | | |
| 138,336,945 | |
| Goodwill | |
| 17,753,907 | | |
| 17,754,136 | |
| Property and Equipment (net of accumulated depreciation of $108,913 and $38,654 at December 31, 2014 and December 31, 2013, respectively) | |
| 322,149 | | |
| 116,419 | |
| Other Assets | |
| 23,427 | | |
| 23,423 | |
| TOTAL ASSETS | |
$ | 341,641,630 | | |
$ | 411,828,690 | |
| | |
| | | |
| | |
| LIABILITIES AND SHAREHOLDERS' EQUITY | |
| | | |
| | |
| CURRENT LIABILITIES | |
| | | |
| | |
| Lines of Credit Payable | |
$ | 32,392,020 | | |
$ | 42,670,573 | |
| Accrued Expenses | |
| 11,682,653 | | |
| 15,701,756 | |
| Bao Li Gaming Acquisition-Contingent Purchase Price Obligation | |
| 22,662,750 | | |
| 16,837,500 | |
| King's Gaming Acquisition-Contingent Purchase Price Obligation | |
| - | | |
| 9,000,000 | |
| Oriental VIP Room Acquisition-Contingent Purchase Price Obligation | |
| 13,738,762 | | |
| 21,650,051 | |
| Loan Payable, Shareholders, current | |
| 2,612,490 | | |
| 5,809,075 | |
| Total Current Liabilities | |
| 83,088,675 | | |
| 111,668,955 | |
| | |
| | | |
| | |
| Bao Li Gaming Acquisition-Contingent Purchase Price Obligation, net of current portion | |
| 19,628,881 | | |
| 16,189,550 | |
| Oriental VIP Room Acquisition-Contingent Purchase Price Obligation, net of current portion | |
| 27,665,264 | | |
| 14,878,218 | |
| Total Liabilities | |
| 130,382,820 | | |
| 142,736,723 | |
| | |
| | | |
| | |
| COMMITMENTS AND CONTINGENCIES | |
| | | |
| | |
| | |
| | | |
| | |
| SHAREHOLDERS' EQUITY | |
| | | |
| | |
| Preferred Shares, $0.0001 par value Authorized 1,150,000 shares; none issued | |
| - | | |
| - | |
| Ordinary Shares, $0.0001 par value, Authorized 500,000,000 shares; 60,452,314 and 59,306,824 issued and outstanding at December 31, 2014 and December 31, 2013, respectively. | |
| 6,044 | | |
| 5,930 | |
| Additional Paid-in Capital | |
| 130,048,153 | | |
| 126,329,321 | |
| Retained Earnings | |
| 80,653,190 | | |
| 142,270,385 | |
| Accumulated Other Comprehensive Income | |
| 551,423 | | |
| 486,331 | |
| Total Shareholders' Equity | |
| 211,258,810 | | |
| 269,091,967 | |
| TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | |
$ | 341,641,630 | | |
$ | 411,828,690 | |
SEE ACCOMPANYING NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS
IAO KUN GROUP HOLDING COMPANY LIMITED
F/K/A ASIA ENTERTAINMENT & RESOURCES
LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31,
| | |
2014 | | |
2013 | | |
2012 | |
| Revenue from VIP Gaming Operations | |
$ | 233,822,859 | | |
$ | 236,850,159 | | |
$ | 236,300,623 | |
| Total Revenues | |
| 233,822,859 | | |
| 236,850,159 | | |
| 236,300,623 | |
| | |
| | | |
| | | |
| | |
| Expenses | |
| | | |
| | | |
| | |
| - Commission to Junket Agents | |
| 188,448,178 | | |
| 182,639,067 | | |
| 154,569,837 | |
| - Selling, General and Administrative Expenses | |
| 26,506,299 | | |
| 21,485,944 | | |
| 18,340,972 | |
| - Special Rolling Tax | |
| 1,662,714 | | |
| 1,704,851 | | |
| 1,815,034 | |
| - Amortization of Intangible Assets | |
| 16,365,034 | | |
| 13,187,006 | | |
| 6,622,238 | |
| Total Expenses | |
| 232,982,225 | | |
| 219,016,868 | | |
| 181,348,081 | |
| | |
| | | |
| | | |
| | |
| Operating income attributable to ordinary shareholders before change in fair value of contingent consideration | |
| 840,634 | | |
| 17,833,291 | | |
| 54,952,542 | |
| | |
| | | |
| | | |
| | |
| Change in Fair Value of Contingent Consideration for the Acquisitions of King's Gaming, Bao Li Gaming and Oriental VIP Room | |
| (60,918,569 | ) | |
| (12,445,789 | ) | |
| 15,166,700 | |
| | |
| | | |
| | | |
| | |
| Net (Loss) Income Attributable to Ordinary Shareholders | |
| (60,077,935 | ) | |
| 5,387,502 | | |
| 70,119,242 | |
| | |
| | | |
| | | |
| | |
| Other Comprehensive (Loss) Income | |
| | | |
| | | |
| | |
| Foreign Currency | |
| | | |
| | | |
| | |
| - Translation Adjustment | |
| 65,092 | | |
| (76,610 | ) | |
| 669,109 | |
| Total Comprehensive (Loss) Income | |
$ | (60,012,843 | ) | |
$ | 5,310,892 | | |
$ | 70,788,351 | |
| | |
| | | |
| | | |
| | |
| Net (Loss) Income Per Share | |
| | | |
| | | |
| | |
| Basic | |
$ | (0.99 | ) | |
$ | 0.10 | | |
$ | 1.53 | |
| Diluted | |
$ | (0.99 | ) | |
$ | 0.10 | | |
$ | 1.53 | |
| | |
| | | |
| | | |
| | |
| Weighted Average Shares Outstanding | |
| | | |
| | | |
| | |
| Basic | |
| 60,781,915 | | |
| 53,030,405 | | |
| 45,752,743 | |
| Diluted | |
| 60,781,915 | | |
| 53,210,572 | | |
| 45,752,922 | |
SEE ACCOMPANYING NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS
IAO KUN GROUP HOLDING COMPANY LIMITED
F/K/A ASIA ENTERTAINMENT & RESOURCES
LTD.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’
EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013
AND 2012
| | |
| | |
| | |
Additional | | |
| | |
Accumulated | | |
Total | |
| | |
Ordinary Shares | | |
Paid-In | | |
Retained | | |
Other Comprehensive | | |
Shareholders' | |
| | |
Shares | | |
Amount | | |
Capital | | |
Earnings | | |
Income | | |
Equity | |
| Balances, January 1, 2012 | |
| 38,804,064 | | |
$ | 3,881 | | |
$ | 52,581,098 | | |
$ | 106,308,297 | | |
$ | (106,168 | ) | |
$ | 158,787,108 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Dividend paid | |
| - | | |
| - | | |
| - | | |
| (12,622,128 | ) | |
| - | | |
| (12,622,128 | ) |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Ordinary shares repurchased and retired | |
| (1,300,247 | ) | |
| (130 | ) | |
| (4,290,560 | ) | |
| - | | |
| - | | |
| (4,290,690 | ) |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Incentive shares issued for AGRL's 2011 net income target treated
as dividend | |
| 3,103,000 | | |
| 310 | | |
| 17,976,841 | | |
| (17,977,151 | ) | |
| - | | |
| - | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Incentive shares issued for King's Gaming 2011 net income
target | |
| 520,000 | | |
| 52 | | |
| 3,057,548 | | |
| - | | |
| - | | |
| 3,057,600 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Director shares issued for compensation | |
| 50,400 | | |
| 5 | | |
| 345,995 | | |
| - | | |
| - | | |
| 346,000 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Net income | |
| - | | |
| - | | |
| - | | |
| 70,119,242 | | |
| - | | |
| 70,119,242 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Foreign currency translation adjustment | |
| - | | |
| - | | |
| - | | |
| - | | |
| 669,109 | | |
| 669,109 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Balances, December 31, 2012 | |
| 41,177,217 | | |
$ | 4,118 | | |
$ | 69,670,922 | | |
$ | 145,828,260 | | |
$ | 562,941 | | |
$ | 216,066,241 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Ordinary shares repurchased and retired | |
| (1,458,953 | ) | |
| (146 | ) | |
| (5,024,614 | ) | |
| - | | |
| - | | |
| (5,024,760 | ) |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Ordinary shares issued for cash at $3.00 per share- rights offering | |
| 9,784,950 | | |
| 978 | | |
| 29,353,872 | | |
| - | | |
| - | | |
| 29,354,850 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Ordinary shares issued for repayment of shareholders loan | |
| 9,743,000 | | |
| 974 | | |
| 34,196,956 | | |
| - | | |
| - | | |
| 34,197,930 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Rights offering costs for issuance of ordinary shares | |
| - | | |
| - | | |
| (2,067,809 | ) | |
| - | | |
| - | | |
| (2,067,809 | ) |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Director shares issued for compensation | |
| 60,610 | | |
| 6 | | |
| 199,994 | | |
| - | | |
| - | | |
| 200,000 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Dividend paid | |
| - | | |
| - | | |
| - | | |
| (8,945,377 | ) | |
| - | | |
| (8,945,377 | ) |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Net income | |
| - | | |
| - | | |
| - | | |
| 5,387,502 | | |
| - | | |
| 5,387,502 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Foreign currency translation adjustment | |
| - | | |
| - | | |
| - | | |
| - | | |
| (76,610 | ) | |
| (76,610 | ) |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Balances, December 31, 2013 | |
| 59,306,824 | | |
$ | 5,930 | | |
$ | 126,329,321 | | |
$ | 142,270,385 | | |
$ | 486,331 | | |
$ | 269,091,967 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Ordinary shares repurchased and retired | |
| (1,415,300 | ) | |
| (142 | ) | |
| (4,193,412 | ) | |
| - | | |
| - | | |
| (4,193,554 | ) |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Incentive shares issued for Bao Li Gaming 2013 net income target | |
| 1,250,000 | | |
| 125 | | |
| 3,837,375 | | |
| - | | |
| - | | |
| 3,837,500 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Incentive shares issued for Oriental VIP Room 2014 net income target | |
| 1,250,000 | | |
| 125 | | |
| 3,874,875 | | |
| - | | |
| - | | |
| 3,875,000 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Directors Shares issued for compensation | |
| 60,790 | | |
| 6 | | |
| 199,994 | | |
| - | | |
| - | | |
| 200,000 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Dividend paid | |
| - | | |
| - | | |
| - | | |
| (1,539,260 | ) | |
| | | |
| (1,539,260 | ) |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Net loss | |
| - | | |
| - | | |
| - | | |
| (60,077,935 | ) | |
| - | | |
| (60,077,935 | ) |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Foreign currency translation adjustment | |
| - | | |
| - | | |
| - | | |
| - | | |
| 65,092 | | |
| 65,092 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Balances, December 31, 2014 | |
| 60,452,314 | | |
$ | 6,044 | | |
$ | 130,048,153 | | |
$ | 80,653,190 | | |
$ | 551,423 | | |
$ | 211,258,810 | |
SEE ACCOMPANYING NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS
IAO KUN GROUP HOLDING COMPANY
LIMITED
F/K/A ASIA ENTERTAINMENT &
RESOURCES LTD.
CONSOLIDATED STATEMENTS OF CASH
FLOWS
FOR THE NINE MONTHS ENDED DECEMBER
31,
| | |
2014 | | |
2013 | | |
2012 | |
| CASH FLOWS FROM OPERATING ACTIVITIES | |
| | | |
| | | |
| | |
| Net (loss) income | |
$ | (60,077,935 | ) | |
$ | 5,387,502 | | |
$ | 70,119,242 | |
| | |
| | | |
| | | |
| | |
| Adjustments to reconcile net (loss) income to net cash provided by operating activities | |
| | | |
| | | |
| | |
| | |
| | | |
| | | |
| | |
| Amortization of intangible assets | |
| 16,365,034 | | |
| 13,187,006 | | |
| 6,622,238 | |
| Change in fair value of contingent purchase price obligation for the acquisition of King's Gaming, Bao Li Gaming and Oriental VIP Room | |
| 60,918,569 | | |
| 12,445,789 | | |
| (15,166,700 | ) |
| Depreciation | |
| 77,224 | | |
| 24,284 | | |
| 13,250 | |
| Loss on sale of equipment | |
| 14,958 | | |
| - | | |
| - | |
| Change in assets and liabilities | |
| | | |
| | | |
| | |
| Accounts Receivable | |
| 3,652,903 | | |
| (2,701,407 | ) | |
| (1,088,951 | ) |
| Markers Receivable | |
| 53,793,183 | | |
| (740,005 | ) | |
| (639,414 | ) |
| Prepaid Expenses and Other Assets | |
| 153,220 | | |
| (200,340 | ) | |
| (9,211 | ) |
| Deferred Offering Costs Expensed | |
| - | | |
| 806,786 | | |
| - | |
| Lines of Credit Payable | |
| (10,277,075 | ) | |
| 7,881,658 | | |
| (11,641,406 | ) |
| Accrued Expenses | |
| (4,018,538 | ) | |
| 1,815,085 | | |
| (1,780,943 | ) |
| Net cash provided by operating activities | |
| 60,601,543 | | |
| 37,906,358 | | |
| 46,428,105 | |
| | |
| | | |
| | | |
| | |
| CASH FLOW FROM INVESTING ACTIVITIES | |
| | | |
| | | |
| | |
| | |
| | | |
| | | |
| | |
| Cash paid for Oriental VIP Room acquisition | |
| - | | |
| (20,000,000 | ) | |
| - | |
| Cash paid for Bao Li Gaming acquisition | |
| - | | |
| - | | |
| (15,146,032 | ) |
| Proceeds from the sale of equipment | |
| 12,895 | | |
| - | | |
| - | |
| Purchase of property and equipment | |
| (303,819 | ) | |
| (126,974 | ) | |
| - | |
| Net cash used in investing activities | |
| (290,924 | ) | |
| (20,126,974 | ) | |
| (15,146,032 | ) |
| | |
| | | |
| | | |
| | |
| CASH FLOW FROM FINANCING ACTIVITIES | |
| | | |
| | | |
| | |
| | |
| | | |
| | | |
| | |
| Contingent consideration paid for King's Gaming acquisition | |
| (9,000,000 | ) | |
| (9,000,000 | ) | |
| (9,000,000 | ) |
| Contingent consideration paid for Bao Li Gaming acquisition | |
| (13,000,000 | ) | |
| (13,000,000 | ) | |
| - | |
| Contingent consideration paid for the Oriental VIP Room acquisition | |
| (26,000,000 | ) | |
| - | | |
| - | |
| Cash paid for shares repurchased | |
| (4,193,554 | ) | |
| (5,024,760 | ) | |
| (4,290,690 | ) |
| Payment of deferred offering costs | |
| - | | |
| - | | |
| (806,745 | ) |
| Professional fee payment for rights offering | |
| - | | |
| (2,067,809 | ) | |
| - | |
| Proceeds from issuance of ordinary shares | |
| - | | |
| 29,354,850 | | |
| - | |
| Proceeds from shareholder loans | |
| - | | |
| 3,640,223 | | |
| - | |
| Repayment of shareholder loans | |
| (3,196,222 | ) | |
| (25,802,070 | ) | |
| (671,071 | ) |
| Dividend paid | |
| (1,539,260 | ) | |
| (8,945,377 | ) | |
| (12,622,128 | ) |
| Net cash used in financing activities | |
| (56,929,036 | ) | |
| (30,844,943 | ) | |
| (27,390,634 | ) |
| | |
| | | |
| | | |
| | |
| Net increase (decrease) in cash and cash equivalents | |
| 3,381,583 | | |
| (13,065,559 | ) | |
| 3,891,439 | |
| | |
| | | |
| | | |
| | |
| Effect of foreign currency translation on cash | |
| 201,854 | | |
| (15,640 | ) | |
| 34,292 | |
| | |
| | | |
| | | |
| | |
| Cash and cash equivalents at beginning of period | |
| 7,563,097 | | |
| 20,644,296 | | |
| 16,718,565 | |
| | |
| | | |
| | | |
| | |
| Cash and cash equivalents at end of period | |
$ | 11,146,534 | | |
$ | 7,563,097 | | |
$ | 20,644,296 | |
| | |
| | | |
| | | |
| | |
| | |
| | | |
| | | |
| | |
| Non-cash Investing Activities | |
| | | |
| | | |
| | |
| Estimated contingent purchase price-Oriental VIP Room | |
$ | - | | |
$ | 37,816,791 | | |
$ | - | |
| Estimated contingent purchase price- Bao Li Gaming | |
$ | - | | |
$ | - | | |
$ | 32,294,981 | |
| | |
| | | |
| | | |
| | |
| Non-cash Financing Activities | |
| | | |
| | | |
| | |
| Ordinary shares issued for repayment of debt | |
$ | - | | |
$ | 34,197,930 | | |
$ | - | |
| Incentive shares issued for 2011 net income target | |
| - | | |
$ | - | | |
$ | 17,977,151 | |
| Incentive shares issued for King's Gaming 2011 net income target and relieved from contingent consideration | |
$ | - | | |
$ | - | | |
$ | 3,057,600 | |
| Director shares issued for compensation | |
$ | 200,000 | | |
$ | 200,000 | | |
$ | 346,000 | |
| Ordinary shares issued for Bao Li Contingent Consideration | |
$ | 3,837,500 | | |
$ | - | | |
$ | - | |
| Ordinary shares issued for the Oriental VIP Contingent Consideration | |
$ | 3,875,000 | | |
| - | | |
| - | |
| Declared Dividend Payable | |
$ | - | | |
$ | - | | |
$ | - | |
SEE ACCOMPANYING NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS
IAO KUN GROUP HOLDING COMPANY LIMITED
F/K/A ASIA ENTERTAINMENT & RESOURCES
LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013
AND 2012
Note 1 – Organization and Business of Companies
Iao Kun Group Holding Company
Limited (formerly Asia Entertainment & Resources Ltd. and formerly CS China Acquisition Corp.) ("Iao Kun" or
the “Company”) was incorporated in the Cayman Islands on September 24, 2007 as a blank check company whose objective
was to acquire, through a share exchange, asset acquisition or other similar business combination, an operating business, or control
of such operating business through contractual arrangements, that has its principal operations located in People’s Republic
of China (“PRC”, “China”). On September 30, 2013, the Company changed its name from Asia Entertainment
& Resources Ltd (“AERL”). The decision to change the name of the Company was to enhance the Company’s brand
image in Macau.
On October 6, 2009, Iao
Kun entered into a Stock Purchase Agreement, subsequently amended on November 10, 2009, December 9, 2009, January 11, 2010 and
April 18, 2011 (the “Agreement”), with Asia Gaming & Resort Limited and its wholly owned subsidiaries (collectively
“AGRL”) and Spring Fortune Investments Ltd. (“Spring Fortune”) that provided for the acquisition by Iao
Kun from Spring Fortune of all of the outstanding capital stock of AGRL. On February 2, 2010, the acquisition was consummated
pursuant to the terms of the Agreement, and AGRL became a wholly owned subsidiary of Iao Kun.
Upon the closing of the
acquisition of AGRL by Iao Kun, the Promoter Companies (defined below) became variable interest entities (‘‘VIEs’’)
of the subsidiaries of AGRL, which are the primary beneficiaries of the operations of the Promotion Entities (defined below) through
the profit interest agreements which were entered into on February 2, 2010 and agreements subsequent to that date.
On November 10, 2010, the
Company entered into an agreement to acquire the right to 100% of the profits derived by King's Gaming Promotion Limited (“King's
Gaming”) from the promotion of the Wenzhou VIP Room at the Venetian Hotel and Casino in Macau as discussed in Note 9.
On May 15, 2011 the Company
opened a VIP gaming room at Galaxy Resort Macau located in Cotai, Macau.
On June 16, 2011, the Company
closed the VIP gaming room at the MGM Grand Hotel and Casino in Macau.
Jubilee Dynasty Limited
("Jubilee Dynasty"), a subsidiary of AGRL, was incorporated on May 18, 2012. The main asset of Jubilee Dynasty
is the right to 100% of the profit derived by Bao Li Gaming Promotion Limited (“Bao Li” or “Bao Li Gaming”)
from the promotion of a VIP gaming room at the City of Dreams Hotel and Casino in Macau, pursuant to a profit interest agreement
between Jubilee Dynasty and Bao Li effective September 1, 2012.
On September 5, 2012, the
Company entered into an agreement to acquire the right to 100% of the profits derived by Bao Li Gaming from the promotion of a
VIP gaming room at the City of Dreams Hotel and Casino in Macau as discussed in Note 10.
Frontier Champion Limited
("Frontier Champion"), a subsidiary of AGRL, was incorporated on May 28, 2013. The main asset of Frontier Champion
is the right to 100% of the profit derived by the Collaborator from the promotion of a VIP gaming room at the Le Royal Arc Casino
in Macau, pursuant to a profit interest agreement between Frontier Champion and the Collaborator effective July 1, 2013.
On June 26, 2013, the Company
entered into an agreement to acquire the right to 100% of the profits derived by Mr. Vong Veng Im from the promotion of a VIP gaming
room at the Le Royal Arc Casino in Macau as discussed in Note 11. Beginning from November 2013, Lam Chou In functions as a Collaborator
for the licensed gaming promoter of the VIP gaming room at Le Royal Arc Casino in Macau. According to Macau laws, a collaborator
needs to enter into an agreement with a licensed gaming promoter and register with the Gaming Inspection and Coordination Bureau
of the Macau SAR.
IAO KUN GROUP HOLDING COMPANY LIMITED
F/K/A ASIA ENTERTAINMENT & RESOURCES
LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013
AND 2012
Currently, Macau laws do
not allow corporate entities, such as Iao Kun, to directly operate a gaming promotion business in Macau. Consequently,
Iao Kun’s gaming promotion business is operated through a series of contractual arrangements, including profit interest agreements
that enable the AGRL subsidiaries to receive substantially all of the economic benefits of the Sang Heng, Sang Lung, Kings Gaming
and Bao Li Gaming (“Promoter Companies”) and Collaborator (“Lam Chou In” or “Oriental VIP Room”)
(collectively “Promotion Entities”) and for AGRL to exercise effective control over the Promotion Entities.
Management’s determination
of the appropriate accounting method with respect to the AGRL VIEs is based on Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”) Topic 810 “Consolidation of Variable Interest Entities" (“Topic
810”). AGRL consolidates the VIEs because the equity investors in the Promotion Entities do not have the characteristics
of a controlling financial interest and Iao Kun through AGRL is the primary beneficiary.
In accordance with FASB
ASC Topic 810, the operations of the Promotion Entities are consolidated with those of Iao Kun for all periods subsequent to the
closing of the acquisition of AGRL by Iao Kun.
The operations of AGRL's
Promotion Entities are based in Macau, and are subject to Macau jurisdiction. The Company operates a gaming promotion business
in VIP gaming rooms located in hotels and casinos in Macau. Iao Kun, its subsidiaries (including AGRL) and the Promotion Entities
are collectively referred to as the "Group".
VIP Gaming Promoter and Collaborator
Agreements
Sang Heng’s Gaming
Representative (VIP Room Promoter) Agreement dated as of February 1, 2008 entered into between Galaxy Casino, S.A., and Sang Heng
allowed for the sharing of profits as a gaming representative of Iao Kun VIP Room in Star World Hotel and Casino in Macau for the
period from November 30, 2007 to December 31, 2008. Pursuant to an agreement in October 2009, both parties agreed that Sang Heng
should be compensated in accordance with Order no. 83/2009 of the Secretary for the Economy and Finances of the Macau SAR, which
provides the maximum commission for gaming activity of promotion of games at 1.25% of the rolling chip volume. The agreement became
effective on November 1, 2009. The agreement must be, and has been, renewed annually. Effective September 1, 2012, both parties
agreed to change to the revenue sharing model to provide that Sang Heng be compensated based upon a mutually agreed upon percentage
of the win/losses of the VIP gaming room.
King’s Gaming’s
Gaming Representative (VIP Room Promoter) Agreement was entered into in July 2008 between Venetian Macau S.A. and King's Gaming
which allowed for the sharing of profits as a gaming representative of Wenzhou VIP Room in Venetian Hotel and Casino in Macau for
the period ended December 31, 2008. The agreement was renewed in January 2009 for the period from January 1, 2009 to December 31,
2009. Pursuant to an agreement in September 2009, both parties agreed that King's Gaming should be compensated in accordance with
Order no. 83/2009 of the Secretary for the Economy and Finances of the Macau SAR, which provides the maximum commission for gaming
activity of promotion of games at 1.25% of the rolling chip volume. The agreement became effective on November 1, 2009. The agreement automatically
renews annually. Effective September 1, 2012, both parties agreed to change to the revenue sharing model to provide that King’s
Gaming be compensated based upon a mutually agreed upon percentage of the wins/losses of the VIP gaming room.
Sang Lung’s Gaming
Representative (VIP Room Promoter) Agreement dated as of June 24, 2011 entered into between Galaxy Casino, S.A., and Sang Lung
allowed for Sang Lung to be compensated in accordance with Order no. 83/2009 of the Secretary for the Economy and Finances of the
Macau SAR, which provides the maximum commission for gaming activity of promotion of games at 1.25% of the rolling chip volume.
The agreement became effective on July 1, 2011. The agreement must be, and has been, renewed annually. Effective September 1, 2012,
both parties agreed to change to the revenue sharing model to provide that Sang Lung be compensated based upon a mutually agreed
upon percentage of the wins/losses of the VIP gaming room.
IAO KUN GROUP HOLDING COMPANY LIMITED
F/K/A ASIA ENTERTAINMENT & RESOURCES
LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013
AND 2012
Bao Li’s Gaming Promoter
Agreement dated as of February 7, 2011 entered into between Melco Crown Gaming (Macau) Limited and Bao Li Gaming which allowed
for Bao Li Gaming to be compensated in accordance with Order no. 83/2009 of the Secretary for the Economy and Finances of the Macau
SAR, which provides the maximum commission for gaming activity of promotion of games at 1.25% of the rolling chip volume. The agreement automatically
renews annually. As a matter of convenience and to maintain flexibility in remuneration methods, the Company also entered into
an agreement with Melco Crown Gaming (Macau) Limited to share in the casino’s VIP gaming room wins/losses from the players
recruited by the Company. Either the Gaming Promoter or the Casino Operator may adjust these arrangements with adequate notice
and agreement by both parties to the arrangement. Effective September 1, 2012, both parties agreed to change to the revenue sharing
model to provide that Bao Li Gaming be compensated based upon a mutually agreed upon percentage of the wins/losses of the VIP gaming
room.
The Collaborator Agreement
dated October 15, 2013 entered into between the licensed gaming promoter of Le Royal Arc Casino and the Collaborator allows the
Collaborator to be compensated based upon a mutually agreed-upon percentage of the win/losses of the Oriental VIP Room at the Le
Royal Arc Casino.
Note 2 — Summary of Significant Accounting
Policies
Principles of Consolidation
The operations of the Promotion
Entities are consolidated with those of AGRL and its wholly owned subsidiaries and Iao Kun as of December 31, 2014 and December
31, 2013 and for the years ended December 31, 2014, 2013 and 2012. Intercompany transactions and account balances have been eliminated.
Unless otherwise indicated all currency amounts are in United States Dollars.
Fiscal Year End
The fiscal year end of
the Company is December 31.
Use of Estimates
The preparation of the
consolidated financial statements in conformity with U.S. GAAP requires the management to make estimates and judgments that affect
the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities.
These estimates and judgments are based on historical information, information that is currently available to the management and
on various other assumptions that the management believes to be reasonable under the circumstances. The Company has made significant
estimates of the contingent purchase price due for the King's Gaming, Bao Li Gaming and the Oriental VIP Room acquisitions in these
consolidated financial statements. Actual results could vary from those estimates.
Revenue Recognition
Revenue from VIP gaming
room promotion operations is recorded monthly based upon the Promotion Entities’ share of the net gaming wins/losses in VIP
gaming rooms. The amounts due to the Promotion Entities are calculated and reported by the Casino Operators and the Promotion
Entities on a monthly basis, usually within two days of the month end.
Additionally, the Promotion
Entities earn revenues based upon percentages of non-negotiable chips exchanged in the VIP gaming rooms (typically 0.05%), which
is available to offset costs incurred for accommodations, food and beverage and other services furnished to players and is included
in gross revenues. These revenues are included in revenue from VIP gaming room promotion operations in the accompanying consolidated
statements of operations.
On August 1, 2012, the
Company announced that, beginning on September 1, 2012, it would be changing its remuneration model from a fixed commission model
of 1.25% of the rolling chip turnover to a revenue sharing model. The decision to change from the fixed commission model to the
revenue sharing model was made as a result of the Company’s expansion into four VIP gaming rooms with the ability to spread
the risk of fluctuations surrounding gaming wins and losses. Additionally, management has initiated a program for junket agents
who purchase non-negotiable chips in cash from the Promotion Entities (“super agent”), allowing the super agent to
assume some of the risk of gaming losses or receive increased commissions as a result of gaming wins.
IAO KUN GROUP HOLDING COMPANY LIMITED
F/K/A ASIA ENTERTAINMENT & RESOURCES
LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013
AND 2012
Win rate was 2.98%, 2.97%
and 3.03% during the years ended December 31, 2014, 2013 and 2012, respectively. The win rate is the percentage of rolling chip
turnover exchanged in the VIP gaming room that is won by the casino (gross wins and losses divided by rolling chip turnover). Total
rolling chip turnover in the Group’s VIP gaming rooms was approximately $16,627,093,000, $17,048,596,000 and $18,149,348,000
during the years ended December 31, 2014, 2013 and 2012, respectively.
VIP Gaming Room Cage and Marker Accounting
In the VIP gaming rooms,
VIP gaming patrons primarily purchase non-negotiable chips from the cage either with cash, cash chips, cashier’s order, or
markers (short term, non-interest bearing loans). Non-negotiable chips can only be used to make wagers. Winning wagers are paid
in cash chips. If the VIP gaming patrons continue to play, they must exchange the cash chips for non-negotiable chips, which is
the basis for commission. The exchange of the non-negotiable chips by the VIP gaming patrons in the VIP gaming room is recorded
as rolling chip turnover and provides a basis for measuring VIP gaming room win percentage. It is customary in Macau to measure
VIP gaming room play using this rolling chip method.
A VIP gaming patron can
be a player, a junket agent or a super agent. Whoever signs on the marker and takes delivery of the non-negotiable chips at the
casino cage and carries them over to the game table is the borrower. It is also common practice that the VIP gaming patron taking
delivery of the non-negotiable chips shares the chips with other VIP gaming patrons for the purpose of achieving a higher rolling
volume (if the VIP gaming patron is a junket agent, they are entitled to receive commission even when the non-negotiable chips
are wagered by third parties acquainted with them) without receiving immediate payment in cash for the non-negotiable chips. Under
Macau law, licensed gaming promoters are permitted to extend credit to VIP gaming patrons creating a civil obligation to pay. This
credit is typically unsecured but is generally offset by the commissions payable to a junket agent.
The Group, through the
Promotion Entities, extends credit to junket agents. A majority of the Group’s consolidated markers receivable are owed by
junket agents from Macau and the rest are primarily in Asia. In addition to enforceability issues, the collectability of markers
receivable from foreign junket agents is affected by a number of factors including changes in economic conditions in the junket
agents’ home countries.
The Group may not be able
to collect all of their markers receivable from the junket agents. Management expects that the Group will be able to enforce these
obligations only in a limited number of jurisdictions, including Macau and Hong Kong. To the extent that junket agents of the Group,
through the Promotion Entities, are from other jurisdictions, the Group may not have access to a forum in which they will be able
to collect all of their markers receivable because, among other reasons, courts of many jurisdictions do not enforce gaming debts
and the Group may encounter forums that will refuse to enforce such debts. The Group’s inability to collect gaming debts
could have a significant negative impact on their operating results.
The following is a summary
of an aging of the Company’s markers receivable by jurisdiction that may refuse to enforce such debts:
| Jurisdiction/Aging | |
December 31,
2014 | | |
% of total
markers
receivable | | |
December 31,
2013 | | |
% of total
markers
receivable | |
| PRC | |
| | | |
| | | |
| | | |
| | |
| 0-30 days | |
$ | 12,330,410 | | |
| | | |
$ | 53,574,330 | | |
| | |
| 31-60 days | |
| 11,760,382 | | |
| | | |
| 30,406,634 | | |
| | |
| 61-90 days | |
| 9,025,019 | | |
| | | |
| 7,011,955 | | |
| | |
| Greater than 90 days | |
| 23,337,632 | | |
| | | |
| 2,185,997 | | |
| | |
| Total | |
$ | 56,453,443 | | |
| 30 | % | |
$ | 93,178,916 | | |
| 38 | % |
IAO KUN GROUP HOLDING COMPANY LIMITED
F/K/A ASIA ENTERTAINMENT & RESOURCES
LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013
AND 2012
The Group regularly evaluates
the allowance for uncollectible marker receivable based on a specific review of junket agent accounts as well as management’s
prior experience with collection trends in the casino industry and current economic and business conditions. Messrs. Lam and Vong
guaranteed all markers receivable in the Company’s VIP gaming rooms until June 25, 2014, upon the execution of a termination
agreement for the guarantees and loan agreements. The guarantees by Messrs. Lam and Vong did not cover markers receivable attributable
to the junket agent networks of Mr. Mok, Mr. Lou and Mr. Lei or Mr. Vong Veng Im as described below. The guarantee of Messrs. Lam
and Vong allowed for offset against the loans provided by them for the working capital. Upon the acquisition of King’s Gaming,
Mr. Mok has guaranteed the collection of all markers receivable attributable to Mr. Mok and his network of junket agents at both
King’s Gaming’s existing VIP gaming room and the Company’s existing and future VIP gaming rooms for as long as
he is employed by the Company. Upon the acquisition of Bao Li Gaming, Mr. Lou and Mr. Lei guaranteed the collection of all markers
receivable attributable to them and their network of junket agents at both Bao Li Gaming’s existing VIP gaming room and the
Company’s existing and future VIP gaming rooms through December 31, 2015. Upon the acquisition of the Oriental VIP room,
Mr. Vong Veng Im guaranteed the collection of all markers receivable attributable to the Collaborator and his network of junket
agents at both the Oriental VIP Room existing and the Company’s existing and future VIP gaming rooms through June 30, 2016.
As of December 31, 2014 and December 31, 2013, management believes that an allowance for uncollectible markers receivable is not
necessary.
Fair Value of Financial Instruments
FASB ASC Topic 820 “Fair
Value Measurements and Disclosures” defines fair value, the methods used to measure fair value and the expanded disclosures
about fair value measurements. Fair value is the price that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between the buyer and the seller at the measurement date. In determining fair value, the valuation techniques
consistent with the market approach, income approach and cost approach shall be used to measure fair value. FASB ASC Topic 820
establishes a fair value hierarchy for inputs, which represent the assumptions used by the buyer and seller in pricing the asset
or liability. These inputs are further defined as observable and unobservable inputs. Observable inputs are those that buyer and
seller would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable
inputs reflect the Company’s assumptions about the inputs that the buyer and seller would use in pricing the asset or liability
developed based on the best information available in the circumstances.
The fair value hierarchy
is categorized into three levels based on the inputs as follows:
| Level 1 — |
|
Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Valuation adjustments and block discounts are not being applied. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these assets and liabilities does not entail a significant degree of judgment. |
| Level 2 — |
|
Valuations based on (i) quoted prices in active markets for similar assets and liabilities, (ii) quoted prices in markets that are not active for identical or similar assets, (iii) inputs other than quoted prices for the assets or liabilities, or (iv) inputs that are derived principally from or corroborated by market through correlation or other means. |
| Level 3 — |
|
Valuations based on inputs that are unobservable and significant to the overall fair value measurement. |
For certain of the Group's
financial instruments, none of which are held for trading purposes, including cash and cash equivalents, accounts receivable, markers
receivable, certain other current assets, lines of credit payable, accrued expenses, and loan payable to shareholders, the
carrying values of these financial instruments approximate their fair value due to their short maturities. The payables-King’s
Gaming, Bao Li Gaming and Oriental VIP Room acquisitions were initially recognized for the fair values of the acquisition contingent
consideration and are adjusted to the fair value at each subsequent reporting date (see Notes 9, Note 10 and Note 11).
IAO KUN GROUP HOLDING COMPANY LIMITED
F/K/A ASIA ENTERTAINMENT & RESOURCES
LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013
AND 2012
At least annually, management
determines if the current valuation techniques used in the fair value measurements are still appropriate and evaluates and adjusts
the unobservable inputs used in the fair value measurements based on current market conditions and other information. There were
no changes in the valuation techniques during the years ended December 31, 2014, 2013 and 2012. Additional information regarding
the valuation technique and inputs used is as follows:
Quantitative Information
about Level 3 Fair Value Measurements
| | |
Fair Value | | |
| |
| |
| |
Contingent
Consideration | |
as of
12/31/2014 | | |
Valuation
Techniques | |
Unobservable Input | |
Range | |
| | |
| | |
| |
| |
| |
| Oriental VIP Room | |
$ | 41,404,026 | | |
Forecasted Performance, 2015-June 2016 | |
Chip Turnover Annual Growth | |
| (40%) – (5%) | |
| | |
| | | |
| |
| |
| | |
| | |
| | | |
Monte Carlo Method | |
Average Simulated Share Prices | |
| $1.24- $1.29 | |
| | |
| | | |
| |
| |
| | |
| Bao-Li Gaming | |
$ | 42,291,631 | | |
Forecasted Performance, 2015 | |
Chip Turnover Annual Growth | |
| (20%) - (5%) | |
| | |
| | | |
| |
| |
| | |
| | |
| | | |
Monte Carlo Method | |
Average Simulated Share Prices | |
| $1.26- $1.31 | |
| | |
Fair Value | | |
| |
| |
| |
Contingent
Consideration | |
as of
12/31/2013 | | |
Valuation
Techniques | |
Unobservable Input | |
Range | |
| | |
| | |
| |
| |
| |
| King’s Gaming | |
$ | 9,000,000 | | |
Forecasted Performance, 2014- 2020 | |
Chip Turnover Annual Growth | |
| 1.9% - 15.0% | |
| | |
| | | |
Forecasted Performance, 2014- 2020 | |
Operating Income/Chip Turnover | |
| 0.14% - 0.16% | |
| | |
| | | |
Monte Carlo Method | |
Average Simulated Share Prices | |
| $2.08- $2.91 | |
| | |
| | | |
| |
| |
| | |
| Oriental VIP Room | |
$ | 36,528,269 | | |
Forecasted Performance, 2014-June 2016 | |
Chip Turnover Annual Growth | |
| (5.0)% - (30.0%) | |
| | |
| | | |
| |
| |
| | |
| | |
| | | |
Monte Carlo Method | |
Average Simulated Share Prices | |
| $2.67- $2.98 | |
| | |
| | | |
| |
| |
| | |
| Bao-Li Gaming | |
$ | 33,027,050 | | |
Forecasted Performance, 2014-2015 | |
Chip Turnover Annual Growth | |
| (5.0%) - (60.0%) | |
| | |
| | | |
| |
| |
| | |
| | |
| | | |
Monte Carlo Method | |
Average Simulated Share Prices | |
| $2.76- $2.90 | |
The significant unobservable
inputs used in the fair value measurement of the Company’s contingent consideration for the Bao Li Gaming and Oriental VIP
Room acquisitions are the forecasted performance results of the operations of Bao Li Gaming and Oriental VIP Room and the simulated
share prices of the Company’s Ordinary Shares under the Monte Carlo method. Significant increases (decreases) in any of those
inputs in isolation would result in a significantly higher (lower) fair value measurement.
Cash and Cash Equivalents
Cash and cash equivalents
consist of cash, cash chips, non-negotiable chips and short-term investments with original maturities of less than 90 days.
Cash equivalents are placed with high credit quality financial institutions.
IAO KUN GROUP HOLDING COMPANY LIMITED
F/K/A ASIA ENTERTAINMENT & RESOURCES
LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013
AND 2012
Accounts Receivable and Concentration of Credit Risk
Accounts receivable are
principally comprised of net gaming revenues, fees and incentives revenues receivable, which do not bear interest and are recorded
at amounts due from the Casino Operators.
When deemed necessary,
the Group records an allowance for doubtful accounts which represents management’s best estimate of the amount of probable
credit losses in the Group’s existing accounts receivable. Management believes that all outstanding balances are collectible
and therefore an allowance has not been established. Although management believes that no allowance is currently necessary, it
is possible that the estimated amount of cash collections with respect to accounts receivable could change.
Earnings Per Share
Basic net earnings (loss)
per common share is computed by dividing net earnings (loss) applicable to common shareholders by the weighted-average number of
common shares outstanding during the period. Diluted net earnings (loss) per common share is determined using the weighted-average
number of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents, consisting
of shares that might be issued upon exercise of common stock options. In periods where losses are reported, the weighted-average
number of common shares outstanding excludes common stock equivalents, because their inclusion would be anti-dilutive.
The calculations of earnings
per share are computed as follows for the years ended December 31,:
| | |
2014 | | |
2013 | | |
2012 | |
| Numerator: | |
| | | |
| | | |
| | |
| Net (loss) income attributable to Ordinary Shareholders for basic and diluted earnings per share | |
$ | (60,077,935 | ) | |
$ | 5,387,502 | | |
$ | 70,119,242 | |
| Denominator: | |
| | | |
| | | |
| | |
| Denominator for basic (loss) earnings per share | |
| | | |
| | | |
| | |
| - Weighted-average Ordinary Shares outstanding during the year | |
| 60,781,915 | | |
| 53,030,405 | | |
| 45,752,743 | |
| Effect of dilutive securities: | |
| | | |
| | | |
| | |
| - Weighted-average Director shares issued/ issuable | |
| - | | |
| 167 | | |
| 179 | |
| - Bao Li Gaming earn out shares | |
| - | | |
| 180,000 | | |
| - | |
| Denominator for diluted (loss) earnings per share | |
| 60,781,915 | | |
| 53,210,572 | | |
| 45,752,922 | |
| | |
| | | |
| | | |
| | |
| Basic (loss) earnings per share | |
$ | (0.99 | ) | |
$ | 0.10 | | |
$ | 1.53 | |
| Diluted (loss) earnings per share | |
$ | (0.99 | ) | |
$ | 0.10 | | |
$ | 1.53 | |
IAO KUN GROUP HOLDING COMPANY LIMITED
F/K/A ASIA ENTERTAINMENT & RESOURCES
LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013
AND 2012
King’s Gaming did
not meet its 2013 Gross Profit Target to exceed $8,860,000 and no incentive shares were issued. Bao Li Gaming met its rolling chip
turnover target of $5,000,000,000 in 2013 and 1,250,000 ordinary shares were issued during the third quarter of 2014. In addition,
Bao Li Gaming met its rolling chip turnover target for the base earnout of $2,500,000,000 in July 2014 and 625,000 ordinary shares
will be issued subsequent to December 31, 2014. Bao Li Gaming has also earned an additional 400,000 ordinary shares under the incremental
earnout clause. The Oriental VIP Room met its rolling chip turnover target of $5,000,000,000 in 2014 and 1,250,000 ordinary shares
were issued during the fourth quarter of 2014. The issuable ordinary shares have been included in basic loss per share based on
the weighted average shares for the year ended December 31, 2014 but incremental shares from the assumed outstanding earn out shares
as of the beginning of each period are excluded from the calculation of diluted loss per shares because the effect would have been
anti-dilutive.
In 2011, the Company decided
that a portion of the Directors fees and officers remuneration would be paid in Ordinary Shares. The shares are to be issued in
January of each year. A total of 60,610 ordinary shares were issued in July 2013 to satisfy the Company’s obligations
for 2012 and have been included in basic and diluted earnings per share based on the weighted average shares for the year ended
December 31, 2013. A total of 60,790 ordinary shares were issued during the third quarter of 2014 to satisfy the Company’s
obligations for 2013 and have been included in basic and diluted earnings per share based on the weighted average shares for the
year ended December 31, 2014. A liability of approximately $209,000 and $209,000 is included in accrued expenses at December 31,
2014 and December 31, 2013, respectively.
The Company had 1,440,000
dilutive potential Ordinary Shares related to the Underwriter Unit Purchase Option (UPO). The UPO expired on August 10, 2013.
The Company issued one
transferable subscription right for each two ordinary shares then owned to stockholders of record on June 3, 2013. Accordingly,
as required by FASB ASC Topic 260 “Earnings Per Share” the number of weighted average Ordinary Shares outstanding for
basic and diluted earnings per share have been increased retroactively by a factor of 1.081 for all periods presented before June
21, 2013. This factor represents the impact of the bonus element of the rights offering on the Company’s Ordinary Shares,
based upon the closing price of the Ordinary Shares immediately prior to the rights trading separately from the Ordinary Shares
on June 5, 2013 ($4.07 per share), and the expected proceeds from the rights offering.
Property and Equipment
Property and equipment
is stated at cost. Depreciation and amortization is recorded on a straight-line basis over the estimated useful lives of the assets
ranging from two to five years, which do not exceed the lease term for leasehold improvements, if applicable.
Goodwill and Other Intangible Assets
The Company amortizes intangible
assets over their estimated useful lives unless it is determined their lives to be indefinite. Goodwill and other intangible assets
with indefinite lives are not amortized but are subject to tests for impairment at least annually. Management performs impairment
tests more frequently than annually if events or circumstances indicate that the value of goodwill or intangible assets with indefinite
lives might be impaired.
The following are the useful
lives of the respective finite-lived intangible assets:
| Bad Debt Guarantee |
|
3 to 5.5 years |
|
Based upon six months after the expiration of the employment agreement or at the expiration of the employment agreement |
| |
|
|
|
|
| Non-Compete agreement |
|
9 to 11.7 years |
|
Based upon the termination date of the casino's license or June 2022 |
| |
|
|
|
|
| Profit interest agreement |
|
9 to 11.7 years |
|
Based upon the termination date of the casino's license or June 2022 |
IAO KUN GROUP HOLDING COMPANY LIMITED
F/K/A ASIA ENTERTAINMENT & RESOURCES
LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013
AND 2012
Indefinite Useful Life Assets
Goodwill is evaluated for
possible impairment by comparing the fair value of a business unit with its carrying value, including the goodwill assigned to
that business unit. Fair value of a business unit is estimated using a combination of income-based and market-based valuation methodologies.
Under the income approach, forecasted cash flows of a business unit are discounted to a present value using a discount rate commensurate
with the risks of those cash flows. Under the market approach, the fair value of a business unit is derived from recent market
transactions involving merger and acquisition and/or publicly-traded guideline companies deemed broadly similar to the subject
business unit. An impairment charge is recorded if the carrying value of the goodwill exceeds its implied fair value. Assets
with indefinite useful lives are not subject to amortization and are tested for impairment annually or more frequently if events
or circumstances indicate that the assets might be impaired. The impairment test consists of a comparison of the fair value of
the asset with its carrying amount. If the carrying amount of the asset exceeds its fair value, an impairment will be recognized
in an amount equal to that excess. If the carrying amount of the asset does not exceed the fair value, no impairment is recognized.
Impairment of Long-lived Assets
The Company evaluates when
events or circumstances indicate that the carrying amount of long-lived assets to be held and used might not be recoverable, the
expected future undiscounted cash flows from the assets are estimated and compared with the carrying amount of the assets. If the
sum of the estimated undiscounted cash flows was less than the carrying amount of the assets, an impairment loss would be recorded.
The impairment loss would be measured on a location by location basis by comparing the fair value of the asset with its carrying
amount. Long-lived assets that are held for disposal are reported at the lower of the assets’ carrying amount or fair value
less costs related to the assets’ disposition. No impairment has been recognized.
Advertising Costs
Costs for advertising and
marketing are expensed the first time the advertising or marketing takes place or as incurred. Advertising and marketing costs
for ongoing operations are included in selling, general and administrative expense. During the years ended December 31, 2014,
2013 and 2012, the Group incurred advertising costs of $709,609, $348,384 and $158,436, respectively.
Stock-Based Compensation
The Company awards stock
and other equity-based instruments to its employees, directors and consultants (collectively "share-based payments").
Compensation cost related to such awards is recorded when earned. Ordinary Shares are issued to the directors subsequent
to year end based on average trading price prior to December 31 each year. All of the Company's stock-based compensation
is based on grants of equity instruments and no liability awards have been granted. All of the Company directors presently receive
$20,000 payable in Ordinary Shares, valued at the average of the closing prices of the Ordinary Shares over the three-month period
preceding the end of each fiscal year.
In December 2011, the
shareholders approved the 2011 Omnibus Securities and Incentive Plan (the “Plan”). The purpose of the Plan is to
assist the Company in attracting, retaining and providing incentives to key management employees and nonemployee directors
of, and nonemployee consultants to the Company and its Affiliates, and to align the interests of such employees, nonemployee
directors and nonemployee consultants with those of the Company’s shareholders. The Plan provides for the granting of
Distribution Equivalent Rights, Incentive Share Options, Non-Qualified Share Options, Performance Share Awards, Performance
Unit Awards, Restricted Share Awards, Restricted Share Unit Awards, Share Appreciation Rights, Tandem Share Appreciation
Rights, Unrestricted Share Awards or any combination of the foregoing up to a maximum of 200,000 Ordinary Shares, as may be
best suited to the circumstances of the particular Employee, Director or Consultant. On April 24, 2012, 50,400 Ordinary
Shares were issued and on July 3, 2013, 60,610 ordinary shares were issued. On July 17, 2014, 60,790 Ordinary Shares were
issued. 111,730 ordinary shares are to be issued for the equity portion of year 2014 compensation upon approval of
a shareholders meeting for a revised Plan and approval from the Board of Directors.
IAO KUN GROUP HOLDING COMPANY LIMITED
F/K/A ASIA ENTERTAINMENT & RESOURCES
LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013
AND 2012
Foreign Currency
The reporting currency
of Iao Kun is in the United States dollar ("US $", "$", “Reporting Currency”). The Group’s
functional currency is the Hong Kong Dollar (“HKD $”, “Functional Currency”). Monetary assets and
liabilities denominated in currencies other than the Functional Currency are translated into the Functional Currency at rates of
exchange prevailing at the balance sheet dates. Transactions denominated in currencies other than the Functional Currency are translated
into the Functional Currency at the exchange rates prevailing on the dates of the transaction.
Exchange gains or
losses arising from foreign currency transactions are included in the determination of net (loss) income for the respective
period.
For financial reporting
purposes, the consolidated financial statements of the Group, which are prepared using the Functional Currency, are then translated
into the Reporting Currency. Assets and liabilities are translated at the exchange rates at the balance sheet dates and revenue
and expenses are translated at the average exchange rates and shareholders' equity is translated at historical exchange rates.
Any translation adjustments resulting are not included in determining net (loss) income but are included in foreign currency translation
adjustment in other comprehensive income, a component of shareholders' equity.
| | |
December 31,
2014 | | |
December 31,
2013 | | |
December 31,
2012 | |
| Period end HK$:US$ exchange rate | |
$ | 7.75 | | |
$ | 7.75 | | |
$ | 7.75 | |
| Average annual HK$:US$ exchange rate | |
$ | 7.75 | | |
$ | 7.76 | | |
$ | 7.76 | |
Comprehensive Income
The Group follows standards
for the reporting and display of comprehensive income and its components in the financial statements. Comprehensive income is defined
as the change in equity of a company during the period from transactions and other events and circumstances excluding transactions
resulting from investments from owners and distributions to owners. Accumulated other comprehensive income, as presented on the
accompanying consolidated statements of changes in equity, is the cumulative foreign currency translation adjustment.
Economic and political risks
The Group’s current
operations are conducted in Macau and Hong Kong. Accordingly, the Group’s consolidated financial condition and results of
operations may be influenced by the political, economic and legal environment in the PRC and by the general state of the PRC economy.
The Group’s operations
in Macau and Hong Kong are subject to special considerations and significant risks not typically associated with companies in North
America and Western Europe. These include risks associated with, among others, the political, economic and legal environment and
foreign currency exchange. The Group’s consolidated results may be adversely affected by changes in the political and social
conditions in the PRC and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures,
currency conversion, remittances abroad and rates and methods of taxation, among other things.
Income Taxes
Sang Heng, King's Gaming,
Bao Li, Iao Pou, Sang Lung and Oriental are not subject to Macau Complimentary tax, because, pursuant to the VIP gaming promoter
agreements with the Casino Operators, gaming revenue is received net of taxes collected by the Macau SAR paid directly by the Casino
Operator on a monthly basis. No provision for Macau Complimentary tax has been made.
IAO KUN GROUP HOLDING COMPANY LIMITED
F/K/A ASIA ENTERTAINMENT & RESOURCES
LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013
AND 2012
As Promotion Entities,
Sang Heng, King's Gaming, Bao Li, Iao Pou ,Sang Lung and Oriental are subject to a tax on the amount of non-negotiable chips exchanged
by VIP gaming patrons in the VIP gaming rooms (“rolling chip turnover”), which is referred to as a “rolling tax”.
The rolling tax is deducted and paid by the Casino Operator on a monthly basis. The rate of rolling tax is 0.01% on the rolling
chip turnover of the VIP gaming room and the rolling tax is deducted as an expense in the consolidated statements of operations.
Doowell and Champion Lion
are incorporated under the BVI Business Companies Act, 2004 (No. 16 of 2004) and are exempted from payment of BVI taxes. Doowell
and Champion Lion are not subject to Korean Income tax because all promotion services are performed outside Korea. No provision
for Korean Income tax has been made.
AGRL is not subject to
Hong Kong profits tax because all operations are performed outside Hong Kong and Hong Kong adopts a territorial tax regime under
which only Hong Kong sourced income is subject to the profit tax.
All subsidiaries are incorporated
under the BVI Business Companies Act, 2004 (No. 16 of 2004) and are exempted from payment of BVI taxes.
The Company is not incorporated
nor does it engage in any trade or business in the United States and is not subject to United States federal income taxes. The
Company did not derive any significant amount of income subject to such taxes after completion of the Share Exchange and accordingly,
no relevant tax provision is made in the consolidated statements of operations.
Deferred income tax assets
and liabilities are determined based upon differences between the financial reporting and tax bases of assets and liabilities and
are measured using the enacted tax rates and laws that will be effective when the differences are expected to reverse.
Deferred tax assets are
reduced by a valuation allowance to the extent that management concludes it is more likely than not that the assets will not be
realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in the consolidated statements of income in the period that includes the enactment date.
The Company has not recorded
deferred income taxes applicable to undistributed earnings of Macau VIP rooms because it is the present intention of management
to reinvest the undistributed earnings indefinitely in Macau. Undistributed earnings amounted to approximately $256,283,000 and
$226,897,000 on December 31, 2014 and 2013, respectively. If the earnings of such foreign subsidiaries were not indefinitely reinvested,
a deferred tax liability of approximately $30,754,000 and $27,225,000 would have been required at December 31, 2014 and 2013, respectively.
Generally, such earnings become subject to Macau tax upon the remittance of dividends and under certain other circumstances. It
is not practicable to estimate the amount of deferred tax liability on such undistributed earnings.
The Company prescribes
a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken in the tax return.
This interpretation also provides guidance on de-recognition of income tax assets and liabilities, classification of current and
deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for
income taxes in interim periods and income tax disclosures. As of December 31, 2014 and 2013, there were no amounts that had been
accrued with respect to uncertain tax positions.
Recently Issued Accounting Pronouncements
Management does not believe
that any recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying
financial statements.
IAO KUN GROUP HOLDING COMPANY LIMITED
F/K/A ASIA ENTERTAINMENT & RESOURCES
LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013
AND 2012
Note 3 — Accounts Receivable
Accounts receivable consisted
of the following:
| | |
December 31, | | |
December 31, | |
| | |
2014 | | |
2013 | |
| Gaming revenues receivable | |
$ | 1,529,052 | | |
$ | 5,182,352 | |
As of December 31, 2014,
accounts receivable were due from four Casino Operators and were 59%, 33%, 5% and 3% of total receivables, respectively. As of
December 31, 2013, accounts receivable were due from four casino Operators and one gaming promoter and were 41%, 33%, 12%, 9% and
5% of total receivables, respectively.
Note 4 — Intangible Assets
Intangible assets as of
December 31, 2014 and December 31, 2013 consist of the following:
| | |
Bad Debt
Guarantee | | |
Non-
Compete
Agreement | | |
Profit Interest
Agreement | | |
Total | |
| Amortized intangible assets: | |
| | | |
| | | |
| | | |
| | |
| Gross carrying amounts | |
| | | |
| | | |
| | | |
| | |
| Balance as of January 1, 2013 | |
$ | 589,719 | | |
$ | 1,518,516 | | |
$ | 104,895,867 | | |
$ | 107,004,102 | |
| Acquisition | |
| 16,881 | | |
| 305,927 | | |
| 56,758,004 | | |
| 57,080,812 | |
| Foreign currency translation | |
| (226 | ) | |
| (422 | ) | |
| (7,535 | ) | |
| (8,183 | ) |
| Balance as of December 31, 2013 | |
| 606,374 | | |
| 1,824,021 | | |
| 161,646,336 | | |
| 164,076,731 | |
| Foreign currency translation | |
| 124 | | |
| (243 | ) | |
| (1,998 | ) | |
| (2,117 | ) |
| | |
| | | |
| | | |
| | | |
| | |
| Balance as of December 31, 2014 | |
| 606,498 | | |
| 1,823,778 | | |
| 161,443,338 | | |
| 164,074,614 | |
| | |
| | | |
| | | |
| | | |
| | |
| Accumulated amortization | |
| | | |
| | | |
| | | |
| | |
| Balance as of January 1, 2013 | |
| 196,440 | | |
| 165,930 | | |
| 12,190,669 | | |
| 12,553,039 | |
| Amortization expense | |
| 124,436 | | |
| 159,235 | | |
| 12,903,335 | | |
| 13,187,006 | |
| Foreign currency translation | |
| (34 | ) | |
| (9 | ) | |
| (216 | ) | |
| (259 | ) |
| Balance as of December 31, 2013 | |
| 320,842 | | |
| 325,156 | | |
| 25,093,788 | | |
| 25,739,786 | |
| Amortization expense | |
| 127,282 | | |
| 176,281 | | |
| 16,061,471 | | |
| 16,365,034 | |
| Foreign currency translation | |
| (55 | ) | |
| 108 | | |
| 1,093 | | |
| 1,146 | |
| | |
| | | |
| | | |
| | | |
| | |
| Balance as of December 31, 2014 | |
| 448,069 | | |
| 501,545 | | |
| 41,156,352 | | |
| 42,105,966 | |
| Total amortized intangible assets | |
$ | 158,429 | | |
$ | 1,322,233 | | |
$ | 120,286,986 | | |
$ | 121,968,648 | |
| | |
Goodwill | |
| Unamortized intangible assets: | |
| | |
| Balance as of January 1, 2013 | |
$ | 17,037,761 | |
| Acquisition | |
| 722,748 | |
| Foreign currency translation | |
| (6,373 | ) |
| Balance as of December 31, 2013 | |
$ | 17,754,136 | |
| Foreign currency translation | |
| (229 | ) |
| | |
| | |
| Balance as of December 31, 2014 | |
$ | 17,753,907 | |
IAO KUN GROUP HOLDING COMPANY LIMITED
F/K/A ASIA ENTERTAINMENT & RESOURCES
LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013
AND 2012
Amortization expense for
the years ended December 31, 2014, 2013 and 2012 was $16,365,034, $13,187,006 and $6,622,238, respectively.
Estimated amortization
expense of intangibles for the next five years and thereafter is as follows:
| 2015 | |
$ | 16,366,511 | |
| 2016 | |
| 16,270,349 | |
| 2017 | |
| 16,239,217 | |
| 2018 | |
| 16,239,217 | |
| 2019 | |
| 16,239,217 | |
| Thereafter | |
| 40,614,137 | |
| | |
$ | 121,968,648 | |
Note 5 — Property and Equipment
Property and equipment
consisted of the following at December 31:
| | |
2014 | | |
2013 | |
| | |
| | |
| |
| Office Equipment | |
$ | 193,669 | | |
$ | 1,506 | |
| Furniture and Fixtures | |
| 4,416 | | |
| 4,416 | |
| Leasehold Improvements | |
| 22,131 | | |
| 22,131 | |
| Motor Vehicles | |
| 210,846 | | |
| 127,020 | |
| | |
| 431,062 | | |
| 155,073 | |
| Less: Accumulated Depreciation | |
| (108,913 | ) | |
| (38,654 | ) |
| | |
$ | 322,149 | | |
$ | 116,419 | |
Depreciation expense was $77,224, $24,284, and $13,250 for the years
ended December 31, 2014, 2013 and 2012, respectively.
Note 6 — Lines of Credit Payable
Lines of Credit Payable
consisted of the following:
| | |
December 31, | | |
December 31, | |
| | |
2014 | | |
2013 | |
| Due to Casino Operators | |
$ | 32,392,020 | | |
$ | 42,670,573 | |
Due to Casino Operators
represents an advance of non-negotiable chips to Sang Heng, Sang Lung, King's Gaming and Bao Li Gaming and are interest free and
renewable monthly and an advance of commission income.
The Casino Operators have
extended lines of credit totaling approximately $59,324,000 and $59,325,000 as of December 31, 2014 and 2013, respectively.
The lines of credit may be exceeded from time to time at the discretion of the Casino Operators. The lines of credit
for Sang Heng, Sang Lung and King’s Gaming are guaranteed by Mr. Lam or Mr. Vong and are secured by their personal checks
and a deposit paid by Mr. Lam. The line of credit for Bao Li Gaming is guaranteed by Mr. Lou and is secured by his personal
check.
IAO KUN GROUP HOLDING COMPANY LIMITED
F/K/A ASIA ENTERTAINMENT & RESOURCES
LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013
AND 2012
Note 7 — Accrued Expenses
Accrued Expenses consist
of the following:
| | |
December 31, | | |
December 31, | |
| | |
2014 | | |
2013 | |
| | |
| | |
| |
| Commission payable-the junket agents | |
$ | 8,886,601 | | |
$ | 13,806,535 | |
| Management fee payable-related party (Note 14) | |
| 573,897 | | |
| 619,042 | |
| Management and Directors' compensation | |
| 562,139 | | |
| 633,385 | |
| Accrued listing expenses | |
| 765,417 | | |
| - | |
| Others | |
| 894,599 | | |
| 642,794 | |
| | |
| | | |
| | |
| | |
$ | 11,682,653 | | |
$ | 15,701,756 | |
One junket agent accounted for approximately
10% of the rolling chip turnover during the year ended December 31, 2014 and 13.68% of commission payable as of December 31, 2014.
Note 8 — Loans Payable, Shareholders
On February 2, 2010, AGRL
entered in to an agreement with Messrs. Lam and Vong to provide funding for working capital and to advance funds to the Promoter
Companies. Pursuant to the agreement, the loans will be in an amount not less than $19,300,000 on and after February 2, 2010
(the date of the acquisition of AGRL by Iao Kun), not less than $45,000,000 on and after March 31, 2010 and until the agreement
is terminated. This funding commitment terminates at the end of the fiscal quarter that AGRL’s working capital is not less
than $100,000,000, exclusive of any working capital provided by Messrs. Lam and Vong. If at any time the balance exceeds
the minimum requirement, Messrs. Lam and Vong may request repayment for the excess amount.
On April 18, 2011, the
terms of the loan agreement were amended and the loan amount totaling $60,000,000 ($30,000,000 each to Messrs. Lam and Vong) was
fixed, non-interest bearing and due on April 18, 2014. In conjunction with the loan amendment, the loans are convertible
at the option of the lenders at a rate of $20 per Ordinary Share or an aggregate of 3,000,000 Ordinary Shares. Additionally,
should the closing price of the Ordinary Shares as reported by the Nasdaq Stock Market for any ten (10) consecutive Trading Days
following the date of amendment equals or exceeds $25, the Company shall have the right to convert all of the loans at a rate of
$20 per Ordinary Shares, or an aggregate of 3,000,000 Ordinary Shares.
In conjunction with the
rights offering completed in June 2013 (See Note 12), and the regulatory requirements of the Company’s previously planned
listing of the Company’s Ordinary Shares on the Hong Kong Stock Exchange, the Company repaid $34,197,930 of the balance of
the loans provided by Messrs. Lam and Vong. A total of 3,312,620 Ordinary Shares were issued at $4.50 per share and 6,430,380 were
issued at $3.00 per share to reduce the outstanding shareholders loan balance. The balance of $25,802,070 was repaid out of the
cash proceeds from the rights offering in July 2013. As a result of the loan repayments, the loans are no longer convertible under
these terms.
As of December 31, 2014
and 2013, the amount of the funding advanced to AGRL by Messrs. Lam and Vong was approximately $2,612,490 and $5,809,075, respectively.
Messrs. Lam and Vong also guaranteed to AGRL the repayment of the loans made by AGRL to the Promoter Companies. Any amounts
due to AGRL pursuant to the guaranty provided by Messrs. Lam and Vong could have, at AGRL's election, been offset against amounts
owing Messrs. Lam and Vong by AGRL pursuant to the agreement. On June 25, 2014, the loans and related guarantees were terminated.
All amounts due as of December 31, 2014 are considered short-term advances and are due on demand.
IAO KUN GROUP HOLDING COMPANY LIMITED
F/K/A ASIA ENTERTAINMENT & RESOURCES
LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013
AND 2012
Note 9—Acquisition of King’s Gaming Promotion Limited
On November 10, 2010, the
Company completed the purchase of the profit interest pursuant to a Profit Interest Purchase Agreement (“King’s
Gaming Purchase Agreement”) with Mr. Mok and Mr. Wong (together, the “King’s Gaming Seller”),
to acquire the right to 100% of the profit interest derived by King’s Gaming, effective November 1, 2010, from the promotion
of the Wenzhou VIP Room at the Venetian Hotel and Casino in Macau for an aggregate amount of (i) up to $36,000,000, of which $9,000,000
was paid at the closing, and (ii) 1,500,000 Ordinary Shares of the Company (the “Purchase Price”) issued at the closing.
The balance of $27,000,000 of the Purchase Price will be maintained as working capital at the cage of King’s Gaming (and
shall be the sole property of the Company until paid to the King’s Gaming Seller in accordance with the terms of the King’s
Gaming Purchase Agreement) and shall be paid to the Seller in installments of $9,000,000 (each, an “Installment Payment”),
subject to meeting a minimum Gross Profit requirement equal to $6,150,000 (the “Minimum Gross Profit Requirement”)
for each of the three fiscal years following the closing date commencing with fiscal year 2011, which shall be evidenced by the
management prepared financial statements of King’s Gaming approved by the Audit Committee of the Company. In the event
King’s Gaming fails to achieve the Minimum Gross Profit Requirement in any of the three fiscal years following the closing
date, the Installment Payment shall be reduced by an amount equal to the product of (x) $9,000,000 and (y) the quotient obtained
by dividing (A) the actual Gross Profit for such year, by (B) the Minimum Gross Profit Requirement.
The Earnout Shares, Incentive
Shares and Additional Incentive Shares (each as defined in the King’s Gaming Purchase Agreement) shall be released and issued
to the Seller as follows:
| | |
Gross Profit Target | | |
Earnout/Incentive | | |
Additional | |
| Year | |
For Earnout/Incentive Shares | | |
Shares | | |
Incentive Shares | |
| 2011 | |
$ | 6,150,000 | | |
| 500,000 | | |
| | * |
| 2012 | |
$ | 7,380,000 | | |
| 500,000 | | |
| | * |
| 2013 | |
$ | 8,860,000 | | |
| 500,000 | | |
| | * |
| 2014 | |
$ | 9,740,000 | | |
| 100,000 | | |
| | * |
| 2015 | |
$ | 10,720,000 | | |
| 100,000 | | |
| | * |
| 2016 | |
$ | 11,790,000 | | |
| 100,000 | | |
| | * |
| 2017 | |
$ | 12,970,000 | | |
| 100,000 | | |
| | * |
| 2018 | |
$ | 14,260,000 | | |
| 100,000 | | |
| | * |
| 2019 | |
$ | 15,690,000 | | |
| 100,000 | | |
| | * |
| 2020 | |
$ | 17,260,000 | | |
| 100,000 | | |
| | * |
*- For each $1,000,000 in which the Gross Profit
target for such year is exceeded, 10,000 Additional Incentive Shares will be issued. The Seller is not entitled to any Additional
Shares on a pro rata basis for multiples of less or greater than $1,000,000.
For the year ended December
31, 2011, Incentive Shares of 500,000 were earned since King’s Gaming met its 2011 Gross Profit Target exceeding $6,150,000
and earned additional incentive shares of 20,000 by exceeding its Gross Profit Target by over $2,000,000.
King’s Gaming did
not meet its 2014, 2013 and 2012 Gross Profit Targets and no incentive shares were issued.
Additionally, Mr. Mok has
agreed to provide a personal guaranty, for so long as he is employed by the Company or King’s Gaming providing for the guaranty
of all obligations of King’s Gaming and the Seller pursuant to the King’s Gaming Purchase Agreement, including, but
not limited to any bad debts the Seller network of junket agents may have incurred or may incur in the future.
As of November 10, 2010,
the total estimated purchase price of $75,973,890, consisting of $9 million in cash, 1.5 million Ordinary Shares valued at $10.74
per share for a value of $16,110,000, and estimated contingent consideration of $50,863,890 consisting of contingent cash and Ordinary
Shares, was allocated based on valuations performed to determine the fair values of the acquired assets, as follows:
IAO KUN GROUP HOLDING
COMPANY LIMITED
F/K/A ASIA ENTERTAINMENT & RESOURCES
LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013
AND 2012
| Gaming License Deposit | |
$ | 12,446 | |
| Bad Debt Guarantee | |
| 466,116 | |
| Non-Compete agreement | |
| 792,304 | |
| Profit interest agreement | |
| 59,694,600 | |
| Goodwill | |
| 15,008,424 | |
| | |
| | |
| Total Estimated Purchase Price | |
$ | 75,973,890 | |
In accordance with the
FASB ASC Topic 805 on business combinations, a liability of $50,857,564 was recognized for the estimated acquisition fair value
of the contingent consideration based on the probability of the achievement of the Gross Profit targets at December 31, 2010. Any
change in the fair value of the acquisition-related contingent consideration subsequent to the acquisition date, including changes
from events after the acquisition date, such as changes in the Group’s estimate of the gross profit expected to be achieved,
will be recognized in earnings in the period that estimated fair value changes. The fair value estimate assumes probability-weighted
gross profits are achieved over the earn-out period. Actual achievement of gross profit range for this assumed earn-out period
could reduce the liability to zero. A change in the fair value of the acquisition-related contingent consideration could have a
material impact on the Group’s statement of operations and financial position in the period of change in estimate.
During the years ended December 31, 2014 and 2013, the Company did not recognize any gains or losses due to the change in the fair
value of the contingent consideration utilizing Level 3 fair value measurements as King’s Gaming is not expected to meet
the Gross Profit Target for 2014 and 2013 and no ordinary shares are expected to be issued. During the year ended December
31, 2012, the Company recognized a gain of $14,612,297, due to the change in the fair value of the contingent consideration utilizing
Level 3 fair value measurements. Fluctuations in the market value of the Company's Ordinary Shares and subsequent performance will
cause the fair value to increase or decrease and the resulting change will be recognized in earnings.
The following is a reconciliation of the change in fair value of
the contingent consideration:
| Contingent Consideration as of January 1, 2013 | |
$ | 18,000,000 | |
| Cash Consideration Paid | |
| (9,000,000 | ) |
| Ordinary Shares Issued | |
| - | |
| Change in Fair Value of Contingent Consideration | |
| - | |
| Foreign Currency Translation Adjustment | |
| - | |
| Contingent Consideration as of December 31, 2013 | |
$ | 9,000,000 | |
| Cash Consideration Paid | |
| (9,000,000 | ) |
| Ordinary Shares Issued | |
| - | |
| Change in Fair Value of Contingent Consideration | |
| - | |
| Foreign Currency Translation Adjustment | |
| - | |
| Contingent Consideration Payable as of December 31, 2014 | |
$ | - | |
Management has considered
the factors that make up the goodwill recognized in the transaction including the reputation of the VIP gaming room and its former
location at the Venetian Hotel and Casino on Cotai in Macau (now located at the Sands Cotai Central Casino). Additional factors
include the synergies between the operations of King's Gaming and the operations of Sang Heng, Sang Lung, Bao Li and Oriental VIP
Room, including the expanded network of junket agents and the ability to offer higher tier VIP players the opportunity to play
at either a high end luxury Cotai location or a high end luxury downtown Macau location. These factors do not qualify for separate
recognition in the overall purchase price allocation.
Note 10—Acquisition of Bao Li Gaming Promotion Limited
On September 12, 2012,
the Company completed the purchase of the profit interest pursuant to a Profit Interest Purchase Agreement (“Bao
Li Purchase Agreement”) with Mr. Lou and Mr. Lei (together, the “Bao Li Seller”), to acquire the right
to 100% of the profit derived by Bao Li Gaming, effective September 1, 2012, from the promotion of the VIP gaming room at the City
of Dreams Hotel and Casino in Macau for an aggregate amount of $15,000,000, of which $7,500,000 was paid upon the satisfaction
of all conditions to closing and $7,500,000 paid at the closing (the “Purchase Price”). Additionally, the Company reimbursed
the Seller approximately $146,026 for cash and incentive receivables acquired.
IAO KUN GROUP HOLDING
COMPANY LIMITED
F/K/A ASIA ENTERTAINMENT & RESOURCES
LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013
AND 2012
For purposes of the Bao
Li Purchase Agreement, “Base Rolling Chip Turnover” means $2,500,000,000 of non-negotiable chips that the Bao Li Seller’s
network of junket agents purchases from Bao Li Gaming’s and the Company’s VIP gaming rooms attributable to the Bao
Li Seller’s network of junket agents at Bao Li Gaming’s existing VIP gaming room and the Company’s existing and
future VIP gaming rooms.
In addition, as more fully
set forth below, the Company is required to issue to the Bao Li Seller (i) up to an aggregate of $39,000,000 and 1,875,000 Ordinary
Shares in the event certain rolling chip turnover targets are achieved for each of the three years following the closing date (the
“Base Earnout Payment”), (ii) and additional cash payments and Ordinary Shares in the event the rolling chip turnover
targets for each of the three years following the closing date are exceeded, in increments of $25,000,000 (the “Incremental
Earnout Payment”). For each $25,000,000 increment in which the rolling chip Turnover target for such year is exceeded,
the Company shall pay an additional $130,000 and issue 6,250 Ordinary Shares. The Bao Li Seller is not entitled to any additional
Incremental Earnout Payments in the event that the Seller’s rolling chip turnover exceeds $5,000,000,000. As a result, in
any year the maximum Incremental Earnout Payment cannot exceed $13,000,000 in cash and 625,000 in Ordinary Shares. In the event
that the Seller fails to achieve the Base Rolling Chip Turnover in any year, the Bao Li Seller will not be entitled to receive
any earnout payments.
The Earnout Shares, Incentive
Shares and Additional Incentive Shares (each as defined in the Bao Li Purchase Agreement) shall be released and issued to the Bao
Li Seller as follows:
| | |
Rolling Chip
Turnover Target | | |
| | |
| | |
| |
| Year | |
For Base
Earnout
Payments | | |
Base Earnout
Cash
Payments | | |
Base
Earnout
Shares | | |
Incremental
Earnout
Payment | |
| 2013 | |
$ | 2,500,000,000 | | |
$ | 13,000,000 | | |
| 625,000 | | |
| | * |
| 2014 | |
$ | 2,500,000,000 | | |
$ | 13,000,000 | | |
| 625,000 | | |
| | * |
| 2015 | |
$ | 2,500,000,000 | | |
$ | 13,000,000 | | |
| 625,000 | | |
| | * |
*- For each $25,000,000 increment in which the rolling chip turnover
target for such year is exceeded, the Company shall pay an additional $130,000 and 6,250 Ordinary Shares will be issued.
Additionally, Mr. Lou and
Mr. Lei have agreed to provide personal guarantees, through December 31, 2015 providing for the guaranty of all obligations of
Bao Li Gaming and the Seller pursuant to the Bao Li Purchase Agreement, including, but not limited to any bad debts the Bao Li
Seller network of junket agents may have incurred or may incur in the future.
As of September 12, 2012,
the total estimated purchase price of $48,007,120 consisting of $15,146,026 in cash, and estimated contingent consideration of
$32,861,094 consisting of contingent cash and Ordinary Shares has been allocated based on valuations performed to determine the
fair values of the acquired assets as follows:
| Gaming License Deposit | |
$ | 12,520 | |
| Cash and Incentive Receivables | |
| 146,026 | |
| Bad Debt Guarantee | |
| 122,381 | |
| Non-Compete agreement | |
| 723,484 | |
| Profit interest agreement | |
| 45,016,159 | |
| Goodwill | |
| 1,986,550 | |
| | |
| | |
| Total Estimated Purchase Price | |
$ | 48,007,120 | |
IAO KUN GROUP HOLDING COMPANY LIMITED
F/K/A ASIA ENTERTAINMENT & RESOURCES
LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013
AND 2012
In accordance with the
FASB ASC Topic 805 on business combinations, a liability of $42,291,631 and $33,027,050 was recognized for the estimated acquisition
fair value of the contingent consideration based on the probability of the achievement of the rolling chip turnover targets at
December 31, 2014 and 2013, respectively. Any change in the fair value of the acquisition-related contingent consideration subsequent
to the acquisition date, including changes from events after the acquisition date, such as changes in the Group’s estimate
of the rolling chip turnover expected to be achieved, will be recognized in earnings in the period that estimated fair value changes.
The fair value estimate assumes probability-weighted rolling chip turnover targets are achieved over the earn-out period. Actual
achievement of rolling chip turnover targets for this assumed earn-out period could reduce the liability to zero. A change in the
fair value of the acquisition-related contingent consideration could have a material impact on the Group’s statement of operations
and financial position in the period of change in estimate. During the years ended December 31, 2014, 2013 and 2012, the Company
recognized losses of $26,177,337, $13,744,041 and a gain of $554,403, respectively, due to the change in the fair value of the
contingent consideration utilizing Level 3 fair value measurements. Fluctuations in the market value of the Company's Ordinary
Shares and subsequent performance will cause the fair value to increase or decrease and the resulting change will be recognized
in earnings.
Bao Li achieved the minimum
rolling chip target for 2013 in May of 2013. As a result the Company paid the Bao Li Seller $13,000,000 in August 2013 and issued
625,000 Ordinary Shares in the third quarter of 2014. Additionally, Bao Li reached the incremental earn out rolling chip target
for 2013 and was paid an additional $13,000,000 in March 2014 and was issued an additional 625,000 Ordinary Shares in the third
quarter of 2014. Bao Li achieved the minimum rolling chip target for 2014 in July of 2014. As a result the Company will pay the
Bao Li Seller $13,000,000 in April 2015 and will issue 625,000 Ordinary Shares in the second quarter of 2015. Additionally, Bao
Li reached an additional incremental earn out rolling chip target for 2014 and will be paid an additional $8,320,000 in April 2015
and will be issued an additional 400,000 Ordinary Shares in the second quarter of 2015.
The following is a reconciliation
of the change in fair value of the contingent consideration:
| Contingent Consideration as of January 1, 2013 | |
$ | 32,294,981 | |
| Payment | |
| (13,000,000 | ) |
| Ordinary Shares Issued | |
| - | |
| Change in Fair Value of Contingent Consideration | |
| 13,744,041 | |
| Foreign Currency Translation Adjustment | |
| (11,972 | ) |
| Contingent Consideration as of December 31, 2013 | |
$ | 33,027,050 | |
| Payment | |
| (13,000,000 | ) |
| Ordinary Shares Issued | |
| (3,837,500 | ) |
| Change in Fair Value of Contingent Consideration | |
| 26,177,337 | |
| Foreign Currency Translation Adjustment | |
| (75,256 | ) |
| Contingent Consideration Payable as of December 31, 2014 | |
$ | 42,291,631 | |
Management has considered the factors that make
up the goodwill recognized in the transaction including the reputation of the VIP gaming room and its location at the City of Dreams
Hotel and Casino in Macau. Additional factors include the synergies between the operations of Bao Li Gaming and the operations
of Sang Heng, Sang Lung, King’s Gaming and Oriental VIP Room, including the expanded network of junket agents and the ability
to offer higher tier VIP players the opportunity to play at another high end luxury Cotai location or a high end luxury downtown
Macau location. These factors do not qualify for separate recognition in the overall purchase price allocation. Transaction costs
for the acquisition of Bao Li Gaming charged to operations for the year ended December 31, 2012 were $251,386.
IAO KUN GROUP HOLDING COMPANY LIMITED
F/K/A ASIA ENTERTAINMENT & RESOURCES
LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013
AND 2012
The following is a summary of the current and long term portions
of the estimated contingent consideration expected to be paid for the acquisition of Bao Li Gaming:
| Years Ended December 31, | |
Total Contingent
Consideration | |
| | |
| |
| 2015 | |
$ | 22,662,750 | |
| 2016 | |
| 19,628,881 | |
| | |
$ | 42,291,631 | |
The operations of Bao Li Gaming acquired assets
have been included in the results of operations of the Company from September 1, 2012, the date for such inclusion per the acquisition
agreement dated September 5, 2012. The acquisition has been accounted for using the acquisition method of accounting and accordingly,
the aggregate consideration has been allocated based on estimated fair values as of the acquisition date.
Management determined that the acquisition of
the operations of Bao Li from the promotion of a VIP gaming room at the City of Dreams Hotel and Casino in Macau would allow the
Company to rapidly expand its operations and network of junket agents and appeal to a wider number of players which may increase
revenues at the Company's other VIP gaming rooms.
The following is a summary of revenues, expenses
and net income of Bao Li since the effective acquisition date (September 1, 2012) included in the consolidated results of operations
for the Company during the year ended December 31, 2012:
| Revenues | |
$ | 10,267,456 | |
| Expenses | |
| 6,343,591 | |
| Net Income Attributable To Bao Li | |
$ | 3,923,865 | |
The following pro forma consolidated statements
of operations have been prepared assuming that the acquisition of Bao Li occurred on January 1, 2012.
| | |
Pro Forma
Consolidated
For the Year
Ended
December
31, 2012 | |
| Revenue | |
$ | 245,660,873 | |
| Expenses | |
| 176,972,496 | |
| Pro Forma Net Income Attributable To Ordinary Shareholders | |
$ | 68,688,377 | |
| Pro Forma Net Income Per Share | |
| | |
| Basic | |
$ | 1.50 | |
| Diluted | |
$ | 1.50 | |
| Weighted average shares outstanding | |
| | |
| Basic | |
| 45,752,743 | |
| Diluted | |
| 45,752,922 | |
Note 11 — Acquisition of the Oriental VIP Room
On June 26, 2013, the Company
completed the purchase of the profit interest pursuant to a Profit Interest Purchase Agreement (“Oriental
VIP Room Purchase Agreement”) with Mr. Vong Veng Im (the “Oriental VIP Room Seller”), to acquire the right to
100% of the profit derived from the operations, effective July 1, 2013, from the promotion of a VIP gaming room at the Le Royal
Arc Casino in Macau for an aggregate amount of $20,000,000 in cash, of which $10,000,000 was paid at the closing and $10,000,000
was paid at a subsequent closing (the “Purchase Price”), upon the completion of certain conditions. Mr. Vong is a collaborator
for the gaming promoter license holder at the Le Royal Arc Casino.
IAO KUN GROUP HOLDING COMPANY LIMITED
F/K/A ASIA ENTERTAINMENT & RESOURCES
LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013
AND 2012
For purposes of the Oriental
VIP Room Purchase Agreement, “Base Rolling Chip Turnover” means $2,500,000,000 of non-negotiable chips that the Oriental
VIP Room Seller’s network of junket agents purchases from Oriental VIP Room’s and the Company’s VIP gaming rooms.
In addition, as more fully
set forth below, the Company is required to pay and issue to the Oriental VIP Room Seller (i) up to an aggregate of $39,000,000
and 1,875,000 Ordinary Shares in the event certain rolling chip turnover targets are achieved for each of the three 12 month periods
ending June 30, 2014, 2015 and 2016 following the closing date (the “Base Earnout Payment”), (ii) and additional cash
payments and Ordinary Shares in the event the rolling chip turnover targets for each of the three 12 month periods ending June
30, 2014, 2015 and 2016 following the closing date are exceeded, in increments of $25,000,000 (the “Incremental Earnout Payment”).
For each $25,000,000 increment in which the rolling chip Turnover target for such year is exceeded, the Company shall pay an additional
$130,000 and issue 6,250 Ordinary Shares. The Oriental VIP Room Seller is not entitled to any additional Incremental Earnout
Payments in the event that the Seller’s rolling chip turnover exceeds $5,000,000,000. As a result, in any year the maximum
Incremental Earnout Payment cannot exceed $13,000,000 in cash and 625,000 in Ordinary Shares. In the event that the Seller fails
to achieve the Base Rolling Chip Turnover in any year, the Oriental VIP Room Seller will not be entitled to receive any earnout
payments. If the Oriental VIP Room Seller achieves an aggregate Rolling Chip Turnover of at least $15,000,000,000 for the 36 month
period ending June 30, 2016, the Company shall pay an additional $2,500,000 for every $1,000,000,000 of rolling chip turnover in
excess of $15,000,000,000 up to a maximum of $12,500,000.
The Earnout Shares, Incentive
Shares and Additional Incentive Shares (each as defined in the Oriental VIP Room Purchase Agreement) shall be released and issued
to the Oriental VIP Room Seller as follows:
| | |
Rolling Chip
Turnover Target | | |
| | |
| | |
| |
| 12 Month Period | |
For Base
Earnout
Payments | | |
Base Earnout
Cash
Payments | | |
Base
Earnout
Shares | | |
Incremental
Earnout
Payment | |
| June 30, 2014 | |
$ | 2,500,000,000 | | |
$ | 13,000,000 | | |
| 625,000 | | |
| | * |
| June 30, 2015 | |
$ | 2,500,000,000 | | |
$ | 13,000,000 | | |
| 625,000 | | |
| | * |
| June 30, 2016 | |
$ | 2,500,000,000 | | |
$ | 13,000,000 | | |
| 625,000 | | |
| | * |
*- For each $25,000,000 increment in which
the rolling chip turnover target for such year is exceeded, the Company shall pay an additional $130,000 and 6,250 Ordinary Shares.
In addition, an aggregate rolling chip turnover of at least $15,000,000,000 for the 36 month period ending June 30, 2016 the Company
shall pay an additional $2,500,000 for every $1,000,000,000 of rolling chip turnover in excess of $15,000,000,000 up to a maximum
of $12,500,000.
Additionally, Mr. Vong
Veng Im has agreed to provide a personal guarantee, through June 30, 2016 providing for the guaranty of all obligations of Oriental
VIP Room and the Oriental VIP Room Seller pursuant to the Oriental VIP Room Purchase Agreement, including, but not limited to any
bad debts the Oriental VIP Room Seller network of junket agents may have incurred or may incur in the future.
As of June 26, 2013, the
total estimated purchase price of $57,803,560 consisting of $10,000,000 in cash, and estimated contingent consideration of $47,803,560
consisting of contingent cash and Ordinary Shares has been allocated based on valuations performed to determine the fair values
of the acquired assets as follows:
| Bad Debt Guarantee | |
$ | 16,881 | |
| Non-Compete agreement | |
| 305,927 | |
| Profit interest agreement | |
| 56,758,004 | |
| Goodwill | |
| 722,748 | |
| | |
| | |
| Total Estimated Purchase Price | |
$ | 57,803,560 | |
IAO KUN GROUP HOLDING
COMPANY LIMITED
F/K/A ASIA ENTERTAINMENT & RESOURCES
LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013
AND 2012
In accordance with the
FASB ASC Topic 805 on business combinations, a liability of $41,404,026 and $36,528,269 was recognized for the estimated acquisition
fair value of the contingent consideration based on the probability of the achievement of the rolling chip turnover targets at
December 31, 2014 and December 31, 2013, respectively. Any change in the fair value of the acquisition-related contingent consideration
subsequent to the acquisition date, including changes from events after the acquisition date, such as changes in the Group’s
estimate of the rolling chip turnover expected to be achieved, will be recognized in earnings in the period that estimated fair
value changes. The fair value estimate assumes probability-weighted rolling chip turnover targets are achieved over the earn-out
period. Actual achievement of rolling chip turnover targets for this assumed earn-out period could reduce the liability to zero.
A change in the fair value of the acquisition-related contingent consideration could have a material impact on the Group’s
statement of operations and financial position in the period of change in estimate. During the years ended December 31, 2014 and
2013, the Company recognized a loss of $34,741,233 and a gain of $1,298,252, respectively, due to the change in the fair value
of the contingent consideration utilizing Level 3 fair value measurements. Fluctuations in the market value of the Company's
Ordinary Shares and subsequent performance will cause the fair value to increase or decrease and the resulting change will be recognized
in earnings.
The Oriental VIP Room achieved
the minimum rolling chip target for 12 months ended June 30, 2014 in January of 2014. As a result the Company paid the Oriental
VIP Room Seller $13,000,000 in September 2014 and issued 625,000 Ordinary Shares in the fourth quarter of 2014. Additionally, the
Oriental VIP Room reached the incremental earn out rolling chip target for 12 months ended June 30, 2014 and was paid an additional
$13,000,000 in September 2014 and issued an additional 625,000 Ordinary Shares in the fourth quarter of 2014. The Oriental VIP
Room has not yet reached the incremental earn out rolling chip target for 12 months ended June 30, 2015.
The following is a reconciliation
of the change in fair value of the contingent consideration:
| Contingent Consideration as of June 26, 2013 | |
$ | 47,803,560 | |
| Payment | |
| (10,000,000 | ) |
| Ordinary Shares Issued | |
| — | |
| Change in Fair Value of Contingent Consideration | |
| (1,298,252 | ) |
| Foreign Currency Translation Adjustment | |
| 22,961 | |
| Contingent Consideration as of December 31, 2013 | |
$ | 36,528,269 | |
| Payment | |
| (26,000,000 | ) |
| Ordinary Shares Issued | |
| (3,875,000 | ) |
| Change in Fair Value of Contingent Consideration | |
| 34,741,233 | |
| Foreign Currency Translation Adjustment | |
| 9,524 | |
| Contingent Consideration Payable as of December 31, 2014 | |
$ | 41,404,026 | |
Management has considered
the factors that make up the goodwill recognized in the transaction including the reputation of the VIP gaming room and its location
at the Le Royal Arc Casino in Macau. Additional factors include the synergies between the operations of the Oriental VIP Room and
the operations of Sang Heng, Sang Lung, Bao Li Gaming and King’s Gaming, including the expanded network of junket agents
and the ability to offer higher tier players the opportunity to play at another high end luxury downtown Macau location or a high
end luxury Cotai location. These factors do not qualify for separate recognition in the overall purchase price allocation. Total
acquisition costs which have been expensed, amounting to approximately $1,252,000.
Management determined that
the acquisition of the operations of Oriental VIP Room at the Le Royal Arc Casino in Macau would allow the Company to expand its
operations in downtown Macau and appeal to a wider number of players. Prior to the acquisition, the Company's had only one VIP
gaming room in downtown Macau. Additionally, the acquisition of the operations of Oriental VIP Room brought an additional network
of junket agents and collaborators that may increase revenues at the Company's Macau VIP rooms.
IAO KUN GROUP HOLDING COMPANY LIMITED
F/K/A ASIA ENTERTAINMENT & RESOURCES
LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013
AND 2012
The following is a summary
of the current and long term portions of the estimated contingent consideration expected to be paid for the acquisition of the
Oriental VIP Room:
| Years Ended December 31, | |
Total Contingent
Consideration | |
| | |
| |
| 2015 | |
$ | 13,738,762 | |
| 2016 | |
| 27,665,264 | |
| | |
$ | 41,404,026 | |
The following is a summary of revenues, expenses
and net income of Oriental VIP Room since the effective acquisition date (July 1, 2013) included in the consolidated results of
operations for the Company during the year ended December 31, 2013:
| Revenues | |
$ | 9,511,291 | |
| Expenses | |
| (10,477,592 | ) |
| Net Income Attributable To Oriental VIP Room | |
$ | (966,301 | ) |
The following pro forma consolidated statements
of operations have been prepared assuming that the acquisition of Oriental VIP Room occurred on January 1 of each of the years
presented.
| | |
Pro Forma | | |
Pro Forma | |
| | |
Consolidated | | |
Consolidated | |
| | |
For the Year | | |
For the Year | |
| | |
Ended | | |
Ended | |
| | |
December | | |
December | |
| | |
31, 2013 | | |
31, 2012 | |
| Revenue | |
$ | 242,775,634 | | |
$ | 250,471,881 | |
| Expenses | |
| 242,079,136 | | |
| 188,319,635 | |
| Pro Forma Net Income Attributable To Ordinary Shareholders | |
$ | 696,498 | | |
$ | 62,152,246 | |
| Pro Forma Net Income Per Share | |
| | | |
| | |
| Basic | |
$ | 0.01 | | |
$ | 1.36 | |
| Diluted | |
$ | 0.01 | | |
$ | 1.36 | |
| Weighted average shares outstanding | |
| | | |
| | |
| Basic | |
| 53,030,405 | | |
| 45,752,743 | |
| Diluted | |
| 53,210,572 | | |
| 45,752,922 | |
IAO KUN GROUP HOLDING COMPANY LIMITED
F/K/A ASIA ENTERTAINMENT & RESOURCES
LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013
AND 2012
Note 12 — Shareholders’ Equity
Ordinary Shares
Iao Kun is authorized to
issue 500,000,000 Ordinary Shares, par value $.0001. The authorized Ordinary Shares was increased from 200,000,000 to 500,000,000
as a result of a shareholder vote on September 24, 2013. The following summarizes the Ordinary Shares issued relating to achieving
earnings targets or rolling chip turnover targets in association with the Company’s acquisitions of AGRL, Kings’ Gaming,
Bao Li Gaming and Oriental VIP room:
| | |
Years Ended December 31, | |
| | |
2014 | | |
2013 | | |
2012 | |
| | |
| | |
| | |
| |
| AGRL | |
| N/A | | |
| - | (2) | |
| 3,103,000 | (1) |
| | |
| | | |
| | | |
| | |
| King's Gaming (Note 9) | |
| - | (4) | |
| - | (4) | |
| 520,000 | (3) |
| | |
| | | |
| | | |
| | |
| Bao Li Gaming (Note 10) | |
| 1,250,000 | (5) | |
| N/A | | |
| N/A | |
| | |
| | | |
| | | |
| | |
| Oriental VIP Room (Note 11) | |
| 1,250,000 | (6) | |
| N/A | | |
| N/A | |
| (1) | AGRL achieved earnings target for the year ended December 31, 2011, therefore 3,103,000 ordinary
shares were issued. |
| (2) | AGRL did not achieve its earnings targets for the year ended December 31, 2012, and therefore no
shares were issued. |
| (3) | The Company issued 520,000 ordinary shares in 2012 relating to King’s Gaming achieving its
Gross Profit Target for the year ended December 31, 2011. |
| (4) | King’s Gaming did not meet its Gross Profit Target for the year ended December 2012 or 2013,
and therefore no shares for achieving those performance targets were issued. |
| (5) | Bao Li achieved the minimum rolling chip target and also reached the incremental earn out rolling
chip target for 2013, therefore an aggregate of 1,250,000 ordinary shares were issued in the third quarter of 2014. |
| (6) | The Oriental VIP Room achieved the minimum rolling chip target and also reached the incremental
earn out rolling chip target for 12 months ended June 30, 2014, therefore an aggregate of 1,250,000 ordinary shares were issued
in the fourth quarter of 2014. |
The holders of the Ordinary
Shares have no conversion, preemptive or other subscription rights and there are no sinking fund or redemption provisions applicable
to the Ordinary Shares.
Rights Offering in 2013
The Company issued one
transferable subscription right for each two ordinary shares then owned to stockholders of record on June 3, 2013. The rights entitled
rights holders to subscribe for an aggregate of up to 20,225,582 ordinary shares. The subscription price was $3 per ordinary share
to be exercised. As a result of a standby purchase agreement with certain persons, including Lam Man Pou, Vong Hon Kun, Lam Chou
In, Zheng An Ting, So Kam Tai, Au Chun Yin, Chan Fok Hoi, Chan Kai Ian, Sin Kam Chan, Leong Wai Meng and Cheung Mee Mo (the “Standby
Purchasers”), whereby the Standby Purchasers have agreed to purchase a number of ordinary shares having a value equal to
the aggregate subscription price the Company would have received with respect to the shares underlying all rights not exercised
by all holders in the rights offering, referred to as the standby purchase, upon the same terms as the other holders, except the
subscription price for 34% of such shares with respect to purchases made by Messrs. Lam Man Pou and Vong Hon Kun was $4.50 per
share. Messrs. Lam and Vong agreed to purchase approximately 34% of the shares sold pursuant to the standby purchase for an exercise
price not less than the closing price of Iao Kun’s Ordinary Shares on May 24, 2013, which was $4.37 per share, at a premium
to the exercise price of the rights ($ 3.00 per share). On June 21, 2013, the subscription period for the rights offering expired
and on June 28, 2013, the Company instructed its transfer agent to issue a total of 19,527,950 ordinary shares. The Company incurred
offering costs of $2,067,809, which have been recorded as a reduction of Additional Paid in Capital.
IAO KUN GROUP HOLDING COMPANY LIMITED
F/K/A ASIA ENTERTAINMENT & RESOURCES
LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013
AND 2012
Weighted average basic
and diluted ordinary shares and net income per share for the year ended December 2012 as originally reported and as adjusted for
the bonus element were as follows:
For the year ended December 31, 2012
| | |
As Originally
Reported | | |
As Adjusted | | |
Effect of
Change | |
| | |
| | |
| | |
| |
| Weighted average basic shares outstanding | |
| 42,324,462 | | |
| 45,752,743 | | |
| 3,428,281 | |
| Weighted average diluted shares outstanding | |
| 42,324,628 | | |
| 45,752,922 | | |
| 3,428,294 | |
| Net income per weighted average basic share | |
$ | 1.66 | | |
$ | 1.53 | | |
$ | (0.13 | ) |
| Net income per weighted average diluted share | |
$ | 1.66 | | |
$ | 1.53 | | |
$ | (0.13 | ) |
Directors Compensation
All of the Company’s
directors presently receive annual compensation of $30,000 in cash and $20,000 payable in Ordinary Shares, valued at the average
of the closing prices of the Ordinary Shares over the three-month period preceding the end of each fiscal year. The Ordinary Shares
will be issued the following year. The chairman of the audit committee will receive additional annual cash compensation of
$10,000 and the other members of the audit committee will each receive additional annual cash compensation of $5,000. The chairman
of the compensation and nominating committees each receive additional annual cash compensation of $5,000 and the other members
of these committees each receive additional annual cash compensation of $3,000. Each director will also receive cash compensation
of $1,000 for each board or committee meeting that he or she attends (whether in person or telephonically) that is at least an
hour in duration and $500 for each board or committee meeting he or she attends that is less than an hour in duration. Total
director fees charged to operations during the years ended December 31, 2014, 2013 and 2012 were $497,000, $497,000 and $497,000,
respectively.
Warrants
Warrants issuable under the Underwriter Unit Purchase Option of
1,440,000 expired on August 10, 2013. As of December 31, 2014 and 2013, there are no warrants outstanding from Iao Kun’s
initial public offering ("IPO").
Share Repurchase Program
During June 2011, the Board
of Directors authorized the establishment of a share repurchase program for the Company to purchase up to two million of its ordinary
shares on the open market at prices to be determined by the Company’s management. The program expired on June 30, 2012. An
aggregate of 26,300 ordinary shares were repurchased for an aggregate purchase price of $124,207 pursuant to the 2011 share repurchase
program. The Ordinary Shares have been retired and the purchase price was allocated to par value and additional paid in capital.
The Board of Directors
has established a share repurchase program, with an expiration date of June 30, 2013 (the “2012 Repurchase Plan”).
The 2012 Repurchase Plan authorized the Company to purchase up to two million of its Ordinary Shares on the open market at prices
to be determined by the Company’s management. During the year ended December 31, 2012, the Company repurchased an aggregate
of 1,273,947 Ordinary Shares for an aggregate purchase price of $4,166,483 pursuant to the 2012 Repurchase Plan. During the quarter
ended March 31, 2013, the Company purchased the remaining 726,053 Ordinary Shares for an aggregate purchase price of $2,728,912.
The Ordinary Shares have been retired and the purchase price was allocated to par value and additional paid in capital.
In March 2013, the Board
of Directors established a new share repurchase program with an expiration date at any time in the discretion of appropriate company
officers (the “2013 Repurchase Plan”). The 2013 Repurchase Plan authorizes the Company to purchase up to four million
of its Ordinary Shares on the open market at prices to be determined by the Company’s management. During the year ended
December 31, 2013, the Company repurchased an aggregate of 732,900 Ordinary Shares for an aggregate purchase price of $2,295,849
pursuant to the 2013 Repurchase Plan. During the year ended December 31, 2014, the Company repurchased an aggregate of 1,415,300
Ordinary Shares for an aggregate purchase price of $4,193,554 pursuant to the 2013 Repurchase Plan.
IAO KUN GROUP HOLDING COMPANY LIMITED
F/K/A ASIA ENTERTAINMENT & RESOURCES
LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013
AND 2012
Dividend
During June 2011, the
Board of Directors authorized a regular cash dividend of $0.10 per outstanding Ordinary Share each year after the release of the
Company’s financial results for the six months ending June 30, and, for each year after the release of the Company’s
annual financial results, an amount per outstanding ordinary share equal to (i) 15% of the Company’s non-GAAP net income
(defined as operating income before amortization of intangible assets and change in fair value of contingent consideration) for
the most recently completed fiscal year, less the amount paid pursuant to the immediately previous six-month dividend, divided
by (ii) the number of Ordinary Shares outstanding on the record date for such dividend. In March 2012, the Board of Directors
authorized an increase in the dividend payable after the release of the Company’s 6-month financial statements from $0.10
to $0.12 per outstanding ordinary share. Subsequent to the rights offering, the Board of Directors authorized a proportionate decrease
in the dividend payable after the release of the Company’s 6-month financial statements from $0.12 to $0.08 per outstanding
ordinary share.
Beginning with the Six
Month Dividend payable for 2014, the Board of Directors has changed the six month dividend from $0.08 per share to: (i) 15% of
the Company’s non-GAAP net income for the most recently completed six months ended June 30, divided by (ii) the number of
ordinary shares outstanding on the record date for such dividend. For the six month dividend payable for 2014, this is equal to
a dividend of approximately $0.026 per share, which was paid on October 14, 2014.
The record date for each
period’s dividend will be set by the Company’s management to be as close as practicable to, but no less than, 15 days
after the public release by the Company of the financial results for the applicable six-month period and fiscal year end. The payment
date for each period’s dividend will be set by the Company’s management to be as close as practicable to, but no less
than, 10 days after the record date.
| Payment Date | |
Amount | |
| | |
| |
| September 2, 2011 | |
$ | 3,880,406 | |
| | |
| | |
| April 18, 2012 | |
$ | 7,527,988 | |
| | |
| | |
| August 31, 2012 | |
$ | 5,094,140 | |
| | |
| | |
| April 26, 2013 | |
$ | 4,142,199 | |
| | |
| | |
| September 20, 2013 | |
$ | 4,803,178 | |
| | |
| | |
| October 14, 2014 | |
$ | 1,539,260 | |
Preferred Stock
The Company is authorized
to issue 1,150,000 preferred shares with such designations, voting and other rights and preferences as may be determined from time
to time by the Board of Directors. There are no issued and outstanding preferred shares at December 31, 2014 and December 31, 2013.
Ordinary Shares Reserved for Future Issuance
At December 31, 2014 and
December 31, 2013, the Company has reserved 5,403,200 and 8,288,990 shares of its authorized but unissued Ordinary Shares for possible
future issuance in connection with the following:
IAO KUN GROUP HOLDING COMPANY LIMITED
F/K/A ASIA ENTERTAINMENT & RESOURCES
LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013
AND 2012
| | |
December 31,
2014 | | |
December 31,
2013 | |
| | |
| | |
| |
| Officer and Director Shares | |
| 28,200 | | |
| 88,990 | |
| | |
| | | |
| | |
| Contingently Issuable Incentive Shares-King's Gaming | |
| 600,000 | | |
| 700,000 | |
| | |
| | | |
| | |
| Contingently Issuable Incentive Shares-Bao Li Gaming | |
| 2,275,000 | | |
| 3,750,000 | |
| | |
| | | |
| | |
| Contingently Issuable Incentive Shares-Oriental VIP Room | |
| 2,500,000 | | |
| 3,750,000 | |
| | |
| | | |
| | |
| Total | |
| 5,403,200 | | |
| 8,288,990 | |
Note 13 — Commitments and Contingencies
Employment Agreements
AGRL entered into employment
agreements with five executive officers: Mr. Lam (Chairman of the Board), Leong Siak Hung (Chief Executive Officer), Li Chun Ming
(Chief Financial Officer), Mr. Vong (Director), and Lam Chou In (Operating Officer) that became effective upon the closing of the
acquisition of AGRL. Upon the closing of the acquisition of King’s Gaming, Iao Kun has entered into two additional
employments contracts with Mr. Mok and Mr. Wong. Upon the closing of the acquisition of Bao Li, the Company entered into employment
agreements with Mr. Lou and Mr. Lei. In February 2012, the Board amended the employment contracts with Mr. Lam, Leong Siak Hung,
Li Chun Ming , Mr. Vong, Lam Chou In, Ip Ching Wah, Mr. Mok and Mr. Wong effective January 1, 2012 to increase their respective
annual salaries. These employment agreements were further amended effective July 1, 2013 to increase annual salaries. Upon the
acquisition of the Oriental VIP Room, the Company entered into a 5 year employment agreement with Vong Veng Im. Beginning July
1, 2013, the Company entered into a two year employment agreement with Chien Lee, Chief Strategic Officer, which was terminated
on June 9, 2014. Upon termination the Company entered into a consulting agreement with Mr. Chien under similar terms. The employment
agreements for Chief Executive Officer and Chief Financial Officer expired in February 2013 and are continuing on the same terms
(subject to increases) on a month to month basis. The agreements with Mr. Lam, Mr. Vong and Lam Chou In expired on February 2,
2015 and are continuing on the same terms on a month to month basis..
Annual minimum compensation
for the terms of the employment agreements for terms greater than one year, as amended, is as follows:
| 2015 | |
$ | 723,592 | |
| 2016 | |
| 448,000 | |
| 2017 | |
| 340,000 | |
| 2018 | |
| 62,000 | |
| Total | |
$ | 1,573,592 | |
Each executive is entitled
to paid vacation in accordance with AGRL’s policies and other customary benefits. The employment agreements provide that
the executive, during the period of five years following the termination of his employment (three years in the case of Messrs.
Leong and Li), shall not compete with AGRL or solicit any of its employees. The agreements with each of Leong Siak Hung, Li Chun
Ming Raymond, Lam Man Pou, Vong Hon Kun and Lam Chou In contain provisions prohibiting the executives, during their respective
terms of employment, from selling, hypothecating or otherwise transferring more than 20% of any Ordinary Shares that may be transferred
to them by Spring Fortune from shares it received or receives as a result of the acquisition. If an executive’s employment
is terminated for any reason prior to the expiration of the employment term, or if the executive breaches the confidentiality and
non-competition and non-solicitation provisions of his employment agreement, the executive is obligated to transfer and assign
to the Company all securities then held by him and all rights to receive securities in the future, which securities will be canceled.
IAO KUN GROUP HOLDING COMPANY LIMITED
F/K/A ASIA ENTERTAINMENT & RESOURCES
LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013
AND 2012
Total compensation charged
to operations during the years ended December 31, 2014, 2013 and 2012, related to these employment contracts were $1,340,803, $1,166,217
and $1,063,256, respectively.
Office Lease
The Company has office
leases in Hong Kong and Macau for executive offices which expire in September 2015 and April 2016, respectively. The
Company also rents a storage space on a month to month basis for $1,547 per month. Minimum future lease payments are $68,445 and
$11,864 for the years ended December 31, 2015 and 2016, respectively. Rent expense was $93,519, $83,969 and $66,753 for the year
ended December 31, 2014, 2013 and 2012, respectively.
Gaming Table Rentals
Starting from August 1,
2013, the Company pays a monthly rental of approximately $425,000 for six gaming tables in its Oriental VIP Room in order to have
a greater percentage of revenue sharing. Beginning in January 2015, the Company reduces the gaming tables from six to four gaming
tables in its Oriental VIP Room. Rental expense charged to operations for gaming table rentals was $5,106,581, $2,127,193 and $0
for the years ended December 31, 2014, 2013 and 2012, respectively.
Revenue Sharing
Beginning in September
2012, the Company has adopted a new program to allow certain cash basis junket agents (non-marker) to share in the risk of wins
and losses in the VIP gaming rooms. The maximum percentage of sharing that the junket agent may elect to share in the risk of wins
and losses is limited to their percentage of rolling chip turnover during the previous month. The junket agent must make its election
by the second day of the subsequent month and may elect from zero percent to the maximum percent. A total of approximately $1,078,000
was recorded as additional commission expense in January 2015 for participating junket agents based on December 2014 rolling chip
turnover. Due to fluctuations in wins and losses as well as the agents’ participation, levels, the total amount of revenues
and losses shared as well as their percentage of rolling chip turnover may fluctuate significantly.
Certain Risks and Uncertainties
The Group’s operations are dependent
on the annual renewal of the gaming licenses by the Macau SAR to the Promoter Companies and the registration of the Collaborator
by the licensed gaming promoter. The tenure of the Promotion Entities acting as gaming promoters and collaborator for the
Casinos is subject to the Gaming Representative / Gaming Promoter Arrangements and Collaborator Agreement.
The Group may not be able to collect all of
their markers receivable from the junket agents. Management expects that the Group will be able to enforce these obligations only
in a limited number of jurisdictions, including Macau. To the extent that junket agents of the Group, through the Promotion Entities,
are from other jurisdictions, the Group may not have access to a forum in which they will be able to collect all of their markers
receivable because, among other reasons, courts of many jurisdictions do not enforce gaming debts and the Group may encounter forums
that will refuse to enforce such debts. The Group’s inability to collect gaming debts could have a significant negative impact
on their operating results.
The Group receives all of their revenue from
Casino Operators within the Asia-Pacific Region. If economic conditions in these areas were to decline materially or additional
casino licenses to new Casino Operators were awarded in these locations, the Group’s consolidated results of operations could
be materially affected.
IAO KUN GROUP HOLDING COMPANY LIMITED
F/K/A ASIA ENTERTAINMENT & RESOURCES
LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013
AND 2012
Note 14 — Related Party Transactions
Management Agreements
Part of day-to-day
management and operation of the VIP gaming rooms is contracted by the Promotion Entities to Pak Si Management and Consultancy
Limited of Macau (“Pak Si”), a related party management company that is responsible for hiring and managing
staff needed for operations. This includes local managers and executives to provide supervision, finance and cage
personnel, public relations, drivers and other service staff (waiters, cleaners, etc.). The agreements renew
annually. The principal of Pak Si is the sister-in-law of Mr. Vong, a director of the Company and its chief operating
officer.
Effective January 1, 2013, the monthly payments
were revised for Sang Heng and Sang Lung from $180,000 to $155,000 each, and Bao Li and King’s Gaming remained at a monthly
rate of $103,000.
Beginning in July 2013, the Oriental VIP Room
entered into a management agreement with Pak Si for $103,000 per month.
Effective July 1, 2014, the monthly payments
were revised for Sang Heng and Sang Lung from $155,000 to $142,000 each, and Bao Li, King’s Gaming and the Oriental VIP Room
were revised from $103,000 to $97,000 each.
Effective January 1, 2015, the monthly payments
were revised for Sang Heng and Sang Lung from $142,000 to $103,000 each, and Bao Li, King’s Gaming and the Oriental VIP Room
were revised from $97,000 to $65,000 each.
Total expenses for Pak Si's services were $7,156,950,
$6,807,018 and $5,966,147 during the years ended December 31, 2014, 2013 and 2012, respectively. Amounts due to Pak Si as
of December 31, 2014 and December 31, 2013 were $573,897 and $619,042, respectively and have been recorded in accrued expenses.
Entertainment Expense
During the years ended December 31, 2014 and
2013 the Group’s paid entertainment expense were $727,298 and $779,224, respectively, for catering and restaurant
services to a related party in which three directors have the ownership interest. There was no such transaction in 2012.
Note 15 — Subsequent Events
On February 9, 2015, the Company was notified
by the Hong Kong Stock Exchange (the "Stock Exchange") that based on the information
provided to the Stock Exchange that, due to the declining financial performance of the Company, the unpredictability of the Company's
revenues, the overall market conditions and the near term industrial outlook in Macau, and certain related party payments made
to Pak Si, the Stock Exchange is unable to proceed further with the Company's listing application and the Company has elected to
not continue with the application process at this time. Total expenses incurred for Hong Kong listing, included in Selling, General
and Administrative expenses, were approximately $3,037,000, $2,312,000 and $0 for year ended December 31, 2014, 2013 and 2012,
respectively.
SIGNATURES
The Registrant hereby certifies that it
meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual
report on its behalf.
| |
IAO KUN GROUP Holding Company
Limited |
| |
|
|
| April 13, 2015 |
By: |
/s/ Leong Siak Hung |
| |
|
Name: Leong Siak Hung |
| |
|
Title: Chief Executive Officer (Principal
Executive Officer)
|
| April 13, 2015 |
By: |
/s/ Raymond Li Chun Ming |
| |
|
Name: Raymond Li Chun Ming |
| |
|
Title: Chief Financial Officer (Principal
Financial and Accounting Officer) |
Exhibit 12.1
Certification
Pursuant to Rule 13a-14(a) of the Exchange
Act
I, Leong Siak Hung, certify that:
| 1. | I have reviewed this annual report on Form 20-F of Iao Kun Group Holding Company Limited; |
| 2. | Based on my knowledge, this 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 company as of, and for, the periods
presented in this report; |
| 4. | The company’s other certifying officer(s) 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 company 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 company, 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 company’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 company’s internal control over financial reporting that occurred during the
period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company’s
internal control over financial reporting; and |
| 5. | The company’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the company’s auditors and the audit committee of the company’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 company’s ability to record, process, summarize and report financial
information; and |
| b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s
internal control over financial reporting. |
| Date: April 13, 2015 |
By: |
/s/ Leong Siak Hung |
| |
|
Name: Leong Siak Hung
Title: Chief Executive Officer
(Principal Executive Officer) |
Exhibit 12.2
Certification
Pursuant to Rule 13a-14(a) of the Exchange
Act
I, Raymond Li Chun Ming, certify that:
| 1. | I have reviewed this annual report on Form 20-F of Iao Kun Group Holding Company Limited; |
| 2. | Based on my knowledge, this 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 company as of, and for, the periods
presented in this report; |
| 4. | The company’s other certifying officer(s) 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 company 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 company, 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 company’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 company’s internal control over financial reporting that occurred during the
period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company’s
internal control over financial reporting; and |
| 5. | The company’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the company’s auditors and the audit committee of the company’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 company’s ability to record, process, summarize and report financial
information; and |
| b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s
internal control over financial reporting. |
| Date: April 13, 2015 |
By: |
/s/ Raymond Li Chun Ming |
| |
|
Name: Raymond Li Chun Ming
Title: Chief Financial Officer
(Principal Financial and Accounting Officer) |
Exhibit 13.1
Certification
Pursuant to 18 U.S.C. Section 1350
Pursuant to U.S.C. Section 1350 of the Sarbanes-Oxley Act of
2002 (subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), each of the undersigned officers of
Iao Kun Group Holding Company Limited. (the “Company”), does hereby certify, to such officer’s knowledge, that:
The Annual Report on Form 20-F for the year ended December 31,
2014 of the Company fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information
contained in the Form 20-F fairly presents, in all material respects, the financial condition and results of operations of the
Company.
| |
IAO KUN GROUP HOLDING COMPANY
LIMITED |
| |
|
|
| April 13, 2015 |
By: |
/s/ Leong Siak Hung |
| |
|
Name: Leong Siak Hung
Title: Chief Executive Officer
(Principal Executive Officer) |
| |
|
|
| April 13, 2015 |
By: |
/s/ Raymond Li Chun Ming |
| |
|
Name: Raymond Li Chun Ming
Title: Chief Financial Officer
(Principal Financial and Accounting Officer) |
Exhibit 15.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
The Board of Directors
Iao Kun Group Holding Company Limited (F/K/A Asia Entertainment
& Resources Ltd.)
We hereby consent to the incorporation by reference in the
Registration Statements on Form F-3 (File No. 333-166860), Form F-3 (File No. 333-185759) and Form S-8 (File No. 333- 183782)
of Iao Kun Group Holding Company Limited and its subsidiaries (“the Company”) of our reports dated April 13,
2015, relating to the Company’s consolidated financial statements as of December 31, 2014 and 2013 and for the three
years ended December 31, 2014 and the effectiveness of internal control over financial reporting as of December 31, 2014,
which appear in this annual report on Form 20-F.
/S/ UHY LLP
New York, New York
April 13, 2015
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