UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

 

FORM 6-K

 

REPORT OF FOREIGN PRIVATE ISSUER

PURSUANT TO RULE 13a-16 OR 15d-16 UNDER

THE SECURITIES EXCHANGE ACT OF 1934

 

For the month of November 2015

 

Commission File Number: 001-53087

 

IAO KUN GROUP HOLDING COMPANY LIMITED

 

 

 

(Translation of registrant’s name into English)

 

Alameda Dr. Carlos D’ Assumpcao No: 181-187

Centro Comercial Comercial

Brilhantismo, 12 Andar T Macau

(Address of Principal Executive Office)

 

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.

 

Form 20-F x Form 40-F ¨

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): ¨

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): ¨

 

Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.

 

Yes ¨           No x

 

If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82-_______________

 

 

 

 

EXPLANATORY NOTE

 

This Report of Foreign Private Issuer on Form 6-K filed by Iao Kun Group Holding Company Limited (the “Company”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements relate to future events or the Company’s future financial performance. The Company has attempted to identify forward-looking statements by terminology including “anticipates,” “believes,” “expects,” “can,” “continue,” “could,” “estimates,” “intends,” “may,” “plans,” “potential,” “predict,” “should” or “will” or the negative of these terms or other comparable terminology. These statements are only predictions. Uncertainties and other factors may cause the Company’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels or activity, performance or achievements expressed or implied by these forward-looking statements. The information in this Report on Form 6-K is not intended to project future performance of the Company. Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company does not guarantee future results, levels of activity, performance or achievements. The Company’s expectations are as of the date this Form 6-K is filed, and the Company does not intend to update any of the forward-looking statements after the date this Report on Form 6-K is filed to confirm these statements to actual results, unless required by law.

 

 2 

 

  

IAO KUN GROUP HOLDING COMPANY LIMITED

F/K/A ASIA ENTERTAINMENT & RESOURCES LTD.

CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME

(Unaudited)

 

   For the Three Months
Ended		   For the Three Months
Ended		   For the Nine Months
Ended		   For the Nine Months
Ended		 
   September 30, 2015   September 30, 2014   September 30, 2015   September 30, 2014 
Revenue from VIP Gaming Operations  $22,395,298   $51,916,783   $85,966,313   $181,549,165 
Total Revenues   22,395,298    51,916,783    85,966,313    181,549,165 
                     
Expenses                    
- Commission to Junket Agents   15,603,525    47,136,322    62,855,213    151,635,092 
- Selling, General and Administrative Expenses   4,346,655    5,485,447    14,383,338    19,346,110 
- Special Rolling Tax   126,929    432,097    520,192    1,376,062 
- Impairment of Goodwill   -    -    17,754,136    - 
- Amortization of Intangible Assets   4,092,788    4,093,158    12,276,149    12,274,409 
 Total Expenses   24,169,897    57,147,024    107,789,028    184,631,673 
                     
Operating loss attributable to ordinary shareholders before change in fair value of contingent consideration   (1,774,599)   (5,230,241)   (21,822,715)   (3,082,508)
                     
Change in Fair Value of Contingent Consideration for the Acquisitions of King's Gaming, Bao Li Gaming and Oriental VIP Room   1,464,512    (7,018,014)   14,790,326    (62,701,703)
Net Loss Attributable to Ordinary Shareholders   (310,087)   (12,248,255)   (7,032,389)   (65,784,211)
                     
Other Comprehensive Income                    
 Foreign Currency                    
- Translation Adjustment   50,151    (407,653)   103,142    (325,948)
Total Comprehensive Loss  $(259,936)  $(12,655,908)  $(6,929,247)  $(66,110,159)
                     
Net Loss Per Share                    
 Basic  $(0.01)  $(0.20)  $(0.11)  $(1.09)
 Diluted  $(0.01)  $(0.20)  $(0.11)  $(1.09)
Weighted Average Shares Outstanding                    
 Basic   62,307,794    61,056,662    62,015,647    60,574,745 
 Diluted   62,307,794    61,056,662    62,015,647    60,574,745 

  

SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

 3 

 

  

IAO KUN GROUP HOLDING COMPANY LIMITED

F/K/A ASIA ENTERTAINMENT & RESOURCES LTD.

CONSOLIDATED BALANCE SHEETS

 

   September 30, 2015   December 31, 2014 
   (Unaudited)     
ASSETS          
CURRENT ASSETS          
Cash and Cash Equivalents  $9,207,637   $11,146,534 
Accounts Receivable, Net   6,737,595    1,529,052 
Markers Receivable   175,413,220    188,549,136 
Prepaid Expenses and Other Assets   503,976    348,777 
Total Current Assets   191,862,428    201,573,499 
           
Intangible Assets (net of accumulated amortization of $54,408,216 and $42,105,966 at September 30, 2015 and December 31, 2014, respectively)   109,748,966    121,968,648 
Goodwill   -    17,753,907 
Property and Equipment (net of accumulated depreciation of $171,588 and $108,913 at September 30, 2015 and December 31, 2014, respectively)   262,316    322,149 
Other Assets   23,232    23,427 
TOTAL ASSETS  $301,896,942   $341,641,630 
           
LIABILITIES AND SHAREHOLDERS' EQUITY          
CURRENT LIABILITIES          
Lines of Credit Payable  $56,515,400   $32,392,020 
Accrued Expenses   6,572,836    11,682,653 
Dividend Payable   870,745    - 
Bao Li Gaming Acquisition-Contingent Purchase Price Obligation   14,711,631    22,662,750 
Oriental VIP Room Acquisition-Contingent Purchase Price Obligation   14,947,026    13,738,762 
Loan Payable, Shareholders, current   2,870,765    2,612,490 
Total Current Liabilities   96,488,403    83,088,675 
           
Bao Li Gaming Acquisition-Contingent Purchase Price Obligation, net of current portion   -    19,628,881 
Oriental VIP Room Acquisition-Contingent Purchase Price Obligation, net of current portion   -    27,665,264 
Total Liabilities   96,488,403    130,382,820 
           
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; 62,196,064 and 60,452,314 issued and outstanding at September 30, 2015 and December 31, 2014, respectively.   6,219    6,044 
Additional Paid-in Capital   133,036,666    130,048,153 
Retained Earnings   71,711,089    80,653,190 
Accumulated Other Comprehensive Income   654,565    551,423 
Total Shareholders' Equity   205,408,539    211,258,810 
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY  $301,896,942   $341,641,630 

 

SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

 4 

 

  

IAO KUN GROUP HOLDING COMPANY LIMITED

F/K/A ASIA ENTERTAINMENT & RESOURCES LTD.

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015

(Unaudited)

 

           Additional       Accumulated   Total 
   Ordinary Shares   Paid-In   Retained   Other Comprehensive   Shareholders' 
   Shares   Amount   Capital   Earnings   Income   Equity 
                         
Balances, December 31, 2014   60,452,314   $6,044   $130,048,153   $80,653,190   $551,423   $211,258,810 
                               
Incentive shares issued for Bao Li Gaming 2014 rolling chip turnover target   1,025,000    103    1,342,647    -    -    1,342,750 
                               
Incentive shares issued for the Oriental VIP Room 2015 rolling chip turnover target   718,750    72    1,645,866    -    -    1,645,938 
                               
Year 2014 annual cash dividends   -    -    -    (1,038,967)   -    (1,038,967)
                               
Year 2015 interim cash dividends   -    -    -    (870,745)   -    (870,745)
                               
Net (loss)   -    -    -    (7,032,389)   -    (7,032,389)
                               
Foreign currency translation adjustment   -    -    -    -    103,142    103,142 
                               
Balances, September 30, 2015   62,196,064   $6,219   $133,036,666   $71,711,089   $654,565   $205,408,539 

 

SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

 5 

 

  

IAO KUN GROUP HOLDING COMPANY LIMITED

F/K/A ASIA ENTERTAINMENT & RESOURCES LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   For the Nine Months Ended   For the Nine Months Ended 
   September 30, 2015   September 30, 2014 
CASH FLOWS FROM OPERATING ACTIVITIES          
Net loss  $(7,032,389)  $(65,784,211)
           
Adjustments to reconcile net loss to net cash provided by operating activities          
           
Amortization of intangible assets   12,276,149    12,274,409 
Change in fair value of contingent purchase price obligation for the acquisition of King's Gaming, Bao Li Gaming and Oriental VIP Room   (14,790,326)   62,701,703 
Impairment of goodwill   17,754,136    - 
Depreciation   62,595    55,845 
Change in assets and liabilities          
Accounts Receivable   (5,205,692)   (9,986,085)
Markers Receivable   13,225,507    47,997,885 
Prepaid Expenses and Other Assets   (154,755)   154,117 
Lines of Credit Payable   24,097,441    12,645,554 
Accrued Expenses   (5,113,652)   (1,500,030)
Net cash provided by operating activities   35,119,014    58,559,187 
           
CASH FLOW FROM INVESTING ACTIVITIES          
           
Purchase of property and equipment   (2,623)   (303,887)
Net cash used in investing activities   (2,623)   (303,887)
           
CASH FLOW FROM FINANCING ACTIVITIES          
           
Contingent consideration paid for King's Gaming acquisition   -    (9,000,000)
Contingent consideration paid for Bao Li Gaming acquisition   (21,320,000)   (13,000,000)
Contingent consideration paid for the Oriental VIP Room acquisition   (14,950,000)   (26,000,000)
Cash paid for shares repurchased   -    (4,193,554)
Payment of dividends   (1,038,967)   - 
Proceeds from shareholder loans, net   256,857    69,548 
Net cash used in financing activities   (37,052,110)   (52,124,006)
           
Net (decrease) increase in cash and cash equivalents   (1,935,719)   6,131,294 
           
Effect of foreign currency translation on cash   (3,178)   186,114 
           
Cash and cash equivalents at beginning of period   11,146,534    7,563,097 
           
Cash and cash equivalents at end of period  $9,207,637   $13,880,505 
           
Non-cash Financing Activities          
Director shares issued for compensation  $-   $200,000 
Ordinary shares issued for contingent consideration payment for Bao Li Gaming  $1,342,750   $3,900,000 
Ordinary shares issued for contingent consideration payment for the Oriental VIP Room  $1,645,938   $- 
Declared Dividend Payable  $870,745   $1,539,260 

 

SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

 6 

 

 

IAO KUN GROUP HOLDING COMPANY LIMITED

F/K/A ASIA ENTERTAINMENT & RESOURCES LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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.

 

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 Promoter Companies, Collaborator and Junket Operator (collectively “Promotion Entities”) and for AGRL to exercise effective control over the Promotion Entities.

 

IKGH has fifteen wholly owned subsidiaries that were incorporated in the British Virgin Islands, listed in the table below.

 

Subsidiaries   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
Robust South Limited ("Robust") *   February 12, 2015
Yuwang Limited ("Yuwang")   March 11, 2015
Sino Hero Enterprises Limited ("Sino Hero")   March 16, 2015
Bliss Time Enterprises Limited ("Bliss")*   March 30, 2015
Brave Ring Limited ("Brave") *   March 30, 2015
Yong Kang Holdings Limited ("Yong") *   April 21, 2015
Prospect Jade Limited ("Prospect") *   April 22, 2015

 

* The subsidiary is currently inactive.

 

+ The subsidiary is currently inactive and it is anticipated that the subsidiary will be terminated in November 2015.

 

 7 

 

  

IAO KUN GROUP HOLDING COMPANY LIMITED

F/K/A ASIA ENTERTAINMENT & RESOURCES LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following companies are the Promotion Entities:

 

VIP Gaming Promotion Entities   Date Formed   Location   Subsidiary holds 100%
of Profit Interest		   Effective date of
profit interest
agreement
                 
Sang Heng Gaming Promotion Company Limited ( Sang Heng )**   March 28, 2007   Star World Hotel and Casino Downtown Macau   Kasino Fortune   February 2, 2010
                 
King s Gaming Promotion Ltd. ( King's Gaming )**   April 15, 2008   Sands Cotai Central Cotai, Macau   Billion Boom   November 10, 2010
                 
Sang Lung Gaming Promotion Company Limited ( Sang Lung )**   March 28, 2011   Galaxy Macau Resort, Macau   Super Number   May 15, 2011
                 
Bao Li Gaming Promotion Ltd. ( Bao Li )**   November 3, 2009   City of Dreams Hotel & Casino Cotai, Macau   Jubilee Dynasty   September 1, 2012
                 
Mr. Lam Chou In (Collaborator) ***       Le Royal Arc Casino Downtown, Macau   Frontier Champion   July 1, 2013
                 
Mr. Lou Kan Kuong
(Crown Australia Junket Operator) ****		       Crown Perth Casino in Perth, Australia and
Crown Melbourne Casino in Melbourne, Australia		   Sino Hero and Yuwang   May 16, 2015

 

** This is a Promoter Company 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.   

**** On May 15, 2015, the Company entered into agreements to acquire all of the profit interests of Mr. Lou Kan Kuong (“Mr. Lou” or the “Crown Australia Junket Operator”) promotion activities at the Crown Perth Casino in Perth, Australia and at the Crown Melbourne Casino in Melbourne, Australia with the consideration of $200 in total. Mr. Lou, who is currently an officer of IKGH, entered into agreements to act as a junket operator for the above two Casinos on June 24, 2013. The profit interests were acquired as an asset purchase for the historical costs of establishing the agreements between Mr. Lou and Australian Casinos as a related party transaction. The Company entered into the agreement to expand to overseas markets for its existing agent network in Macau.

 

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.

 

 8 

 

  

IAO KUN GROUP HOLDING COMPANY LIMITED

F/K/A ASIA ENTERTAINMENT & RESOURCES LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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 primarily 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 and Australia. 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. King’s Gaming moved its VIP gaming room to Sands Cotai Central in February 2013.

 

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.

 

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 (“Melco Crown”) to share in the casino’s VIP gaming room wins/losses from the players recruited by the Company. Either the Gaming Promoter or Melco Crown 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.

 

 9 

 

  

IAO KUN GROUP HOLDING COMPANY LIMITED

F/K/A ASIA ENTERTAINMENT & RESOURCES LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

The Junket Operator Agreement dated June 24, 2013 entered into between Mr. Lou Kan Kuong and Crown Melbourne and Crown Perth, Australia which allows the Crown Australia Junket Operator to be compensated based upon a mutually-agreed percentage of the rolling chips turnover at Crown Melbourne and Crown Perth, Australia.

 

Note 2 — Summary of Significant Accounting Policies

 

Basis of Presentation

 

The consolidated financial statements as of September 30, 2015 and for the three and nine month periods ended September 30, 2015 and 2014 are unaudited. The accompanying unaudited consolidated financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial reporting. In the opinion of management, all adjustments (consisting of normal recurring adjustments) have been made that are necessary to present fairly the financial position, the results of its operations and cash flows. Operating results as presented are not necessarily indicative of the results to be expected for a full year. These financial statements and related notes should be read in conjunction with the financial statements and notes thereto included in the Company’s Form 20-F for the year ended December 31, 2014 filed on April 14, 2015 with the Securities and Exchange Commission.

 

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 September 30, 2015 and December 31, 2014 and for the three and nine month periods ended September 30, 2015 and 2014. 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 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 management and on various other assumptions that management believes to be reasonable under the circumstances. The Company has made significant estimates of the contingent purchase price obligation for the King's Gaming, Bao Li Gaming and the Oriental VIP Room acquisitions, goodwill and other intangible assets in these consolidated financial statements. Actual results could vary from those estimates.

 

Revenue Recognition

 

Revenue from VIP gaming room promotion operations in Macau 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. Revenue from VIP operations in Australia is based upon a fixed commission as a percentage of rolling chip turnover.

 

Additionally, the Promotion Entities in Macau 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.

 

 10 

 

  

IAO KUN GROUP HOLDING COMPANY LIMITED

F/K/A ASIA ENTERTAINMENT & RESOURCES LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Beginning on September 1, 2012, the Company changed its remuneration model from a fixed commission model of 1.25% of the rolling chip turnover to a revenue sharing model in Macau. 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 in Macau (“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.

 

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). Win rate and total rolling chip turnover in the Group’s VIP gaming rooms during the three and nine month periods ended September 30, 2015 and 2014 are as follows:

 

   For the Three Months Ended   For the Nine Months Ended 
   September 30, 2015   September 30, 2014   September 30, 2015   September 30, 2014 
Win rate   3.91%   2.51%   3.63%   2.78%
                     
Total rolling chip turnover  $1,269,175,000   $4,320,066,000   $5,201,660,000   $13,759,487,000 

 

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.

 

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 mainland China. 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.  

 

 11 

 

  

IAO KUN GROUP HOLDING COMPANY LIMITED

F/K/A ASIA ENTERTAINMENT & RESOURCES LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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  September 30,
2015		   % of total
markers
receivable		   December 31,
2014		   % of total
markers
receivable		 
PRC                    
0-30 days  $16,781,719        $12,330,410      
31-60 days   9,605,037         11,760,382      
61-90 days   7,198,617         9,025,019      
Greater than 90 days   21,473,271         23,337,632      
Total  $55,058,644    31%  $56,453,443    30%

 

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 and the Company’s existing and future VIP gaming rooms through June 30, 2016. Upon the acquisition of the profit interest of the Crown Australia Junket Operator, Mr. Lou Kan Kuong guaranteed the collection of all markers receivable attributable to the Crown Australia operation and his network of junket agents at Crown Australia, Melbourne and Perth for so long as he is employed by the Company or the termination of the Australia junket business, whichever is earlier. As of September 30, 2015 and December 31, 2014, 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.

 

 12 

 

  

IAO KUN GROUP HOLDING COMPANY LIMITED

F/K/A ASIA ENTERTAINMENT & RESOURCES LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

  

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 Note 8, Note 9 and Note 10).

 

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 nine months ended September 30, 2015.

 

The following are the classes of assets and liabilities measured at fair value:

 

Recurring fair value measurements:

 

       Fair Value Measurements Using 
       Quoted                 
       Prices in                 
       Active                 
       Markets          Total Gains   Total Gains 
       for   Significant      for the Nine   For the Three 
       Identical   Other   Significant   Months   Months 
   As of September   Liabilities   Observable   Unobservable   Ended September   Ended September 
   30, 2015   (Level 1)   Inputs (Level 2)   Inputs (Level 3)   30, 2015   30, 2015 
                         
Fair Value of Contingent Consideration:                              
                               
Oriental VIP Room  $14,947,026   $-   $-   $14,947,026   $9,864,995   $296,694 
                               
Bao Li Gaming  $14,711,631   $-   $-   $14,711,631   $4,925,331   $1,167,818 
                               
Total recurring fair value measurements                      $14,790,326   $1,464,512 

 

 13 

 

  

IAO KUN GROUP HOLDING COMPANY LIMITED

F/K/A ASIA ENTERTAINMENT & RESOURCES LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

   

       Quoted                 
       Prices in                 
       Active           Total   Total 
       Markets          (Losses) for   (Losses) for 
       for   Significant      the Nine   the Three 
       Identical   Other   Significant   Months   Months 
   As of September   Liabilities   Observable   Unobservable   Ended September   Ended September 
   30, 2014   (Level 1)   Inputs (Level 2)   Inputs (Level 3)   30, 2014   30, 2014 
                         
Fair Value of Contingent Consideration:                              
                               
Oriental VIP Room  $44,969,695   $-   $-   $44,969,695   $(34,492,531)  $(3,058,480)
                               
Bao Li Gaming  $44,296,420   $-   $-   $44,296,420   $(28,209,172)  $(3,959,534)
                               
Total recurring fair value measurements                      $(62,701,703)  $(7,018,014)

 

Non-recurring fair value measurements:

 

       Fair Value Measurements Using 
       Quoted                 
       Prices in           Total   Total 
       Active           (Losses) for   (Losses) for 
       Markets   Significant       the Nine   the Three 
       for   Other   Significant   Months   Months 
   As of   Identical   Observable   Unobservable   Ended   Ended 
   September   Liabilities   Inputs (Level   Inputs (Level   September   September 
   30, 2015   (Level 1)   2)   3)   30, 2015   30, 2015 
                         
Goodwill  $-   $-   $-   $-   $(17,754,136)  $- 
                               
Total non-recurring fair value measurements                      $(17,754,136)  $- 

 

Additional information regarding the valuation technique and inputs used is as follows:

  

 14 

 

  

IAO KUN GROUP HOLDING COMPANY LIMITED

F/K/A ASIA ENTERTAINMENT & RESOURCES LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Quantitative Information about Level 3 Fair Value Measurements:

 

   Fair Value           
Contingent
Consideration		  as of 
9/30/2015		   Valuation
Techniques		  Unobservable Input  Range 
               
Oriental VIP Room  $14,947,026   Forecasted Performance, 2015-June 2016  Chip Turnover Annual Growth   (15%) – 5% 
                 
        Monte Carlo Method  Average Simulated Share Prices  $1.71 
                 
Bao Li  Gaming  $14,711,631   Forecasted Performance, 2015  Chip Turnover Annual Growth   (40%) - (10%) 
                 
        Monte Carlo Method  Average Simulated Share Prices  $1.73 

  

   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 

 

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.

 

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.

 

 15 

 

  

IAO KUN GROUP HOLDING COMPANY LIMITED

F/K/A ASIA ENTERTAINMENT & RESOURCES LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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 three and nine months ended September 30:

 

   Three Months Ended
September 30, 2015		   Three Months
Ended September
30, 2014		   Nine Months Ended 
September 30, 2015		   Nine Months
Ended  September
30, 2014		 
Numerator:                    
Net loss attributable to Ordinary Shareholders for basic and diluted loss per share  $(310,087)  $(12,248,255)  $(7,032,389)  $(65,784,211)
Denominator:                    
Denominator for basic loss per share                    
- Weighted-average Ordinary Shares outstanding during the period   62,307,794    61,056,662    62,015,647    60,574,745 
                     
Denominator for diluted loss per share   62,307,794    61,056,662    62,015,647    60,574,745 
                     
Basic loss per share  $(0.01)  $(0.20)  $(0.11)  $(1.09)
Diluted loss per share  $(0.01)  $(0.20)  $(0.11)  $(1.09)

 

 Bao Li Gaming met its rolling chip turnover target for the base earnout in July 2014 and also earned an additional Ordinary Shares under the incremental earnout clause as of December 31, 2014; therefore, 1,025,000 Ordinary Shares in total were issued in May 2015. The Oriental VIP Room met its rolling chip turnover target as of June 30, 2014 and 1,250,000 Ordinary Shares were issued during the fourth quarter of 2014. The Oriental VIP Room met its base rolling chip turnover target in April 2015 and also earned an additional 93,750 Ordinary Shares under the incremental earnout clause as of June 30, 2015; therefore, 718,750 Ordinary Shares were issued during the third quarter of 2015. The issued Ordinary Shares have been included in basic and diluted earnings per share based on the weighted average shares for the three and nine month periods ended September 30, 2015.

 

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 60,790 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 three and nine months ended September 30, 2014. A total of 111,730 Ordinary Shares are expected to be issued during the fourth quarter of 2015 to satisfy the Company’s obligations for 2014 and have been included in basic and diluted earnings per share based on the weighted average shares for the three and nine months ended September 30, 2015. A liability of approximately $359,000 and $209,000 is included in accrued expenses at September 30, 2015 and December 31, 2014, respectively.

 

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.

 

 16 

 

  

IAO KUN GROUP HOLDING COMPANY LIMITED

F/K/A ASIA ENTERTAINMENT & RESOURCES LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

Indefinite Useful Life Assets

 

In accordance with U.S. GAAP, the Company performs impairment testing for goodwill at least annually unless indicators of impairment exist in interim periods. The Company performs its annual test of goodwill on December 31 each year.

 

Goodwill impairment testing follows the two-step approach as defined in FASB ASC Topic 350, which is performed at the entity level as the Company has one reporting unit, which is gaming promotion business mainly located in Macau. The first step (“Step 1”) compares the fair value of the reporting unit to its carrying value. If the carrying value of the reporting unit exceeds its fair value, the second step of the impairment test is performed to measure the amount of impairment loss to be recognized. In the second step (“Step 2”), the fair value of the reporting unit resulting from the first step of the evaluation is allocated to the fair value of all of the assets and liabilities of the reporting unit in order to determine an implied goodwill value. This allocation is similar to the purchase price allocation performed in purchase accounting. If the carrying value of goodwill exceeds the implied fair value, the excess of the carrying value is required to be recorded as an impairment loss. The loss recognized cannot exceed the carrying value of goodwill.

 

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.

 

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 three month periods ended September 30, 2015 and 2014, the Group incurred advertising costs $152,214 and $39,559, respectively. During the nine month periods ended September 30, 2015 and 2014, the Group incurred advertising costs $357,586 and $587,197, respectively.

 

 17 

 

  

IAO KUN GROUP HOLDING COMPANY LIMITED

F/K/A ASIA ENTERTAINMENT & RESOURCES LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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 the 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 July 17, 2014, 60,790 Ordinary Shares were issued for year 2013 compensation. 111,730 Ordinary Shares are to be issued for the equity portion of year 2014 compensation upon approval by the Company’s shareholders at a shareholders meeting for a revised Plan and approval from the Board of Directors.

 

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.

 

   September 30,
2015		   September 30,
2014		   December 31,
2014		 
Period end HK$:US$ exchange rate  $7.75   $7.77   $7.75 
Average three-months ended HK$:US$ exchange rate  $7.75   $7.75   $- 
Average nine-months ended HK$:US$ exchange rate  $7.75   $7.75   $- 
Average annual HK$:US$ exchange rate  $-   $-   $7.75 

 

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.

 

 18 

 

  

IAO KUN GROUP HOLDING COMPANY LIMITED

F/K/A ASIA ENTERTAINMENT & RESOURCES LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Economic and political risks

 

The Group’s current operations are mainly 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.

 

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.

 

Note 3 — Accounts Receivable

 

Accounts receivable consisted of the following:

 

   September 30,   December 31, 
   2015   2014 
Gaming revenues receivable  $6,737,595   $1,529,052 

 

As of September 30, 2015, accounts receivable were due from four casino operators and one gaming promoter and were 48%, 38%, 9%, 3% and 2% of total receivables, respectively. As of December 31, 2014, accounts receivable were due from four casino operators and were 59%, 33%, 5% and 3% of total receivables, respectively.

 

Note 4 — Goodwill and Other Intangible Assets

 

Goodwill

 

Changes in the carrying value of goodwill are as follows:

 

   December 31, 2014   Other   Impairments   September 30, 2015 
Goodwill, gross  $17,753,907   $-   $-   $17,753,907 
Foreign currency translation   -    229    -    229 
Accumulated impairment loss   -    -    (17,754,136)   (17,754,136)
 Total Goodwill, net  $17,753,907   $229   $(17,754,136)  $- 

 

For the quarter ended June 30, 2015, the Company concluded there was indicator of potential goodwill impairment due to the impact of the significant decline in the Macau VIP gaming promotion business. As a result of identifying indicator of impairment, the Company performed an impairment test of goodwill as of June 30, 2015.

 

In performing Step 1 of the impairment test, the Company estimated the fair value of the reporting unit using a combination of the income approach and market-based valuation methodologies with greater emphasis placed on the income approach, for purpose of estimating the total enterprise value for the Company.

 

 19 

 

  

IAO KUN GROUP HOLDING COMPANY LIMITED

F/K/A ASIA ENTERTAINMENT & RESOURCES LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

Under the income approach which is based on probability-weighted discounted cash flow (“DCF”) technique, forecasted net cash flow (“NCF”) of the 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; (v) the expiration date of the concession and sub-concession agreements for the right to operate casinos in Macau; and (vi) 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 give 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 the Company’s routine short-term management procedures and long-range strategic planning process. In addition, the Company tested the reasonableness of the assumption inputs and outcomes of its DCF analysis against available comparable market data.

 

Under the market approach, the fair value of the reporting unit is derived by reference to the Company’s market capitalization at the valuation date.

 

The Step 1 analysis indicated that the carrying value of the reporting unit exceeded its estimated fair value, requiring the Company to perform Step 2 to measure the amount of impairment loss, if any.

 

Under Step 2, the fair value of all of the reporting unit’s assets and liabilities were estimated for the purpose of deriving an estimate of the implied fair value of goodwill. This test resulted in a non-cash, goodwill impairment charge of $17,754,136, which was recognized during the three months ended June 30, 2015.

 

Determining the fair value of a reporting unit is highly judgmental in nature and involves the use of significant estimates and assumptions. The Company’s fair value estimates for purposes of determining the goodwill impairment charge are considered Level 3 fair value measurements. The Company based its fair value estimates on assumptions it believes to be reasonable but that are unpredictable and inherently uncertain. Actual future results related to assumed variables could differ from these estimates.

 

Other Intangible Assets

 

Intangible assets as of September 30, 2015 and December 31, 2014 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, 2014  $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    161,644,338    164,074,614 
Foreign currency translation   306    918    81,344    82,568 
                     
Balance as of September 30, 2015   606,804    1,824,696    161,725,682    164,157,182 
                     
Accumulated amortization                    
Balance as of January 1, 2014   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 
Amortization expense   95,480    132,236    12,048,433    12,276,149 
Foreign currency translation   265    305    25,531    26,101 
                     
Balance as of September 30, 2015   543,814    634,086    53,230,316    54,408,216 
Total amortized intangible assets  $62,990   $1,190,610   $108,495,366   $109,748,966 

 

 20 

 

  

IAO KUN GROUP HOLDING COMPANY LIMITED

F/K/A ASIA ENTERTAINMENT & RESOURCES LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

As a result of the same indicators mentioned above for Goodwill Impairment, the Company performed impairment test of intangible assets as of June 30, 2015 and the sum of the estimated undiscounted cash flows exceeded the carrying amount of the intangible assets. Therefore, no impairment has been recognized for other intangible assets.

 

Amortization expense for the three month periods ended September 30, 2015 and 2014 was $4,092,788, and $4,093,158, respectively; and $12,276,149 and $12,274,409 for the nine month periods ended September 30, 2015 and September 30, 2014, respectively.

 

Estimated amortization expense of intangibles for the next five years and thereafter is as follows:

 

2015 (3 months)  $4,092,050 
2016   16,272,028 
2017   16,240,893 
2018   16,240,893 
2019   16,240,893 
Thereafter   40,662,209 
   $109,748,966 

 

Note 5 — Lines of Credit Payable

 

Lines of Credit Payable consisted of the following:

 

   September 30,   December 31, 
   2015   2014 
Due to casino operators  $56,515,400   $32,392,020 

 

Due to casino operators represents an advance of non-negotiable chips to Sang Heng, Sang Lung and Bao Li Gaming and are interest free and renewable monthly and an advance of commission income.

 

The casino operators, both in Macau and Australia, have extended lines of credit totaling approximately $57,533,000 and $59,324,000 as of September 30, 2015 and December 31, 2014, 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 lines of credit for Bao Li Gaming and the Crown Australia Junket Operator are guaranteed by Mr. Lou and are secured by his personal checks.

 

 21 

 

   

IAO KUN GROUP HOLDING COMPANY LIMITED

F/K/A ASIA ENTERTAINMENT & RESOURCES LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 6 — Accrued Expenses

 

Accrued Expenses consist of the following:

 

   September 30,   December 31, 
   2015   2014 
           
Commission payable-the junket agents  $4,900,312   $8,886,601 
Management fee payable-related party (Note 13)   399,995    573,897 
Management and Directors' compensation   589,545    562,139 
Accrued listing expenses   51,681    765,417 
Others   631,303    894,599 
           
   $6,572,836   $11,682,653 

 

One junket agent accounted for approximately 13% and 14% of the rolling chip turnover during the three and nine months ended September 30, 2015, respectively. One junket agent accounted for approximately 23% of commission payable as of September 30, 2015. One junket agent accounted for approximately 10% of the rolling chip turnover during the year ended December 31, 2014 and 14% of commission payable as of December 31, 2014.

 

Note 7 — Loans Payable, Shareholders

 

As of September 30, 2015 and December 31, 2014, the amount of the funding advanced to AGRL by Messrs. Lam and Vong was approximately $2,870,765 and $2,612,490, respectively.  All amounts due as of September 30, 2015 and December 31, 2014 are considered short-term advances and are due on demand. 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.

 

Note 8—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.

  

 22 

 

  

IAO KUN GROUP HOLDING COMPANY LIMITED

F/K/A ASIA ENTERTAINMENT & RESOURCES LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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 Gross Profit Targets in year 2012 through 2014 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:

 

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. 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 three and nine month periods ended September 30, 2015 and 2014, 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 and no Ordinary Shares are expected to be issued.  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.

 

 23 

 

 

IAO KUN GROUP HOLDING COMPANY LIMITED

F/K/A ASIA ENTERTAINMENT & RESOURCES LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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 9—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. 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.

 

 24 

 

 

IAO KUN GROUP HOLDING COMPANY LIMITED

F/K/A ASIA ENTERTAINMENT & RESOURCES LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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 

 

In accordance with the FASB ASC Topic 805 on business combinations, a liability of $14,711,631 and $42,291,631 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 September 30, 2015 and December 31, 2014, 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. 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 three and nine month periods ended September 30, 2015, the Company recognized gains of $1,167,818 and $4,925,331, respectively, due to the change in the fair value of the contingent consideration utilizing Level 3 fair value measurements. During the three and nine months ended September 30, 2014, the Company recognized losses of $3,959,534 and $28,209,172, 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.

 

As of September 30, 2015, Bao Li has not achieved the minimum rolling chip target for year 2015. Bao Li achieved the rolling chip target for 2013 and 2014, and Earnout cash and Earnout Ordinary Shares earned and issued are as below:

 

   Base Earnout   Base Earnout   Incremental Earnout   Incremental
Earnout		 
Year  Cash Payments   Shares Issued   Cash Payments   Shares Issued 
2013  $13,000,000    625,000   $13,000,000    625,000 
2014  $13,000,000    625,000   $8,320,000    400,000 

 

The following is a reconciliation of the change in fair value of the contingent consideration:

 

Contingent Consideration as of January 1, 2015  $42,291,631 
Payment   (21,320,000)
Ordinary Shares Issued   (1,342,750)
Change in Fair Value of Contingent Consideration   (4,925,331)
Foreign Currency Translation Adjustment   8,081 
Contingent Consideration Payable as of September 30, 2015  $14,711,631 

 

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.

 

 25 

 

 

 

IAO KUN GROUP HOLDING COMPANY LIMITED

F/K/A ASIA ENTERTAINMENT & RESOURCES LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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  $- 
2016   14,711,631 
   $14,711,631 

 

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.

 

Note 10 — 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.

 

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.

 

 26 

 

  

IAO KUN GROUP HOLDING COMPANY LIMITED

F/K/A ASIA ENTERTAINMENT & RESOURCES LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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 

 

In accordance with the FASB ASC Topic 805 on business combinations, a liability of $14,947,026 and $41,404,026 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 September 30, 2015 and December 31, 2014, 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. 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 three and nine month periods ended September 30, 2015, the Company recognized gains of $296,694 and a gain of $9,864,995, respectively, due to the change in the fair value of the contingent consideration utilizing Level 3 fair value measurements.  During the three and nine months ended September 30, 2014, the Company recognized losses of $3,058,480 and $34,492,531, 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.

  

 27 

 

 

IAO KUN GROUP HOLDING COMPANY LIMITED

F/K/A ASIA ENTERTAINMENT & RESOURCES LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The Oriental VIP Room achieved the rolling chip target for 12 month periods ended June 30, 2015 and 2014 and Earnout cash and Earnout Ordinary Shares earned and issued are as below:

 

       Base Earnout   Incremental   Incremental Earnout 
   Base Earnout   Shares   Earnout   Shares 
Period ended  Cash Payments   Issued/Earned   Cash Payments   Issued/Earned 
June 30, 2014  $13,000,000    625,000   $13,000,000    625,000 
June 30, 2015  $13,000,000    625,000   $1,950,000    93,750 

 

 

The following is a reconciliation of the change in fair value of the contingent consideration:

 

Contingent Consideration as of January 1, 2015  $41,404,026 
Payment   (14,950,000)
Ordinary Shares Issued   (1,645,938)
Change in Fair Value of Contingent Consideration   (9,864,995)
Foreign Currency Translation Adjustment   3,933 
Contingent Consideration Payable as of September 30, 2015  $14,947,026 

 

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.

 

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.

 

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  $- 
2016   14,947,026 
   $14,947,026 

 

Note 11 — 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 King’s Gaming, Bao Li Gaming and Oriental VIP room.

 

 28 

 

 

IAO KUN GROUP HOLDING COMPANY LIMITED

F/K/A ASIA ENTERTAINMENT & RESOURCES LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

  

   Nine Months
Ended		   Years Ended December 31, 
   September
30, 2015		   2014   2013 
             
King's Gaming (Note 8)   -(1)   -(1)   -(1)
                
Bao Li Gaming (Note 9)   1,025,000(2)   1,250,000(2)    N/A 
                
Oriental VIP Room (Note 10)   718,750(3)   1,250,000(3)    N/A 

 

(1)King’s Gaming did not meet its Gross Profit Target for the years ended December 2014, 2013 or 2012, and therefore no shares for achieving those performance targets were issued.
(2)Bao Li achieved the minimum rolling chip target and also reached the incremental earn out rolling chip target for 2013 and 2014, and therefore an aggregate of 1,250,000 and 1,025,000 Ordinary Shares were issued in the third quarter of 2014 and the second quarter of 2015, respectively.
(3)The Oriental VIP Room achieved the minimum rolling chip target and also reached the incremental earn out rolling chip target for the 12 months ended June 30, 2014, and therefore an aggregate of 1,250,000 Ordinary Shares were issued in the fourth quarter of 2014.  The Oriental VIP Room achieved the minimum rolling chip target and also reached an additional incremental earn out rolling chip target for the 12 months ended June 30, 2015 and a total of 718,750 Ordinary Shares were issued during the third quarter of 2015.

 

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.

 

Directors Compensation

 

All of the Company’s directors presently receive annual compensation of $30,000 in cash and $20,000 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 three month periods ended September 30, 2015 and 2014 were $124,250 and $124,250, respectively; and during the nine month periods ended September 30, 2015 and 2014 were $372,750 and $372,750, respectively.

 

Share Repurchase Program

 

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. During the nine month period ended September 30, 2015, there were no shares repurchased.

 

 29 

 

 

IAO KUN GROUP HOLDING COMPANY LIMITED

F/K/A ASIA ENTERTAINMENT & RESOURCES LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Dividend

 

The Board of Directors has authorized a regular cash dividend each year after the release of the Company’s financial results for the six months ending June 30 (the “Six Month Dividend”), an amount per outstanding ordinary share 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 six months ended June 30, divided by (ii) the number of Ordinary Shares outstanding on the record date for such dividend; and, an annual dividend each year after the release of the Company’s annual financial results (the “Annual Dividend”), equates to an amount per outstanding ordinary share equal to (i) 15% of the Company’s non-GAAP net income 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. 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. An additional dividend totaling $1,038,967 was paid on June 22, 2015 for 2014 Annual Dividend based upon the number of Ordinary Shares outstanding on June 5, 2015. For the Six Month Dividend payable for 2015, this is equal to a dividend of approximately $0.014 per share, which was paid on October 19, 2015.

 

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 
      
June 22, 2015  $1,038,967 
      
October 19, 2015  $870,745 

 

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 September 30, 2015 and December 31, 2014.

  

 30 

 

  

IAO KUN GROUP HOLDING COMPANY LIMITED

F/K/A ASIA ENTERTAINMENT & RESOURCES LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Ordinary Shares Reserved for Future Issuance

 

At September 30, 2015 and December 31, 2014, the Company has reserved the following Ordinary Shares of its authorized but unissued Ordinary Shares for possible future issuance:

 

   September 30,
2015		   December 31,
2014		 
         
Officer and Director Shares   28,200    28,200 
           
Contingently Issuable Incentive Shares-King's Gaming   600,000    600,000 
           
Contingently Issuable Incentive Shares-Bao Li Gaming   1,250,000    2,275,000 
           
Contingently Issuable Incentive Shares-Oriental VIP Room   1,250,000    2,500,000 
           
Total   3,128,200    5,403,200 

 

Hong Kong Stock Exchange Listing

 

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 $0 and $1,604,000 for three month periods ended September 30, 2015 and 2014, respectively; and $159,000 and $1,742,000 for nine month periods ended September 30, 2015 and 2014, respectively.

 

Note 12 — Commitments and Contingencies

 

Employment Agreements

 

AGRL entered into employment agreements with five executive officers: Mr. Lam (Chairman of the Board), Leong Siak Hung (Former Chief Executive Officer), Li Chun Ming (Former 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. 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 the Former Chief Executive Officer and Former Chief Financial Officer expired in February 2013 and continued on the same terms (subject to increases) on a month to month basis until April 30, 2015, upon their resignations. The agreement with Mr. Lam expired on February 2, 2015 and are continuing on the same terms on a month to month basis.

 

On May 1, 2015, the Company entered into employment agreements with Mr. Vong (Chief Executive Officer), Mr. Lam Chou In (Chief Operating Officer) and Mr. Yip Cheuk Fai (Chief Financial Officer). Each of the agreements is for a period of three years and each executive is entitled to paid vacation in accordance with the Company’s policies and other customary benefits.

 

Annual minimum compensation for the terms of the employment agreements for terms greater than one year, as amended, is as follows at September 30, 2015:

 

2015 (3 months)  $300,000 
2016   1,036,000 
2017   928,000 
2018   258,000 
Total  $2,522,000 

 

 31 

 

 

IAO KUN GROUP HOLDING COMPANY LIMITED

F/K/A ASIA ENTERTAINMENT & RESOURCES LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The employment agreements provide that the executive, during the period of five years following the termination of his employment, 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.

 

Total compensation charged to operations during the three month periods ended September 30, 2015 and 2014, related to these employment contracts were $320,938 and $319,829, respectively; during the nine month periods ended September 30, 2015 and 2014, related to these employment contracts were $815,727 and $1,020,177, 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 $10,679 and $14,239 for the years ended December 31, 2015 and 2016, respectively. Rent expense was $24,857 and $22,702 for the three month periods ended September 30, 2015 and 2014, respectively; $72,194 and $68,925 for the nine month periods ended September 30, 2015 and 2014, respectively.

 

Gaming Table Rentals

 

Starting from August 1, 2013, the Company paid 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 reduced the gaming tables from six to four gaming tables in its Oriental VIP Room and the monthly rental was reduced to approximately $309,000, which was further reduced to $284,000 in May 2015 and $258,000 beginning in June 2015. Beginning in September 2015, the Company no longer pays a monthly rental for gaming tables and has reduced its percentage of revenue sharing. Rental expense charged to operations for gaming table rentals was $516,076 and $1,277,238 for the three month periods ended September 30, 2015 and 2014, respectively; $2,295,826 and $3,830,133 for the nine month periods ended September 30, 2015 and 2014, respectively.

 

Revenue Sharing

 

Beginning in September 2012, the Company 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 $103,000 was recorded as additional commission expense in October 2015 for participating junket agents based on September 2015 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 in Macau 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.

 

 32 

 

 

IAO KUN GROUP HOLDING COMPANY LIMITED

F/K/A ASIA ENTERTAINMENT & RESOURCES LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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.

 

Note 13 — Related Party Transactions

 

Management Agreements

 

Part of day-to-day management and operation of the VIP gaming rooms is contracted by the Promotion Entities in Macau 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 Executive Officer.

 

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 reduced 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 reduced from $103,000 to $97,000 each.

 

Effective January 1, 2015, the monthly payments were reduced 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 reduced from $97,000 to $65,000 each.

 

Total expenses for Pak Si's services were $1,199,721 and $1,722,392 during the three month periods ended September 30, 2015 and 2014, respectively; and $3,598,514 and $5,435,694 during the nine month periods ended September 30, 2015 and 2014, respectively.  Amounts due to Pak Si as of September 30, 2015 and December 31, 2014 were $399,995 and $573,897, respectively, and have been recorded in accrued expenses.

 

Entertainment Expense

 

The Group incurred entertainment expense for catering and restaurant services provided by a related party in which three directors have the majority ownership interest. Such entertainment expense were $76,865 and $153,358 during the three month periods ended September 30, 2015 and 2014, respectively; and $302,913 and $511,952 during nine month periods ended September 30, 2015 and 2014, respectively.

 

 33 

 

  

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 unaudited consolidated financial statements and related footnotes thereto included in this report for the three and nine months ended September 30, 2015 and the audited consolidated financial statements and related footnotes thereto included in our annual report on Form 20-F for the year ended December 31, 2014. 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 and two major casinos in Australia through the Promotion Entities, which include the Promoter Companies, the Collaborator (who are licensed gaming promoters and DICJ registered gaming collaborator) in Macau and Junket Operator in Australia (the terms “Promotion Entities,” “Promoter Companies,” Collaborator,” and “Junket Operator” are defined in the notes to the financial statements included with this report on Form 6-K). 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 in Macau. 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 in Macau. Revenue from VIP operation in Australia is based upon a mutually-agreed percentage of the rolling chip turnover. 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 interim financial reporting.

 

SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

(All figures are in thousands except earnings (loss) per share)

 

Statements of operations data (unaudited)

 

   For the three months
ended
September 30,		   For the nine months
ended
September 30,		 
   2015   2014   2015   2014 
                 
Revenue  $22,395   $51,917   $85,966   $181,549 
Expenses                    
Commission to junket agents   (15,604)   (47,136)   (62,855)   (151,635)
Selling, general and administrative expenses   (4,347)   (5,485)   (14,383)   (19,346)
Special rolling tax   (127)   (432)   (520)   (1,376)
Impairment of goodwill   -    -    (17,754)   - 
Amortization of intangible assets   (4,093)   (4,093)   (12,276)   (12,274)
Operating loss before change in fair value of contingent consideration   (1,775)   (5,230)   (21,822)   (3,083)
Change in Fair value of Contingent Consideration for the acquisitions   1,465    (7,018)   14,790    (62,702)
                     
Net loss  before tax   (310)   (12,248)   (7,032)   (65,784)
Income tax expense   -    -    -    - 
Net loss for the period attributable to Ordinary Shareholders   (310)   (12,248)   (7,032)   (65,784)
Other comprehensive income (loss) after tax   50    (407)   103    (326)
Total comprehensive loss for the period attributable to Ordinary Shareholders  $(260)  $(12,656)  $(6,929)  $(66,110)
GAAP loss per share                    
Basic  $(0.01)  $(0.20)  $(0.11)  $(1.09)
Diluted  $(0.01)  $(0.20)  $(0.11)  $(1.09)

 

 34 

 

 

Balance sheet data

 

   September
30,		   December
31,		 
   2015   2014 
   (unaudited)     
Current assets  $191,862   $201,573 
Non-current assets  $110,035   $140,068 
Current liabilities  $96,488   $83,089 
Non-current liabilities  $-   $47,294 
Total shareholders’ equity  $205,409   $211,258 

 

Cash flow data (unaudited)

 

   For the nine
months
ended September
30, 2015		   For the nine
months 
ended September
 30, 2014		 
         
Net cash provided by operating activities  $35,119   $58,559 
Net cash used in investing activities   (3)   (304)
Net cash used in financing activities   (37,052)   (52,124)
Net (decrease) increase in cash and cash equivalents  $(1,936)  $6,131 

 

SIGNIFICANT FACTORS AFFECTING OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION

 

Macau’s gaming and tourism markets

 

Our business is and will be influenced most significantly by the growth or decline 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. 

 

 35 

 

 

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. 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. Starting from the first quarter of 2015, the number of visitors to Macau, particularly visitors from China’s Guangdong province (where most visitors to Macau come from), began to decline significantly due to Chinese government policies and regulatory factors.

 

According to the DICJ, gross gaming revenues in Macau increased by 13.4% from 2011 to 2012, increased by 18.6% from 2012 to 2013, and decreased by 2.5% from 2013 to 2014. According to the DICJ, gross gaming revenues in Macau decreased by 36.2% from the first nine months of 2014 to the first nine months of 2015, primarily due to the decline in revenue of VIP baccarat since 2012, which accounted for 73.2%, 69.3%, 66.1%, 60.5%, and 55.8% of total gross gaming revenue in Macau in 2011, 2012, 2013, 2014 and the first nine months of 2015, respectively. Such decline was primarily a result of slower economic growth in parts of mainland China and the on-going anti-corruption campaign in mainland China, as well as the continued tightening of government policies (including visa restrictions and credit card usage) 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 September 30, 2015, we had an aggregate of US$57.5 million in total available lines of credit from casino operators in Macau and Australia, and the casino operators may extend temporary credit in excess of this amount to us from time to time.

 

In light of the decreasing trend of VIP baccarat, the casino game offered in the VIP Rooms, as well as the slower growth of China’s economy; the on-going anti-corruption campaign and the continued tightening of government policies 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, 2014 and the nine months ended September 30, 2015 were adversely impacted. While our efforts to monitor the collection of outstanding markers have successfully mitigated our risk of bad debt, we have experienced a lengthening of the collection period on certain markers, though they remain within our collection policy of 180 days.

 

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, similar to 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 fewer financial resources than we have 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, we continue to evaluate the sector and the potential expansion opportunities including overseas.

 

 36 

 

 

We have offered higher fixed commission rates to non-credit agents (agents that we do not extend credit to) 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 junket agents. With the decreasing trend 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

 

Macau 

 

Beginning September 1, 2012, we changed our remuneration model from a fixed rate commission of not more than 1.25% of rolling chip turnover to a revenue sharing model where we currently share 40% to 45% of the net gaming win/loss before expenses with the respective casino operators and L’Arc Promoter in Macau. 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. Beginning in September 2015, we are no longer paying a table rental fee and our percentage of net gaming win/loss was reduced.

 

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.

 

Our operating results under the revenue sharing model directly correlate with the win/loss rate in the VIP Rooms and are therefore subject to greater 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 changed from 1.26% in 2011, to 1.30% in 2012, 1.39% in 2013, 1.41% in 2014, and to 1.65% during the nine months ended September 30, 2015. 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 September 30, 2015 ranged from 2.18% to 4.19%.

 

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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.

 

Australia

 

On May 15, 2015, we entered into agreements to acquire all of the profit interests of Mr. Lou Kan Kuong (“Mr. Lou”) for acting as a junket operator for the Crown Perth Casino in Perth, Australia and for the Crown Melbourne Casino in Melbourne, Australia for $200 of consideration in total. Mr. Lou, who is currently an officer of IKGH, entered into agreements to act as a junket operator for the above two Casinos on June 24, 2013. We have started trial operations in the Australian casinos to gain a greater understanding of the preferences of our junket agents and VIP players and the logistics of the market. As of today, nominal revenues have been generated by the Australia operation, equal to our costs as we test this market. We receive a fixed percentage of the rolling chip turnover we generate at the Australian casinos and do not currently share in the win/loss results. The profit interests were acquired as an asset purchase for the historical costs of establishing the agreements between Mr. Lou and Australian Casinos as a related party transaction. We entered into the agreement to expand to overseas markets for our existing agent network in Macau.

  

Goodwill Impairment

 

Goodwill is recorded when the purchase price for an acquisition exceeds the estimated fair value of the net tangible and identified intangible assets acquired. The Company currently has only one reporting unit which is the gaming promotion business mainly located in Macau. Current operations in Australia are managed under the same reporting unit as Macau. As our international business expands, we may have additional reporting units.

 

The Company has adjusted the rolling chip turnover guidance to reflect the decline in revenue of the VIP gaming business in Macau. During the first nine months of 2015, the Company has been actively exploring alternatives to diversify the source of revenue in overseas markets. These results, along with changes in the competitive marketplace led to a shift in strategic direction and reduced future revenue and profitability expectations for the business. As a result of these changes in strategy and expectations, the Company forecasted reductions in rolling chip turnover growth rates and lower future cash flows used to estimate the fair value of the business unit, which resulted in an impairment charge for goodwill recorded in the consolidated financial statements.

 

Refer to the Note 4, Goodwill and other intangible assets, of the notes to the Consolidated Financial Statements, for further information.

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

Management’s discussion and analysis of our results of operations and liquidity and capital resources are based on our consolidated financial information. We describe our significant accounting policies in Note 2, Summary of Significant Accounting Policies, of the Notes to unaudited Consolidated Financial Statements included in this report. Our unaudited consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial reporting. In the opinion of management, all adjustments (consisting of normal recurring adjustments) have been made that are necessary to present fairly the financial position, the results of its operations and cash flows. Operating results as presented are not necessarily indicative of the results to be expected for a full year. These financial statements and related notes should be read in conjunction with the financial statements and notes thereto included in the Company’s Form 20-F filed on April 14, 2015 with the Securities and Exchange Commission for the year ended December 31, 2014. Certain of our accounting policies require that management apply significant judgments in defining the appropriate assumptions integral to financial estimates. On an ongoing basis, management reviews the accounting policies, assumptions, estimates and judgments to ensure that our financial statements are presented fairly and in accordance with U.S. GAAP. Judgments are based on historical experience, terms of existing contracts, industry trends and information available from outside sources, as appropriate. However, by their nature, judgments are subject to an inherent degree of uncertainty, and, therefore, actual results could differ from our estimates.

  

 38 

 

 

Management regularly evaluates accounting estimates, including those relating to income taxes, intangible assets and amortization, impairment of goodwill, fair value of contingent consideration payables, and impairment of markers receivable.

 

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 in Macau. We have started trial operations in Australia and believe the operations will contribute to future revenues. 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 in Macau 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 gaming rooms. Our Australian operations are based upon a fixed percentage of rolling chip turnover. 

  

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 in Macau. During the nine month periods ended September 30, 2015 and 2014, the junket agents who participated in such super-agent program received more commissions than they would have under the fixed rate commission model.

 

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 three months
ended
September 30,		   For the nine months
ended
September 30,		 
   2015   2014   2015   2014 
                 
Legal and professional fees  $297   $183   $706   $714 
Management salaries and director fees   566    675    1,866    2,101 
Management fees   1,200    1,722    3,599    5,436 
Staff costs excluding directors’ remuneration   919    643    3,105    1,626 
VIP room operating costs   541    1,300    2,383    3,907 
Other(1)   824    874    2,564    3,731 
Hong Kong Listing Expenses   -    88    160    1,831 
Total  $4,347   $5,485   $14,383   $19,346 

Note:

  (1) Other mainly includes entertainment expenses, investor relations fees, advertising expenses and overseas travelling expenses by management.

 

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Changes in the Management and Board of Directors

 

Effective as of May 1, 2015:

 

· Vong Hon Kun, formerly the Chief Operating Officer of IKGH, has been promoted to Chief Executive Officer of IKGH, and remains a director of IKGH.
   
· Lam Chou In, formerly an Operating Officer of IKGH, has been promoted to Chief Operating Officer of IKGH and has been appointed to the Board of Directors.
   
· Yip Cheuk Fai has been named the Chief Financial Officer of IKGH and has been appointed to the Board of Directors.
   
· Kwok Chi Chung has been appointed to IKGH’s Board of Directors as an independent director and is serving on IKGH’s Audit and Nominating Committees.
   
· The appointments were made due to the resignations of Leong Siak Hung from his position as Chief Executive Officer and a director of IKGH, Raymond Li Chun Ming from his position as Chief Financial Officer and a director of IKGH, and George Chui Vai Hou as a director of IKGH. Mr. Leong will remain as a consultant of IKGH until the end of 2015. Each has resigned for personal and/or medical reasons and not because of any disagreements with IKGH.

 

RESULTS OF OPERATIONS

 

Three Months ended September 30, 2015 Compared to the Three Months ended September 30, 2014

 

The following table sets forth certain information regarding our unaudited results of operations for the three months ended September 30, 2015 and 2014 (all figures are in $ thousands except ratios and percentages).

 

   Three Months
Ended September
30, 
2015		   Three Months
Ended September
30,
2014		   % change
from 2014
to 2015		 
Revenue from VIP gaming promotion  $22,395   $51,917    (57)%
                
Commission to junket agents  $15,604   $47,136    (67)%
                
Selling, general and administrative expenses  $4,347   $5,485    (21)%
                
Operating loss before change in fair value of contingent consideration  $(1,775)  $(5,230)   (66)%
                
Percentage of operating loss before change in fair value of contingent consideration/Revenue from VIP gaming promotion   (7.93)%   (10.07)%     

 

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Non-GAAP Financial Results

 

The following Non-GAAP financial results for the three months ended September 30, 2015 and 2014 are used by management to evaluate our financial performance prior to the deduction of amortization of intangible assets, impairment of goodwill 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).

 

   

Three Months
Ended September

30, 
2015

     Three Months
Ended September
30,
2014		     % change
from 2014
to 2015		  
Non-GAAP income (loss) before amortization of intangible assets, impairment of goodwill and change in fair value of contingent consideration   $ 2,318     $ (1,137 )     (304 )%
                         
Percentage of Non-GAAP income (loss) before amortization of intangible assets, impairment of goodwill and change in fair value of contingent consideration/Revenue from VIP gaming promotion     10.35 %     (2.19 )%        

 

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 three months ended September 30, 2015 and 2014 (all figures are in $ thousands except for ratios and percentages).

 

   Three Months
Ended September
30, 
2015		   Three Months
Ended September
30,
2014		   % change
from 2014
to 2015		 
Rolling Chip Turnover  $1,269,175   $4,320,066    (70.6)%
                
Revenue from VIP gaming promotion/Rolling Chip Turnover   1.76%   1.20%   46.8%
                
Commission to junket agents/Rolling Chip Turnover   1.23%   1.09%   12.7%
                
Gross margin (Revenue less commissions and special rolling tax)/Rolling Chip Turnover   0.53%   0.10%   421.6%
                
Selling, general and administrative expenses/Rolling Chip Turnover   0.34%   0.13%   169.8%
                
Operating loss before change in fair value of contingent consideration/Rolling Chip Turnover   (0.14)%   (0.12)%   (15.5)%

  

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Below is a quarterly analysis of the win rate in our VIP gaming rooms from January 1, 2013 to September 30, 2015:

 

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   2.51%
Q4 2014   3.95%
Q1 2015   4.19%
Q2 2015   2.73%
Q3 2015   3.91%

 

Revenue from VIP gaming promotion operations was US$22.4 million for the three months ended September 30, 2015, as compared to US$51.9 million for the three months ended September 30, 2014, representing a decrease of 56.9%, whereas revenue as a percentage of rolling chip turnover increased from 1.20% for the three months ended September 30, 2014 to 1.76% in 2015, representing an increase of 46.8%. Such increases were primarily a result of a win rate of 3.91% for the three months ended September 30, 2015, which is above the statistical average win rate range, compared to a win rate of 2.51% for the three months ended September 30, 2014, which is below the statistical average win rate range.

   

During the third quarter of 2015, we experienced a continuing significant decrease in our Rolling Chip Turnover compared to the same period in 2014. Our Rolling Chip Turnover in the third quarter was $1.27 billion and $4.3 billion in 2015 and 2014, respectively, a 70.6% decrease. Our Rolling Chip Turnover was significantly impacted by:

 

  · a higher than the statistical average win rate which may result in lower Rolling Chip Turnover;
     
  · potential players being deterred by a variety of factors including increased oversight of credit cards that many gamblers use to access funds in Macau;
     
  · a lack of demand from high rollers and less visits to Macau primarily due to recent anti-corruption enforcement by the PRC government; and
     
  · our tightening policy to provide gaming credit as a result of lengthened collection periods on certain markers, which remain within our collection policy of 180 days.

 

The commission paid to junket agents decreased by US$31.5 million, or 66.9%, to US$15.6 million for the three months ended September 30, 2015 as compared to the three months ended September 30, 2014, primarily as a result of significantly lower Rolling Chip Turnover compared to the prior period. The commission paid to junket agents as a percentage of rolling chip turnover was 1.23% for the three months ended September 30, 2015, up from 1.09% for the three months ended September 30, 2014, an increase of 12.7%. 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, as well as higher commission paid to non-credit agents and super agents. The increase in the commission paid to junket agents as a percentage of rolling chip turnover was primarily a result of super agents participation in our revenue sharing program and a high win rate for the quarter.

 

 42 

 

 

Selling, general and administrative expenses decreased by US$1.1 million, or 20.8%, to US$4.3 million for the three months ended September 30, 2015 as compared to the three months ended September 30, 2014. Staff costs increased by US$0.3 million as a result of an increase in the number of employees and decreased management fees of US$0.5 million due to directly hiring employees to reduce our reliance on Pak Si and our monthly management fees have been reduced accordingly. VIP gaming room operating costs and other costs decreased by US$0.8 million during the three months ended September 30, 2015 as a result of the reduced number of junket agents and VIP players visiting Macau. As a result of no longer pursuing a listing on the Hong Kong Stock Exchange, no listing expenses were incurred during the three months ended September 30, 2015.

 

The special rolling tax decreased by US$0.3 million, or 70.6%, to US$0.1 million for the three months ended September 30, 2015 from the three months ended September 30, 2014 as a result of the decrease in rolling chip turnover. The percentage of the special rolling tax to revenue from VIP gaming promotion remained consistent in a range of 0.6% to 0.8% in the three month periods ended September 30, 2015 and 2014.

 

Amortization of intangible assets for the three month periods ended September 30, 2015 and 2014 remained the same.

 

Operating loss before change in the fair value of contingent consideration payables was US$1.8 million for the three months ended September 30, 2015, as compared to operating loss of US$5.2 million for the three months ended September 30, 2014, representing an decrease in our loss of 66.0%, primarily as a result of a higher gross gaming margin as a result of a higher win rate and lower commission costs as well as lower VIP gaming room operating costs and no Hong Kong listing expenses.

  

There was a decrease in the fair value of the contingent consideration liability in respect of the Bao Li Acquisition and Oriental VIP Room Acquisition of US$1.5 million, primarily resulting from the lower share price as well as the acquired networks of junket agents achieving lower rolling chip turnover results than forecasted at June 30, 2015. There was no fair value change of the contingent consideration payable in respect of the King’s Gaming acquisition for the three months ended September 30, 2015 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 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. 

 

The net loss was lower by US$11.9 million from net loss of US$12.2 million for the three months ended September 30, 2014 to net loss of US$0.3 million for the three months ended September 30, 2015 primarily due to the high win rate and the gain from the change in fair value of contingent consideration.

 

Basic and diluted loss per share for the three months ended September 30, 2015 was US$0.01 based upon the weighted average share count of 62,307,794.

  

Nine Months ended September 30, 2015 Compared to the Nine Months ended September 30, 2014

 

The following table sets forth certain information regarding our unaudited results of operations for the nine months ended September 30, 2015 and 2014 (all figures are in $ thousands except ratios and percentages).

 

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   Nine Months
Ended September
30, 
2015		   Nine Months
Ended September
30,
2014		   % change
from 2014
to 2015		 
Revenue from VIP gaming promotion  $85,966   $181,549    (53)%
                
Commission to junket agents  $62,855   $151,635    (59)%
                
Selling, general and administrative expenses  $14,383   $19,346    (26)%
                
Operating loss before change in fair value of contingent consideration  $(21,823)  $(3,082)   608%
                
Percentage of operating loss before change in fair value of contingent consideration/Revenue from VIP gaming promotion   (25.39)%   (1.70)%     

 

Non-GAAP Financial Results

 

The following Non-GAAP financial results for the nine months ended September 30, 2015 and 2014 are used by management to evaluate our financial performance prior to the deduction of amortization of intangible assets, impairment of goodwill 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).

 

   Nine Months
Ended September
30, 
2015		   Nine Months
Ended September
30,
2014		   % change
from 2014
to 2015		 
Non-GAAP income before amortization of intangible assets, impairment of goodwill and change in fair value of contingent consideration  $8,208   $9,192    (11)%
                
Percentage of Non-GAAP income before amortization of intangible assets, impairment of goodwill and change in fair value of contingent consideration/Revenue from VIP gaming promotion   9.55%   5.06%     

   

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 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 nine months ended September 30, 2015 and 2014 (all figures are in $ thousands except for ratios and percentages).

 

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   Nine Months
Ended September
30, 
2015		   Nine Months
Ended September
30,
2014		   % change
from 2014
to 2015		 
Rolling Chip Turnover  $5,201,660   $13,759,487    (62.2)%
                
Revenue from VIP gaming promotion/Rolling Chip Turnover   1.65%   1.32%   25.3%
                
Commission to junket agents/Rolling Chip Turnover   1.21%   1.10%   9.6%
                
Gross margin (Revenue less commissions and special rolling tax)/Rolling Chip Turnover   0.43%   0.21%   109.6%
                
Selling, general and administrative expenses/Rolling Chip Turnover   0.28%   0.14%   96.7%
                
Operating loss before change in fair value of contingent consideration/Rolling Chip Turnover   (0.42)%   (0.02)%   1,773.0%

 

Below is a quarterly analysis of the win rate in our VIP gaming rooms from January 1, 2013 to September 30, 2015:

 

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   2.51%
Q4 2014   3.95%
Q1 2015   4.19%
Q2 2015   2.73%
Q3 2015   3.91%

  

Revenue from VIP gaming promotion operations was US$86.0 million for the nine months ended September 30, 2015, as compared to US$181.5 million for the nine months ended September 30, 2014, representing a decrease of 52.6%, whereas revenue as a percentage of rolling chip turnover increased from 1.32% for the nine months ended September 30, 2014 to 1.65% in 2015, representing an increase of 25.3%. Such increases were primarily a result of a win rate of 3.63% for the nine months ended September 30, 2015, which is above the statistical average win rate range, compared to a win rate of 2.99% for the nine months ended September 30, 2014. 

 

During the first nine months of 2015, we experienced a significant decrease in our Rolling Chip Turnover compared to the same period in 2014. Our Rolling Chip Turnover was $5.2 billion and $13.76 billion in the first nine months of 2015 and 2014, respectively, a 62.2% decrease. Our Rolling Chip Turnover was significantly impacted by:

 

  · a higher than the statistical average win rate in the first nine months of 2015, which may result in lower Rolling Chip Turnover;
     
  · potential players being deterred by a variety of factors including tighter visa policies for mainland Chinese visitors and increased oversight of credit cards that many gamblers use to access funds in Macau;

 

 45 

 

 

 

 

 · a lack of demand from high rollers and less visits to Macau primarily due to recent anti-corruption enforcement act by PRC government; and
     
  · our tightening policy to provide gaming credit as a result of lengthened collection periods on certain markers which remain within the collection policy of 180 days.

 

The commission paid to junket agents decreased by US$88.8 million, or 58.6%, to US$62.9 million for the nine months ended September 30, 2015, as compared to the nine months ended September 30, 2014, primarily as a result of significantly lower Rolling Chip Turnover compared to the prior period. The commission paid to junket agents as a percentage of rolling chip turnover was 1.21% for the nine months ended September 30, 2015, up from 1.10% for the nine months ended September 30, 2014, an increase of 9.6%. 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, as well as higher commission paid to non-credit agents and super agents. The increase in the commission paid to junket agents as a percentage of Rolling Chip Turnover was primarily a result of the high win rate and super agent participation in our revenue sharing program.

 

Selling, general and administrative expenses decreased by US$5 million, or 25.7%, to US$14.4 million for the nine months ended September 30, 2015 as compared to the nine months ended September 30, 2014. Staff costs increased by US$1.5 million as a result of an increase in the number of employees and decreased management fees of US$1.8 million due to directly hiring employees to reduce our reliance on Pak Si. VIP gaming room operating costs and other costs decreased by US$2.7 million during the nine months ended September 30, 2015 as a result of the reduced number of junket agents and VIP players visiting Macau. As a result of no longer pursuing a listing on the Hong Kong Stock Exchange, the listing expenses were US$0.2 million during the nine months ended September 30, 2015 compared to US$1.8 million recorded in the prior period. We do not anticipate additional listing costs.

 

The special rolling tax decreased by US$0.9 million, or 62.2%, to US$0.5 million for the nine months ended September 30, 2015 from the nine months ended September 30, 2014 as a result of the decrease in rolling chip turnover. The percentage of the special rolling tax to revenue from VIP gaming promotion remained consistent in a range of 0.6% to 0.8% for the nine month periods ended September 30, 2015 and 2014.

 

Amortization of intangible assets for the nine month periods ended September 30, 2015 and 2014 remained the same.

 

We performed an assessment to test our goodwill for impairment as of June 30, 2015 and determined that the goodwill was impaired as of June 30, 2015 and recorded an impairment charge of US$17.8 million during the nine months ended September 30, 2015. There was no impairment of goodwill recognized during the nine months ended September 30, 2014.

 

Operating loss before change in the fair value of contingent consideration payables was US$21.8 million for the nine months ended September 30, 2015, as compared to operating loss of US$3.1 million for the nine months ended September 30, 2014, representing an increase in net loss of 608%, primarily as a result of a significant decrease in revenues as a result of lower Rolling Chip Turnover and a one-time charge of impairment of goodwill.

  

There was an decrease in the fair value of the contingent consideration liability in respect of the Bao Li Acquisition and Oriental VIP Room Acquisition of US$14.8 million, primarily resulting from the acquired networks of junket agents achieving lower rolling chip turnover results than forecasted at December 31, 2014. There was no fair value change of the contingent consideration payable in respect of the King’s Gaming acquisition for the nine months ended September 30, 2015 as the forecasted gross profit level of King’s Gamingresulted in no additional earn-out shares expected to be earned by the King’s Gaming 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. 

 

 46 

 

 

As a result of the above, a decrease in net loss results by US$58.8 million from net loss of 65.8 millionlion for the nine months ended September 30, 2014 to net loss of US$7.0 million for the nine months ended September 30, 2015.

 

Basic and diluted loss per share for the nine months ended September 30, 2015 was US$0.11 based upon the weighted average share count of 62,015,647.

 

Non-GAAP Financial Measures

 

Our calculation of Non-GAAP income (operating income before amortization of intangible assets, impairment of goodwill 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, impairment of goodwill 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 Three 
Months 
Ended September 
30, 2015		   For  the Three 
Months 
Ended September 
30, 2014		   For  the Nine 
Months 
Ended September 
30, 2015		   For  the Nine 
Months 
Ended September 
30, 2014		 
                 
Net loss attributable to ordinary shareholders  $(310,087)  $(12,248,255)  $(7,032,389)  $(65,784,211)
                     
Amortization of intangible assets   4,092,788    4,093,158    12,276,149    12,274,409 
                     
Impairment of goodwill   -    -    17,754,136    - 
                     
Change in fair value of contingent consideration   (1,464,512)   7,018,014    (14,790,326)   62,701,703 
                     
Non-GAAP income (loss) (before amortization of intangible assets, impairment of goodwill and  change in fair value of contingent consideration)  $2,318,189   $(1,137,083)  $8,207,570   $9,191,901 
                     
Weighted Average Shares Outstanding                    
                     
Basic   62,307,794    61,056,662    62,015,647    60,574,745 
Diluted   62,307,794    61,056,662    62,068,211    60,841,526 

 

 47 

 

 

   For the Three Months
Ended September 30, 2015		   For the Three Months
Ended September 30, 2014		 
   Basic   Fully
Diluted		   Basic   Fully
Diluted		 
                 
Net loss per share attributable to ordinary shareholders  $(0.01)  $(0.01)  $(0.20)  $(0.20)
                     
Amortization of intangible assets   0.07    0.07    0.07    0.07 
                     
Impairment of goodwill   -    -    -    - 
                     
Change in fair value of contingent consideration   (0.02)   (0.02)   0.11    0.11 
                     
Non-GAAP income (loss) per share (before amortization of intangible assets, impairment of goodwill and change in fair value of contingent consideration)  $0.04   $0.04   $(0.02)  $(0.02)

 

   For  the Nine Months
Ended September 30, 2015		   For  the Nine Months
Ended September 30, 2014		 
   Basic   Fully
Diluted		   Basic   Fully
Diluted		 
                 
Loss per share attributable to ordinary shareholders  $(0.11)  $(0.11)  $(1.09)  $(1.08)
                     
Amortization of intangible assets   0.20    0.20    0.20    0.20 
                     
Impairment of goodwill   0.28    0.28    -    - 
                     
Change in fair value of contingent consideration   (0.24)   (0.24)   1.04    1.03 
                     
Non-GAAP Earnings per share (before amortization of intangible assets, impairment of goodwill and change in fair value of contingent consideration)  $0.13   $0.13   $0.15   $0.15 

 

 48 

 

 

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 Gaming, Bao Li 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 our 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 in Macau 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.

 

Australia

 

The Junket Operator in Australia is currently not subject to Goods and Services Tax (“GST”) and any income tax in Australia.

 

LIQUIDITY AND CAPITAL RESOURCES

 

As of September 30, 2015, our total available cage capital was US$184.6 million, consisting of markers receivable of US$175.4 million and cash and cash chips on hand of US$9.2 million.

 

 49 

 

 

As of September 30, 2015, we had a total cash and cash equivalents balance of US$9.2 million, compared to cash and cash equivalents of US$11.1 million as of December 31, 2014. The decrease is mainly as a result of lower extension of credit and longer collection periods for markers receivable, increased utilization of line of credit and increased shareholder loans offset by the reduced payments for the settlement of the outstanding consideration for the acquisitions of the Bao Li Gaming and the Oriental VIP Room in 2015 and no additional payments for King’s Gaming. Our credit risk is primarily attributable to markers receivable.

 

As of September 30, 2015, we had available lines of credit of US$57.5 million from casino operators in Macau and Australia, excluding temporary credits, of which US$56.5 million was outstanding as of September 30, 2015. 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 September 30, 2015 we had interest free loans from shareholders of US$2.9 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.

 

Our expected sources of repayment of the lines of credit extended by the casino operators in Macau and Australia and loans from 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. There were no shares repurchased during the nine months ended September 30, 2015. The 2013 Repurchase Plan 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.

 

 50 

 

 

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 nine
months
ended September
30, 2015		   For the nine
months
ended September
30, 2014		 
         
Net cash provided by operating activities  $35,119   $58,559 
Net cash used in investing activities   (3)   (304)
Net cash used in financing activities   (37,052)   (52,124)
Net (decrease) increase in cash and cash equivalents  $(1,936)  $6,131 

 

Cash flow generated from operating activities

 

The decrease in net cash provided by operating activities for the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014 was primarily due to an increase in collection period for markers receivable and increased utilization of our lines of credit. Other fluctuations in cash from operating activities were due primarily to miscellaneous timing differences.

 

 51 

 

 

Cash flow used in investing activities

 

The decrease in net cash used in investing activities for the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014 was primarily due to an insignificant purchase of property and equipment in 2015.

 

Cash flow used in financing activities

 

The decrease in net cash used in financing activities for the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014 was primarily due to (1) no Ordinary Shares were repurchased in 2015; and (2) reduced payments (in total) for contingent consideration paid for the acquisitions of King’s Gaming, Bao Li Gaming and the Oriental VIP Room in 2015 as compared to 2014.

 

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;
  · dividend distributions;
  · repurchase of outstanding shares;
  · funds raised through the issuance of our securities; and
  · earnings accumulated and reinvested.

 

Off-Balance Sheet Arrangements

 

None

 

 52 

 

  

SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

Dated:  November 19, 2015 IAO KUN GROUP HOLDING COMPANY LIMITED
     
  By: /s/ Yip Cheuk Fai
     Name: Yip Cheuk Fai
     Title:  Chief Financial Officer

 

 53 

 

 

EXHIBIT INDEX

 

Financial Statements and Exhibits.

 

Exhibit No.   Description
     
99.1   Press Release dated November 19, 2015

  

 54 



 

Exhibit 99.1

 

Iao Kun Group Holding Company Limited Announces Third Quarter and Nine Months 2015 Financial Results

 

Hong Kong, China – November 19, 2015 – Iao Kun Group Holding Company Limited (“IKGH”) (NASDAQ: IKGH), which operates through its subsidiaries and related promotion entities that act as VIP room gaming promoters and a collaborator, today announced unaudited financial results for the three and nine months ended September 30, 2015. All currency amounts are stated in United States dollars. Please refer to the Form 6-K that will be filed with the Securities and Exchange Commission for the full unaudited financial statements and related disclosures for the three and nine months ended September 30, 2015.

 

Third Quarter 2015 Highlights

 

·Rolling Chip Turnover (a metric used by casinos to measure the aggregate amount of players’ bets and overall volume of VIP gaming room business transacted, which is further defined below) for the three months ended September 30, 2015 was $1.3 billion, a decrease of 71%, compared to $4.3 billion for the three months ended September 30, 2014.

 

·Net loss, including gain from the change in fair value of contingent consideration of $1.5 million related to the King’s Gaming, Bao Li Gaming and Oriental VIP Room acquisitions, was $0.3 million, or $0.01 net loss per share (basic and diluted), for the third quarter of 2015, compared to a net loss of $12.2 million, or $0.20 net loss per share (basic and diluted), for the same period of 2014.

 

·Non-GAAP income, which is operating income before amortization of intangible assets, impairment of goodwill and the change in fair value of contingent consideration related to the acquisitions of King’s Gaming, Bao Li Gaming and Oriental VIP Room, was $2.3 million, or $0.04 earnings per share (basic and diluted), for the three months ended September 30, 2015, compared to a non-GAAP loss of $1.1 million, or $0.02 loss per share (basic and diluted), for the three months ended September 30, 2014.

 

Third Quarter 2015 Results

 

For the three months ended September 30, 2015, IKGH recorded revenue of $22.4 million, a 57% decrease from the same period of 2014, primarily due to lower rolling chip turnover during the quarter, as well as (i) a decrease of players for VIP baccarat, consistent with the overall decline of gaming revenue in Macau; (ii) the economic downturn and ongoing anti-corruption campaign in mainland China, where the majority of IKGH’s VIP gaming patrons reside, and (iii) the continued tightening of government policies in mainland China.

  

The improved net loss for the three months ended September 30, 2015 as compared to the three months ended September 30, 2014 was primarily a result of the change in contingent consideration, which was a gain of $1.5 million for the third quarter of 2015 compared to a loss of $7 million for the same period of 2014, as well as lower commissions to junket agents for the three months ended September 30, 2015 as a result of lower Rolling Chip Turnover compared to the prior-year period. IKGH also incurred lower selling, general and administrative expenses for the three months ended September 30, 2015, primarily due to the costs incurred in 2014 in connection with IKGH’s application to list on the Hong Kong Stock Exchange. IKGH does not anticipate additional listing costs.

 

“We continue to carefully navigate the VIP market in Macau and manage our capital as the ongoing macro environment continues to be challenging,” said Mr. Lam Man Pou, Chairman of IKGH. “With the macro environment in Macau still being difficult, we continue to be on the lookout for additional VIP opportunities in overseas markets to complement our Australian interests and to further diversify our current sources of revenue. We remain committed to finding appropriate opportunities to expand our presence and ultimately generate long-term value for our shareholders.”

 

 

 

 

 

Nine Month 2015 Highlights

 

·Rolling Chip Turnover for the nine months ended September 30, 2015 was $5.2 billion, a decrease of 62% compared to $13.8 billion for the nine months ended September 30, 2014.

 

·Net loss, including gain from the change in fair value of contingent consideration of $14.8 million related to the King’s Gaming, Bao Li Gaming and Oriental VIP Room acquisitions, was $7.0 million, or $0.11 net loss per share (basic and diluted), for the nine months ended September 30, 2015, compared to a net loss of $65.8 million, or $1.09 net loss per share (basic and diluted), for the same period of 2014.  During the nine months ended September 30, 2015, IKGH incurred a one-time $17.8 million impairment of goodwill.

 

·Non-GAAP income was $8.2 million, or $0.13 earnings per share (basic and diluted), for the nine months ended September 30, 2015, compared to income of $9.2 million, or $0.15 earnings per share (basic and diluted), for the nine months ended September 30, 2014.

 

Outlook for 2015

 

For the first ten months of 2015, IKGH’s Rolling Chip Turnover was US$5.67 billion (an average of $0.57 billion per month), down 62% year-over-year, compared to US$14.87 billion (an average of $1.49 billion per month) for the first ten months of 2014.

 

The Company is maintaining its 2015 Rolling Chip Turnover guidance for its five existing VIP rooms in Macau of US$6.0 billion to US$7.0 billion.

 

Conference Call and Replay Information

 

IKGH will conduct a conference call to discuss the financial results today at 8:30AM EST/9:30PM Macau. To participate, please dial one of the following numbers at least 10 minutes prior to the scheduled start of the call:

 

1-800-967-7185 (United States/Canada)

10-800-714-1202 (North China)

10-800-140-1181 (South China)

800-901-111 (Hong Kong)

800-101-2003 (Singapore)

0808-101-1147 (United Kingdom)

1-719-457-2714 (Other International)

 

Interested parties may also access the live call on the Internet at www.ikghcl.com (select Events and Presentations). Following its completion, a replay of the call can be accessed on the Internet at the above link or through December 3, 2015 by calling either 1-877-870-5176 (U.S. callers) or 1-858-384-5517 (International callers) and providing conference ID 3417662.

 

Definition of Rolling Chip Turnover

 

Rolling Chip Turnover is used by casinos to measure the volume of VIP business transacted and represents the aggregate amount of non-negotiable chips players 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 players to allow casinos to calculate the commission payable to VIP room gaming promoters and collaborator. Commissions are paid based on the total amount of "non-negotiable chips" purchased by each player. VIP room gaming promoters therefore require the players to "roll," from time to time, their "cash chips" into "non-negotiable" chips for further betting (hence the term "Rolling Chip Turnover"). Through the 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.

 

 

 

 

All IKGH’s Macau VIP rooms are on a revenue sharing remuneration model. On a win/loss split basis, the VIP room gaming promoter and collaborator receive an agreed percentage of the "win" in the VIP gaming room (plus certain incentive allowances), and is required to also bear the same percentage of losses that might be incurred. Revenue from VIP operation in Australia is based upon a mutually-agreed percentage of the rolling chip turnover.

 

About Iao Kun Group Holding Company Limited

 

IKGH is a holding company which operates through its subsidiaries and related promotion entities that act as VIP room gaming promoters and a collaborator, and is entitled to receive all of the profits of the VIP gaming promoters and a collaborator from VIP gaming rooms. IKGH’s VIP room gaming promoters and collaborator currently participate in the promotion of five major luxury VIP gaming facilities in Macau, China, the largest gaming market in the world. One VIP gaming room is located at the top-tier 5-star hotel, the StarWorld Hotel & Casino in downtown Macau, and another is located in the luxury 5-star hotel, the Galaxy Macau™ Resort in Cotai, each of which is operated by Galaxy Casino, S.A. Additional VIP gaming rooms are located at the Sands Cotai Central and City of Dreams Macau, both in Cotai, and Le Royal Arc Casino, located in NAPE, Downtown Macau. IKGH recently started trial operations to the Australian casinos (Crown Perth Casino in Perth, Australia and the Crown Melbourne Casino in Melbourne, Australia) to gain a greater understanding of the preferences of its junket agents and VIP players and the logistics of the market.

 

Forward-Looking Statements

 

This press release includes forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. Forward-looking statements are statements that are not historical facts. Such forward-looking statements, based upon the current beliefs and expectations of IKGH’s management, are subject to risks and uncertainties, which could cause actual results to differ from the forward-looking statements. The gaming industry is characterized by an element of chance. Theoretical win rates for IKGH’s promotion entities’ VIP gaming room operations depend on a variety of factors, some beyond their control. In addition to the element of chance, theoretical win rates are also affected by other factors, including gaming patrons' skill and experience, the mix of games played, the financial resources of gaming patrons, the spread of table limits, the volume of bets placed by IKGH’s promotion entities’ gaming patrons and the amount of time gaming patrons spend on gambling — thus VIP gaming rooms’ actual win rates may differ greatly over short time periods, such as from quarter to quarter, and could cause their quarterly results to be volatile. These factors, alone or in combination, have the potential to negatively impact the VIP gaming rooms’ win rates. Investors and potential investors should consult all of the information set forth herein and should also refer to the risk factors set forth in IKGH’s Annual Report on Form 20-F filed in April 2015, and other reports filed or to be filed from time-to-time with the Securities and Exchange Commission.

 

 

 

  

IAO KUN GROUP HOLDING COMPANY LIMITED
F/K/A ASIA ENTERTAINMENT & RESOURCES LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME

(Unaudited)

 

   For the Three Months Ended   For the Three Months Ended   For the Nine Months Ended   For the Nine Months Ended 
   September 30, 2015   September 30, 2014   September 30, 2015   September 30, 2014 
Revenue from VIP Gaming Operations  $22,395,298   $51,916,783   $85,966,313   $181,549,165 
Total Revenues   22,395,298    51,916,783    85,966,313    181,549,165 
                     
Expenses                    
- Commission to Junket Agents   15,603,525    47,136,322    62,855,213    151,635,092 
- Selling, General and Administrative Expenses   4,346,655    5,485,447    14,383,338    19,346,110 
- Special Rolling Tax   126,929    432,097    520,192    1,376,062 
- Impairment of Goodwill   -    -    17,754,136    - 
- Amortization of Intangible Assets   4,092,788    4,093,158    12,276,149    12,274,409 
 Total Expenses   24,169,897    57,147,024    107,789,028    184,631,673 
                     
Operating loss attributable to ordinary shareholders before change in fair value of contingent consideration   (1,774,599)   (5,230,241)   (21,822,715)   (3,082,508)
                     
Change in Fair Value of Contingent Consideration for the Acquisitions of King's Gaming, Bao Li Gaming and Oriental VIP Room   1,464,512    (7,018,014)   14,790,326    (62,701,703)
Net Loss Attributable to Ordinary Shareholders   (310,087)   (12,248,255)   (7,032,389)   (65,784,211)
                     
Other Comprehensive Income                    
 Foreign Currency                    
- Translation Adjustment   50,151    (407,653)   103,142    (325,948)
Total Comprehensive Loss  $(259,936)  $(12,655,908)  $(6,929,247)  $(66,110,159)
                     
Net Loss Per Share                    
Basic  $(0.01)  $(0.20)  $(0.11)  $(1.09)
Diluted  $(0.01)  $(0.20)  $(0.11)  $(1.09)
Weighted Average Shares Outstanding                    
Basic   62,307,794    61,056,662    62,015,647    60,574,745 
Diluted   62,307,794    61,056,662    62,015,647    60,574,745 

 

 

 

 

 IAO KUN GROUP HOLDING COMPANY LIMITED

F/K/A ASIA ENTERTAINMENT & RESOURCES LTD.

CONSOLIDATED BALANCE SHEETS

 

   September 30, 2015   December 31, 2014 
   (Unaudited)     
ASSETS          
CURRENT ASSETS          
Cash and Cash Equivalents  $9,207,637   $11,146,534 
Accounts Receivable, Net   6,737,595    1,529,052 
Markers Receivable   175,413,220    188,549,136 
Prepaid Expenses and Other Assets   503,976    348,777 
Total Current Assets   191,862,428    201,573,499 
           
Intangible Assets (net of accumulated amortization of $54,408,216 and $42,105,966  at September 30, 2015 and December 31, 2014, respectively)   109,748,966    121,968,648 
Goodwill   -    17,753,907 
Property and Equipment (net of accumulated depreciation of $171,588 and $108,913 at September 30, 2015 and  December 31, 2014, respectively)   262,316    322,149 
Other Assets   23,232    23,427 
TOTAL ASSETS  $301,896,942   $341,641,630 
           
LIABILITIES AND SHAREHOLDERS' EQUITY          
CURRENT LIABILITIES          
Lines of Credit Payable  $56,515,400   $32,392,020 
Accrued Expenses   6,572,836    11,682,653 
Dividend Payable   870,745    - 
Bao Li Gaming Acquisition-Contingent Purchase Price Obligation   14,711,631    22,662,750 
Oriental VIP Room Acquisition-Contingent Purchase Price Obligation   14,947,026    13,738,762 
Loan Payable, Shareholders, current   2,870,765    2,612,490 
Total Current Liabilities   96,488,403    83,088,675 
           
Bao Li Gaming Acquisition-Contingent Purchase Price Obligation, net of current portion   -    19,628,881 
Oriental VIP Room Acquisition-Contingent Purchase Price Obligation, net of current portion   -    27,665,264 
Total Liabilities   96,488,403    130,382,820 
           
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; 62,196,064 and 60,452,314 issued and outstanding at September 30, 2015 and December 31, 2014, respectively.		   6,219    6,044 
Additional Paid-in Capital   133,036,666    130,048,153 
Retained Earnings   71,711,089    80,653,190 
Accumulated Other Comprehensive Income   654,565    551,423 
Total Shareholders' Equity   205,408,539    211,258,810 
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY  $301,896,942   $341,641,630 

 


 

 

 

Cash flow information (in thousands) (unaudited)

   For the nine
months
ended September
30, 2015		   For the nine
months 
ended September
 30, 2014		 
         
Net cash provided by operating activities  $35,119   $58,559 
Net cash used in investing activities   (3)   (304)
Net cash used in financing activities   (37,052)   (52,124)
Net (decrease) increase in cash and cash equivalents  $(1,936)  $6,131 

 

Non-GAAP Financial Measures

 

The Company’s calculation of Non-GAAP income (operating income before amortization of intangible assets, impairment of goodwill 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, impairment of goodwill and change in fair value of contingent consideration.  The Company uses this information internally in evaluating its operations and believes this information is important to investors because it provides users of the Company’s 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 the Company’s net income to Non-GAAP income and GAAP EPS to its Non-GAAP EPS: 

 

   For  the Three 
Months 
Ended September 
30, 2015		   For  the Three 
Months 
Ended September 
30, 2014		   For  the Nine 
Months 
Ended September
30, 2015		   For  the Nine 
Months 
Ended September 
30, 2014		 
                 
Net loss attributable to ordinary shareholders  $(310,087)  $(12,248,255)  $(7,032,389)  $(65,784,211)
                     
Amortization of intangible assets   4,092,788    4,093,158    12,276,149    12,274,409 
                     
Impairment of goodwill   -    -    17,754,136    - 
                     
Change in fair value of contingent consideration   (1,464,512)   7,018,014    (14,790,326)   62,701,703 
                     
Non-GAAP income (loss) (before amortization of intangible assets, impairment of goodwill and change in fair value of contingent consideration)  $2,318,189   $(1,137,083)  $8,207,570   $9,191,901 
                     
Weighted Average Shares Outstanding                    
                     
Basic   62,307,794    61,056,662    62,015,647    60,574,745 
Diluted   62,307,794    61,056,662    62,068,211    60,841,526 

 

 

 

 

   For the Three Months
Ended September 30, 2015		   For the Three Months
Ended September 30, 2014		 
   Basic   Fully Diluted   Basic   Fully Diluted 
                 
Net loss per share attributable to ordinary shareholders  $(0.01)  $(0.01)  $(0.20)  $(0.20)
                     
Amortization of intangible assets   0.07    0.07    0.07    0.07 
                     
Impairment of goodwill   -    -    -    - 
                     
Change in fair value of contingent consideration   (0.02)   (0.02)   0.11    0.11 
                     
Non-GAAP income (loss) per share (before amortization of intangible assets, impairment of goodwill and change in fair value of contingent consideration)  $0.04   $0.04   $(0.02)  $(0.02)

 

  

For  the Nine Months
Ended September 30, 2015

   For  the Nine Months
Ended September 30, 2014		 
   Basic   Fully Diluted   Basic   Fully Diluted 
                 
Loss per share attributable to ordinary shareholders  $(0.11)  $(0.11)  $(1.09)  $(1.08)
                     
Amortization of intangible assets   0.20    0.20    0.20    0.20 
                     
Impairment of goodwill   0.28    0.28    -    - 
                     
Change in fair value of contingent consideration   (0.24)   (0.24)   1.04    1.03 
                     
Non-GAAP Earnings per share (before amortization of intangible assets, impairment of goodwill and change in fair value of contingent consideration)  $0.13   $0.13   $0.15   $0.15 

 

Contact: 

 

Iao Kun Group Holding Company Limited
James Preissler, +1 646-450-8808
preissj@ikghcl.com

 

 

 

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