Attached files
| file | filename |
|---|---|
| EX-32.1 - EXHIBIT 32.1 - Entertainment Gaming Asia Inc. | v409331_ex32-1.htm |
| EX-31.2 - EXHIBIT 31.2 - Entertainment Gaming Asia Inc. | v409331_ex31-2.htm |
| EX-31.1 - EXHIBIT 31.1 - Entertainment Gaming Asia Inc. | v409331_ex31-1.htm |
| EXCEL - IDEA: XBRL DOCUMENT - Entertainment Gaming Asia Inc. | Financial_Report.xls |
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended March 31, 2015
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission file number: 001-32161
Entertainment Gaming Asia Inc.
(Exact name of registrant as specified in its charter)
| Nevada | 91-1696010 | |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification no.) |
Unit C1, Ground Floor, Koon Wah Building
No. 2 Yuen Shun Circuit
Yuen Chau Kok, Shatin
New Territories, Hong Kong SAR
(Address of principal executive offices, including zip code)
+ 852-3147-6600
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company (as defined in Rule 12b-2 of the Act):
| Large accelerated filer ¨ | Accelerated filer ¨ | |
| Non-accelerated filer ¨ | Smaller reporting company x | |
| (Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of May 1, 2015, 14,464,220 shares of common stock of Entertainment Gaming Asia Inc. were outstanding.
| 2 |
PART I — FINANCIAL INFORMATION
ENTERTAINMENT GAMING ASIA INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(amounts in thousands, except per share data)
| March 31, 2015 | December 31, 2014 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 20,820 | $ | 17,301 | ||||
| Accounts receivable, net | 666 | 830 | ||||||
| Amounts due from related parties | 1,849 | 2,112 | ||||||
| Other receivables | 122 | 316 | ||||||
| Inventories | 3,265 | 2,617 | ||||||
| Prepaid expenses and other current assets | 681 | 1,447 | ||||||
| Total current assets | 27,403 | 24,623 | ||||||
| Gaming equipment, net | 5,127 | 5,624 | ||||||
| Casino contracts | 2,369 | 2,982 | ||||||
| Property and equipment, net | 9,238 | 8,895 | ||||||
| Goodwill | 350 | 351 | ||||||
| Intangible assets, net | 519 | 595 | ||||||
| Contract amendment fees | 99 | 126 | ||||||
| Deferred tax asset | 141 | 142 | ||||||
| Prepaids, deposits and other assets | 1,142 | 1,316 | ||||||
| Total assets | $ | 46,388 | $ | 44,654 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 1,803 | $ | 645 | ||||
| Amounts due to related parties | 111 | 47 | ||||||
| Accrued expenses | 1,941 | 2,009 | ||||||
| Income tax payable | 5 | — | ||||||
| Customer deposits and other current liabilities | 270 | 306 | ||||||
| Total current liabilities | 4,130 | 3,007 | ||||||
| Other liabilities | 855 | 845 | ||||||
| Deferred tax liability | 107 | 107 | ||||||
| Total liabilities | 5,092 | 3,959 | ||||||
| Commitments and contingencies | ||||||||
| Stockholders’ equity: | ||||||||
| Common stock, $.001 par value, 18,750,000 shares authorized; 14,464,220 and 14,471,095 shares issued and outstanding | 14 | 14 | ||||||
| Additional paid-in-capital | 47,710 | 47,680 | ||||||
| Accumulated other comprehensive income | 754 | 753 | ||||||
| Accumulated losses since January 1, 2011 ($386.1 million accumulated deficit eliminated) | (7,183 | ) | (7,753 | ) | ||||
| Total EGT stockholders’ equity | 41,295 | 40,694 | ||||||
| Non-controlling interest | 1 | 1 | ||||||
| Total stockholders’ equity | 41,296 | 40,695 | ||||||
| Total liabilities and stockholders’ equity | $ | 46,388 | $ | 44,654 | ||||
The notes to consolidated financial statements are an integral part of these consolidated statements.
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ENTERTAINMENT GAMING ASIA INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(amounts in thousands, except per share data)
(Unaudited)
| Three-Month Periods Ended March 31, | ||||||||
| 2015 | 2014 | |||||||
| Revenues: | ||||||||
| Gaming operations | $ | 4,010 | $ | 3,883 | ||||
| Gaming products | 4,272 | 811 | ||||||
| Total revenues | 8,282 | 4,694 | ||||||
| Operating costs and expenses: | ||||||||
| Cost of gaming operations | ||||||||
| Gaming property and equipment depreciation | 819 | 881 | ||||||
| Casino contract amortization | 611 | 610 | ||||||
| Other gaming related intangibles amortization | 63 | 63 | ||||||
| Other operating costs | 822 | 845 | ||||||
| Cost of gaming products | 3,662 | 1,488 | ||||||
| Selling, general and administrative expenses | 1,612 | 1,554 | ||||||
| Gain on disposition of assets | (5 | ) | — | |||||
| Product development expenses | 35 | 54 | ||||||
| Depreciation and amortization | 54 | 49 | ||||||
| Total operating costs and expenses | 7,673 | 5,544 | ||||||
| Income/(loss) from operations | 609 | (850 | ) | |||||
| Other (expenses)/income: | ||||||||
| Interest expense and finance fees | (1 | ) | (1 | ) | ||||
| Interest income | 3 | — | ||||||
| Foreign currency losses | (30 | ) | (15 | ) | ||||
| Other | 9 | 8 | ||||||
| Total other (expenses)/income | (19 | ) | (8 | ) | ||||
| Income/(loss) from continuing operations before income tax | 590 | (858 | ) | |||||
| Income tax expenses | (20 | ) | (15 | ) | ||||
| Net income/(loss) from continuing operations | 570 | (873 | ) | |||||
| Net loss from discontinued operations, net of tax | — | (157 | ) | |||||
| Net income/(loss) attributable to EGT stockholders | $ | 570 | $ | (1,030 | ) | |||
| Other comprehensive income/(loss): | ||||||||
| Foreign currency translation | 1 | (41 | ) | |||||
| Total other comprehensive income/(loss), net of tax | 1 | (41 | ) | |||||
| Comprehensive income/(loss) attributable to EGT stockholders | $ | 571 | $ | (1,071 | ) | |||
| Per share data (basic and diluted): | ||||||||
| Earnings/(loss) | $ | 0.04 | $ | (0.14 | ) | |||
| Earnings/(loss) from continuing operations | $ | 0.04 | $ | (0.12 | ) | |||
| Earnings/(loss) from discontinued operations, net of tax | $ | — | $ | (0.02 | ) | |||
| Weighted average common shares outstanding: | ||||||||
| Basic | 14,450 | 7,496 | ||||||
| Diluted | 14,467 | 7,496 | ||||||
The notes to consolidated financial statements are an integral part of these consolidated statements.
| 4 |
ENTERTAINMENT GAMING ASIA INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(amounts in thousands)
(Unaudited)
| Three-Month Periods Ended March 31, | ||||||||
| 2015 | 2014 | |||||||
| Cash flows provided by/(used in) operating activities: | ||||||||
| Net income/(loss) | $ | 570 | $ | (1,030 | ) | |||
| Adjustments to reconcile net income/(loss) to net cash provided by/(used in) by operating activities: | ||||||||
| Foreign currency losses | 7 | 11 | ||||||
| Depreciation of gaming equipment and property and equipment | 1,130 | 1,120 | ||||||
| Amortization of casino contracts | 611 | 610 | ||||||
| Amortization of intangible assets | 75 | 75 | ||||||
| Amortization of contract amendment fees | 27 | 27 | ||||||
| Stock-based compensation expenses | 30 | 71 | ||||||
| Gain on disposition of assets | (5 | ) | — | |||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable and other receivables | 156 | 205 | ||||||
| Inventories | (664 | ) | (301 | ) | ||||
| Prepaid expenses and other current assets | 786 | 35 | ||||||
| Prepaids, deposits and other assets | 172 | (613 | ) | |||||
| Accounts payable | 1,213 | (103 | ) | |||||
| Amounts due from/to related parties | 329 | (134 | ) | |||||
| Accrued expenses and other liabilities | (59 | ) | 159 | |||||
| Income tax payable | 5 | — | ||||||
| Customer deposits and other current liabilities | (37 | ) | (249 | ) | ||||
| Net cash provided by/(used in) operating activities | 4,346 | (117 | ) | |||||
| Cash flows used in investing activities: | ||||||||
| Construction/purchase of property and equipment | (864 | ) | (700 | ) | ||||
| Purchases of gaming machines and systems | (169 | ) | (147 | ) | ||||
| Proceeds from sale of gaming equipment | 7 | — | ||||||
| Proceeds from sale of subsidiary related to discontinued operations | 200 | — | ||||||
| Net cash used in investing activities | (826 | ) | (847 | ) | ||||
| Cash flows used in financing activities: | ||||||||
| Net cash used in financing activities | — | — | ||||||
| Effect of exchange rate changes on cash | (1 | ) | (35 | ) | ||||
| Increase/(decrease) in cash and cash equivalents | 3,519 | (999 | ) | |||||
| Cash and cash equivalents at beginning of period | 17,301 | 5,301 | ||||||
| Cash and cash equivalents at end of period | $ | 20,820 | $ | 4,302 | ||||
The notes to consolidated financial statements are an integral part of these consolidated statements.
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ENTERTAINMENT GAMING ASIA INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1. Description of Business and Significant Accounting Policies
The business activities of the Company entail the owning and leasing of electronic gaming machines (EGMs) placed in premier hotels and other venues in Cambodia and the Philippines, the development and operation of gaming establishments under the Dreamworld brand in select emerging gaming markets in Asia and the design, manufacture and distribution of gaming chips and plaques under the Dolphin brand to major casinos primarily in Southeast Asia and Australia.
The Company owned and operated a casino under the Dreamworld name in the Pailin Province of Cambodia. In June 2014, the Company ceased operations of the casino in Pailin and, on June 20, 2014, entered into an agreement to sell 100% of the issued share capital of Dreamworld Leisure (Pailin) Limited, a wholly-owned Cambodian subsidiary of the Company established for the purpose of owning and operating the casino. All related historical revenues and expenses for the casino in Pailin have been reclassified as discontinued operations. The accounting policies of these discontinued operations are consistent with the Company’s policies for the accompanying consolidated financial statements.
Basis of Presentation
These consolidated financial statements are prepared pursuant to generally accepted accounting principles in the United States for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X promulgated by the Securities and Exchange Commission (“SEC”) and reflect all adjustments, consisting of normal recurring adjustments and other adjustments, which management believes are necessary to fairly present the financial position, results of operations and cash flows of the Company, for the respective periods presented. The results of operations for an interim period are not necessarily indicative of the results that may be expected for any other interim period or the year as a whole. The accompanying unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, filed with the SEC on March 26, 2015. Certain previously reported amounts have been reclassified to conform to the current period presentation.
The Company effected a 1-for-4 reverse stock split of its common shares as of February 26, 2015. All historical share amounts and share price information presented in the financial statements and notes have been proportionally adjusted to reflect the impact of this reverse stock split, including but not limited to basic and diluted weighted-average shares issued and outstanding.
Principles of Consolidation
These consolidated financial statements include the accounts of Entertainment Gaming Asia Inc. and all its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. Certain prior period amounts in the consolidated financial statements and notes thereto have been reclassified to conform to the current period’s presentation.
Use of Estimates
The Company is required to make estimates, judgments and assumptions that it believes are reasonable based on its historical experience, contract terms, observance of known trends in the Company and the industry as a whole, and information available from other outside sources. These estimates affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. On a regular basis, the Company evaluates its estimates, including those related to revenue recognition, product returns, long-lived assets, inventory obsolescence, stock-based compensation, income taxes, bad debts, warranty obligations, long-term contracts, contingencies and litigation. Actual results may differ from those estimates.
Discontinued Operations
A discontinued operation is a component of an entity that either has been disposed of, or that is classified as held for sale, and (i) represents a separate major line of business or geographical area of operations; and (ii) is a part of a single coordinated plan to dispose of a separate major line of business or geographical area of operations; or (iii) is a subsidiary acquired exclusively with a view to resale.
Non-current assets held for discontinued operations are carried at the lower of carrying amount or fair value less costs to sell. Any gain or loss from disposal of a business, together with the results of these operations until the date of disposal, is reported separately as discontinued operations. The financial information of discontinued operations is excluded from the respective captions in the Company’s consolidated statements of comprehensive income and related notes for all periods presented.
| 6 |
Cash and Cash Equivalents
All highly-liquid instruments with original maturities of three months or less are considered cash equivalents. The Company places its cash and temporary investments with financial institutions. As of March 31, 2015, the Company had deposits with financial institutions in excess of Federal Deposit Insurance Corporation (FDIC) insured limits by approximately $20.6 million.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are stated at face value less any allowances for doubtful accounts. Allowances for doubtful accounts are maintained at levels determined by Company management to adequately provide for uncollectible amounts. In determining the estimated uncollectable amounts, the Company evaluates a combination of factors, including, but not limited to, activity in the related market, financial condition of customers, specific customer collection experience and history of write-offs and collections. Interest income is imposed on overdue accounts receivable after the Company evaluates a combination of factors, including but not limited to, customer collection experiences, customer relationship and contract terms. Accounts receivable balances are written off after all collection efforts have been exhausted.
Inventories
Inventories are stated at the lower of cost, determined using the first-in, first-out method, or market. Cost elements included in work-in-process and finished goods include raw materials, direct labor and manufacturing overheads. Inventories included a lower of cost or market (LCM) write-down of approximately $14,000 and $177,000 for the three-month periods ended March 31, 2015 and 2014, respectively.
Long-Lived Assets
The Company accounts for impairment of long-lived assets in accordance with Financial Accounting Standards Board (FASB) ASC 360, Property, Plant and Equipment. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In such instances, the Company estimates the undiscounted future cash flows that result from the use of the asset and its ultimate disposition. If the sum of the undiscounted cash flows is less than the carrying value, the Company recognizes an impairment loss, measured as the amount by which the carrying value exceeds the fair value of the asset, determined principally using discounted cash flows. There were no impairment charges for long-lived assets for the three-month periods ended March 31, 2015 and 2014.
Prepaids, Deposits and Other Assets
Prepaids, deposits and other assets consist primarily of prepaid lease, prepaid value-added taxes in foreign countries, prepayments to suppliers, rental and utilities and other deposits.
Gaming Equipment
Gaming equipment consists primarily of EGMs and systems. Gaming equipment is stated at cost. The Company depreciates new EGMs and systems over a five-year useful life and depreciates refurbished EGMs and systems over a three-year useful life once placed in service. Depreciation of gaming equipment of approximately $660,000 and $733,000 was included in cost of gaming operations in the consolidated statements of comprehensive income for the three-month periods ended March 31, 2015 and 2014, respectively.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the useful lives of the assets currently estimated to be three to twenty years, which in the case of leasehold improvements, is limited to the life of the lease and throughout the renewal period as long as renewal is reasonably assured.
The Company capitalizes certain direct and incremental costs related to the design and construction, project payroll, and applicable portions of interest incurred for potential projects in property and equipment.
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Depreciation of property and equipment of approximately $159,000 and $148,000 was included in the cost of gaming operations in the consolidated statements of comprehensive income for the three-month periods ended March 31, 2015 and 2014, respectively.
Depreciation of property and equipment of approximately $256,000 and $136,000 was included in cost of gaming products in the consolidated statements of comprehensive income for the three-month periods ended March 31, 2015 and 2014, respectively.
Goodwill and Intangible Assets, Including Casino Contracts
Intangible assets consist of patents, trademarks, technical know-how, gaming operation agreement, casino contracts and goodwill. Intangible assets other than goodwill are amortized on the straight-line basis over the period of time the asset is expected to contribute directly or indirectly to future cash flows, which ranges from four to ten years. The straight-line amortization method is utilized because the Company believes there is no more reliably determinable method of reflecting the pattern for which the economic benefits of the intangible assets are consumed or otherwise used.
Amortization expenses related to casino contracts were approximately $611,000 and $610,000 for the three-month periods ended March 31, 2015 and 2014, respectively. Amortization expenses related to other gaming related intangibles were approximately $63,000 for the three-month periods ended March 31, 2015 and 2014. The amounts were accounted for as cost of gaming operations in the consolidated statements of comprehensive income. Amortization expenses related to technical know-how were approximately $6,000 and $7,000 for the three-month periods ended March 31, 2015 and 2014, respectively. The amounts were accounted for as cost of gaming products in the consolidated statements of comprehensive income. Amortization expenses related to patents and trademarks were approximately $6,000 for the three-month periods ended March 31, 2015 and 2014. The amounts were accounted for as selling, general and administrative expenses in the consolidated statements of comprehensive income.
The Company measures and tests finite-lived intangibles for impairment when there are indicators of impairment in accordance with ASC 360-10-05, Property, Plant and Equipment.
The Company measures and tests goodwill for impairment, at least annually in accordance with ASC 350-10-05, Intangibles — Goodwill and Other.
Impairment testing for goodwill and other intangibles requires judgment, including the identification of reporting units, allocation of related goodwill, assignment of corporate shared assets and liabilities to reporting units, estimated future cash flows and determinations of fair values. While the Company believes its estimates of future revenues and future cash flows are reasonable, different assumptions could materially affect the assessment of useful lives, recoverability and fair values. No impairment charges relating to intangible assets were recorded for the three-month periods ended March 31, 2015 and 2014, respectively.
Litigation and Other Contingencies
In the performance of its ordinary course of business operations, the Company is subject to risks of various legal matters, litigation and claims of various types. The Company has regular litigation reviews, including updates from corporate and outside counsel, to assess the need for accounting recognition or disclosure of these contingencies. See Note 16.
ASC 450, Contingencies, requires that liabilities for contingencies be recorded when it is probable that a liability has been incurred and that the amount can be reasonably estimated. Significant management judgment is required related to contingent liabilities and the outcome of litigation because both are difficult to predict. For a contingency for which an unfavorable outcome is reasonably possible and which is significant, the Company discloses the nature of the contingency and, when feasible, an estimate of the possible loss.
Revenue Recognition
The Company recognizes revenue when all of the following have been satisfied:
| · | Persuasive evidence of an arrangement exists; | |
| · | The price to the customer is fixed and determinable; | |
| · | Delivery has occurred and any acceptance terms have been fulfilled; | |
| · | No significant contractual obligations remain; and | |
| · | Collection is reasonably assured. |
Gaming Revenue and Promotional Allowances
The Company earns recurring gaming revenue from its gaming operations.
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For its slot participation operations, the Company earns recurring gaming revenue by providing customers with EGMs and casino management systems which track game performance and provide statistics on installed EGMs owned by the Company and leased to venue owners. Revenues are recognized on the contractual terms of the slot agreements between the Company and the venue owners and are based on the Company’s share of net winnings and reimbursement of expenses, net of customer incentives and commitment fees.
Revenues are recognized as earned unless collection is not reasonably assured, in which case revenues are recognized when the payments for net winnings are received. All slot participation operations revenues were recognized as earned during the three-month periods ended March 31, 2015 and 2014, respectively.
Commitment fees paid to the venue operators relating to contract amendments which are not recoverable from daily net win are capitalized as assets and amortized as a reduction of revenue over the term of the amended contracts. The Company had commitment fee balances related to contract amendments of approximately $99,000 and $126,000 as of March 31, 2015 and December 31, 2014, respectively.
For discontinued casino operations, the Company’s revenues are measured by the aggregate net difference between gaming wins and losses, with liabilities recognized for funds deposited by customers before gaming play occurs and for chips in their possession, if any. Cash discounts, other cash incentives related to casino play and commissions rebated through junkets or tour guides, if any, to customers are recorded as a reduction to casino revenue. Consequently, the Company’s casino revenues are reduced by discounts and commissions.
The Company does not accrue a jackpot liability for its slot machines and progressive jackpots because the Company can avoid payment of such amounts, as regulations do not prohibit removal of gaming machines from the gaming floor without payment of the jackpots.
Promotional allowances represent goods and services, which would be accounted for as revenue if sold, that a casino gives to customers as an inducement to gamble at that establishment. Such goods and services include food and beverages. The Company includes the retail value of promotional allowances in gross revenues and deducts it from gross revenues to reach net revenues on the face of the consolidated statements of comprehensive income.
The Company also earned recurring gaming revenue through leasing table game equipment and providing casino management services to gaming operators within its former casino property. Revenues from gaming table leasing arrangements are recognized as earned over the contractual terms of the arrangement between the Company and the gaming promoters and are included in discontinued operations.
Gaming Products Sales
The Company recognizes revenue from the sale of its gaming products and accessories to end users upon shipment against customer contracts or purchase orders.
Stock-Based Compensation
Under the fair value recognition provisions of ASC 718, Compensation-Stock Compensation, the Company recognizes stock-based compensation expenses for all service-based awards to employees and non-employee directors with graded vesting schedules on the straight-line basis over the requisite service period for the entire award. Estimates are revised if subsequent information indicates that forfeitures will differ from previous estimates, and the cumulative effect on compensation cost of a change in the estimated forfeitures is recognized in the period of the change. For non-employee awards, the Company remeasures compensation cost each period until the service condition is complete and recognizes compensation cost on the straight-line basis over the requisite service period. Option valuation models require the input of highly subjective assumptions, and changes in the assumptions used can materially affect the fair value estimates. Judgment is required in estimating stock price volatility, forfeiture rates, expected dividends, and expected terms that options remain outstanding. For restricted stock awards with performance conditions, the Company evaluates if performance conditions are probable in each reporting period. The compensation expense of restricted awards is recognized ratably over the implicit service period if achieving performance conditions is probable. Cumulative catch-up adjustments are required in the event of changes in assessment of probability. See Note 12 for additional information relating to stock-based compensation assumptions. Stock-based compensation expenses totaled approximately $30,000 and $71,000 for the three-month periods ended March 31, 2015 and 2014, respectively.
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Product Development
Product development expenses are expensed as incurred. Employee-related costs associated with product development are included in product development expenses. Product development expenses were approximately $35,000 and $54,000 for the three-month periods ended March 31, 2015 and 2014, respectively.
Leases
Leases are classified at the inception date as either a capital lease or an operating lease. A lease is a capital lease if any of the following conditions exists:
| · | Ownership is transferred to the lessee by the end of the lease term; |
| · | There is a bargain purchase option; |
| · | The lease term is at least 75% of the property’s estimated remaining economic life; or |
| · | The present value of the minimum lease payments at the beginning of the lease term is 90% or more of the fair value of the leased property to the lessor at the inception date. |
A capital lease is accounted for as if there was an acquisition of an asset and an incurrence of an obligation at the inception of the lease. All other leases are accounted for as operating leases wherein rental payments are expensed as incurred. The Company had no capital leases as of March 31, 2015 and December 31, 2014.
Income Taxes
The Company is subject to income taxes in the United States (including federal and state) and several foreign jurisdictions in which it operates. Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax basis and are stated at enacted tax rates expected to be in effect when taxes are actually paid or recovered. ASC 740, Income Taxes, requires that deferred tax assets be evaluated for future realization and reduced by a valuation allowance to the extent the Company believes a portion will not be realized. The Company considers many factors when assessing the likelihood of future realization of its deferred tax assets, including its recent cumulative earnings experience and expectations of future taxable income by taxing jurisdiction, the carry-forward periods available to the Company for tax reporting purposes, and other relevant factors.
The Company accounts for uncertain tax positions in accordance with ASC 740, which contains a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely to be realized upon ultimate settlement. The Company considers many factors when evaluating and estimating its tax positions and tax benefits, which may require periodic adjustments and which may not accurately anticipate actual outcomes. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits in the provision for income taxes in the statements of comprehensive income.
On December 31, 2010, the Company effected a Quasi-Reorganization. As of that date, the Company’s deferred taxes were reported in conformity with applicable income tax accounting standards described above, net of applicable valuation allowances. Deferred tax assets and liabilities were recognized for differences between the assigned values and the tax basis of the recognized assets and liabilities with corresponding valuation allowances as appropriate. In accordance with the Quasi-Reorganization requirements, pre-existing tax benefits realized subsequent to the Quasi-Reorganization are recorded directly in equity.
Earnings/(Loss) per Share
Basic earnings/(loss) per share are computed by dividing the reported net earnings/(loss) by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing the net income by the weighted average number of shares of common stock and shares issuable from stock options and restricted shares during the period. The computation of diluted earnings per share excludes the impact of stock options and restricted shares that are anti-dilutive. There was no difference in diluted loss per share from basic loss per share for three-month period ended March 31, 2014 as the assumed exercise of common stock equivalents would have an anti-dilutive effect due to losses.
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Foreign Currency Translations and Transactions
The functional currency of the Company’s international subsidiaries, except for its operations in Cambodia whose functional currency is also U.S. dollars, is generally the local currency. For these subsidiaries, the Company translates the assets and liabilities at exchange rates in effect at the balance sheet date and income and expense accounts at average exchange rates during the year. Resulting currency translation adjustments are recorded directly to accumulated other comprehensive income within stockholders’ equity. Gains and losses resulting from transactions in non-functional currencies are recorded in the consolidated statements of comprehensive income.
Below is a summary of closing exchange rates as of March 31, 2015 and December 31, 2014 and average exchange rates for the three-month periods ended March 31, 2015 and 2014.
| (US$1 to foreign currency) | March 31, 2015 | December 31, 2014 | ||||||
| Australian dollar | 1.30 | 1.23 | ||||||
| Philippine peso | 44.71 | 44.84 | ||||||
| Hong Kong dollar | 7.75 | 7.76 | ||||||
| Thai baht | 32.60 | 32.97 | ||||||
| Three-Month Periods Ended March 31, | ||||||||
| (US$1 to foreign currency) | 2015 | 2014 | ||||||
| Australian dollar | 1.27 | 1.12 | ||||||
| Philippine peso | 44.37 | 44.94 | ||||||
| Hong Kong dollar | 7.76 | 7.76 | ||||||
| Thai baht | 32.53 | 32.72 | ||||||
Fair Value Measurements
Fair value is defined under ASC 820, Fair Value Measurements and Disclosures, as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under ASC 820 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard establishes a fair value hierarchy based on three levels of input, of which the first two are considered observable and the last unobservable.
| · | Level 1 — Quoted prices in active markets for identical assets or liabilities. These are typically obtained from real-time quotes for transactions in active exchange markets involving identical assets. |
| · | Level 2 — Input, other than quoted prices included within Level 1, which are observable for the asset or liability, either directly or indirectly. These are typically obtained from readily-available pricing sources for comparable instruments. |
| · | Level 3 — Unobservable input, where there is little or no market activity for the asset or liability. This input reflects the reporting entity’s own assumptions of the data that participants would use in pricing the asset or liability, based on the best information available under the circumstances. |
As of March 31, 2015, the fair values of financial assets and liabilities approximate carrying values due to the short maturity of these items.
Defined Benefit Pension Plan
The Company provides pension benefits to all regular full-time employees in the Philippines through a defined benefit plan. A defined benefit plan is a pension plan that defines an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and salary.
The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high quality corporate bonds that are denominated in the currency in which the benefits will be paid and that have terms to maturity approximating to the terms of the related pension liability.
| 11 |
The accounting guidance related to employers’ accounting for defined benefit pension plan requires recognition in the balance sheet of the present value of the defined benefit obligation at the reporting date, together with adjustments for unrecognized actuarial gains or losses and past service costs or credits in other comprehensive income.
There were no adjustments for unrecognized actuarial gains or losses and past service costs or credits to equity through other comprehensive income for the three-month periods ended March 31, 2015 and 2014.
Asset Retirement Obligations
Asset retirement obligations are legal obligations associated with the retirement of long-lived assets resulting from the acquisition, construction, development and/or normal use of the underlying assets. Recognition of a liability for an asset retirement obligation is required in the period in which it is incurred at its estimated fair value. The associated asset retirement costs are capitalized as part of the carrying amount of the underlying asset and depreciated over the estimated useful life of the asset. The liability is accreted through charges to operating expenses. If the asset retirement obligation is settled for other than the carrying amount of the liability, the Company recognizes a gain or loss on settlement.
The Company records all asset retirement obligations for which we have legal obligations to remove all installation works and reinstate the manufacturing facilities to its original state at estimated fair value. For the three-month period ended March 31, 2015, the Company recognized approximately $4,000 as asset retirement obligation operating costs related to accretion of the liabilities and depreciation of the assets.
| Note 2. | Segments |
The Company currently conducts business in two operating segments: (i) gaming operations, which include slot participation operations; and (ii) gaming products, which consist of the design, manufacture and distribution of gaming chips and plaques. The Company owned and operated a casino in the Pailin Province of Cambodia. In June 2014, the Company ceased operations of the casino and entered into an agreement to sell 100% of the issued capital shares of the Company’s wholly-owned Cambodian subsidiary established for the purpose of owning and operating the casino. All the related historical revenues and expenses for the casino in Pailin have been reclassified as discontinued operations. The accounting policies of the discontinued operations are consistent with the Company’s policies for the accompanying consolidated financial statements.
The following table presents the financial information for each of the Company’s operating segments.
| Three-Month Periods Ended March 31, | ||||||||
| (amounts in thousands) | 2015 | 2014 | ||||||
| (Unaudited) | (Unaudited) | |||||||
| Revenues: | ||||||||
| Gaming operations | $ | 4,010 | $ | 3,883 | ||||
| Gaming products | 4,272 | 811 | ||||||
| Total revenues | $ | 8,282 | $ | 4,694 | ||||
| Operating income/(loss): | ||||||||
| Gaming operations operating income | $ | 1,700 | $ | 1,484 | ||||
| Gaming products operating income/(loss) | 575 | (731 | ) | |||||
| Corporate and other operating costs and expenses | (1,666 | ) | (1,603 | ) | ||||
| Total operating income/(loss) | $ | 609 | $ | (850 | ) | |||
| Depreciation and amortization: | ||||||||
| Gaming operations | $ | 1,504 | $ | 1,569 | ||||
| Gaming products | 282 | 167 | ||||||
| Corporate | 24 | 10 | ||||||
| Total depreciation and amortization | $ | 1,810 | $ | 1,746 | ||||
| 12 |
Geographic segment revenues for the three-month periods ended March 31, 2015 and 2014 consisted of the following:
| Three-Month Periods Ended March 31, | ||||||||
| (amounts in thousands) | 2015 | 2014 | ||||||
| (Unaudited) | (Unaudited) | |||||||
| Cambodia | $ | 3,324 | $ | 3,143 | ||||
| Macau | 561 | 359 | ||||||
| Philippines | 3,644 | 934 | ||||||
| Australia | 753 | 192 | ||||||
| Other | — | 66 | ||||||
| Total | $ | 8,282 | $ | 4,694 | ||||
For the three-month periods ended March 31, 2015 and 2014, in the gaming operations segment, the largest customer represented 73% and 67%, respectively, of total gaming operations revenue. For the three-month periods ended March 31, 2015 and 2014, in the gaming products segment, the largest customer represented 68% and 24%, respectively, of total gaming products sales.
| Note 3. | Inventories |
Inventories consisted of the following:
| (amounts in thousands) | March 31, 2015 | December 31, 2014 | ||||||
| (Unaudited) | ||||||||
| Raw materials | $ | 1,990 | $ | 1,866 | ||||
| Work-in-process | 758 | 600 | ||||||
| Finished goods (1) | 415 | — | ||||||
| Spare parts | 102 | 151 | ||||||
| Total | $ | 3,265 | $ | 2,617 | ||||
| (1) | Finished goods increased from December 31, 2014 to March 31, 2015 due to an order for the gaming products division to be delivered in the three-month period ended June 30, 2015. |
| Note 4. | Prepaid Expenses and Other Current Assets |
Prepaid expenses and other current assets consisted of the following:
| (amounts in thousands) | March 31, 2015 | December 31, 2014 | ||||||
| (Unaudited) | ||||||||
| Prepayments to suppliers (1) | $ | 668 | $ | 1,434 | ||||
| Prepaid leases | 13 | 13 | ||||||
| Total | $ | 681 | $ | 1,447 | ||||
| (1) | Prepayments to suppliers decreased from December 31, 2014 to March 31, 2015 due to the recognition of costs in preparation of gaming chip and plaque orders delivered in the three-month period ended March 31, 2015. |
| Note 5. | Receivables |
Accounts and other receivables consisted of the following:
| (amounts in thousands) | March 31, 2015 | December 31, 2014 | ||||||
| (Unaudited) | ||||||||
| Trade receivables | $ | 666 | $ | 830 | ||||
| Other receivables | 122 | 316 | ||||||
| 788 | 1,146 | |||||||
| Less: allowance for doubtful accounts | — | — | ||||||
| Net | $ | 788 | $ | 1,146 | ||||
| 13 |
| Note 6. | Gaming Equipment |
Gaming equipment is stated at cost. The major categories of gaming equipment and accumulated depreciation consisted of the following:
| Useful Life | ||||||||||||
| (amounts in thousands) | (years) | March 31, 2015 | December 31, 2014 | |||||||||
| (Unaudited) | ||||||||||||
| EGMs | 3-5 | $ | 17,884 | $ | 17,844 | |||||||
| Systems | 5 | 1,579 | 1,503 | |||||||||
| 19,463 | 19,347 | |||||||||||
| Less: accumulated depreciation | (14,336 | ) | (13,723 | ) | ||||||||
| Net | $ | 5,127 | $ | 5,624 | ||||||||
Depreciation expense of approximately $660,000 and $733,000 was included in cost of gaming operations in the consolidated statements of comprehensive income for the three-month periods ended March 31, 2015 and 2014, respectively.
| Note 7. | Property and Equipment |
Property and equipment are stated at cost. The major categories of property and equipment and accumulated depreciation consisted of the following:
| Useful Life | ||||||||||||
| (amounts in thousands) | (years) | March 31, 2015 | December 31, 2014 | |||||||||
| (Unaudited) | ||||||||||||
| Equipment, vehicles, furniture and fixtures | 3-10 | $ | 7,318 | $ | 6,697 | |||||||
| Land and building | 5 | 2,928 | 2,928 | |||||||||
| Leasehold improvements | 1-6 | 1,600 | 1,421 | |||||||||
| Construction in progress | N/A | 642 | 634 | |||||||||
| 12,488 | 11,680 | |||||||||||
| Less: accumulated depreciation | (3,250 | ) | (2,785 | ) | ||||||||
| Net | $ | 9,238 | $ | 8,895 | ||||||||
Depreciation expense of property and equipment of approximately $159,000 and $148,000 was included in cost of gaming operations in the consolidated statements of comprehensive income for the three-month periods ended March 31, 2015 and 2014, respectively.
Depreciation expense of property and equipment of approximately $256,000 and $136,000 was included in cost of gaming products in the consolidated statement of comprehensive income for the three-month periods ended March 31, 2015 and 2014, respectively.
| Note 8. | Goodwill and Intangible Assets, including Casino Contracts |
Goodwill and intangible assets, if any, are stated at cost. The major categories of goodwill and intangible assets and accumulated amortization consisted of the following:
| Useful Life | ||||||||||||
| (amounts in thousands) | (years) | March 31, 2015 | December 31, 2014 | |||||||||
| (Unaudited) | ||||||||||||
| Gaming operation agreement | 4-5 | $ | 1,175 | $ | 1,175 | |||||||
| Less: accumulated amortization | (882 | ) | (818 | ) | ||||||||
| 293 | 357 | |||||||||||
| Goodwill | N/A | 350 | 351 | |||||||||
| Patents | 5-6 | 114 | 114 | |||||||||
| Less: accumulated amortization | (88 | ) | (83 | ) | ||||||||
| 26 | 31 | |||||||||||
| Trademarks | 5-9 | 26 | 26 | |||||||||
| Less: accumulated amortization | (13 | ) | (12 | ) | ||||||||
| 13 | 14 | |||||||||||
| Technical know-how | 10 | 261 | 261 | |||||||||
| Less: accumulated amortization | (74 | ) | (68 | ) | ||||||||
| 187 | 193 | |||||||||||
| Casino contracts | 5-6 | 12,745 | 12,754 | |||||||||
| Less: accumulated amortization | (10,376 | ) | (9,772 | ) | ||||||||
| 2,369 | 2,982 | |||||||||||
| Net | $ | 3,238 | $ | 3,928 | ||||||||
| 14 |
Amortization expenses for finite-lived intangible assets were approximately $686,000 for the three-month periods ended March 31, 2015 and 2014.
Goodwill movements during the periods consisted of the following:
| (amounts in thousands) | 2015 | 2014 | ||||||
| (Unaudited) | ||||||||
| Balance as of January 1 | $ | 351 | $ | 353 | ||||
| Foreign currency translation adjustment | (1 | ) | (2 | ) | ||||
| Balance as of March 31/December 31 | $ | 350 | $ | 351 | ||||
| Note 9. | Prepaids, Deposits and Other Assets |
Prepaids, deposits and other assets consisted of the following:
| (amounts in thousands) | March 31, 2015 | December 31, 2014 | ||||||
| (Unaudited) | ||||||||
| Prepaid taxes | $ | 347 | $ | 323 | ||||
| Prepaid lease | 209 | 211 | ||||||
| Prepayments to suppliers | 258 | 454 | ||||||
| Rentals, utilities and other deposits | 328 | 328 | ||||||
| Total | $ | 1,142 | $ | 1,316 | ||||
As of March 31, 2015, the prepaid lease consisted of land lease prepayments of approximately $209,000 for a gaming development project located in Cambodia.
| Note 10. | Accrued Expenses |
Accrued expenses consisted of the following:
| (amounts in thousands) | March 31, 2015 | December 31, 2014 | ||||||
| (Unaudited) | ||||||||
| Payroll and related costs | $ | 632 | $ | 723 | ||||
| Professional fees | 347 | 350 | ||||||
| Withholding tax expenses | 550 | 583 | ||||||
| Other tax expenses | 44 | 44 | ||||||
| Other | 368 | 309 | ||||||
| Total | $ | 1,941 | $ | 2,009 | ||||
| Note 11. | Other Liabilities |
Other liabilities consisted of the following:
| (amounts in thousands) | March 31, 2015 | December 31, 2014 | ||||||
| (Unaudited) | ||||||||
| Other tax liabilities | $ | 709 | $ | 694 | ||||
| Other | 146 | 151 | ||||||
| Total | $ | 855 | $ | 845 | ||||
| 15 |
| Note 12. | Stock-Based Compensation |
The Company effected a 1-for-4 reverse stock split of its common shares as of February 26, 2015. All historical share amounts and share price information presented below have been proportionally adjusted to reflect the impact of this reverse split.
At the annual shareholders meeting held on September 8, 2008, a new stock option plan, the 2008 Stock Incentive Plan, was voted on and became effective on January 1, 2009, which replaced two previous plans, the Amended and Restated 1999 Stock Option Plan and the Amended and Restated 1999 Directors’ Stock Option Plan, thereby terminating both of the previous plans on December 31, 2008.
The 2008 Plan allows for incentive awards to eligible recipients consisting of:
| · | Options to purchase shares of common stock that qualify as incentive stock options within the meaning of the Internal Revenue Code; | |
| · | Non-statutory stock options that do not qualify as incentive options; | |
| · | Restricted stock awards; and | |
| · | Performance stock awards which are subject to future achievement of performance criteria or free of any performance or vesting. |
The maximum number of shares reserved for issuance under the 2008 Plan was originally 312,500 shares, and in July 2010 the Company’s shareholders approved an increase in the number of shares reserved for issuance to 625,000 shares. At the annual shareholders meeting held on July 13, 2012, the Company’s shareholders approved a further increase in the number of shares reserved for issuance to 937,500 shares. At the annual shareholders meeting held on December 12, 2014, the Company’s shareholders approved a further increase in the number of shares reserved for issuance to 1,250,000 shares. The exercise price of options granted under the 2008 Plan shall not be less than 100% of the fair market value of one share of common stock on the date of grant, unless the participant owns more than 10% of the total combined voting power of all classes of stock of the Company or any parent or subsidiary corporation of the Company, in which case the exercise price shall then be 110% of the fair market value. The outstanding stock options generally vest over three years and have ten-year contractual terms.
During the three-month period ended March 31, 2015, there were no grants of stock options and restricted stock awards and there were no exercises of outstanding stock options.
Prior to January 1, 2009, the Company had two stock options plans, the Amended and Restated 1999 Stock Option Plan and the Amended and Restated 1999 Directors’ Stock Option Plan, through which 937,500 shares and 18,750 shares were authorized, respectively. Both these previous plans expired on December 31, 2008. However, options granted under these previous plans that were outstanding as of the date of termination remain outstanding and subject to termination according to their terms.
During the three-month period ended March 31, 2015, stock options for the purchase of 229,564 shares and 4,376 shares of common stock, respectively, were outstanding in relation to the Amended and Restated 1999 Stock Option Plan and the Amended and Restated 1999 Director’s Stock Option Plan.
As of March 31, 2015, stock options for the purchase of 536,849 shares of common stock were outstanding under the 2008 Plan.
As of March 31, 2015, stock options for the purchase of 733,518 shares of common stock were exercisable with a weighted average exercise price of $8.11, a weighted average fair value of $3.49 and an aggregate intrinsic value of approximately $30,000. The total fair value of shares vested during the three-month period ended March 31, 2015 was approximately $24,000. As of March 31, 2015, an aggregate of 37,271 options granted under all plans were subject to vesting with a total compensation cost of approximately $53,000. The amount is expected to be recognized over 1.01 years.
| 16 |
A summary of all current and expired plans as of March 31, 2015 and changes during the period then ended are presented in the following table:
Options
Number of Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (in years) | Aggregate Intrinsic Value (in thousands) | |||||||||||||
| Outstanding as of December 31, 2014 | 785,220 | $ | 8.03 | 5.50 | $ | 46 | ||||||||||
| Granted | — | — | — | — | ||||||||||||
| Exercised | — | — | — | — | ||||||||||||
| Forfeited or expired | (14,431 | ) | 5.98 | — | — | |||||||||||
| Outstanding as of March 31, 2015 | 770,789 | 8.07 | 5.20 | 30 | ||||||||||||
| Exercisable as of March 31, 2015 | 733,518 | $ | 8.11 | 5.06 | $ | 30 | ||||||||||
Restricted Stock
| Number of shares | Weighted Average Fair Value at Grant Date | Weighted Average Remaining Contractual Life (in years) | ||||||||||
| Unvested balance as of December 31, 2014 | 7,500 | $ | 4.84 | 1.41 | ||||||||
| Granted | — | — | — | |||||||||
| Vested | — | — | — | |||||||||
| Unvested balance as of March 31, 2015 | 7,500 | $ | 4.84 | 1.16 | ||||||||
Recognition and Measurement
The fair value of each stock-based award to employees and non-employee directors is estimated on the measurement date which generally is the grant date while awards to non-employees and restricted common stock with performance criteria are measured at the earlier of the performance commitment date or the service completion date using the Black-Scholes-Merton option-pricing model. Option valuation models require the input of highly subjective assumptions, and changes in assumptions used can materially affect the fair value estimates. The Company estimates the expected life of the award by taking into consideration the vesting period, contractual term, historical exercise data, expected volatility, blackout periods and other relevant factors. Volatility is estimated by evaluating the Company’s historical volatility data. The risk-free interest rate on the measurement date is based on U.S. Treasury constant maturity rates for a period approximating the expected life of the award. The Company historically has not paid dividends, nor does it expect to pay dividends in the foreseeable future and, therefore, the expected dividend rate is zero.
The following table summarizes the range of assumptions utilized in the Black-Scholes-Merton option-pricing model for the valuation of stock options granted during the three-month periods ended March 31, 2015 and 2014.
| Three-Month Periods Ended March 31, | ||||||||||||||||
| 2015 | 2014 | |||||||||||||||
| Range of values: | Low | High | Low | High | ||||||||||||
| Expected volatility | 78.74 | % | 80.91 | % | 73.03 | % | 74.03 | % | ||||||||
| Expected dividends | — | — | — | — | ||||||||||||
| Expected term (in years) | 4.78 | 8.11 | 3.73 | 9.11 | ||||||||||||
| Risk free rate | 1.13 | % | 1.80 | % | 1.16 | % | 2.52 | % | ||||||||
For stock-based compensation accrued to employees and non-employee directors, the Company recognizes stock-based compensation expenses for all service-based awards with graded vesting schedules on the straight-line basis over the requisite service period for the entire award. Initial accruals of compensation expense are based on the estimated number of shares for which requisite service is expected to be rendered. Estimates are revised if subsequent information indicates that forfeitures will differ from previous estimates, and the cumulative effect on compensation cost of a change in the estimated forfeitures is recognized in the period of the change.
For non-employee awards, the Company remeasures compensation cost each period until the service condition is complete and recognizes compensation cost on the straight-line basis over the requisite service period.
The Company estimates forfeitures and recognizes compensation cost only for those awards expected to vest assuming all awards would vest and reverse recognized compensation cost for forfeited awards when the awards are actually forfeited.
| 17 |
For awards with service conditions and graded vesting that were granted prior to the adoption of ASC 718, the Company estimates the requisite service period and the number of shares expected to vest, and recognizes compensation expense for each tranche on the straight-line basis over the estimated requisite service period.
| Note 13. | Related Party Transactions |
Significant revenues, purchases and expenses arising from transactions with related parties consisted of the following:
| Three-Month Periods Ended March 31, | ||||||||
| (amounts in thousands) | 2015 | 2014 | ||||||
| (Unaudited) | (Unaudited) | |||||||
| Related party transactions provided to: | ||||||||
| Melco Crown (Macau) Limited | ||||||||
| Sales of gaming products | $ | 349 | $ | 135 | ||||
| MCE Leisure (Philippines) Corporation | ||||||||
| Sales of gaming products | $ | 2,892 | $ | — | ||||
| Melco Crown Entertainment Limited | ||||||||
| Sales of gaming products | $ | 212 | $ | — | ||||
| Related party transactions provided by: | ||||||||
| Melco Services Limited | ||||||||
| Technical services | $ | 1 | $ | 1 | ||||
| Other | $ | 4 | $ | 1 | ||||
| Golden Future (Management Services) Limited | ||||||||
| Management services | $ | 61 | $ | 59 | ||||
Melco Services Limited is a wholly-owned subsidiary of Melco International Development Limited, which owns 64.8% of Entertainment Gaming Asia Inc.
Melco International Development Limited owns 34.3% of Melco Crown Entertainment Limited, which owns 90% of Melco Crown (Macau) Limited and 68.6% of MCE Leisure (Philippines) Corporation, respectively.
Golden Future (Management Services) Limited is a wholly-owned subsidiary of Melco Crown (Macau) Limited.
Amounts due from/to related parties consisted of the following:
| (amounts in thousands) | March 31, 2015 | December 31, 2014 | ||||||
| (Unaudited) | ||||||||
| Amounts due from related parties | $ | 1,849 | $ | 2,112 | ||||
| Amounts due to related parties | $ | 111 | $ | 47 | ||||
| Note 14. | Income Taxes |
The Company recorded income tax expenses of $20,000 and $15,000 for the three-month periods ended March 31, 2015 and 2014, respectively. The Company’s effective income tax rates were 3.4% and (1.7)% for the three-month periods ended March 31, 2015 and 2014, respectively. The EGT Cambodia entity and the Company’s subsidiary, which held its discontinued casino operations in Pailin that were sold in October 2014, are income tax exempt and only pay a fixed monthly tax rather than a tax on income. The change in effective tax rate was mainly due to an increase in the consolidated pre-tax income.
The fixed obligation tax arrangement is subject to annual renewal and negotiation. The Company has renewed the fixed obligation tax arrangement for EGT Cambodia for 2015.
The Company has been subjected to income tax examinations by tax authorities in jurisdictions in which it operates.
| 18 |
The Company’s 2009 to 2013 Australian income tax returns remain open to examination by the Australian Taxation Office. The Company’s 2011 to 2014 Cambodian income tax returns remain open to examination by the General Department of Taxation. The Company’s 2011 to 2014 Philippines income tax returns remain open to examination by the Philippines Bureau of Internal Revenue. The Company’s 2007 to 2014 Hong Kong income tax returns remain open to examination by the Hong Kong Inland Revenue Department.
| Note 15. | Discontinued Operations |
From May 2012 until June 2014, the Company operated Dreamworld Casino (Pailin), a casino in the Pailin Province of Cambodia. Dreamworld Casino (Pailin) was constructed on land leased from a local land owner and, in consideration, the land owner was entitled to receive monthly a rental fee in the amount of $5,000 and 20% of the profit before depreciation (the total gross revenue of the casino less any payouts paid to customers, operating expenses, and gaming and non-gaming taxes on the casino’s revenue). The initial lease term was 20 years, commencing in September 2011 and was subject to renewal by the parties in writing.
Dreamworld Casino (Pailin) was unprofitable and after unsuccessful efforts to improve performance, in June 2014, the Company ceased operations of the casino. On June 20, 2014, the Company entered into an agreement to sell 100% of the issued capital shares of Dreamworld Leisure (Pailin) Limited, or DWP, a wholly-owned Cambodian subsidiary of the Company established for the purposes of owning and operating Dreamworld Casino (Pailin), to a local Cambodian individual. In connection with the sale of the issued capital shares of DWP, on June 20, 2014 the Company and its partner in the operations entered into an agreement to terminate the previous agreements with the partner and all future obligations thereunder including future lease payments owed by the Company.
The sale included all assets of DWP with the exception of its EGMs, certain surveillance equipment and other assets excluded in the agreement and prohibits any use of the Dreamworld brand name by the buyer. Total consideration to be paid to the Company by the buyer was to be $500,000, of which $100,000 was paid at the time of entering the agreement and the balance to be paid in sixteen $25,000 monthly installments commencing within one month of the signed agreement. The parties closed the sale transaction in October 2014. Subsequently, the related parties agreed to amend the agreement to reduce the total consideration to be paid to $363,000, which has since been paid in full. The Company recognized a gain of approximately $90,000 on disposal of the entity in the year ended December 31, 2014.
The Company had recorded an impairment charge of approximately $2.5 million for the year ended December 31, 2013 related to the Dreamworld Casino (Pailin) facility and gaming assets. The impairment charge represented the entire capital expenditure incurred by the Company for the property as of December 31, 2013, with the exception of those assets that the Company believed could be redeployed to other existing properties.
The following table details selected financial information for the discontinued operations in the consolidated statements of comprehensive income.
| Three-Month Periods Ended March 31, | ||||||||
| (amounts in thousands) | 2015 | 2014 | ||||||
| (Unaudited) | (Unaudited) | |||||||
| Loss from operations | $ | — | $ | (165 | ) | |||
| Foreign currency exchange gain | — | 8 | ||||||
| Loss from discontinued operations, net of tax | $ | — | $ | (157 | ) | |||
| Note 16. | Commitments and Contingencies |
Legal Matters
There are no pending legal proceedings, other than routine litigation matters incidental to our business, to which we or our properties are subject.
| Note 17. | Earnings/(Loss) Per Share |
The Company effected a 1-for-4 reverse stock split of its common shares as of February 26, 2015. All historical share amounts and earnings/(loss) per share information presented have been proportionally adjusted to reflect the impact of this reverse stock split.
| 19 |
Computation of the basic and diluted earnings/(loss) per share from continuing operations consisted of the following:
| Three-Month Periods Ended March 31, | ||||||||||||||||||||||||
| 2015 | 2014 | |||||||||||||||||||||||
| (Unaudited) | (Unaudited) | |||||||||||||||||||||||
| (amounts in thousands, except per share data) | Income | Number of Shares | Per Share Amount | Loss | Number of Shares | Per Share Amount | ||||||||||||||||||
| Basic | ||||||||||||||||||||||||
| Net income/(loss) attributable to equity shareholders | $ | 570 | 14,450 | $ | 0.04 | $ | (873 | ) | 7,496 | $ | (0.12 | ) | ||||||||||||
| Effect of dilutive securities | ||||||||||||||||||||||||
| Dilutive stock options/restricted shares (1) | 17 | — | ||||||||||||||||||||||
| Diluted | ||||||||||||||||||||||||
| Net income/(loss) attributable to equity shareholders plus assumed conversion | $ | 570 | 14,467 | $ | 0.04 | $ | (873 | ) | 7,496 | $ | (0.12 | ) | ||||||||||||
| (1) | There was no difference in diluted loss per share from basic loss per share as the assumed exercise of common stock equivalents would have an anti-dilutive effect due to losses for the three-month periods ended March 31, 2014. |
For the three-month periods ended March 31, 2015 and 2014, outstanding stock options of 753,988 and 764,810, respectively, shares of common stock were excluded from the calculation of diluted earnings per share as their effect would be anti-dilutive.
| Note 18. | Retirement Plan |
The components of accrued retirement benefits consisted of the following:
| (amounts in thousands) | 2015 | 2014 | ||||||
| (Unaudited) | ||||||||
| Balance as of January 1 | $ | 29 | $ | 21 | ||||
| Service cost | — | 7 | ||||||
| Interest cost | — | 1 | ||||||
| Actuarial gain and others | — | — | ||||||
| Balance as of March 31/December 31 | $ | 29 | $ | 29 | ||||
| Note 19. | Asset Retirement Obligations |
Reconciliations of the carrying amounts of the Company’s asset retirement obligations are as follows:
| (amounts in thousands) | 2015 | 2014 | ||||||
| (Unaudited) | ||||||||
| Balance as of January 1 | $ | 92 | $ | — | ||||
| Additions | — | 92 | ||||||
| Accretion expense | — | — | ||||||
| Balance as of March 31/December 31 | $ | 92 | $ | 92 | ||||
| Note 20. | Accumulated Other Comprehensive Income |
The accumulated balances in respect of other comprehensive income consisted of the following:
| (amounts in thousands) | Defined Benefit Pension Plan | Foreign Currency Translation | Accumulated Other Comprehensive Income | |||||||||
| Balances as of January 1, 2014 | $ | 99 | $ | 643 | $ | 742 | ||||||
| Current period other comprehensive income/(loss) | (12 | ) | 23 | 11 | ||||||||
| Balances as of December 31, 2014 | 87 | 666 | 753 | |||||||||
| Current period other comprehensive income | — | 1 | 1 | |||||||||
| Balances as of March 31, 2015 | $ | 87 | $ | 667 | $ | 754 | ||||||
| 20 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
CAUTIONARY STATEMENT
The following discussion and analysis should be read in conjunction with our unaudited consolidated financial statements and the related notes thereto contained elsewhere in this report. The information contained in this quarterly report on Form 10-Q is not a complete description of our business or the risks associated with an investment in our common stock. We urge you to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the Securities and Exchange Commission, or SEC, including our annual report on Form 10-K for the year ended December 31, 2014, filed with the SEC on March 26, 2015 and subsequent reports on Form 8-K, which discuss our business in greater detail.
In this report we make, and from time to time we otherwise make, written and oral statements regarding our business and prospects, such as projections of future performance, statements of management’s plans and objectives, forecasts of market trends, and other matters that are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Statements containing the words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimates,” “projects,” “believes,” “expects,” “anticipates,” “intends,” “target,” “goal,” “plans,” “objective,” “should” or similar expressions identify forward-looking statements, which may appear in documents, reports, filings with the Securities and Exchange Commission, news releases, written or oral presentations made by officers or other representatives made by us to analysts, stockholders, investors, news organizations and others, and discussions with management and other of our representatives. For such statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.
Our future results, including results related to forward-looking statements, involve a number of risks and uncertainties. No assurance can be given that the results reflected in any forward-looking statements will be achieved. Any forward-looking statement speaks only as of the date on which such statement is made. Our forward-looking statements are based upon assumptions that are sometimes based upon estimates, data, communications and other information from suppliers, government agencies and other sources that may be subject to revision. Except as required by law, we do not undertake any obligation to update or keep current either (i) any forward-looking statement to reflect events or circumstances arising after the date of such statement, or (ii) the important factors that could cause our future results to differ materially from historical results or trends, results anticipated or planned by us, or which are reflected from time to time in any forward-looking statement.
There are several important factors that could cause our future results to differ materially from historical results or trends, results anticipated or planned by us, or results that are reflected from time to time in any forward-looking statement. Some of these important factors, but not necessarily all important factors, are included in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and in the section “Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2014 filed with the SEC on March 26, 2015.
We own or have rights to certain trademarks that we used in connection with our business or products, including, but not limited to, Dolphin™. Other than this trademark, this report also makes reference to trademarks and trade names of other companies.
On February 26, 2015, we effected a 1-for-4 reverse stock split of our common stock and corresponding decrease in the number of authorized shares of common stock. All historical share amounts and share information presented in the financial statements and notes have been proportionally adjusted to reflect the impact of this reverse stock split, including but not limited to basic and diluted weighted-average shares issued and outstanding. Certain reclassifications have been made to the prior periods’ financial statements to conform to the current period’s presentation.
This discussion is intended to provide the reader with information that will assist in understanding our financial statements, the changes in certain key items in those financial statements from year to year, and the primary factors that accounted for those changes, as well as how certain accounting principles affect our financial statements. The discussion also provides information about the financial results of the various segments of our business to provide a better understanding of how those segments and their results affect our financial condition and results of operations as a whole. This discussion should be read in conjunction with our consolidated financial statements and accompanying notes as of and for the three-month periods ended March 31, 2015 and 2014 included elsewhere in this report.
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General
We are a gaming company focused on capitalizing on the growth opportunities in emerging gaming markets of Asia. We generate revenue in two principal ways: gaming operations and gaming products sales. Our gaming operations comprise slot participation operations in Cambodia and the Philippines, which when permitted, operate under our Dreamworld brand. Our gaming products comprise the manufacture and sale of gaming chips and plaques under our Dolphin brand and the distribution of gaming products in select markets for third-party suppliers.
Our consolidated revenue for the three-month period ended March 31, 2015 was approximately $8.3 million, of which revenue from the gaming operations and gaming products segments comprised 48% and 52%, respectively, of consolidated revenue. This compares to consolidated revenue of approximately $4.7 million for the three-month period ended March 31, 2014, of which revenue from the gaming operations and gaming products segments comprised 83% and 17%, respectively, of consolidated revenue.
In November 2014, we completed a fully-subscribed rights offering of our common stock, which netted us cash proceeds of approximately $14.3 million. Our largest shareholder, EGT Entertainment Holding Limited, a wholly-owned subsidiary of Melco International Development Limited, supported the transaction and increased its ownership position from 38.0% to 64.8%. As a result of the rights offering, we have significantly strengthened our balance sheet and have become an indirect majority-owned subsidiary of a respected leader in Asian gaming. We believe that Melco’s investment not only significantly improves our capital position but also affords us many benefits in terms of positioning us for long-term growth. As a Melco subsidiary, we will endeavor to leverage the relationships and industry expertise of the Melco group of companies to increase our access to a broader pool of potential growth opportunities and capital. This could provide us the potential to not only grow our existing business lines but also to expand into new ones.
We have developed our business model with the goal of creating growth potential and the ability to generate quality recurring cash flow. We believe that this model combined with our established presence and strong relationships in our markets provide us the potential to capitalize on the growth opportunities in our target markets in Asia. We seek to improve revenue by making our gaming properties quality leaders in their markets by providing our customers with their favorite games, superior customer service and attractive and comfortable surroundings. We seek to increase and expand our diversified revenue streams through our gaming products division and potentially other gaming platforms. We seek to improve margins by focusing on operational efficiency and cost control. Our long-term strategy includes responsible investment in improving and maintaining our existing operations and in selectively securing new projects that will serve to enhance future earnings growth. We intend to implement these strategies in ways that we believe will benefit our shareholders.
Gaming Operations
As of March 31, 2015, our gaming operations, which comprised our slot participation business, were located in two countries, Cambodia and the Philippines, and totaled 1,591 EGM seats in operation in six venues. In Cambodia, we had a total of 1,045 EGM seats in operation in three venues. In the Philippines, we had a total of 546 EGM seats in operation in three venues.
In Cambodia, our gaming operations largely focus on operating a substantial portion of the gaming machine area in prime casino floor locations at NagaWorld, a premier luxury destination gaming resort and the only licensed full service casino in and around the capital city of Phnom Penh. As of March 31, 2015, we had 670 EGM seats placed at NagaWorld. We and NagaWorld split the net win from all the 670 EGMs and certain operating costs related to marketing and floor staff on a respective basis of 25%/75%. Net win represents the monies wagered less payouts to customers. The net win from the 670 EGMs are settled and our share is distributed daily to us. Our operations in NagaWorld are a primary contributor to our gaming operations revenue and cash flow.
Our gaming operations in Cambodia also include Thansur Bokor Highland Resort and Dreamworld Club (Poipet). Thansur Bokor is a casino resort developed by leading Cambodian hotelier, Sokha Hotels and Resorts, in a tourist area of the Kampot Province. As of March 31, 2015, we had approximately 140 EGM seats placed in this venue. We and Sokha split the net win and certain operating expenses for the placed EGMs on a respective basis of 27%/73%.
Dreamworld Club (Poipet) is a slot hall located in the established gaming market of Poipet in the Banteay Meanchey Province of Northwestern Cambodia near the Thailand border. As of March 31, 2015, we had approximately 290 EGM seats placed in this venue. Dreamworld Club (Poipet) operates under a machine operation and participation agreement with a local partner that owns and operates an existing casino in Poipet. Under the terms of the agreement, the local partner allocated, at no expense to us, part of its land with an area of approximately 16,000 square feet to us to develop and construct, at our own design, budget and cost, the slot venue. We are responsible for all capital expenditures for Dreamworld Club (Poipet) and the placement of EGMs and are the sole operators of this venue. We and the local partner split the net win from all the EGMs placed by us at Dreamworld Club (Poipet) and certain operating costs related to marketing and floor staff on a respective basis of 40%/60%.
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In the Philippines, our gaming operations comprise three venues in the greater Manila area. For these three venues, our share of the net win per unit per day ranges from 15% to 35%.
We intend to selectively pursue gaming projects for both slot participation and gaming development in growing gaming markets in Asia. For slot participation, we intend to pursue opportunities to place our EGMs in prime locations on the gaming floors of major casinos and/or hotels. When possible, we seek to operate our slot operations under our Dreamworld brand. For gaming development, we intend to pursue projects that will enable us to expand our market presence and increase brand equity in our Dreamworld name. We will endeavor to pursue projects that are relatively larger in size and investment than our previous development projects and in more established markets with higher levels of existing natural player traffic. There is no assurance we will be successful in establishing new projects with these characteristics or that any such projects will be successful.
Gaming Products
We engage in the design, manufacture and distribution of gaming chips and plaques from our manufacturing facilities in Hong Kong. Until March 2013, we had been engaged in the design, manufacture and distribution of non-gaming plastic products, mainly automotive parts. In March 2013, we sold the portion of our business dedicated to the manufacture and sale of non-gaming plastic products and commenced the relocation of the gaming chips and plaques operations from Australia to Hong Kong.
Our customer base for Dolphin gaming chips and plaques includes major casino resorts in Macau, the Philippines and Australia. We believe we have a meaningful market share within our markets in Asia and Australia and are focused on expanding our footprint in the growing gaming markets in Asia.
In addition, in the second half of 2014, we expanded the gaming products division to include the distribution of third-party gaming products. We have entered into two distribution agreements. However, as of March 31, 2015, we have not recorded material revenue from these agreements.
Discontinued Operations
Dreamworld Casino (Pailin), a small regional casino we developed and operated, opened in May 2012 and closed in June 2014. Dreamworld Casino (Pailin) was located in the Pailin Province of Northwestern Cambodia next to the Thailand border. It was constructed on land leased from a local land owner and, in consideration, the land owner was entitled to receive a monthly rental fee in the amount of $5,000 and 20% of the profit before depreciation, which consisted of the total gross revenue of the casino less any payouts paid to customers, operating expenses, and gaming and non-gaming taxes on the casino’s revenue. The casino measured approximately 16,000 square feet and, as of December 31, 2013, housed 88 EGM seats and table games leased to a third-party operator.
We incurred significant operating losses for Dreamworld Casino (Pailin) in the year ended December 31, 2013. The property’s performance was negatively impacted by an insufficient level of player traffic and the high costs associated with acquiring a quality player base in this market. In an effort to provide recurring revenue and reduce operating costs for these operations, in September 2013, we began to transition to a leasing model for the table games under which third-party operators would pay us a fixed monthly rental fee per table. However, due to an inability to secure long-term third-party table game operators, along with the low level of natural player traffic and the political unrest in Thailand, we decided to cease operations of the casino effective in June 2014.
On June 20, 2014, we entered into an agreement to sell 100% of the issued capital shares of Dreamworld Leisure (Pailin) Limited, our wholly-owned Cambodian subsidiary established for purposes of owning and operating Dreamworld Casino (Pailin), to a local Cambodian individual, who is a relative of our partner in the operations. The sale closed in October 2014 and we recorded a gain of approximately $90,000 on disposal of the entity in the year ended December 31, 2014.
In connection with our 2013 annual valuation review of the facility and gaming assets, and as required by U.S. generally accepted accounting principles, we recorded an impairment charge of approximately $2.5 million as of December 31, 2013 for Dreamworld Casino (Pailin), which represented our aggregate capital expenditure for the facilities.
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All related historical revenues and expenses from Dreamworld Casino (Pailin) have been reclassified as discontinued operations.
Results of Operations for the Three-Month Periods Ended March 31, 2015 and 2014
The following table summarizes our operating results on a consolidated basis and separately by each of the two operating segments, namely, gaming operations and gaming products for the three-month periods ended March 31, 2015 and 2014. All historical revenues and expenses associated with Dreamworld Casino (Pailin), which closed in June 2014 and was sold in October 2014, have been reclassified as discontinued operations.
| Three-Month Periods Ended March 31, | ||||||||
| (amounts in thousands, except per share data) | 2015 | 2014 | ||||||
| Total: | ||||||||
| Revenues | $ | 8,282 | $ | 4,694 | ||||
| Gross profit | $ | 2,305 | $ | 807 | ||||
| Gross margin percentage | 28 | % | 17 | % | ||||
| Adjusted EBITDA from continuing operations (1) | $ | 2,423 | $ | 960 | ||||
| Operating income/(loss) from continuing operations | $ | 609 | $ | (850 | ) | |||
| Net income/(loss) from continuing operations | $ | 570 | $ | (873 | ) | |||
| Net income/(loss) | $ | 570 | $ | (1,030 | ) | |||
| Basic and diluted earnings/(loss) per share from continuing operations | $ | 0.04 | $ | (0.12 | ) | |||
| Weighted average common shares outstanding | ||||||||
| Basic | 14,450 | 7,496 | ||||||
| Diluted | 14,467 | 7,496 | ||||||
| Gaming operations: | ||||||||
| Revenues | $ | 4,010 | $ | 3,883 | ||||
| Gross profit | $ | 1,695 | $ | 1,484 | ||||
| Gross margin percentage | 42 | % | 38 | % | ||||
| Gaming products: | ||||||||
| Revenues | $ | 4,272 | $ | 811 | ||||
| Gross profit/(loss) | $ | 610 | $ | (677 | ) | |||
| Gross margin percentage | 14 | % | NM | |||||
| (1) | We define “Adjusted EBITDA" as earnings from continuing operations before interest, taxes, depreciation, amortization, stock-based compensation, and other non-cash operating income and expenses. Adjusted EBITDA is presented exclusively as a supplemental disclosure because our management believes that it is widely used to measure the performance, and as a basis for valuation, of gaming companies. Our management uses Adjusted EBITDA as a measure of the operating performance of its segments and to compare the operating performance of its operations with those of its competitors. We also present Adjusted EBITDA because it is used by some investors as a way to measure a company’s ability to incur and service debt, make capital expenditures and meet working capital requirements. Gaming companies have historically reported EBITDA as a supplement to financial measures in accordance with generally accepted accounting principles in the United States (“GAAP”). Adjusted EBITDA should not be considered as an alternative to operating income as an indicator of our performance, as an alternative to cash flows from operating activities as a measure of liquidity, or as an alternative to any other measure determined in accordance with GAAP. Unlike net income, Adjusted EBITDA does not include depreciation or interest expense and, therefore, does not reflect current or future capital expenditures or the cost of capital. We compensate for these limitations by using Adjusted EBITDA as only one of several comparative tools, together with GAAP measurements, to assist in the evaluation of operating performance. Such GAAP measurements include operating income, net income, cash flows from operations and cash flow data. We have significant uses of cash flows, including capital expenditures, interest payments, debt principal repayments, taxes and other non-recurring charges, which are not reflected in Adjusted EBITDA. Our calculation of Adjusted EBITDA may be different from the calculation methods used by other companies and, therefore, comparability may be limited. |
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A reconciliation of EBITDA from continuing operations, as adjusted, to the net income/(loss) from continuing operations is provided below.
| Three-Month Periods Ended March 31, | ||||||||
| (amounts in thousands) | 2015 | 2014 | ||||||
| Net income/(loss) from continuing operations — GAAP basis | $ | 570 | $ | (873 | ) | |||
| Interest expense and finance fees | 1 | 1 | ||||||
| Interest income | (3 | ) | — | |||||
| Income tax expenses | 20 | 15 | ||||||
| Depreciation and amortization | 1,810 | 1,746 | ||||||
| Stock-based compensation expenses | 30 | 71 | ||||||
| Gain on disposition of assets | (5 | ) | — | |||||
| Adjusted EBITDA from continuing operations | $ | 2,423 | $ | 960 | ||||
Total revenues increased approximately $3.6 million to $8.3 million for the three-month period ended March 31, 2015 compared to approximately $4.7 million in the same period of the prior year due to increases in both business divisions. Revenue from gaming operations increased primarily as a result of higher slot operations revenue from NagaWorld. Revenue from the gaming products division increased as a result of higher sales of gaming chips and plaques to existing customers compared to the prior year period.
Gross profit increased approximately $1.5 million to $2.3 million for the three-month period ended March 31, 2015 compared to approximately $807,000 in the same period of the prior year. The increase was primarily a result of higher slot operations revenue from NagaWorld and an increase in sales and gross margin for the gaming products division, as described in greater detail below, compared to the prior year period.
Operating income from continuing operations increased approximately $1.5 million to $609,000 for the three-month period ended March 31, 2015 compared to an operating loss from continuing operations of approximately $850,000 in the same period of the prior year. The increase in operating income from continuing operations was primarily a result of the higher gross profit.
Net income from continuing operations increased approximately $1.4 million to $570,000 for the three-month period ended March 31, 2015 compared to a net loss from continuing operations of approximately $873,000 in the same period of the prior year. The increase in net income from continuing operations was primarily a result of the higher operating income from continuing operations, as explained above. Net income increased approximately $1.6 million to $570,000 for the three-month period ended March 31, 2015 compared to a net loss of approximately $1.0 million in the same period of the prior year. The net loss for the three-month period ended March 31, 2014 included a net loss of approximately $157,000 from discontinued operations.
Gaming Operations
Revenues from gaming operations consisted of slot participation operations.
| Three-Month Periods Ended March 31, | ||||||||
| (amounts in thousands, except per unit data) | 2015 | 2014 | ||||||
| Net revenue to the Company | ||||||||
| Cambodia slot operations | $ | 3,118 | $ | 2,931 | ||||
| Philippines slot operations | 670 | 728 | ||||||
| Service revenue (1) | 222 | 224 | ||||||
| Consolidated total | $ | 4,010 | $ | 3,883 | ||||
| Average net win per unit per day | ||||||||
| Cambodia slot operations | $ | 128 | $ | 117 | ||||
| Philippines slot operations | $ | 68 | $ | 71 | ||||
| Consolidated total | $ | 108 | $ | 101 | ||||
| March 31, | ||||||||
| 2015 | 2014 | |||||||
| EGM seats in operation | ||||||||
| Cambodia slot operations | 1,045 | 1,086 | ||||||
| Philippines slot operations | 546 | 566 | ||||||
| Consolidated total | 1,591 | 1,652 | ||||||
| (1) | Service revenue represents reimbursements of certain expenses, which for accounting purposes, are included in the revenue and grossed up in the cost of gaming operations. |
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Revenue from gaming operations increased approximately $127,000 to $4.0 million during the three-month period ended March 31, 2015 compared to approximately $3.9 million in the same period of the prior year. The increase was primarily due to higher slot operations revenue from NagaWorld partially offset by lower revenue from Thansur Bokor and the Philippines operations.
Gaming operations revenue for the three-month periods ended March 31, 2015 and 2014 included approximately $222,000 and $224,000, respectively, in service revenue related to the reimbursement of net shared costs from casino operators.
Consolidated average net win per unit per day for the consolidated slot operations increased $7 to $108 for the three-month period ended March 31, 2015 compared to $101 for the prior year period due to increases from the Cambodia operations.
Revenue from the Cambodia slot operations increased approximately $187,000 to $3.1 million for the three-month period ended March 31, 2015 compared to approximately $2.9 million in the prior year period. Average net win per unit per day for Cambodia increased $11 to $128 for the three-month period ended March 31, 2015 compared to $117 for the prior year period. The increases were primarily the result of improvement from NagaWorld partially offset by declines from Thansur Bokor.
NagaWorld revenue was approximately $2.8 million for the three-month period ended March 31, 2015 compared to approximately $2.5 million in the prior year period and average net win per unit per day was $198 compared to $175 in the prior year period. The increases were primarily due to improved player traffic levels.
Revenue from the Philippines slot operations decreased approximately $58,000 to $670,000 for the three-month period ended March 31, 2015 compared to approximately $728,000 in the prior year period. Average net win per unit per day for the Philippines decreased $3 to $68 for the three-month period ended March 31, 2015 compared to $71 in the prior year period. The decreases were primarily due to increased competition in Manila from new casino resorts, one of which opened in early 2013 and another which soft opened in December 2014.
Due to the increasing competition for our venues in the Philippines, we are focused on enhancing returns on assets in this market through targeted marketing programs and strategic management of the machine mix.
Gross profit from gaming operations increased approximately $211,000 to $1.7 million for the three-month period ended March 31, 2015 compared to approximately $1.5 million in the prior year period primarily due to higher revenue from NagaWorld. Cost of gaming operations for the three-month period ended March 31, 2015 included approximately $819,000 in depreciation of gaming property and equipment, $611,000 of amortization of casino contracts, $63,000 of amortization of other gaming related intangibles and $822,000 of other operating costs. Cost of gaming operations for the three-month period ended March 31, 2014 included approximately $881,000 of depreciation of gaming property and equipment, $610,000 of amortization of casino contracts, $63,000 of amortization of other gaming related intangibles and $845,000 of other operating costs.
As of March 31, 2015, we had a total of 1,863 EGM seats of which 272 were held in inventory and 1,591 were in operation. Of the 1,591 EGM seats in operation, 1,045 were in operation in three venues in Cambodia and 546 were in operation in three venues in the Philippines.
| March 31, 2015 | December 31, 2014 | |||||||||||||||
| (amounts in thousands, except per unit data) | Units | Carrying Value | Units | Carrying Value | ||||||||||||
| EGMs and systems used in operations (1) | 1,591 | $ | 4,891 | 1,619 | $ | 5,367 | ||||||||||
| EGMs and systems held for future use | 272 | 236 | 252 | 257 | ||||||||||||
| Total EGMs and systems | 1,863 | $ | 5,127 | 1,871 | $ | 5,624 | ||||||||||
| (1) | EGMs and systems used in operations as of March 31, 2015 and December 31, 2014 included 32 EGM seats, which were in operation on a participation basis and, therefore, their carrying values were not included. |
As part of our ongoing efforts to maximize returns and minimize capital expenditures for the gaming operations, we seek to strategically manage our existing EGM base through the redeployment of gaming assets between venues, when appropriate.
Gaming Products
Gaming products revenue increased approximately $3.5 million to $4.3 million for the three-month period ended March 31, 2015 compared to approximately $811,000 in the prior year period. The increase was mainly a result of higher sales of gaming chips and plaques to existing customers for the three-month period ended March 31, 2015.
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Gross profit on gaming products increased approximately $1.3 million to $610,000 for the three-month period ended March 31, 2015 compared to a gross margin loss of approximately $677,000 in the prior year period. The increase in gross profit was primarily due to higher sales volumes, improved production efficiencies as a result of efforts to increase overall automation and the outsourcing of certain production processes for two orders with short lead times as demand exceeded our existing capacity during the period.
Operating Expenses
The schedule of expenses on a consolidated basis consisted of the following:
| Three-Month Periods Ended March 31, | ||||||||
| (amounts in thousands) | 2015 | 2014 | ||||||
| Selling, general and administrative expenses | $ | 1,582 | $ | 1,483 | ||||
| Stock-based compensation expenses | 30 | 71 | ||||||
| Gain on disposition of assets | (5 | ) | — | |||||
| Product development expenses | 35 | 54 | ||||||
| Depreciation and amortization | 54 | 49 | ||||||
| $ | 1,696 | $ | 1,657 | |||||
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased approximately $99,000 to $1.6 million for the three-month period ended March 31, 2015 compared to approximately $1.5 million in the same period of the prior year. Consulting and legal expenses increased approximately $239,000 primarily due to professional advisors’ fees for potential projects. The increases were partially offset by decreases in salaries and wages, and rent expenses of approximately $55,000 mainly due to the adjustment of an over-provision for employee bonuses for the year ended December 31, 2014 and the relocation of our back office support functions to a nearby smaller rental area. In addition, advertising, office expenses and other expenses decreased approximately $85,000 primarily due to various cost reduction initiatives.
Stock-Based Compensation Expenses
Stock-based compensation expenses decreased approximately $41,000 to $30,000 for the three-month period ended March 31, 2015 compared to approximately $71,000 in the prior year period primarily due to no new option grants issued and a decrease in average stock prices during the three-month period ended March 31, 2015 as compared to the prior year period.
Gain on Disposition of Assets
Gain on disposition of assets was approximately $5,000 for the three-month period ended March 31, 2015, which primarily related to the sale of non-performing EGMs. There were no dispositions of assets for the three-month ended March 31, 2014.
Product Development Expenses
Product development expenses decreased approximately $19,000 to $35,000 for the three-month period ended March 31, 2015 compared to approximately $54,000 in the prior year period mainly as a result of decreased activities in new product development for gaming products.
Depreciation and Amortization Expenses
Depreciation and amortization expenses increased approximately $5,000 to $54,000 for the three-month period ended March 31, 2015 compared to approximately $49,000 in the prior year period primarily as a result of new systems and computer related equipment for the corporate office.
Other Income/(Expenses)
Other expenses increased approximately $11,000 to $19,000 for the three-month period ended March 31, 2015 compared to approximately $8,000 in the prior year period. The increase in other expenses was primarily due to an increase in foreign currency losses mainly resulting from a comparatively lower increase in the value of U.S. dollar denominated payables for the Philippines operations compared to the prior year period.
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Income Tax Provisions
Effective tax rates for the three-month periods ended March 31, 2015 and 2014 were approximately 3.4% and (1.7)%, respectively. We continue to review the treatment of tax losses and future income generated by our foreign subsidiaries to minimize taxation costs.
FINANCIAL CONDITION
Liquidity and Capital Resources
As of March 31, 2015, we had total cash and cash equivalents of approximately $20.8 million and working capital of approximately $23.3 million. Our cash and working capital during the three-month period ended March 31, 2015 was positively impacted by cash flow from operating activities of approximately $4.3 million but was negatively impacted by the purchases of equipment for the gaming products division and of EGMs and related systems for the gaming operations division.
As part of our growth strategy for gaming operations, we expect to purchase EGMs to supplement existing inventory and source future targeted deployment plans. As part of our growth strategy for the gaming products division, we intend to incur costs related to increasing capacity and enhancing production efficiencies for these operations. We also continue to pursue new gaming projects including slot participation and gaming development. In addition, we are exploring avenues to expand our operations into new gaming platforms and markets. However, there is no guarantee we will be successful in these efforts.
We presently expect that our capital expenditures for the remainder of 2015 will be approximately $2.0 million, excluding the costs and expenses of any new projects. This primarily includes EGMs and systems purchases, upgrades and general maintenance for the gaming operations.
We anticipate our available working capital, along with cash expected to be generated from operating activities, will allow us to meet our capital expenditure needs through 2015, excluding the costs and expenses of any new projects.
However, as noted above, we continue to pursue new projects. While there is no guarantee we will be successful in securing new projects, if we were to secure new projects our capital expenditures through 2015 would increase beyond the $2.0 million currently contemplated. We completed the above-mentioned rights offering for purposes of raising additional capital sufficient to finance one or more gaming projects. However, at this time, we are unable to predict the amount of additional capital expenditures that could be required in 2015 for such potential projects. Where possible, we intend to fund our gaming projects from our cash flow from operating activities and cash on hand. Further, we will seek to structure the development of these projects in phases to better control and pace the related capital expenditures. Nonetheless, we may endeavor to obtain additional required capital from various financing sources including commercial debt financing and the sale of our debt or equity securities should the need arise. However, there are no commitments or arrangements in place as of the date of this report for receipt of additional capital and there are no assurances we will be able to acquire additional capital if, and when, needed on commercially reasonable terms or at all.
Cash Flows Summary
| Three-Month Periods Ended March 31, | ||||||||
| (amount in thousands) | 2015 | 2014 | ||||||
| Cash provided by/(used in): | ||||||||
| Operations | $ | 4,346 | $ | (117 | ) | |||
| Investing | (826 | ) | (847 | ) | ||||
| Financing | — | — | ||||||
| Effect of exchange rate change in cash | (1 | ) | (35 | ) | ||||
| $ | 3,519 | $ | (999 | ) | ||||
Operations
Cash provided by operating activities was approximately $4.3 million for the three-month period ended March 31, 2015 compared to cash used in operating activities of approximately $117,000 in the prior year period. For the three-month period ended March 31, 2015, cash provided by operating activities primarily resulted from operating income from both the gaming operations and gaming products divisions and a decrease in the use of funds for working capital. For the three-month period ended March 31, 2014, cash used by operating activities primarily resulted from an operating loss incurred for the gaming products division and an increase in the use of working capital in preparation for upcoming gaming products orders.
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Investing
Cash used in investing activities was approximately $826,000 for the three-month period ended March 31, 2015 compared to approximately $847,000 in the same period of the prior year. The net decrease in cash used in investing activities was mainly a result of the receipt of a settlement balance related to the disposal of the Dreamworld Leisure (Pailin) Limited subsidiary largely offset by higher capital expenditures related to the purchase of equipment for the gaming products division and EGMs for the gaming operations division.
Financing
Cash used in financing activities was $NIL for the three-month periods ended March 31, 2015 and 2014.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our consolidated financial statements were prepared in conformity with accounting principles generally accepted in the United States. Accordingly, we are required to make estimates incorporating judgments and assumptions we believe are reasonable based on our historical experience, contract terms, observance of known trends in our Company and the industry as a whole, as well as information available from other outside sources. Our estimates affect amounts recorded in the financial statements and actual results may differ from initial estimates.
We consider the following accounting estimates to be the most critical to fully understanding and evaluating our reported financial results. They require us to make subjective or complex judgments about matters that are inherently uncertain or variable. Senior management has discussed the development, selection and disclosure of the following accounting estimates, particularly those considered most sensitive to changes from external factors, with the audit committee of our board of directors.
Allowance for Doubtful Accounts Receivable
As of March 31, 2015, we had net accounts receivable of approximately $666,000, representing 1% of total assets. We specifically analyze the collectability of each account based upon the age of the account, the customer’s financial condition, collection history and any other known information, and we provide specific allowances for aged account balances. Revenue is recognized on an accrual basis for customers with doubtful accounts receivable. Our allowance for doubtful accounts receivable was $NIL as of March 31, 2015 and December 31, 2014.
Inventory
The determination of obsolete or excess inventory requires us to estimate the future demand for our products within specific time horizons, generally one year or less. If we experience a significant unexpected decrease in demand for our products or a higher occurrence of inventory obsolescence because of changes in technology or customer requirements, we could be required to increase our inventory provisions. Our inventory provision was approximately $14,000 and $177,000 for the three-month periods ended March 31, 2015 and 2014, respectively.
Gaming Equipment and Property and Equipment
As of March 31, 2015, we had gaming equipment and property and equipment of approximately $14.4 million, representing 31% of our total assets. We depreciate gaming equipment and property and equipment on the straight-line basis over their estimated useful lives. The estimated useful lives are based on the nature of the assets as well as current operating strategies and legal considerations such as contractual life. Future events, such as property expansions, property developments, trends in market demand, new competition, or technology obsolescence, could result in a change in the manner in which we use certain assets and require changes in the estimated useful lives of such assets.
For assets to be held and used, they are reviewed for impairment whenever indicators of impairment exist. If an indicator of impairment exists, we first group assets at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities (the “asset group”). Secondly, we estimate the undiscounted future cash flows that are directly associated with and expected to arise from the use and eventual disposition of such asset group. If the undiscounted cash flows exceed the carrying value, no impairment is indicated. If the undiscounted cash flows do not exceed the carrying value, then an impairment is measured based on fair value compared to carrying value, with fair value typically based on a discounted cash flow model.
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To estimate the undiscounted cash flows of an asset group, we consider potential cash flow scenarios based on management estimates given current conditions. Determining the recoverability of our asset groups is judgmental in nature and requires the use of significant estimates and assumptions, including estimated cash flows, growth rates and future market conditions, among others. Future changes to our estimates and assumptions based upon changes in macro-economic factors, regulatory environments, operating results or management’s intentions may result in future changes to the recoverability of our asset group.
Goodwill and Intangible Assets, including Casino Contracts
As of March 31, 2015, we had intangible assets, including goodwill and casino contracts of approximately $3.2 million, representing 7% of our total assets. Goodwill is not subject to amortization and is tested for impairment and recoverability annually or more frequently if events or circumstances indicate that the assets might be impaired. The impairment test consists of a comparison of its fair value with its carrying amount. If the carrying amount is not recoverable and exceeds its fair value, an impairment provision will be recognized in an amount equal to that excess. If its carrying amount does not exceed the fair value, no impairment is recognized.
Finite-lived intangible assets, including casino contracts are amortized on a straight-line basis over their estimated useful lives. The estimated useful lives are based on the nature of the assets as well as legal considerations such as contractual life. Future events, such as technology obsolescence could result in a change in the manner in which we use the assets and require a change in the estimated useful lives of such assets. Finite-lived intangible assets, including casino contracts are tested for impairment and recoverability when there are indicators of impairment. The impairment test consists of a comparison of its fair value with its carrying amount. If the carrying amount is not recoverable and exceeds its fair value, an impairment provision will be recognized in an amount equal to that excess. If its carrying amount does not exceed the fair value, no impairment is recognized.
As of March 31, 2015, we had casino contracts and a gaming operation agreement aggregating approximately $2.7 million, representing 82% of total intangible assets.
Stock-Based Compensation
We apply ASC 718, Compensation-Stock Compensation, to account for stock-based compensation. Under the fair value recognition provisions of ASC 718, we recognize stock-based compensation expenses for all service-based awards to employees and non-employee directors with graded vesting schedules on the straight-line basis over the requisite service period for the entire award. Estimates are revised if subsequent information indicates that forfeitures will differ from previous estimates, and the cumulative effect on compensation costs of a change in the estimated forfeitures is recognized in the period of the change. For non-employee awards, we remeasure compensation costs each period until the service condition is complete and recognize compensation costs on the straight-line basis over the requisite service period. Option valuation models require the input of highly subjective assumptions, and changes in the assumptions used can materially affect the fair value estimate. Judgment is required in estimating stock price volatility, forfeiture rates, expected dividends, and expected terms that options remain outstanding. For restricted stock awards with performance conditions, we evaluate if performance conditions are probable in each reporting period. The compensation expense of restricted awards is recognized ratably over the implicit service period if achieving performance conditions is probable. Initial accruals of compensation expense are based on the estimated number of shares for which requisite service is expected to be rendered.
Stock-based compensation expenses totaled approximately $30,000 and $71,000 for the three-month periods ended March 31, 2015 and 2014, respectively, in the accompanying consolidated statements of comprehensive income.
Income Taxes
We are subject to income taxes in the U.S. (including federal and state) and several foreign jurisdictions in which we operate. We record income taxes under the asset and liability method, whereby deferred tax assets and liabilities are recognized based on the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and attributable to operating loss and tax credit carryforwards. Accounting standards regarding income taxes requires a reduction of the carrying amounts of deferred tax assets by a valuation allowance, if based on the available evidence, it is “more-likely-than-not” that such assets will not be realized. Accordingly, the need to establish valuation allowances for deferred tax assets is assessed at each reporting period based on a “more-likely-than-not” realization threshold. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, the duration of statutory carryforward periods, our experience with operating loss and tax credit carryforwards not expiring, and implementation of tax planning strategies.
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We recorded a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized. Management will reassess the realization of deferred tax assets based on the applicable accounting standards for income taxes each reporting period and consider the scheduled reversal of deferred tax liabilities, sources of taxable income and tax planning strategies. To the extent that the financial results of these operations improve and it becomes “more-likely-than-not” that the deferred tax assets are realizable, we will be able to reduce the valuation allowance. For valuation allowance related to deferred tax assets generated prior to Quasi-Reorganization, which was effected on December 31, 2010, reductions in the valuation allowance will be recorded directly in equity.
Significant judgment is required in evaluating our tax positions and determining our provision for income taxes. During the ordinary course of business, there are many transactions for which the tax treatment is uncertain. Accounting standards regarding uncertainty in income taxes provides a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is “more-likely-than-not” that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely, based solely on the technical merits, of being sustained on examinations. We consider many factors when evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments and which may not accurately anticipate actual outcomes. We recognize interest and penalties, if any, related to unrecognized tax benefits in the provision of income taxes in the statements of comprehensive income.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet financing arrangements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures.
Our management, with the participation of our chief executive officer and chief accounting officer, has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934. Based on this evaluation, management concluded that our disclosure controls and procedures were effective as of March 31, 2015.
(b) Changes in Internal Control Over Financial Reporting.
There were no changes in our internal control over financial reporting that occurred during the three-month period ended March 31, 2015 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
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| Exhibit No. |
Description | Method of Filing | ||
| 3.1 | Certificate of Change filed with the Secretary of State of Nevada on February 25, 2015. | Incorporated by reference to the Registrant’s Current Report on Form 8-K dated February 26, 2015 | ||
| 31.1 | Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | Filed electronically herewith | ||
| 31.2 | Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | Filed electronically herewith | ||
| 32.1 | Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350). | Filed electronically herewith | ||
| 101.INS | XBRL Instance Document | Filed electronically herewith | ||
| 101.SCH | XBRL Taxonomy Extension Schema Document | Filed electronically herewith | ||
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | Filed electronically herewith | ||
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | Filed electronically herewith | ||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | Filed electronically herewith | ||
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | Filed electronically herewith |
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| ENTERTAINMENT GAMING ASIA INC. | |||
| (Registrant) | |||
| Date: | May 15, 2015 | By: | /s/ Clarence Chung |
| Clarence Chung | |||
| Its: | President and Chief Executive Officer | ||
| Date: | May 15, 2015 | By: | /s/ Andy Tsui |
| Andy Tsui | |||
| Its: | Chief Accounting Officer | ||
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