Entertainment Gaming Asia Inc. - FORM 10-Q

Attached files

file	filename
EX-32.1 - EXHIBIT 32.1 - Entertainment Gaming Asia Inc.	v465864_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - Entertainment Gaming Asia Inc.	v465864_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - Entertainment Gaming Asia Inc.	v465864_ex31-1.htm
EX-3.1 - EXHIBIT 3.1 - Entertainment Gaming Asia Inc.	v465864_ex3-1.htm

FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2017

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		(I.R.S. Employer
incorporation or organization)		Identification no.)

37/F, The Centrium

60 Wyndham Street

Central, Hong Kong SAR

(Address of principal executive offices, including zip code)

+ 852-2153-9454

(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 x		Smaller reporting company ¨
(Do not check if a smaller reporting company)

		Emerging Growth Company ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

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, 2017, 14,464,220 shares of common stock of Entertainment Gaming Asia Inc. were outstanding.

		Page

	PART I — FINANCIAL INFORMATION

Item 1.	Financial Statements	3

	Consolidated Balance Sheets	3

	Consolidated Statements of Comprehensive Loss	4

	Consolidated Statements of Cash Flows	5

	Notes to Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26

	Overview	26

	Results of Operations	29

	Liquidity and Capital Resources	33

	Critical Accounting Policies and Estimates	34

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	37

Item 4.	Controls and Procedures	37

	PART II — OTHER INFORMATION

Item 6.	Exhibits	38

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

ENTERTAINMENT GAMING ASIA INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(amounts in thousands, except per share data)

	March 31, 2017			December 31, 2016
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	31,705		$	33,599
Accounts receivable, net		126			128
Other receivables		1,079			1,051
Inventories		12			21
Prepaid expenses and other current assets		290			235
Total current assets		33,212			35,034

Gaming equipment, net		322			389
Property and equipment, net		892			915
Goodwill		312			315
Intangible assets, net		1,472			1,512
Deferred tax asset		59			59
Prepayments, deposits and other assets		1,209			1,204
Total assets	$	37,478		$	39,428

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	336		$	79
Amounts due to related parties		205			160
Accrued expenses		825			1,118
Income tax payable		197			161
Deferred revenue		17			2
Customer deposits and other current liabilities		73			54
Total current liabilities		1,653			1,574

Other liabilities		446			441
Deferred tax liability		5,654			5,654
Total liabilities		7,753			7,669
Commitments and contingencies

Stockholders’ equity:
Common stock, $.001 par value, 250,000,000 shares authorized; 14,464,220 shares issued and outstanding		14			14
Additional paid-in-capital		47,854			47,827
Accumulated other comprehensive income		565			585
Accumulated losses		(18,709	)		(16,668	)
Total EGT stockholders’ equity		29,724			31,758
Non-controlling interest		1			1
Total stockholders’ equity		29,725			31,759
Total liabilities and stockholders’ equity	$	37,478		$	39,428

The notes to consolidated financial statements are an integral part of these consolidated statements.

ENTERTAINMENT GAMING ASIA INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Loss

(amounts in thousands, except per share data)

(Unaudited)

	Three-Month Period Ended March 31,
	2017			2016 (1)
Revenues:
Gaming operations	$	379		$	604
Social gaming		37			—
Total revenues		416			604

Operating costs and expenses:
Cost of gaming operations
Gaming property and equipment depreciation		67			104
Casino contract amortization		—			93
Other gaming related intangibles amortization		—			63
Other operating costs		161			162
Cost of social gaming		143			—
Selling, general and administrative expenses (2)		1,805			758
Research and development expenses		215			397
Depreciation and amortization		22			24
Total operating costs and expenses		2,413			1,601

Loss from continuing operations		(1,997	)		(997	)

Other income/(expenses):
Interest income		61			2
Foreign currency (losses)/gains		(23	)		46
Other		3			4
Total other income		41			52

Loss from continuing operations before income tax		(1,956	)		(945	)

Income tax expenses		(37	)		(29	)

Net loss from continuing operations		(1,993	)		(974	)
Net loss from discontinued operations, net of tax (3)		(48	)		(501	)

Net loss attributable to EGT stockholders	$	(2,041	)	$	(1,475	)

Other comprehensive (loss)/income:
Foreign currency translation		(20	)		29
Total other comprehensive (loss)/income, net of tax		(20	)		29

Comprehensive loss attributable to EGT stockholders	$	(2,061	)	$	(1,446	)

Per share data (basic and diluted):
Loss	$	(0.14	)	$	(0.10	)
Loss from continuing operations	$	(0.14	)	$	(0.07	)
Loss from discontinued operations, net of tax	$	—		$	(0.03	)

Weighted average common shares outstanding:
Basic and diluted		14,464			14,460

The notes to consolidated financial statements are an integral part of these consolidated statements.

(1)

Amounts for the three-month period ended March 31, 2016 have been reclassified to conform to the current period presentation, including the impact of discontinued operations.

(2)

Amounts for the three-month periods ended March 31, 2017 and 2016 included related party services fees of approximately $102,000 and $64,000, respectively.

(3)

Amounts for the three-month periods ended March 31, 2017 and 2016 included related party sales of NIL and approximately $159,000 and related party services fees of NIL and approximately $63,000, respectively.

ENTERTAINMENT GAMING ASIA INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(amounts in thousands)

(Unaudited)

	Three-Month Period Ended March 31,
	2017			2016 (1)
Cash flows (used in)/provided by operating activities:
Net loss from continuing operations	$	(1,993	)	$	(974	)
Adjustments to reconcile net loss from continuing operations to net cash (used in)/provided by operating activities:
Foreign currency losses		—			17
Depreciation of gaming equipment and property and equipment		89			128
Amortization of casino contracts		—			93
Amortization of intangible assets		97			63
Stock-based compensation expenses		27			14
Changes in operating assets and liabilities:
Accounts receivable and other receivables		4			35
Inventories		9			(33	)
Prepaid expenses and other current assets		(86	)		(13	)
Prepayments, deposits and other assets		(7	)		(15	)
Accounts payable		258			28
Amounts due from/to related parties		45			(213	)
Accrued expenses and other liabilities		(118	)		(38	)
Income tax payable		37			13
Customer deposits and other current liabilities		28			—
Deferred revenue		15			—
Operating cash used in continuing operations		(1,595	)		(895	)
Operating cash (used in)/provided by discontinued operations		(229	)		1,311
Net cash (used in)/provided by operating activities		(1,824	)		416

Cash flows used in investing activities:
Purchases of property and equipment		(2	)		(11	)
Development/purchase of intangibles		(59	)		(334	)
Investing cash used in continuing operations		(61	)		(345	)
Investing cash used in discontinued operations		—			(36	)
Net cash used in investing activities		(61	)		(381	)

Effect of exchange rate changes on cash		(9	)		(31	)
(Decrease)/increase in cash and cash equivalents		(1,894	)		4
Cash and cash equivalents at beginning of period		33,599			30,681
Cash and cash equivalents at end of period	$	31,705		$	30,685

The notes to consolidated financial statements are an integral part of these consolidated statements.

(1)

Amounts for the three-month period ended March 31, 2016 have been reclassified to conform to the current period presentation, including the impact of discontinued operations.

ENTERTAINMENT GAMING ASIA INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

Note 1.

Description of Business and Significant Accounting Policies

The current business activities of the Company entail: (i) the owning and leasing of electronic gaming machines (EGMs) placed in gaming locations in the Philippines on a revenue-sharing (participation) basis with venue owners; and (ii) the development and testing of a social gaming platform and applications designed for the Pan-Asian markets.

During the three-month period ended March 31, 2016, the Company’s business activities included owning and leasing EGMs on a revenue-sharing (participation) and fixed-lease basis in Cambodia. These leasing contracts were terminated and the related assets were sold during the year ended December 31, 2016. Also during the three-month period ended March 31, 2016, the Company operated a gaming products business, which entailed the design, manufacture and distribution of gaming chips and plaques as well as the distribution of third-party gaming products. On May 11, 2016, the Company sold the principal assets of these operations and has exited this business. All related historical revenues and expenses for the Cambodia gaming operations and the gaming products business 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, 2016, filed with the SEC on April 11, 2017.

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 (or group of components) that either has been disposed of, or that is classified as held for sale, and represents a strategic shift that has (or will have) a major effect on the Company’s operations and financial results.

Non-current assets held for discontinued operations are carried at the lower of carrying amount or fair value less costs to sell. Any gain or loss from disposal of a business, together with the results of these operations until the date of disposal, is reported separately as discontinued operations. The financial information of discontinued operations is excluded from the respective captions in the Company’s consolidated statements of comprehensive loss and related notes for all periods presented.

Cash and Cash Equivalents

All highly-liquid instruments with original maturities of three months or less are considered cash equivalents. The Company places its cash and temporary investments with financial institutions. As of March 31, 2017, the Company had deposits with financial institutions in excess of Federal Deposit Insurance Corporation (FDIC) insured limits by approximately $31.5 million.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable are stated at face value less any allowances for doubtful accounts. Allowances for doubtful accounts are maintained at levels determined by Company management to adequately provide for uncollectible amounts. In determining the estimated uncollectable amounts, the Company evaluates a combination of factors, including, but not limited to, activity in the related market, financial condition of customers, specific customer collection experience and history of write-offs and collections. Interest income is imposed on overdue accounts receivable after the Company evaluates a combination of factors, including but not limited to, customer collection experiences, customer relationship and contract terms. Accounts receivable balances are written off after all collection efforts have been exhausted.

Inventories

Inventories are stated at the lower of cost, determined using the first-in, first-out method, or market. Cost elements included in work-in-process and finished goods include raw materials, direct labor and manufacturing overheads. There were no lower of cost or market (LCM) write-downs for the continuing operations for the three-month periods ended March 31, 2017 and 2016.

Long-Lived Assets

The Company accounts for impairment of long-lived assets in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (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, 2017 and 2016.

Prepayments, Deposits and Other Assets

Prepayments, deposits and other assets consist primarily of other receivables, rental and utilities and other deposits.

Gaming Equipment

Gaming equipment consists primarily of EGMs and systems. Gaming equipment is stated at cost. The Company depreciates new EGMs and systems over a five-year useful life and depreciates refurbished EGMs and systems over a three-year useful life once placed in service. Depreciation of gaming equipment of approximately $65,000 and $101,000 was included in cost of gaming operations for the continuing operations in the consolidated statements of comprehensive loss for the three-month periods ended March 31, 2017 and 2016, respectively. Depreciation of gaming equipment of NIL and approximately $324,000 was included in the net loss from discontinued operations in the consolidated statements of comprehensive loss for three-month periods ended March 31, 2017 and 2016, 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 six 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 costs and applicable portions of interest incurred for potential projects in property and equipment.

Depreciation of property and equipment of approximately $2,000 and $3,000 was included in cost of gaming operations for continuing operations in the consolidated statements of comprehensive loss for the three-month periods ended March 31, 2017 and 2016, respectively.

Depreciation of property and equipment of approximately $1,000 and $352,000 was included in the net loss from discontinued operations in the consolidated statements of comprehensive loss for three-month periods ended March 31, 2017 and 2016, respectively.

Goodwill and Intangible Assets, Including Casino Contracts

Intangible assets consist of patents, trademarks, technical know-how, a gaming operations agreement, casino contracts, capitalized software costs and goodwill. Intangible assets other than goodwill are amortized on the straight-line basis over the period of time the asset is expected to contribute directly or indirectly to future cash flows, which ranges from four to ten years. The straight-line amortization method is utilized because the Company believes there is no more reliably determinable method of reflecting the pattern for which the economic benefits of the intangible assets are consumed or otherwise used.

The Company capitalizes certain costs relating to software developed to solely meet the Company’s internal requirements and for which there are no substantive plans to market the software. These costs mainly include payroll and payroll-related costs for employees who are directly associated with and who devote time to the internal-use software projects during the application development stage until the software is substantially complete and ready for its intended use. Costs incurred prior to the criteria met for capitalization are expensed to research and development expenses as incurred. Management has committed resources to develop social gaming applications, and it is probable that these social gaming applications will be completed and the software will be used as intended. Such capitalized costs are amortized on the straight-line basis over the estimated useful life of the related assets.

Amortization expenses related to casino contracts for the Philippines gaming operations of NIL and approximately $93,000 were included in the cost of gaming operations for the continuing operations in the consolidated statements of comprehensive loss for the three-month periods ended March 31, 2017 and 2016, respectively. Amortization expenses related to other gaming related intangibles for the Philippines gaming operations of NIL and approximately $63,000 were included in the cost of gaming operations for the continuing operations in the consolidated statements of comprehensive loss for the three-month periods ended March 31, 2017 and 2016, respectively.

Amortization expenses related to internal-use software of approximately $97,000 for the three-month period ended March 31, 2017 were accounted as cost of social gaming operations in the consolidated statements of comprehensive loss. There were no amortization expenses related to internal-use software for the three-month period ended March 31, 2016.

Amortization expenses related to casino contracts for the discontinued Cambodia gaming operations were NIL and approximately $341,000 for the three-month periods ended March 31, 2017 and 2016, respectively. Amortization expenses related to technical know-how for the discontinued gaming product operations were NIL and approximately $6,000 for the three-month periods ended March 31, 2017 and 2016, respectively. Amortization expenses related to patents and trademarks for the discontinued gaming product operations were NIL and approximately $6,000 for the three-month periods ended March 31, 2017 and 2016, respectively. The amounts were accounted for in arriving at the net loss from discontinued operations in the consolidated statements of comprehensive loss.

The Company measures and tests finite-lived intangibles for impairment when there are indicators of impairment in accordance with ASC 360-10-05, Property, Plant and Equipment.

The Company measures and tests goodwill for impairment at least annually in accordance with ASC 350-10-05, Intangibles — Goodwill and Other.

The Company first assesses qualitative factors to determine whether it is necessary to perform the two-step goodwill impairment test. If determined to be necessary, the two-step impairment test shall be used to identify potential goodwill impairment. 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 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, 2017 and 2016.

Litigation and Other Contingencies

In the performance of its ordinary course of business operations, the Company is subject to risks of various legal matters, litigation and claims of various types. The Company has regular litigation reviews, including updates from corporate and outside counsel, to assess the need for accounting recognition or disclosure of these contingencies. See Note 16.

ASC 450, Contingencies, requires that liabilities for contingencies be recorded when it is probable that a liability has been incurred and that the amount can be reasonably estimated. Significant management judgment is required related to contingent liabilities and the outcome of litigation because both are difficult to predict. For a contingency for which an unfavorable outcome is reasonably possible and which is significant, the Company discloses the nature of the contingency and, when feasible, an estimate of the possible loss.

Revenue Recognition

The Company recognizes revenue when all of the following have been satisfied:

Persuasive evidence of an arrangement exists;

The price to the customer is fixed and determinable;

Delivery has occurred and any acceptance terms have been fulfilled;

No significant contractual obligations remain; and

Collection is reasonably assured.

Gaming Operations Revenue

The Company earns recurring gaming revenue from its gaming operations.

For gaming operations, the Company earns recurring revenue by providing customers with EGMs and casino management systems which track game performance and provide statistics on installed EGMs owned by the Company and leased to venue owners. Revenues are recognized on the contractual terms of the EGM agreements between the Company and the venue owners. During the reported periods, revenues were based on either the Company’s share of net winnings and reimbursement of expenses and commitment fees, or a fixed lease fee, which was applicable for one venue under the now discontinued Cambodia gaming operations for the period of March 1, 2016 through June 30, 2016.

Revenues are recognized as earned unless collection is not reasonably assured, in which case revenues are recognized when payment is received. All gaming operations revenues were recognized as earned for the three-month periods ended March 31, 2017 and 2016.

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 no commitment fee balances related to contract amendments as of March 31, 2017 and December 31, 2016.

Social Gaming

The Company is currently testing a social gaming platform and applications to derive revenue from the in-game sale of virtual coins that allows players to extend play time or accelerate their progress. The Company recognizes the sale of virtual coins over the estimated average playing period of paying players.

On a quarterly basis, the Company determines the estimated average playing period for paying players by game beginning at the time of a paying player’s first purchase in that game and ending on a date when that paying player is no longer playing the game. To determine which players are inactive, the Company analyzes the dates that each paying player last logged into that game.

The Company earns revenue through certain mobile platforms, including iOS and Android, and recognizes online game revenue based on the gross amount paid by the player because the Company is the primary obligor and has the contractual right to determine the price to be paid by the player. The Company records the related platform and payment processing fees as cost of revenue in the periods incurred.

Gaming Products Sales

For the discontinued gaming products business, the Company recognized revenue from the sale of its gaming products and accessories to end users upon shipment against customer contracts or purchase orders. In accordance with the criteria of ASC 605-45, Reporting Revenue Gross as a Principal versus Net as an Agent, the Company recognized gross revenue when it acted as a principal, had discretion to choose suppliers and establish selling prices, assumed credit risk and provided the products or services required in the transaction. If these criteria were not met, in which the supplier was the primary obligor in the arrangement and bears the general inventory risk, the Company recognized revenue net of related costs. The Company also recognized revenue for the maintenance services of gaming products on the straight-line basis over the contract term in accordance with ASC 605, Revenue Recognition.

Stock-Based Compensation

Under the fair value recognition provisions of ASC 718, Compensation-Stock Compensation, the Company recognizes stock-based compensation expenses for all service-based awards to employees and non-employee directors with graded vesting schedules on a pro rata 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 completed 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 $27,000 and $14,000 for the three-month periods ended March 31, 2017 and 2016, respectively, in the consolidated statements of comprehensive loss.

Research and Development

Research and development expenses are expensed as incurred. Employee-related costs associated with research and development and certain costs associated with the development of the social gaming platform and applications are included in research and development expenses. Research and development expenses for continuing operations were approximately $215,000 and $397,000 for the three-month periods ended March 31, 2017 and 2016, 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 exist:

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, 2017 and December 31, 2016.

Income Taxes

The Company is subject to income taxes in the United States (including federal and state) and several foreign jurisdictions in which it operates. Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax basis and are stated at enacted tax rates expected to be in effect when taxes are actually paid or recovered. ASC 740, Income Taxes, requires that deferred tax assets be evaluated for future realization and reduced by a valuation allowance to the extent the Company believes a portion will not be realized. The Company considers many factors when assessing the likelihood of future realization of its deferred tax assets, including its recent cumulative earnings experience and expectations of future taxable income by taxing jurisdiction, the carry-forward periods available to the Company for tax reporting purposes, and other relevant factors.

The Company accounts for uncertain tax positions in accordance with ASC 740, which contains a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely to be realized upon ultimate settlement. The Company considers many factors when evaluating and estimating its tax positions and tax benefits, which may require periodic adjustments and which may not accurately anticipate actual outcomes. The Company recognizes interest and penalties, if any, related to unrecognized tax benefits in the provision for income taxes in the consolidated statements of comprehensive loss.

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.

(Loss)/Earnings per Share

Basic (loss)/earnings per share are computed by dividing the reported net (loss)/earnings by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed by dividing the net (loss)/earnings by the weighted average number of shares of common stock and shares issuable from stock options and restricted shares during the period. The computation of diluted earnings per share excludes the impact of stock options and restricted shares that are anti-dilutive due to the stock options’ exercise price exceeding the Company’s stock price as of March 31, 2017. There were no differences in diluted loss per share from basic loss from continuing operations per share for the three-month periods ended March 31, 2017 and 2016 as the assumed exercise of common stock equivalents would have an anti-dilutive effect due to losses.

Foreign Currency Translations and Transactions

The functional currency of the Company’s international subsidiaries, except for its operations in Cambodia whose functional currency is also U.S. dollars, is generally the local currency. For these subsidiaries, the Company translates the assets and liabilities at exchange rates in effect at the balance sheet date and income and expense accounts at average exchange rates during the period. Resulting currency translation adjustments are recorded directly to accumulated other comprehensive income within stockholders’ equity. Gains and losses resulting from transactions in non-functional currencies are recorded in the consolidated statements of comprehensive loss.

Below is a summary of closing exchange rates as of March 31, 2017 and December 31, 2016 and average exchange rates for the three-month periods ended March 31, 2017 and 2016.

(US$1 to foreign currency)	March 31, 2017		December 31, 2016
Australian dollar		1.31		1.39
Hong Kong dollar		7.77		7.75
Philippine peso		50.19		49.81
Thai baht		34.34		35.26

	Three-Month Period Ended March 31,
(US$1 to foreign currency)	2017		2016
Australian dollar		1.32		1.33
Hong Kong dollar		7.76		7.76
Philippine peso		49.99		46.72
Thai baht		35.20		35.20

Fair Value Measurement

Fair value is defined under ASC 820, Fair Value Measurements and Disclosures, as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under ASC 820 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard establishes a fair value hierarchy based on three levels of input, of which the first two are considered observable and the last unobservable.

Level 1 — Quoted prices in active markets for identical assets or liabilities. These are typically obtained from real-time quotes for transactions in active exchange markets involving identical assets.

Level 2 — Input, other than quoted prices included within Level 1, which are observable for the asset or liability, either directly or indirectly. These are typically obtained from readily-available pricing sources for comparable instruments.

Level 3 — Unobservable input, where there is little or no market activity for the asset or liability. This input reflects the reporting entity’s own assumptions of the data that participants would use in pricing the asset or liability, based on the best information available under the circumstances.

As of March 31, 2017, the fair values of financial assets and liabilities approximate carrying values due to the short maturity of these items.

Defined Benefit Pension Plan

The Company provides pension benefits to all regular full-time employees in the Philippines through a defined benefit plan. A defined benefit plan is a pension plan that defines an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and salary.

The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high quality corporate bonds that are denominated in the currency in which the benefits will be paid and that have terms to maturity approximating to the terms of the related pension liability.

The accounting guidance related to employers’ accounting for defined benefit pension plan requires recognition in the balance sheet of the present value of the defined benefit obligation at the reporting date, together with adjustments for unrecognized actuarial gains or losses and past service costs or credits in other comprehensive loss.

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, 2017 and 2016.

Asset Retirement Obligations

Asset retirement obligations are legal obligations associated with the retirement of long-lived assets resulting from the acquisition, construction, development and/or normal use of the underlying assets. Recognition of a liability for an asset retirement obligation is required in the period in which it is incurred at its estimated fair value. The associated asset retirement costs are capitalized as part of the carrying amount of the underlying asset and depreciated over the estimated useful life of the asset. The liability is accreted through charges to operating expenses. If the asset retirement obligation is settled for other than the carrying amount of the liability, the Company recognizes a gain or loss on settlement.

The Company records all asset retirement obligations for which it has legal obligations to remove all installation work and reinstate the manufacturing facilities to its original state at its estimated fair value. For the three-month periods ended March 31, 2017 and 2016, the Company had no asset retirement obligation operating costs related to accretion of the liabilities.

Customer Loyalty Program

The Company offers a loyalty program for its social casino gaming platform, which enables players to redeem accumulated points for reward items. Players can redeem experience points from game time play for incentives, for example, food and beverage, rooms and entertainment at casino resort properties. The Company accrues for loyalty program points expected to be redeemed for free goods and services as marketing expense. The accruals are based on management’s estimates and assumptions regarding the estimated costs of providing those benefits and the actual redemption rates in each country, less an estimate for points not expected to be redeemed.

Recent Accounting Pronouncements

In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which intends to improve the recognition and measurement of financial instruments. The ASU will be effective for fiscal years and interim periods within those years beginning after December 15, 2017. The Company is currently assessing the potential impact of this ASU on its consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) – Accounting for Leases, which changes the accounting for leases, including a requirement to record all leases on the balance sheet as assets and liabilities. This update is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the impact of adopting the new leases standard on its consolidated financial statements.

In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers – Principal versus Agent Considerations, which intends to clarify the implementation guidance on principal versus agent considerations. The effective date for this ASU is the same as the effective date for ASU 2014-09, “Revenue from Contracts with Customers”. The Company is currently assessing the potential impact of this ASU on its consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation: Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for employee share-based payment transactions including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The standard is effective for interim and annual reporting periods beginning after December 15, 2016, although early adoption is permitted. The Company does not expect the impact of the adoption of this ASU to be material to its consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows – Classification of Certain Cash Receipts and Cash Payments, which attempts to reduce the existing diversity in practice with respect to reporting the following eight specific cash flow issues: debt prepayment or debt extinguishment costs; settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies (including bank-owned life insurance policies); distributions received from equity method investees; beneficial interests in securitization transactions; and separately identifiable cash flows and application of the predominance principle. This guidance will be effective for the Company on January 1, 2018. The Company is currently assessing the potential impact of this ASU on its consolidated financial statements.

In December 2016, the FASB issued ASU 2016-20, Technical Corrections and Improvements to Topic 606 – Revenue from Contracts with Customers, which amends certain narrow aspects of the guidance issued in ASU 2014-09, Revenue from Contracts with Customers, including guidance related to the disclosure of remaining performance obligations and prior-period performance obligations, as well as other amendments to the guidance on loan guarantee fees, contract costs, refund liabilities, advertising costs and the clarification of certain examples. The Company is currently assessing the potential impact of this ASU on its consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other – Simplifying the Test for Goodwill Impairment, which eliminates Step two from the goodwill impairment test. Instead, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. This ASU is effective for an entity’s annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not expect the impact of the adoption of this ASU to be material to its consolidated financial statements.

Note 2.

Segments

The Company presently conducts business under two operating segments: (i) gaming operations, which include the leasing of its owned EGMs on a revenue-sharing (participation) basis; and (ii) social gaming, which includes the development and testing of a social gaming platform and applications designed for the Pan-Asian markets. The chief operating decision-maker reviews its operations by these two operating segments.

During the reported periods, the Company’s business activities included gaming operations in Cambodia involving the leasing of its owned EGMs on both a revenue-sharing and fixed lease basis. In addition, the Company operated a gaming products business, which entailed the design, manufacture and distribution of gaming chips and plaques as well as the distribution of third-party gaming products. In a series of transactions during the year ended December 31, 2016, the Company sold all the assets associated with its Cambodia gaming operations and, by December 31, 2016, had exited its Cambodia gaming operations. The Company sold the principal assets of its gaming products operations on May 11, 2016 and thereby exited this business.

All related historical revenues and expenses for the Cambodia gaming operations and gaming products business 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.

The following table presents the financial information for each of the Company’s continuing operating segments.

	Three-Month Period Ended March 31,
(amounts in thousands)	2017			2016 (1)
	(Unaudited)			(Unaudited)
Revenues:
Gaming operations	$	379		$	604
Social gaming		37			—
Total revenues	$	416		$	604

Operating (loss)/income:
Gaming operations	$	151		$	182
Social gaming		(321	)		(397	)
Corporate and other operating costs and expenses		(1,827	)		(782	)
Total operating loss	$	(1,997	)	$	(997	)

Depreciation and amortization:
Gaming operations	$	67		$	260
Social gaming		104			—
Corporate		15			24
Total depreciation and amortization	$	186		$	284

(1)

Amounts for the three-month period ended March 31, 2016 have been reclassified to conform to the current period presentation, including the impact of discontinued operations.

Geographic segment revenues of the Company’s continuing operations segments for the three-month periods ended March 31, 2017 and 2016 are as follows:

	Three-Month Period Ended March 31,
(amounts in thousands)	2017		2016 (1)
	(Unaudited)		(Unaudited)
Philippines		404		604
Others		12		—
Total	$	416	$	604

(1)

Amounts for the three-month period ended March 31, 2016 have been reclassified to conform to the current period presentation, including the impact of discontinued operations.

For the three-month periods ended March 31, 2017 and 2016, the largest customer for gaming operations represented approximately 63% and 43%, respectively, of total gaming operations revenue.

Note 3.

Inventories

Inventories consisted of the following:

(amounts in thousands)	March 31, 2017		December 31, 2016
	(Unaudited)
Spare parts	$	12	$	21
Total	$	12	$	21

Note 4.

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consisted of the following:

(amounts in thousands)	March 31, 2017		December 31, 2016
	(Unaudited)
Prepayments	$	171	$	49
Prepaid insurance		119		186
Total	$	290	$	235

Note 5.

Receivables

Accounts and other receivables consisted of the following:

(amounts in thousands)	March 31, 2017		December 31, 2016
	(Unaudited)
Trade receivables	$	126	$	135
Other receivables (1)		1,079		1,051
		1,205		1,186
Less: allowance for doubtful accounts		—		(7	)
Net	$	1,205	$	1,179

(1)

As of March 31, 2017 and December 31, 2016, other receivables included approximately $1.0 million in payments due within one year from the sale of the Company’s gaming products operations assets on May 11, 2016. The non-current balance of the future payments receivable is included in prepayments, deposits and other assets. See Note 9.

Note 6.

Gaming Equipment

Gaming equipment is stated at cost. The major categories of gaming equipment and accumulated depreciation consisted of the following:

(amounts in thousands)	Useful Life (years)	March 31, 2017			December 31, 2016
		(Unaudited)
EGMs	3-5	$	3,518		$	3,722
Systems	5		972			979
			4,490			4,701
Less: accumulated depreciation			(4,168	)		(4,312	)
Net carrying value		$	322		$	389

Depreciation expense of gaming equipment of approximately $65,000 and $101,000 was included in cost of gaming operations for continuing operations in the consolidated statements of comprehensive loss for the three-month periods ended March 31, 2017 and 2016, respectively.

Depreciation expense of gaming equipment of NIL and approximately $324,000 was included in the net loss from discontinued operations in the consolidated statements of comprehensive loss for the three-month periods ended March 31, 2017 and 2016, respectively.

Note 7.

Property and Equipment

Property and equipment are stated at cost. The major categories of property and equipment and accumulated depreciation consisted of the following:

(amounts in thousands)	Useful Life (years)	March 31, 2017			December 31, 2016
		(Unaudited)
Equipment, vehicles, furniture and fixtures	3-5	$	607		$	606
Land and building	5		797			797
Leasehold improvements	1-6		45			45
			1,449			1,448
Less: accumulated depreciation			(557	)		(533	)
Net carrying value		$	892		$	915

Depreciation expense of property and equipment of approximately $2,000 and $3,000 was included in cost of gaming operations for the continuing operations in the consolidated statements of comprehensive loss for the three-month periods ended March 31, 2017 and 2016, respectively.

Depreciation expense of property and equipment of approximately $1,000 and $352,000 was included in the net loss from discontinued operations in the consolidated statements of comprehensive loss for three-month periods ended March 31, 2017 and 2016, respectively.

Note 8.

Goodwill and Intangible Assets, including Casino Contracts

Goodwill and intangible assets are stated at cost. The major categories of goodwill and intangible assets and accumulated amortization consisted of the following:

(amounts in thousands)	Useful Life (years)	March 31, 2017			December 31, 2016
		(Unaudited)
Gaming operation agreement	4-5	$	1,164		$	1,166
Less: accumulated amortization			(1,164	)		(1,166	)
			—			—

Goodwill	N/A		312			315

Casino contracts	5-6		1,927			1,942
Less: accumulated amortization			(1,927	)		(1,942	)
			—			—

Internal-use software (1)	4		1,730			1,673
Less: accumulated amortization			(258	)		(161	)
			1,472			1,512
Net carrying value		$	1,784		$	1,827

(1)

Internal-use software relates to the development of the social gaming platform and applications.

Amortization expense for finite-lived intangible assets of NIL and approximately $156,000 was included in cost of gaming operations for the continuing operations in the consolidated statements of comprehensive loss for the three-month periods ended March 31, 2017 and 2016, respectively.

Amortization expense for internal-use software of approximately $97,000 was included in the cost of social gaming in the consolidated statements of comprehensive loss for the three-month period ended March 31, 2017. There was no amortization expense for internal-use software for the three-month period ended March 31, 2016.

Goodwill movements during the periods consisted of the following:

(amounts in thousands)	2017			2016
	(Unaudited)
Balance as of January 1	$	315		$	332
Foreign currency translation adjustment		(3	)		(17	)
Balance as of March 31/December 31	$	312		$	315

Note 9.

Prepayments, Deposits and Other Assets

Prepayments, deposits and other assets consisted of the following:

(amounts in thousands)	March 31, 2017		December 31, 2016
	(Unaudited)
Rentals, utilities and other deposits	$	233	$	228
Other receivables (1)		976		976
Total	$	1,209	$	1,204

(1)

Other receivables as of March 31, 2017 and December 31, 2016 included approximately $976,000 in payments due in more than one year from the sale of the gaming products assets. The current balance of the future payments receivable is included under receivables. See Note 5.

Note 10.

Accrued Expenses

Accrued expenses consisted of the following:

(amounts in thousands)	March 31, 2017		December 31, 2016
	(Unaudited)
Payroll and related costs	$	255	$	323
Professional fees		151		243
Other tax expenses		294		266
Other expenses		125		286
Total	$	825	$	1,118

Note 11.

Other Liabilities

Other liabilities consisted of the following:

(amounts in thousands)	March 31, 2017		December 31, 2016
	(Unaudited)
Other tax liabilities	$	423	$	418
Other		23		23
Total	$	446	$	441

Note 12.

Stock-Based Compensation

At the annual shareholders meeting held on September 8, 2008, 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 these plans on December 31, 2008.

On July 18, 2016, the Company’s shareholders approved a new 2016 Stock Incentive Plan. The 2016 plan was amended and restated the 2008 plan to bring it in alignment with the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited. The Company’s equity incentive plans are subject to the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited as a result of becoming an indirect majority-owned subsidiary of Melco International Development Limited, a company listed on the main board of the Hong Kong Stock Exchange.

The 2016 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 2016 plan is 1,250,000 shares. The exercise price of options granted under the 2016 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.

Pursuant to shareholder approval of the 2016 plan, the Company implemented a voluntary stock option exchange program for its employees, directors and certain others, or the participants. The stock option exchange program had been approved by the board of directors on April 29, 2016 and was approved by shareholders on July 18, 2016.

Under the terms of the stock option exchange program, the participants had the opportunity to cancel their existing underwater outstanding stock options (i.e., options with exercise prices that are higher than the current market trading price of the Company’s common stock) in exchange for a replacement option grant for an equal number of shares. The replacement options have an exercise price of $1.94, which is based on the higher of: (i) 100% of the fair market value of the Company’s common stock on the board approval date and (ii) 100% of the average fair market value of one share of the Company’s common stock for the five business days immediately preceding the board approval date.

The replacement options have a ten-year term from the board of directors’ approval date and are subject to a new vesting schedule. They will vest over three years, vesting 50% on the first anniversary and 25% on each of the second and third anniversaries of the approval date, subject to the participants remaining continuously in service with the Company, except in the case of replacement options issued to non-employee directors which will continue to vest after the termination of their service to the Company.

The compensation expense resulted from the exchange program and is recognized in accordance with ASC 718 Compensation-Stock Compensation. As a result of the option exchange, the Company expects to incur approximately $147,000 in non-cash compensation expense attributable to the incremental fair value of the replacement options granted to the participants, measured as of the date such awards were granted. The incremental compensation expense associated with the replacement options will be recognized over the expected life of the replacement options.

In the three-month period ended March 31, 2017, there were no grants of stock options or restricted stock awards and no exercises of outstanding stock options.

Under the previous 1999 plans, a total of 956,250 shares were authorized, of which 937,500 shares were under the Amended and Restated 1999 Stock Option Plan and 18,750 shares were under the Amended and Restated 1999 Directors’ Stock Option Plan. While these previous plans expired on December 31, 2008, options granted and outstanding under them as of the date of expiration remain outstanding and subject to termination according to the previous plans terms.

As of March 31, 2017, stock options for the purchase of 70,314 shares and 1,563 shares of common stock were outstanding in relation to the Amended and Restated 1999 Stock Option Plan and the Amended and Restated 1999 Director’s Stock Option Plan, respectively.

As of March 31, 2017, stock options for the purchase of 186,339 shares and 459,155 shares of common stock were outstanding in relation to the 2008 and 2016 plans, respectively.

As of March 31, 2017, stock options for the purchase of 258,216 shares of common stock were exercisable with a weighted average exercise price of $8.56, a weighted average fair value of $3.37 and an aggregate intrinsic value of approximately $22,000 under all plans. The total fair value of shares vested during the three-month period ended March 31, 2017 was NIL. As of March 31, 2017, an aggregate of 459,155 options granted under all plans was subject to vesting with a total compensation cost of approximately $78,000. The amount is expected to be recognized over 2.12 years.

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, 2016		718,934		$	4.40		6.85	$	6
Granted		—			—		—		—
Exercised		—			—		—		—
Forfeited or expired		(1,563	)		38.77		—		—
Outstanding as of March 31, 2017		717,371			4.32		6.62		22
Exercisable as of March 31, 2017		258,216		$	8.56		2.24	$	22

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 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, 2017 and 2016.

	Three-Month Period Ended March 31,
	2017						2016
Range of values:	Low			High			Low			High
Expected volatility		88.12	%		88.77	%		81.78	%		87.26	%
Expected dividends		—			—			—			—
Expected term (in years)		4.78			9.24			4.78			7.11
Risk free rate		1.84	%		2.37	%		1.17	%		1.69	%

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 a pro rata 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 a pro rata basis over the requisite service period.

The Company estimates forfeitures and recognizes compensation cost only for those awards expected to vest assuming all awards would vest and reverse recognized compensation cost for forfeited awards when the awards are actually forfeited.

For awards with service conditions and graded vesting that were granted prior to the adoption of ASC 718, the Company estimates the requisite service period and the number of shares expected to vest, and recognizes compensation expense for each tranche on the straight-line basis over the estimated requisite service period.

Note 13.

Related Party Transactions

Significant revenues, purchases and expenses arising from transactions with related parties consisted of the following:

	Three-Month Period Ended March 31,
(amounts in thousands)	2017		2016
	(Unaudited)		(Unaudited)
Related party transactions provided to:
MCE Leisure (Philippines) Corporation
Sales of gaming products	$	—	$	159

Related party transactions provided by:
Melco Services Limited
Other (1)	$	102	$	64

Golden Future (Management Services) Limited
Management services	$	—	$	63

(1)

The amounts for the three-month periods ended March 31, 2017 and 2016 included fees paid to Melco Services Limited under a management services agreement, which was effective as of January 1, 2015.

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 51.3% of Melco Resorts & Entertainment Limited (formerly known as Melco Crown Entertainment Limited), which owns 90% of Melco Crown (Macau) Limited and 72.8% of MCE Leisure (Philippines) Corporation.

Golden Future (Management Services) Limited is a wholly-owned subsidiary of Melco Crown (Macau) Limited.

Note 14.

Income Taxes

The Company recorded income tax expenses for continuing operations of approximately $37,000 and $29,000 for the three-month periods ended March 31, 2017 and 2016, respectively. The Company’s effective income tax rates were (1.9)% and (3.1)% for the three-month periods ended March 31, 2017 and 2016, respectively. The change in effective tax rate was mainly due to the overall increase in pre-tax loss from continuing operations for the three-month period ended March 31, 2017 compared to the prior year period.

The Company is subject to income tax examinations by tax authorities in jurisdictions in which it operates. The Company’s 2014 to 2016 United States income tax returns remain open to examination by the Internal Revenue Service. The Company’s 2014 to 2016 Cambodian income tax returns remain open to examination by the General Department of Taxation. The Company’s 2013 to 2016 Philippines income tax returns remain open to examination by the Philippines Bureau of Internal Revenue. The Company’s 2010 to 2016 Hong Kong income tax returns remain open to examination by the Hong Kong Inland Revenue Department.

Note 15.

Discontinued Operations

During the reported periods, the Company’s business activities included discontinued gaming operations in Cambodia on both a revenue-sharing and fixed lease basis and the operation of a gaming products business, which entailed the design, manufacture and distribution of gaming chips and plaques as well as the distribution of third-party gaming products.

Discontinued Cambodia Gaming Operations

During the year ended December 31, 2016, the Company terminated its two EGM participation agreements and one EGM leasing agreement in Cambodia and exited its Cambodia gaming operations. Concurrent with the termination of the agreements, the Company sold all of its EGMs and gaming equipment in Cambodia in three separate transactions as set out below.

On July 6, 2016, the Company terminated its most recent EGM leasing agreement with NagaWorld Limited effective June 30, 2016 and agreed to sell to a third-party in Cambodia all of its 670 EGM seats placed at NagaWorld’s casino for cash proceeds of $2.5 million. The purchase price was paid in full and the transaction closed on July 6, 2016. The Company had placed EGMs in NagaWorld on a participation basis from January 2009 to February 2016 and had leased EGMs on a fixed lease basis from March 2016 to June 2016. NagaWorld had been a primary contributor to the Company’s operating results and cash flows.

On October 31, 2016, the Company terminated its machine operation and participation agreement with Thansur Bokor in Cambodia and sold all of its 71 EGM seats placed there to the casino owner for cash proceeds of $250,000. The purchase price was paid in full and the transaction closed on October 27, 2016. The Company had placed EGMs on participation basis in Thansur Bokor since May 2012.

On December 21, 2016, the Company terminated its machine operation and participation agreement with the venue and land owners of Dreamworld Club (Poipet) in Cambodia effective December 1, 2016. Pursuant to the machine operation and participation agreement, the ownership of the Dreamworld Club (Poipet) building structure, which was constructed and paid for by the Company on the property of the venue owner of Dreamworld Club (Poipet), reverted to the venue owner upon termination of the agreement. Also on December 21, 2016, the Company agreed to sell its 278 EGM seats placed in Dreamworld Club (Poipet) as well as the 72 EGM seats held in storage and the gaming equipment spare parts and accessories in Cambodia, to the venue owner of Dreamworld Club (Poipet) for cash proceeds of $900,000. The proceeds from the sale were received in full and the transaction closed on December 23, 2016. The Company had placed EGMs on a participation basis in Dreamworld Club (Poipet) since May 2012.

The following table details selected financial information for the discontinued Cambodia gaming operations in the consolidated statements of comprehensive loss.

	Three-Month Period Ended March 31,
(amounts in thousands)	2017			2016
	(Unaudited)			(Unaudited)
Revenues from gaming operations	$	—		$	3,246
Cost of gaming operations		—			(1,953	)
Selling, general and administrative expenses		(51	)		(374	)
Foreign currency exchange gains		7			8
Depreciation and amortization		(1	)		(8	)
Other income		—			1
(Loss)/income from discontinued Cambodia gaming operations, net of tax	$	(45	)	$	920

Discontinued Gaming Products

On May 11, 2016, the Company entered into an asset purchase agreement pursuant to which it sold the principal assets dedicated to the design, manufacture and distribution of chips, plaques and layouts for gaming tables to Gaming Partners International Corporation (GPIC). The transaction under the agreement closed on May 11, 2016.

Under the terms of the agreement, the Company sold to GPIC certain assets of its gaming products business, including fixed assets, raw materials and inventory and intellectual property, for cash consideration of approximately $5.9 million. The consideration includes a purchase price of approximately $5.4 million and $530,000 for restrictive covenants related to a non-compete arrangement given by the Company and Mr. Clarence Chung. The purchase price will be paid out in installments over a 24-month period after closing, with approximately $3.2 million paid at closing and approximately $1.1 million to be paid on each of the first two anniversaries of the closing. Payment related to the restrictive covenants was paid after closing. GPIC also paid to the Company after closing an amount equal to four months’ rental for its factory subject to a cap of $260,000 and a fixed sum of $520,000 for costs related to the termination of the gaming products business employees.

In addition, GPIC will make earn-out payments to the Company. These earn-out payments include: 3% of net revenue on certain sales to specific Asian-based casinos over the next five years subject to a cap of a total of $500 million of net revenue; and 15% of net revenues on sales to the Company’s related party casinos for an indefinite time period for the first $10 million of net revenue and, in addition, 3% of net revenue from these related party casino sales over the next five years subject to a cap of $30 million of net revenue. The Company shall only be entitled to earn-out payments in excess of $900,000.

The agreement includes customary representations, warranties and covenants by the Company and GPIC, including each party’s agreement to indemnify the other against certain claims or losses resulting from certain breaches of representations, warranties or covenants under the agreement and third-party claims arising before and after the close. The asset sale represents our exit from the business of design, manufacture and distribution of chips, plaques and layouts for gaming tables and, as part of the transaction, the Company has agreed with GPIC not to engage in the manufacture of gaming chips, plaques, jetons, playing cards and layouts for gaming tables in competition with GPIC.

In connection with the close of the transaction under the agreement, the Company’s wholly-owned subsidiary, DPD Limited, formerly known as Dolphin Products Limited, and GPIC settled and released each other of all claims relating to the civil actions instituted by GPIC against DPD in the High Court of the Hong Kong Special Administrative Region in December 2015.

The following table details selected financial information for the discontinued gaming products operations in the consolidated statements of comprehensive loss.

	Three-Month Period Ended March 31,
(amounts in thousands)	2017			2016
	(Unaudited)			(Unaudited)
Revenues from gaming products	$	—		$	1,305
Cost of gaming products		—			(1,761	)
Selling, general and administrative expenses (1)		(2	)		(918	)
Research and development expenses		—			(50	)
Foreign currency exchange (losses)/gains		(1	)		18
Depreciation and amortization		—			(20	)
Other income		—			5
Loss from discontinued gaming products operations, net of tax	$	(3	)	$	(1,421	)

(1)

For the three-month period ended March 31, 2016, the Company incurred approximately $648,000 in legal fees related to DPD Limited, formerly known as Dolphin Products Limited.

Note 16.

Commitments and Contingencies

Legal Matters

Gaming Partners International Corporation Litigation

On December 21, 2015, Gaming Partners International Corporation (GPIC) commenced a legal action in the High Court of the Hong Kong Special Administrative Region against DPD Limited, formerly known as Dolphin Products Limited (DPD), the Company’s wholly-owned subsidiary.

On May 11, 2016, GPIC agreed to irrevocably withdraw, terminate and discontinue the legal action mentioned above. On the same date, we agreed to sell substantially all the principal assets of DPD to GPIC and to discontinue DPD’s business of designing, manufacturing and distributing gaming chips and plaques and distributing third-party table game products.

Note 17.

Loss Per Share

Computation of the basic and diluted loss per share from continuing operations consisted of the following:

	Three-Month Period Ended March 31,
	2017								2016 (2)
	(Unaudited)								(Unaudited)
(amounts in thousands, except per share data)	Loss			Number of Shares		Per Share Amount			Loss			Number of Shares		Per Share Amount
Basic
Net loss attributable to equity shareholders	$	(1,993	)		14,464	$	(0.14	)	$	(974	)		14,460	$	(0.07	)
Effect of dilutive securities
Dilutive stock options/restricted shares (1)					—								—
Diluted
Net loss attributable to equity shareholders plus assumed conversion	$	(1,993	)		14,464	$	(0.14	)	$	(974	)		14,460	$	(0.07	)

(1)

For the three-month periods ended March 31, 2017 and 2016, there were no differences in diluted loss per share from basic loss from continuing operations per share as the assumed exercise of common stock equivalents would have an anti-dilutive effect due to losses.

(2)

Amounts for the three-month period ended March 31, 2016 have been reclassified to conform to the current period presentation, including the impact of discontinued operations.

For the three-month periods ended March 31, 2017 and 2016, outstanding stock options of 709,404 and 743,630, respectively, shares of common stock were excluded from the calculation of diluted losses 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)	2017		2016
	(Unaudited)
Balance as of January 1	$	23	$	23
Service cost		—		5
Interest cost		—		1
Actuarial gain and others		—		(6	)
Balance as of March 31/December 31	$	23	$	23

Note 19.

Asset Retirement Obligations

Reconciliations of the carrying amounts of the Company’s asset retirement obligations consisted of the following:

(amounts in thousands)	2017		2016
	(Unaudited)
Balance as of January 1	$	—	$	99
Reduction		—		(99	)
Accretion expense		—		—
Balance as of March 31/December 31	$	—	$	—

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, 2016	$	90		$	619		$	709
Current period other comprehensive loss		(5	)		(119	)		(124	)
Balances as of December 31, 2016		85			500			585
Current period other comprehensive loss		—			(20	)		(20	)
Balances as of March 31, 2017 (Unaudited)	$	85		$	480		$	565

Note 21.

Subsequent Events

On May 3, 2017, the Company entered into a non-binding memorandum of understanding to sell its remaining operating assets in the Philippines for cash consideration of approximately $1.9 million, which would provide the Company an estimated pre-tax gain on disposal of approximately $1.3 million. Subject to final contract negotiations and due diligence, the sale is expected to close within the second quarter of 2017. However, there can be no assurance that the Company can conclude the sale for the aforementioned terms, if at all.

On May 5, 2017, Melco International Development Limited, the Company’s indirect majority shareholder, submitted a preliminary non-binding proposal to the board of directors of the Company to acquire all of the outstanding common stock not already owned by Melco’s wholly-owned subsidiary, EGT Entertainment or its affiliates, for $2.35 per share, in cash via tender offer.

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, 2016, filed with the SEC on April 11, 2017 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, 2016 filed with the SEC on April 11, 2017.

During the reported periods, we owned or had rights to certain trademarks that we used in connection with our discontinued gaming products operations, including, but not limited to Dolphin™.

Overview

This discussion is intended to provide the reader with information that will assist in understanding our financial statements, the changes in certain key items in those financial statements from year to year, and the primary factors that accounted for those changes, as well as how certain accounting principles affect our financial statements. The discussion also provides information about the financial results of the various segments of our business to provide a better understanding of how those segments and their results affect our financial condition and results of operations as a whole. This discussion should be read in conjunction with our consolidated financial statements and accompanying notes as of and for the three-month periods ended March 31, 2017 and 2016 included elsewhere in this report.

We primarily generate revenue from continuing operations through the leasing of our owned electronic gaming machines (EGMs) in the Philippines. In addition to the gaming operations in the Philippines, in 2015, we commenced operations to develop a social gaming platform and applications specifically designed for the Pan-Asian markets. We began initial testing of the first application in the third quarter of 2016. The application remains in the testing phase as of the date of this report and has generated minimal revenue. Our consolidated revenue from continuing operations for the three-month periods ended March 31, 2017 and 2016 was approximately $416,000 and $604,000, respectively.

During the year ended December 31, 2016, we disposed all of our gaming assets in Cambodia, certain gaming assets in the Philippines and the principal assets of the gaming products business. These sales have provided cash proceeds of approximately $10.3 million and the potential for earn-outs on certain gaming chip and plaque sales related to the now discontinued gaming products business. To date, we have received approximately $9.2 million of the sales proceeds and no earn-outs on gaming chip and plaque sales.

In May 2016, we sold the principal assets of the gaming products operations, which comprised the manufacture and sale of gaming chips and plaques and the distribution of third-party gaming products mainly in Asia and Australia, and exited this business. Cash consideration for the sale was approximately $5.9 million plus the potential for earn-outs on future gaming chip and plaque orders to specified customers and subject to certain restrictions.

On June 30, 2016, our EGM leasing agreement with NagaWorld in Cambodia terminated and the machine operation and participation agreement with Leisure World VIP Slot Club in the Philippines expired. Immediately following in July 2016, we sold the related gaming machine assets in these venues. The cash proceeds were $2.5 million for the sale of EGMs placed in NagaWorld and $750,000 for the EGMs placed in Leisure World.

In October 2016, we terminated our EGM machine operation and participation agreement with Thansur Bokor in Cambodia and sold the EGMs placed there for cash proceeds of $250,000.

In December 2016, we terminated the Dreamworld Club (Poipet) EGM machine operation and participation agreement and sold our remaining gaming assets in Cambodia, including our EGMs placed in Dreamworld Club (Poipet) as well as our EGMs held in storage and gaming equipment spare parts and accessories in Cambodia, to the venue owner of Dreamworld Club (Poipet) for cash proceeds of $900,000.

Gaming Operations

Our gaming operations currently comprise the slot participation business of our owned EGMs in the Philippines. As of March 31, 2017, we had a total of 413 EGM seats in operation in two venues.

In the Philippines, our gaming operations are located in the greater Manila area. Our share of the net win per unit per day ranges from 16% to 35%. On June 30, 2016, one of our EGM operation and participation contracts in the Philippines expired and, on July 4, 2016, we sold all 154 EGM seats placed there to the venue owner. Our operations in the two remaining venues expire on June 30, 2017 and December 31, 2017, respectively.

Social Gaming

In the second half of 2015, we commenced the development of a social gaming platform and a free-to-play, mobile social casino gaming application called City of Games designed specifically for the Pan-Asian markets, excluding Mainland China. City of Games content currently comprises two internally developed baccarat games and some licensed third-party slot games. The platform is designed to allow the operator of the games to generate revenue through the in-game sale of virtual coins that allows players to extend play time or accelerate their progress. It also allows for the ability to offer rewards whereby players can redeem experience points from game time play for incentives, for example, food and beverage, rooms and entertainment at casino resort properties.

In August 2016, we commenced testing of City of Games and it remains in a testing stage. We have marketed the application, primarily through the purchase of advertisements on Facebook’s mobile platform in certain areas in Pan-Asia.

In the second half of 2016, we began development of a non-casino gaming application exclusively for the Mainland China market. This application is currently in an early development stage.

As of the date of this report and other than the aforementioned purchase of advertisements on Facebook, we do not have any material agreements, understandings or arrangements with any third parties with respect to the marketing of our social gaming platform. We have yet to define a business model for the full-scale commercial exploitation of the social gaming operations.

The social gaming operations have been fully internally funded. Total costs, both expensed and capitalized, for the development and testing of the platform and applications were approximately $1.4 million and $59,000, and $399,000 and $334,000 for the three-month periods ended March 31, 2017 and 2016, respectively. As of March 31, 2017, we have spent a total of $5.4 million on the development of social gaming.

Discontinued Operations

During the reported periods, discontinued operations consisted of our Cambodia gaming operations and gaming products businesses.

Gaming Operations

Our discontinued gaming operations comprised the leasing of our owned EGMs on a revenue-sharing (participation) and fixed lease basis in Cambodia.

From March 1, 2010 to June 30, 2016, our gaming operations included placing and leasing 670 EGM seats on revenue-sharing (participation) and fixed lease basis to NagaWorld, a gaming resort and the only licensed full service casino in and around the capital city of Phnom Penh owned by NagaWorld Limited. From March 1, 2010 and February 29, 2016, pursuant to a machine operation and participation contract between us and NagaWorld, we jointly operated a substantial portion of the gaming machine area in prime casino floor locations and we and NagaWorld split the net win, which represented the monies wagered less payouts to customers, from our 670 EGM seats placed in their property and certain operating costs related to marketing and floor staff on a respective basis of 25%/75%.

Upon termination of the machine operation and participation agreement on February 29, 2016, we entered into a machine lease agreement with NagaWorld Limited pursuant to which NagaWorld leased all of our 670 EGM seats and related equipment in their present locations on the NagaWorld casino floor commencing March 1, 2016. We were responsible to pay the withholding tax and provide onsite machine and system maintenance but did not provide any other operational support staff. NagaWorld paid us, on a monthly basis, a fixed fee per machine seat per day. The monthly lease payments per machine seat per day were $22 from March 1 through May 31, 2016, $20 from June 1 through August 31, 2016, and then $18 beginning in September 1, 2016 and thereafter until the contract terminated. NagaWorld had the option to terminate the agreement upon not less than 30 days’ prior written notice. On July 6, 2016, we and NagaWorld agreed to terminate the agreement effective June 30, 2016. Also on July 6, 2016, we agreed to sell all 670 EGM seats placed at NagaWorld to a third-party in Cambodia. The NagaWorld operations had been a primary contributor to our gaming operations revenue and consolidated cash flow.

From May 2012 to October 2016, we placed EGMs in Thansur Bokor on a revenue-sharing (participation) basis, a casino resort developed by Cambodian hotelier, Sokha Hotels and Resorts, in the Kampot Province. Under the original agreement, we and Sokha split the net win and certain operating expenses for the placed EGMs on a respective basis of 27%/73%. In August 2015, we and Sokha amended our agreement and adjusted the number of our EGMs placed in this venue to 71 and the split of net win and certain operating costs to 29%/71%, respectively. On October 27, 2016, we sold all 71 EGM seats placed in Thansur Bokor to the casino owner for $250,000 and, on October 31, 2016, we terminated the related participation agreement.

From May 2012 to December 2016, we placed EGMs on a revenue-sharing (participation) basis and managed the operations of Dreamworld Club (Poipet), a slot hall located in the established gaming market of Poipet in the Banteay Meanchey Province of Northwestern Cambodia near the Thailand border. Dreamworld Club (Poipet) operated 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 develop and construct, at our own design and cost, the slot venue. We were responsible for all capital expenditures for Dreamworld Club (Poipet) and the placement of EGMs and were 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%. On December 21, 2016, we sold all 278 EGM seats placed in Dreamworld Club (Poipet), as well as our 72 EGM seats held in storage and gaming equipment spare parts and accessories in Cambodia, to the venue owner of Dreamworld Club (Poipet) for cash proceeds of $900,000.

Gaming Products

Our discontinued gaming products business involved the design, manufacture and distribution of gaming chips and plaques from our manufacturing facilities in Hong Kong. Our customer base for the gaming chips and plaques included major casino resorts in Macau, the Philippines and Australia. In addition, we had four agreements with third-party gaming suppliers to distribute their products, including gaming table layouts, UV lights and kiosks. Typically, we sold these products to our existing gaming chip and plaque customers in various markets in Asia and sales of these products represented a small amount of total gaming products revenue.

On May 11, 2016, we reached a definitive agreement to sell the principal assets of the gaming products operations and closed the transaction on the same day. We have exited this business.

All related historical revenues and expenses from the Cambodia gaming operations and gaming products operations have been reclassified as discontinued operations. See Note 15.

Results of Operations for the Three-Month Periods Ended March 31, 2017 and 2016

The following table summarizes our operating results on a consolidated basis and separately for each of the two operating segments, namely, gaming operations and social gaming for the three-month periods ended March 31, 2017 and 2016. All historical revenues and expenses associated with the Cambodia gaming operations and gaming products business have been reclassified as discontinued operations.

	Three-Month Period Ended March 31,
(amounts in thousands, except per share data)	2017			2016 (1)
Total:
Revenue	$	416		$	604
Gross profit	$	45		$	182
Gross margin percentage		11	%		30	%
Adjusted LBITDA from continuing operations (2)	$	(1,804	)	$	(649	)
Operating loss from continuing operations	$	(1,997	)	$	(997	)
Net loss from continuing operations	$	(1,993	)	$	(974	)

Net loss	$	(2,041	)	$	(1,475	)

Basic and diluted loss from continuing operations per share	$	(0.14	)	$	(0.07	)

Weighted average common shares outstanding
Basic		14,464			14,460
Diluted		14,464			14,460

Gaming operations:
Revenue	$	379		$	604
Gross profit	$	151		$	182
Gross margin percentage		40	%		30	%

Social gaming:
Revenue	$	37		$	—
Gross loss	$	(106	)	$	—
Gross margin percentage		NM			NM

A reconciliation of LBITDA, as adjusted, to the net loss from continuing operations is provided below.

	Three-Month Period Ended March 31,
(amounts in thousands)	2017			2016 (1)
Net loss from continuing operations— GAAP basis	$	(1,993	)	$	(974	)
Interest income		(61	)		(2	)
Income tax expenses		37			29
Depreciation and amortization		186			284
Stock-based compensation expenses		27			14
Adjusted LBITDA from continuing operations	$	(1,804	)	$	(649	)

(1)

Amounts for the three-month period ended March 31, 2016 have been reclassified to conform to the current period presentation, including the impact of discontinued operations.

(2)

We define “Adjusted LBITDA” as loss before interest, taxes, depreciation, amortization, stock-based compensation, and other non-cash operating income and expenses. Adjusted LBITDA 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 LBITDA 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 LBITDA 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 LBITDA as a supplement to financial measures in accordance with generally accepted accounting principles in the United States (“GAAP”). Adjusted LBITDA 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 LBITDA 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 LBITDA as only one of several comparative tools, together with GAAP measurements, to assist in the evaluation of operating performance. Such GAAP measurements include operating income, net income, cash flows from operations and cash flow data. We have significant uses of cash flows, including capital expenditures, taxes and other non-recurring charges, which are not reflected in Adjusted LBITDA. Our calculation of Adjusted LBITDA may be different from the calculation methods used by other companies and, therefore, comparability may be limited.

Total revenue decreased approximately $188,000 to $416,000 for the three-month period ended March 31, 2017 compared to approximately $604,000 in the prior year period. The decrease was due to the expiration of the EGM participation agreement with Leisure World on June 30, 2016 and lower average daily net win per unit for the Philippines gaming operations.

Gross profit decreased approximately $137,000 to $45,000 for the three-month period ended March 31, 2017 compared to approximately $182,000 in the prior year period. The decrease was primarily a result of lower revenue partially offset by lower depreciation and amortization expenses for the gaming operations in the three-month period ended March 31, 2017.

Operating loss from continuing operations increased approximately $1.0 million to $2.0 million for the three-month period ended March 31, 2017 compared to approximately $997,000 in the prior year period. The increase was primarily a result of the lower gross profit and higher operating expenses related to the social gaming operations.

Net loss from continuing operations increased approximately $1.0 million to $2.0 million for the three-month period ended March 31, 2017 compared to approximately $974,000 in the prior year period. The increase was primarily a result of the higher operating loss.

Net loss increased approximately $566,000 to $2.0 million for the three-month period ended March 31, 2017 compared to approximately $1.5 million in the prior year period. The three-month periods ended March 31, 2017 and 2016 included net losses of approximately $48,000 and $501,000, respectively, from discontinued operations. See Note 15.

Gaming Operations

During the reported periods, gaming operations revenue from continuing operations consisted of the leasing of our owned EGMs on a revenue-sharing (participation) basis in the Philippines.

Gaming operations revenue decreased approximately $225,000 to $379,000 for the three-month period ended March 31, 2017 compared to approximately $604,000 in the prior year period due to fewer EGMs in operation and lower average daily net win per unit. The installed base of EGMs declined 134 seats to 413 seats as of March 31, 2017 compared to 547 seats as of March 31, 2016 primarily as a result of the expiration of the Leisure World participation agreement on June 30, 2016. Average net win per day per unit decreased $17 to $43 for the three-month period ended March 31, 2017 compared to $60 in the prior year period primarily as a result of the expiration of the Leisure World participation agreement, the venue with the then highest average net win per day per unit, and continued competition from major casino resorts in the Manila area.

Gross profit from gaming operations decreased approximately $31,000 to $151,000 for the three-month period ended March 31, 2017 compared to approximately $182,000 in the prior year period primarily due to the lower revenue partially offset by lower depreciation and amortization expenses. Cost of gaming operations for the three-month period ended March 31, 2017 included approximately $67,000 in depreciation of gaming property and equipment and $161,000 of other operating costs. Cost of gaming operations for the three-month period ended March 31, 2016 included approximately $104,000 in depreciation of gaming property and equipment, $93,000 of amortization of casino contracts, $63,000 of amortization of other gaming related intangibles and $162,000 of other operating costs.

As of March 31, 2017, we had a total of 566 EGM seats of which 153 were held in inventory and 413 were in operation in two venues in the Philippines.

	March 31, 2017				December 31, 2016
(amounts in thousands, except per unit data)	Units		Carrying Value		Units		Carrying Value
EGMs and systems used in operations (1)		413	$	305		411	$	370
EGMs and systems held for future use		153		17		155		19
Total EGMs and systems		566	$	322		566	$	389

(1)

EGMs and systems used in operations as of March 31, 2017 and December 31, 2016 included 12 EGM seats, which were in operation on a revenue-sharing basis with a lessor 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.

Social Gaming

In the second half of 2015, we began development of a social gaming platform and a social casino application, which included two baccarat games, designed for the Pan-Asian markets. In August 2016, we commenced limited testing of the platform and the application, branded City of Games, in the Philippines. Testing was expanded in December 2016 to include additional markets, a limited amount of third-party licensed slot games and a rewards feature whereby players could redeem rewards with accumulated experience points. Marketing efforts have primarily focused on the purchase of advertisements on Facebook. City of Games remains in a testing phase and has generated minimal revenue. We continue to evaluate the market testing results in order to define the optimal method of commercialization.

We are also developing a non-casino gaming application intended exclusively for the Mainland China market. This application is currently in the early stages of development.

As of the date of this report and other than the purchase of advertisements on Facebook’s mobile platform for City of Games, we do not have any material agreements, understandings or arrangements with any third parties with respect to the marketing of our social gaming platform. We have yet to define a business model for the full-scale commercial exploitation of the social gaming operations.

We capitalize costs for the development of the platform and the internal-use software when the planning stage efforts are successfully completed, management has committed project resourcing and it is probable that the project will be completed and the software will be used as intended. Such costs are amortized on the straight-line basis over the estimated useful lives of the related assets. Costs incurred prior to meeting these criteria are expensed to research and development expenses as incurred. On August 16, 2016, these criteria were met for City of Games and we ceased capitalizing costs for the development of the platform and the internal-use software for the City of Games application. On October 1, 2016, we began capitalizing certain development and internal-use software costs for the Mainland China application.

For the three-month period ended March 31, 2017, we incurred approximately $1.4 million and $59,000 in total expenses and capitalized costs, respectively, related to the development and distribution of the social gaming platform and two applications. For the three-month period ended March 31, 2016, we incurred approximately $399,000 and $334,000 in total expenses and capitalized costs, respectively, related to the development of the social gaming platform and application. As of March 31, 2017, we have spent a total of $5.4 million on the development of social gaming.

Operating Expenses

The schedule of expenses on a consolidated basis for continuing operations consisted of the following:

	Three-Month Period Ended March 31,
(amounts in thousands)	2017		2016
Selling, general and administrative expenses	$	1,778	$	744
Stock-based compensation expenses		27		14
Research and development expenses		215		397
Depreciation and amortization		22		24
	$	2,042	$	1,179

Selling, General and Administrative Expenses

Selling, general and administrative expenses for continuing operations increased approximately $1.0 million to $1.8 million for the three-month period ended March 31, 2017 compared to approximately $744,000 in the prior year period. The increase was primarily due to higher salaries and wages, rent and advertising expenses as a result of a higher headcount and marketing efforts for the social gaming operations.

Stock-Based Compensation Expenses

Stock-based compensation expenses increased approximately $13,000 to $27,000 for the three-month period ended March 31, 2017 compared to approximately $14,000 in the prior year period primarily due to the voluntary stock option exchange program for our employees, directors and certain others implemented in July 2016. See Note 12.

Research and Development Expenses

Research and development expenses decreased approximately $182,000 to $215,000 for the three-month period ended March 31, 2017 compared to approximately $397,000 in the prior year period mainly as a result of fewer expenses related to the development of the social gaming operations in the three-month period ended March 31, 2017.

Depreciation and Amortization Expenses

Depreciation and amortization expenses were approximately $22,000 for the three-month period ended March 31, 2017, as compared to approximately $24,000 in the prior year period.

Other Income/(Expenses)

Other income decreased approximately $11,000 to $41,000 for the three-month period ended March 31, 2017 compared to approximately $52,000 in the prior year period. The decrease was primarily due to foreign currency losses compared to gains in the prior year period mainly as a result of the settlement of U.S. dollar denominated payables for the Philippines operations with appreciated U.S. dollar compared to the prior year period.

Income Tax Provisions

Effective tax rates for the three-month periods ended March 31, 2017 and 2016 were approximately (1.9)% and (3.1)%, 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, 2017, we had total cash and cash equivalents of approximately $31.7 million and working capital of approximately $31.6 million. Our cash and working capital was negatively impacted by operating losses and an increase in investments in the social gaming operations.

Our cash flow for 2017 is expected to be negatively impacted by our reduced base of operations and the costs related to the social gaming operations and corporate overhead. This is expected to be partially offset by a cash receipt of approximately $1.1 million in May 2017 related to the 2016 sale of the gaming products assets.

We do not expect any meaningful capital expenditures for 2017 and anticipate our available working capital will allow us to meet our capital expenditure needs through 2017.

Cash Flow Summary

	Three-Month Period Ended March 31,
(amounts in thousands)	2017			2016
Cash (used in)/provided by:
Operations	$	(1,824	)	$	416
Investing		(61	)		(381	)
Financing		—			—
Effect of exchange rate change in cash		(9	)		(31	)
Net (decrease)/increase in cash and cash equivalents	$	(1,894	)	$	4

Operations

Cash used in operating activities was approximately $1.8 million for the three-month period ended March 31, 2017 compared to cash provided by operating activities of approximately $416,000 in the prior year period. For the three-month period ended March 31, 2017, cash used in operating activities primarily resulted from operating losses from the social gaming operations. For the three-month period ended March 31, 2016, cash provided by operating activities primarily resulted from operating income from the gaming operations division partially offset by operating losses from the discontinued gaming products division and the use of funds for working capital and expenses related to the social gaming operations.

Investing

Cash used in investing activities was approximately $61,000 for the three-month period ended March 31, 2017 compared to approximately $381,000 in the prior year period. The net decrease in cash used in investing activities was mainly a result of fewer purchases of EGMs for the gaming operations and no purchases of equipment for the discontinued gaming products division in the three-month period ended March 31, 2017.

Financing

No cash was used in financing activities for the three-month periods ended March 31, 2017 and 2016.

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, 2017, we had net accounts receivable of approximately $126,000, representing less than 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. There was no allowance for doubtful accounts receivable as of March 31, 2017. Our allowance for doubtful accounts receivable was approximately $7,000 as of December 31, 2016, which related to the discontinued gaming products operations.

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. There was no inventory provision for the three-month period ended March 31, 2017. We booked an inventory provision of $89,000 for the three-month period ended March 31, 2016, which related to the discontinued gaming products operations.

Gaming Equipment and Property and Equipment

As of March 31, 2017, we had gaming equipment and property and equipment of approximately $1.2 million, representing 3% of our total assets. We depreciate gaming equipment and property and equipment on the straight-line basis over their estimated useful lives. The estimated useful lives are based on the nature of the assets as well as current operating strategies and legal considerations such as contractual life. Future events, such as property expansions, property developments, trends in market demand, new competition, or technology obsolescence, could result in a change in the manner in which we use certain assets and require changes in the estimated useful lives of such assets.

For assets to be held and used, they are reviewed for impairment whenever indicators of impairment exist. If an indicator of impairment exists, we first group assets at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities (the “asset group”). Secondly, we estimate the undiscounted future cash flows that are directly associated with and expected to arise from the use and eventual disposition of such asset group. If the undiscounted cash flows exceed the carrying value, no impairment is indicated. If the undiscounted cash flows do not exceed the carrying value, then an impairment is measured based on fair value compared to carrying value, with fair value typically based on a discounted cash flow model.

To estimate the undiscounted cash flows of an asset group, we consider potential cash flow scenarios based on management estimates given current conditions. Determining the recoverability of our asset groups is judgmental in nature and requires the use of significant estimates and assumptions, including estimated cash flows, growth rates and future market conditions, among others. Future changes to our estimates and assumptions based upon changes in macro-economic factors, regulatory environments, operating results or management’s intentions may result in future changes to the recoverability of our asset group.

Goodwill and Intangible Assets, including Casino Contracts

As of March 31, 2017, we had intangible assets, including goodwill and capitalized software costs, of approximately $1.8 million, representing 5% 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.

Certain costs relate to software developed to solely meet our internal requirements and for which there are no substantive plans to market the software. These costs mainly include payroll and payroll-related costs for employees who are directly associated with and who devote time to the internal-use software projects during the application development stage until the software is substantially complete and ready for its intended use. We also capitalize certain costs related to the development of the social gaming applications to be marketed. These costs are capitalized once technological feasibility has been established. Costs incurred prior to the criteria met for capitalization are expensed to research and development expenses as incurred. Our management committed the resources of developing the social gaming applications, and the social gaming applications have reached a defined stage of development such that the software could be used as intended. Such capitalized costs are amortized on the straight-line basis over the estimated useful life of the related assets.

Finite-lived intangible assets are amortized 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 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 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.

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 a pro rata 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 $27,000 and $14,000 for the three-month periods ended March 31, 2017 and 2016, respectively, in the accompanying consolidated statements of comprehensive loss.

Income Taxes

We are subject to income taxes in the U.S. (including federal and state) and several foreign jurisdictions in which we operate. We record income taxes under the asset and liability method, whereby deferred tax assets and liabilities are recognized based on the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and attributable to operating loss and tax credit carryforwards. Accounting standards regarding income taxes requires a reduction of the carrying amounts of deferred tax assets by a valuation allowance, if based on the available evidence, it is “more-likely-than-not” that such assets will not be realized. Accordingly, the need to establish valuation allowances for deferred tax assets is assessed at each reporting period based on a “more-likely-than-not” realization threshold. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, the duration of statutory carryforward periods, our experience with operating loss and tax credit carryforwards not expiring, and implementation of tax planning strategies.

We recorded a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized. Management will reassess the realization of deferred tax assets based on the applicable accounting standards for income taxes each reporting period and consider the scheduled reversal of deferred tax liabilities, sources of taxable income and tax planning strategies. To the extent that the financial results of these operations improve and it becomes “more-likely-than-not” that the deferred tax assets are realizable, we will be able to reduce the valuation allowance. For valuation allowance related to deferred tax assets generated prior to Quasi-Reorganization, which was effected on December 31, 2010, reductions in the valuation allowance will be recorded directly in equity.

Significant judgment is required in evaluating our tax positions and determining our provision for income taxes. During the ordinary course of business, there are many transactions for which the tax treatment is uncertain. Accounting standards regarding uncertainty in income taxes provides a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is “more-likely-than-not” that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely, based solely on the technical merits, of being sustained on examinations. We consider many factors when evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments and which may not accurately anticipate actual outcomes. We recognize interest and penalties, if any, related to unrecognized tax benefits in the provision of income taxes in the statements of comprehensive loss.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet financing arrangements.

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risks, which arise during the normal course of business from changes in foreign exchange rates. We have transacted business in several countries around the world using several currencies, of which the most significant to our operations for the three-month periods ended March 31, 2017 and 2016, were the Philippine peso and Hong Kong dollar. We translate 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 period. Resulting currency translation adjustments are recorded directly to accumulated other comprehensive income within stockholders’ equity. Gains and losses resulting from transactions in non-functional currencies are recorded in the consolidated statements of comprehensive loss. Historically, we have not utilized any hedging strategies to minimize the impact of fluctuations in the foreign currencies used in our operations. We expect that a significant portion of the volume of our business will continue to be denominated in foreign currencies. As such, we expect our cash flows and earnings to continue to be exposed to the risks that may arise from fluctuations in foreign currency exchange rates.

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, 2017.

(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, 2017 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II — OTHER INFORMATION

Item 6.

Exhibits

Exhibit No.	Description	Method of Filing
3.1	Certificate of Change filed with the Secretary of State of Nevada on March 31, 2017.	Filed electronically herewith

31.1	Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	Filed electronically herewith

31.2	Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	Filed electronically herewith

32.1	Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).	Filed electronically herewith

101.INS	XBRL Instance Document	Filed electronically herewith

101.SCH	XBRL Taxonomy Extension Schema Document	Filed electronically herewith

101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document	Filed electronically herewith

101.LAB	XBRL Taxonomy Extension Label Linkbase Document	Filed electronically herewith

101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document	Filed electronically herewith

101.DEF	XBRL Taxonomy Extension Definition Linkbase Document	Filed electronically herewith

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

		ENTERTAINMENT GAMING ASIA INC.
		(Registrant)


Date:	May 15, 2017	By:	/s/ Clarence Chung
			Clarence Chung
		Its:	President and Chief Executive Officer


Date:	May 15, 2017	By:	/s/ Traci L. Mangini
			Traci L. Mangini
		Its:	Chief Financial Officer

Entertainment Gaming Asia Inc. - FORM 10-Q - May 15, 2017

Attached files

Entertainment Gaming Asia Inc. Reports