Item 1.
Financial
Statements
ENTERTAINMENT GAMING ASIA INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(amounts in thousands, except per share
data)
|
|
March 31, 2013
|
|
|
December 31, 2012
|
|
|
|
(unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
4,485
|
|
|
$
|
10,365
|
|
Accounts receivable, net
|
|
|
566
|
|
|
|
1,841
|
|
Other receivables
|
|
|
1,652
|
|
|
|
112
|
|
Inventories
|
|
|
769
|
|
|
|
2,047
|
|
Prepaid expenses and other current
assets
|
|
|
326
|
|
|
|
387
|
|
Total current assets
|
|
|
7,798
|
|
|
|
14,752
|
|
|
|
|
|
|
|
|
|
|
Gaming equipment, net
|
|
|
10,901
|
|
|
|
9,724
|
|
Casino contracts
|
|
|
7,372
|
|
|
|
7,982
|
|
Property and equipment, net
|
|
|
7,937
|
|
|
|
6,170
|
|
Goodwill
|
|
|
382
|
|
|
|
380
|
|
Intangible assets, net
|
|
|
1,184
|
|
|
|
1,253
|
|
Contract amendment fees
|
|
|
315
|
|
|
|
342
|
|
Deferred tax assets
|
|
|
—
|
|
|
|
201
|
|
Prepaids, deposits and other assets
|
|
|
2,546
|
|
|
|
2,914
|
|
Total assets
|
|
$
|
38,435
|
|
|
$
|
43,718
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,487
|
|
|
$
|
3,636
|
|
Accrued expenses
|
|
|
2,438
|
|
|
|
2,619
|
|
Income tax payable
|
|
|
8
|
|
|
|
—
|
|
Customer deposits and other current
liabilities
|
|
|
178
|
|
|
|
656
|
|
Total current liabilities
|
|
|
4,111
|
|
|
|
6,911
|
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
729
|
|
|
|
1,078
|
|
Deferred tax liability
|
|
|
137
|
|
|
|
137
|
|
Total liabilities
|
|
|
4,977
|
|
|
|
8,126
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
Common stock, $.001 par value, 75,000,000 shares authorized; 30,024,662
and 29,974,662 shares issued and outstanding
|
|
|
30
|
|
|
|
30
|
|
Additional paid-in-capital
|
|
|
32,614
|
|
|
|
32,224
|
|
Accumulated other comprehensive income
|
|
|
912
|
|
|
|
929
|
|
Retained (losses)/earnings since
January 1, 2011 ($386.1 million accumulated deficit eliminated upon Quasi-Reorganization)
|
|
|
(99
|
)
|
|
|
2,408
|
|
Total EGT stockholders’ equity
|
|
|
33,457
|
|
|
|
35,591
|
|
Non-controlling interest
|
|
|
1
|
|
|
|
1
|
|
Total stockholders’ equity
|
|
|
33,458
|
|
|
|
35,592
|
|
Total liabilities and stockholders’
equity
|
|
$
|
38,435
|
|
|
$
|
43,718
|
|
The notes to consolidated financial statements
are an integral part of these consolidated statements.
ENTERTAINMENT GAMING ASIA INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive
Income
(amounts in thousands, except per share
data)
(Unaudited)
|
|
Three-Month Periods Ended March 31,
|
|
|
|
2013
|
|
|
2012
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Gaming operations, gross
|
|
$
|
5,274
|
|
|
$
|
4,956
|
|
Less: promotional
allowances
|
|
|
—
|
|
|
|
—
|
|
Gaming operations, net
|
|
|
5,274
|
|
|
|
4,956
|
|
Gaming products
|
|
|
1,427
|
|
|
|
532
|
|
Total revenues
|
|
|
6,701
|
|
|
|
5,488
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
Cost of gaming operations
|
|
|
|
|
|
|
|
|
Gaming assets depreciation
|
|
|
1,142
|
|
|
|
1,109
|
|
Casino contract amortization
|
|
|
620
|
|
|
|
615
|
|
Other gaming related intangibles amortization
|
|
|
63
|
|
|
|
63
|
|
Other operating costs
|
|
|
1,760
|
|
|
|
524
|
|
Cost of gaming products
|
|
|
1,496
|
|
|
|
421
|
|
Selling, general and administrative expenses
|
|
|
1,864
|
|
|
|
1,850
|
|
Gain on dispositions of assets
|
|
|
—
|
|
|
|
(12
|
)
|
Product development expenses
|
|
|
120
|
|
|
|
100
|
|
Depreciation and amortization
|
|
|
30
|
|
|
|
31
|
|
Total operating costs and expenses
|
|
|
7,095
|
|
|
|
4,701
|
|
|
|
|
|
|
|
|
|
|
(Loss)/income from operations
|
|
|
(394
|
)
|
|
|
787
|
|
|
|
|
|
|
|
|
|
|
Other income/(expense):
|
|
|
|
|
|
|
|
|
Interest expense and finance fees
|
|
|
(4
|
)
|
|
|
(53
|
)
|
Interest income
|
|
|
4
|
|
|
|
12
|
|
Foreign currency gains
|
|
|
103
|
|
|
|
189
|
|
Other
|
|
|
3
|
|
|
|
—
|
|
Total other income
|
|
|
106
|
|
|
|
148
|
|
|
|
|
|
|
|
|
|
|
(Loss)/income from continuing operations before income
tax expense
|
|
|
(288
|
)
|
|
|
935
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
(41
|
)
|
|
|
(54
|
)
|
|
|
|
|
|
|
|
|
|
Net (loss)/income from continuing operations
|
|
|
(329
|
)
|
|
|
881
|
|
Net (loss)/income from discontinued operations, net of tax
|
|
|
(2,178
|
)
|
|
|
91
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/income
|
|
$
|
(2,507
|
)
|
|
$
|
972
|
|
Less: Net (loss)/income attributable
to non-controlling interest
|
|
|
—
|
|
|
|
—
|
|
Net (loss)/income attributable
to EGT Stockholders
|
|
$
|
(2,507
|
)
|
|
$
|
972
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
(Loss)/earnings from continuing operations
|
|
$
|
(0.01
|
)
|
|
$
|
0.03
|
|
(Loss)/earnings from discontinued operations, net of
tax
|
|
$
|
(0.07
|
)
|
|
$
|
—
|
|
(Loss)/earnings
|
|
$
|
(0.08
|
)
|
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
|
|
|
|
|
|
Basic
|
|
|
30,024
|
|
|
|
29,900
|
|
Diluted
|
|
|
30,024
|
|
|
|
30,190
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income, net of tax
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
11
|
|
|
|
51
|
|
Defined benefit pension plan
|
|
|
|
|
|
|
|
|
Prior service cost arising during
period
|
|
|
(28
|
)
|
|
|
—
|
|
Net change during period
|
|
|
—
|
|
|
|
—
|
|
Amortization
of prior service cost included in net periodic pension cost
|
|
|
—
|
|
|
|
—
|
|
Defined benefit pension plan, net
|
|
|
(28
|
)
|
|
|
—
|
|
Other comprehensive (loss)/income, net of tax
|
|
$
|
(17
|
)
|
|
$
|
51
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (loss)/income
|
|
$
|
(2,524
|
)
|
|
$
|
1,023
|
|
Less: Comprehensive (loss)/income
attributable to non-controlling interest
|
|
|
—
|
|
|
|
—
|
|
Comprehensive (loss)/income attributable to EGT Stockholders
|
|
$
|
(2,524
|
)
|
|
$
|
1,023
|
|
The notes to consolidated financial statements
are an integral part of these consolidated statements.
ENTERTAINMENT GAMING ASIA INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(amounts in thousands)
(Unaudited)
|
|
Three-Month Periods Ended March 31,
|
|
|
|
2013
|
|
|
2012
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net (loss)/income
|
|
$
|
(2,507
|
)
|
|
$
|
972
|
|
Adjustments to reconcile net (loss)/income to net cash
(used in)/provided by operating activities:
|
|
|
|
|
|
|
|
|
Foreign currency gains
|
|
|
8
|
|
|
|
(201
|
)
|
Depreciation of gaming equipment and property and equipment
|
|
|
1,244
|
|
|
|
1,181
|
|
Amortization of casino contracts
|
|
|
620
|
|
|
|
615
|
|
Amortization of intangible assets
|
|
|
75
|
|
|
|
69
|
|
Amortization of contract amendment fees
|
|
|
27
|
|
|
|
27
|
|
Stock-based compensation expense
|
|
|
247
|
|
|
|
265
|
|
Gain on disposition of property and equipment
|
|
|
—
|
|
|
|
(12
|
)
|
Loss on disposition of subsidiary, including property
and equipment
|
|
|
999
|
|
|
|
—
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable and other receivables
|
|
|
(265
|
)
|
|
|
544
|
|
Inventories
|
|
|
892
|
|
|
|
(113
|
)
|
Prepaid expenses and other current assets
|
|
|
107
|
|
|
|
(391
|
)
|
Prepaids, deposits and other assets
|
|
|
177
|
|
|
|
(98
|
)
|
Accounts payable
|
|
|
(1,187
|
)
|
|
|
(300
|
)
|
Amounts due to a related party
|
|
|
—
|
|
|
|
(14
|
)
|
Accrued expenses and other liabilities
|
|
|
(497
|
)
|
|
|
(615
|
)
|
Income tax payable
|
|
|
8
|
|
|
|
7
|
|
Customer deposits and other current
liabilities
|
|
|
(517
|
)
|
|
|
72
|
|
Net cash (used in)/provided by operating
activities
|
|
|
(569
|
)
|
|
|
2,008
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Construction/purchase of property and equipment
|
|
|
(1,786
|
)
|
|
|
(124
|
)
|
Purchases of gaming machines and systems
|
|
|
(3,184
|
)
|
|
|
(229
|
)
|
Addition of project costs
|
|
|
(755
|
)
|
|
|
(1,225
|
)
|
Proceeds from sale of subsidiary related to discontinued operations
|
|
|
365
|
|
|
|
—
|
|
Proceeds from sale of gaming machines,
property and equipment
|
|
|
—
|
|
|
|
40
|
|
Net cash used in investing activities
|
|
|
(5,360
|
)
|
|
|
(1,538
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Repayment of short-term debt and leases
|
|
|
—
|
|
|
|
(50
|
)
|
Repayment of notes payable
|
|
|
—
|
|
|
|
(1,524
|
)
|
Exercise of stock options
|
|
|
—
|
|
|
|
—
|
|
Net cash used in financing activities
|
|
|
—
|
|
|
|
(1,574
|
)
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes
on cash
|
|
|
49
|
|
|
|
40
|
|
Decrease in cash and cash equivalents
|
|
|
(5,880
|
)
|
|
|
(1,064
|
)
|
Cash and cash equivalents at beginning
of period
|
|
|
10,365
|
|
|
|
12,759
|
|
Cash and cash equivalents at end
of period
|
|
$
|
4,485
|
|
|
$
|
11,695
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow
information
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
—
|
|
|
$
|
64
|
|
Income tax paid
|
|
$
|
—
|
|
|
$
|
54
|
|
Non-cash investing/financing activities
|
|
|
|
|
|
|
|
|
Issuance of restricted/performance stock
|
|
$
|
99
|
|
|
$
|
195
|
|
Purchase of gaming machines and systems
|
|
$
|
1,226
|
|
|
$
|
—
|
|
The notes to consolidated financial statements
are an integral part of these consolidated statements.
ENTERTAINMENT GAMING ASIA INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note
1.
Description of Business and Significant Accounting Policies
The principal business activities of the
Company are its gaming operations, which include the owning and leasing of electronic gaming machines (EGMs) placed in premier
hotels and other venues and the development and operation of casinos and gaming establishments in select emerging markets in the
Indo-China region. Also, through its subsidiary, Dolphin Products Limited, a Hong Kong company, the Company is engaged in the
design, manufacture and distribution of gaming chips and plaques to major casinos primarily in Southeast Asia and Australia. During
the reporting period, the Company was also engaged in the design, manufacture and distribution of other, non-gaming plastic products,
primarily for the automotive industry. These operations were sold on March 28, 2013 and related historical revenues and expenses
have been reclassified as discontinued operations. The accounting policies of these segments are consistent with the Company’s
policies for the accompanying consolidated financial statements.
In March 2011, the Company formed
a new company in Cambodia with a local partner for the development, ownership and operation of a casino project in the Kampot
Province of Cambodia. Net revenue of the new company (the total gross revenue of the casino less any payouts paid to customers,
operating expenses, and gaming and non-gaming taxes on the new company’s revenue) will be shared on a 60/40 basis between
the Company and the relevant local partner.
In May 2011, the Company agreed to
form a new company with another local partner in Cambodia for the development, ownership and operation of a casino project in
the Pailin Province of Cambodia and, in June 2011, the Company formed a legal entity in Cambodia to serve as the new company
(“Dreamworld Pailin”) for the new casino project’s operations. In July 2011, the local partner agreed with
the Company to revise the prior cooperation structure for the casino project and entered into new agreements pursuant to which
(a) the Company is the sole owner of Dreamworld Pailin, (b) the local partner’s profit participation was reduced
from 45% to 20% and (c) the Company will pay a fair monthly rental to the relevant local partner for the lease of the casino
project property.
Effective since January 1, 2012, the Company
adopted the FASB issued ASU 2011-05,
Comprehensive Income (Topic 220): Presentation of Comprehensive Income, as amended by
ASU 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications
of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.
The amended standards eliminate
the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity
and require that all changes in stockholders’ equity - except investments by, and distributions to, owners - be presented
either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The adoption of
these amended standards revised the manner which entities present comprehensive income in their financial statements. In addition,
the amended standards require to present the changes in accumulated other comprehensive income by component in the statement of
stockholders’ equity or in the notes to the financial statements. The Company has elected to present the other comprehensive
income in a single continuous statement of comprehensive income and present the changes in accumulated other comprehensive income
in the statement of stockholders’ equity. The adoption of the amended standards did not have any impact on the Company’s
financial position, results of operations, or earnings per share. The new presentation required by the amended standards has been
applied retrospectively to all periods presented.
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, 2012, filed with the SEC on March 28, 2013. Certain previously reported
amounts have been reclassified to conform to the current period presentation.
The Company effected a 1-for-4 reverse
stock split of its common shares as of June 12, 2012. All historical share amounts and share price information presented in the
financial statements and notes have been proportionally adjusted to reflect the impact of this reverse stock split, including
but not limited to basic and diluted weighted-average shares issued and outstanding.
Principles of Consolidation
These consolidated financial statements
include the accounts of Entertainment Gaming Asia Inc. and all its subsidiaries. All intercompany balances and transactions have
been eliminated in consolidation.
Use of Estimates
The Company is required to make estimates,
judgments and assumptions that it believes are reasonable based on its historical experience, contract terms, observance of known
trends in the Company and the industry as a whole, and information available from other outside sources. These estimates affect
the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities.
On a regular basis, the Company evaluates its estimates, including those related to revenue recognition, product returns, long-lived
assets, inventory obsolescence, stock-based compensation, income taxes, bad debts, warranty obligations, long-term contracts,
contingencies and litigation. Actual results may differ from those estimates.
Discontinued Operations
A discontinued operation is a component
of an entity that either has been disposed of, or that is classified as held for sale, and (i) represents a separate major
line of business or geographical area of operations; and (ii) is a part of a single coordinated plan to dispose of a separate major
line of business or geographical area of operations; or (iii) is a subsidiary acquired exclusively with a view to resale.
Non-current assets held for discontinued operations are carried at the lower of carrying amount or fair
value less costs to sell. Any gain or loss from disposal of a business, together with the results of these operations until the
date of disposal, is reported separately as discontinued operations. The financial information of discontinued operations
is excluded from the respective captions in the Company's consolidated statements of comprehensive income and related notes for
all years 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, 2013, the Company had deposits with financial institutions in excess of Federal Deposit
Insurance Corporation (FDIC) insured limits by approximately $4.2 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.
Long-Lived Assets
The Company accounts for impairment of
long-lived assets in accordance with Financial Accounting Standards Board (FASB) ASC 360,
Property, Plant and Equipment
.
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. In such instances, the Company estimates the undiscounted future cash flows that result from
the use of the asset and its ultimate disposition. If the sum of the undiscounted cash flows is less than the carrying value,
the Company recognizes an impairment loss, measured as the amount by which the carrying value exceeds the fair value of the asset,
determined principally using discounted cash flows. There were no impairment charges for long-lived assets for the three-month
periods ended March 31, 2013 and 2012.
Prepaids, Deposits and Other Assets
Prepaids, deposits and other assets consist
primarily of prepaid leases, prepaid value-added taxes in foreign countries, prepayments to suppliers, rental and utilities deposits
and restricted deposits as lease security. The Company had restricted deposits in the amounts of $NIL and $331,000 as of March 31,
2013 and December 31, 2012, respectively, in the form of certificates of deposits as security on leases.
Gaming Equipment
Gaming equipment consists primarily of
electronic gaming machines (EGMs) and systems. EGMs and systems are 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 $1.1 million was included in cost of gaming operations in the consolidated statements
of comprehensive income for both the three-month periods ended March 31, 2013 and 2012.
Property and Equipment
Property and equipment are stated at cost.
Depreciation is computed using the straight-line method over the useful lives of the assets currently estimated to be three to
twenty years, which in the case of leasehold improvements, is limited to the life of the lease and throughout the renewal period
as long as renewal is reasonably assured.
Depreciation of property and
equipment of approximately $89,000 and $NIL, respectively, which were recorded in the cost of gaming operations in the
consolidated statements of comprehensive income.
Depreciation of property and equipment
of approximately $41,000 and $17,000 were included in cost of operations (gaming products) in the consolidated statements of comprehensive
income for the three-month periods ended March 31, 2013 and 2012, respectively.
Goodwill and Intangible Assets,
Including Casino Contracts
Intangible assets consist of patents,
trademarks, technical know-how, gaming operation agreement, casino contracts and goodwill. Intangible assets other than goodwill
are amortized on the straight-line basis over the period of time the asset is expected to contribute directly or indirectly to
future cash flows, which ranges from four to ten years. The straight-line amortization method is utilized because the Company
believes there is no more reliably determinable method of reflecting the pattern for which the economic benefits of the intangible
assets are consumed or otherwise used.
Amortization expenses related to casino
contracts were approximately $620,000 and $615,000 for the three-month periods ended March 31, 2013 and 2012, respectively.
Amortization expenses related to other gaming related intangibles were approximately $63,000 and $63,000 for the three-month periods
ended March 31, 2013 and 2012, respectively. The amounts were accounted for as cost of gaming operations. Amortization expenses
related to technical know-how were approximately $6,000 and $NIL for the three-month periods ended March 31, 2013 and 2012, respectively.
The amounts were accounted for as cost of operations (gaming products). Amortization expenses related to patents and trademarks
were approximately $6,000 and $6,000 for the three-month periods ended March 31, 2013 and 2012, respectively. The amounts
were accounted for as selling, general and administrative expenses.
The Company measures and tests finite-lived
intangibles for impairment when there are indicators of impairment in accordance with ASC 360-10-05,
Property, Plant and Equipment
.
The Company measures and tests Goodwill
for impairment, at least annually in accordance with ASC 350-10-05,
Intangibles — Goodwill and Other
.
Impairment testing for goodwill and other
intangibles requires judgment, including the identification of reporting units, allocation of related goodwill, assignment of
corporate shared assets and liabilities to reporting units, estimated future cash flows and determinations of fair values. While
the Company believes its estimates of future revenues and future cash flows are reasonable, different assumptions could materially
affect the assessment of useful lives, recoverability and fair values. No impairment charges relating to intangible assets were
recorded for the three-month periods ended March 31, 2013 and 2012, respectively.
Litigation and Other Contingencies
In the performance of its ordinary course
of business operations, the Company is subject to risks of various legal matters, litigation and claims of various types. The
Company has regular litigation reviews, including updates from corporate and outside counsel, to assess the need for accounting
recognition or disclosure of these contingencies. The status of a significant claim is summarized in Note 16.
ASC 450,
Contingencies,
requires
that liabilities for contingencies be recorded when it is probable that a liability has been incurred and that the amount can
be reasonably estimated. Significant management judgment is required related to contingent liabilities and the outcome of litigation
because both are difficult to predict. For a contingency for which an unfavorable outcome is reasonably possible and which is
significant, the Company discloses the nature of the contingency and, when feasible, an estimate of the possible loss.
Revenue Recognition
The Company recognizes revenue when all of the following have
been satisfied:
|
·
|
Persuasive
evidence of an
arrangement exists;
|
|
·
|
The price to
the customer is
fixed and determinable;
|
|
·
|
Delivery has
occurred and any
acceptance terms
have been fulfilled;
|
|
·
|
No significant
contractual obligations
remain; and
|
|
·
|
Collection
is reasonably assured.
|
Gaming Revenue and Promotional Allowances
The Company earns recurring gaming revenue from its slot and
casino operations.
For slot operations, the Company earns
recurring gaming revenue by providing customers with EGMs and casino management systems which track game performance and provide
statistics on installed EGMs owned by the Company and leased to venue owners. Revenues are recognized on the contractual terms
of the slot agreements between the Company and the venue owners and are based on the Company’s share of net winnings, net
of customer incentives and commitment fees.
Revenues are recognized as earned with
the exception of one of the Company’s venues in which revenues were recognized when the payment for net winnings was received
as the collections from this venue were not reasonably assured. The slot contract with this venue owner was terminated on
July 31, 2012 and the Company collected the balance payments in the fourth quarter of 2012.
Commitment fees paid to the venue operators
relating to contract amendments which are not recoverable from daily net win are capitalized as assets and amortized as a reduction
of revenue over the term of the amended contracts. The Company had commitment fee balances related to contract amendments of
approximately $315,000 and $342,000 as of March 31, 2013 and December 31, 2012, respectively.
For casino operations, the Company’s
revenues are measured by the aggregate net difference between gaming wins and losses, with liabilities recognized for funds deposited
by customers before gaming play occurs and for chips in the customers’ possession, if any. Cash discounts, other cash incentives
related to casino play and commissions rebated through junkets or tour guides, if any, to customers are recorded as a reduction
to casino revenue. Consequently, the Company’s casino revenues are reduced by discounts and commissions.
The Company does not accrue a jackpot
liability for its slot machine base and progressive jackpots (“jackpots”) because the Company can avoid payment of
such amounts, as regulations do not prohibit removal of gaming machines from the gaming floor without payment of the jackpots.
Promotional allowances represent
goods and services, which would be accounted for as revenue if sold, that a casino gives to customers as an inducement to
gamble at that establishment. Such goods and services include food and beverages. The Company includes the retail value of
promotional allowances in gross revenues and deducts it from gross revenues to reach net revenues on the face of the
consolidated statements of comprehensive income.
Gaming Products Sales
The Company recognizes revenue from the
sale of its gaming products to end users upon shipment against customer contracts or purchase orders.
The Company also recognizes revenue from
the sale of its products to end users on bill and hold arrangements when all of the following have been satisfied:
|
·
|
The risk of
ownership must
be passed to the
buyer;
|
|
·
|
The customer
must have a fixed
commitment to purchase
the goods;
|
|
·
|
The buyer,
not the Company,
must request that
the transaction
be on bill and
hold basis;
|
|
·
|
There must
be a fixed schedule
for the delivery
of goods;
|
|
·
|
The Company
must not have specific
performance obligations
such that the earning
process is not
complete;
|
|
·
|
The ordered
goods must be segregated
from the Company’s
inventory and not
subject to being
used to fill other
orders, and;
|
|
·
|
The product
must be complete
and ready for shipment.
|
There were no sales related to bill-and-hold arrangements
for both the three-month periods ended March 31, 2013 and 2012.
Stock-Based Compensation
Under the fair value recognition provisions
of ASC 718,
Compensation-Stock Compensation
, the Company recognizes stock-based compensation expenses for all service-based
awards to employees and non-employee directors with graded vesting schedules on the straight-line basis over the requisite service
period for the entire award. Estimates are revised if subsequent information indicates that forfeitures will differ from previous
estimates, and the cumulative effect on compensation cost of a change in the estimated forfeitures is recognized in the period
of the change. For non-employee awards, the Company remeasures compensation cost each period until the service condition is complete
and recognizes compensation cost on the straight-line basis over the requisite service period. Option valuation models require
the input of highly subjective assumptions, and changes in the assumptions used can materially affect the fair value estimates.
Judgment is required in estimating stock price volatility, forfeiture rates, expected dividends, and expected terms that options
remain outstanding. For restricted stock awards with performance conditions, the Company evaluates if performance conditions are
probable in each reporting period. The compensation expense of restricted awards is recognized ratably over the implicit service
period if achieving performance conditions is probable. Cumulative catch-up adjustments are required in the event of changes in
assessment of probability. See Note 12 for additional information relating to stock-based compensation assumptions. Stock-based
compensation expense totaled approximately $247,000 and $265,000 for the three-month periods ended March 31, 2013 and 2012,
respectively.
Product Development
Product development expenses are charged
to expense as incurred. Employee related costs associated with product development are included in product development expenses.
Product development expenses were approximately $120,000 and $100,000 for the three-month periods ended March 31, 2013 and
2012, respectively. The increase was primarily a result of increased new product development activities for the gaming products
division, specifically gaming chips and plaques.
Leases
Leases are classified at the inception date as either a capital
lease or an operating lease. A lease is a capital lease if any of the following conditions exists:
|
·
|
Ownership
is transferred to the
lessee by the end of
the lease term;
|
|
·
|
There
is a bargain purchase
option;
|
|
·
|
The
lease term is at least
75% of the property’s
estimated remaining
economic life; or
|
|
·
|
The
present value of the
minimum lease payments
at the beginning of
the lease term is 90%
or more of the fair
value of the leased
property to the lessor
at the inception date.
|
A capital lease is accounted for as if
there was an acquisition of an asset and an incurrence of an obligation at the inception of the lease. All other leases are accounted
for as operating leases wherein rental payments are expensed as incurred. The Company had no capital leases as of March 31, 2013.
Income Taxes
The Company is subject to income taxes
in the United States (including federal and state) and several foreign jurisdictions in which it operates. Deferred income tax
balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax basis
and are stated at enacted tax rates expected to be in effect when taxes are actually paid or recovered. ASC 740,
Income
Taxes,
requires that deferred tax assets be evaluated for future realization and reduced by a valuation allowance to the extent
the Company believes a portion will not be realized. The Company considers many factors when assessing the likelihood of future
realization of its deferred tax assets, including its recent cumulative earnings experience and expectations of future taxable
income by taxing jurisdiction, the carry-forward periods available to the Company for tax reporting purposes, and other relevant
factors.
The Company accounts for uncertain tax
positions in accordance with ASC 740, which contains a two-step approach to recognizing and measuring uncertain tax positions.
The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it
is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes,
if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely to be realized upon ultimate
settlement. The Company considers many factors when evaluating and estimating its tax positions and tax benefits, which may require
periodic adjustments and which may not accurately anticipate actual outcomes. The Company recognizes interest and penalties, if
any, related to unrecognized tax benefits in the provision for income taxes in the statements of comprehensive income.
On December 31, 2010, the Company
effected a Quasi-Reorganization. As of that date, the Company’s deferred taxes were reported in conformity with applicable
income tax accounting standards described above, net of applicable valuation allowances. Deferred tax assets and liabilities were
recognized for differences between the assigned values and the tax basis of the recognized assets and liabilities with corresponding
valuation allowances as appropriate. In accordance with the Quasi-Reorganization requirements, pre-existing tax benefits realized
subsequent to the Quasi-Reorganization are recorded directly in equity.
(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 income by the weighted average number of shares of common stock and
shares issuable from stock options and restricted shares during the period. The computation of diluted earnings per share excludes
the impact of stock options and restricted shares that are anti-dilutive. There is no difference in diluted loss per share from
basic loss per share as the assumed exercise of common stock equivalents would have an anti-dilutive effect due to losses.
Foreign Currency Translations and Transactions
The functional currency of the Company’s
international subsidiaries, except for its operations in Cambodia whose functional currency is also U.S. dollars, is generally
the local currency. For these subsidiaries, the Company translates the assets and liabilities at exchange rates in effect at the
balance sheet date and income and expense accounts at average exchange rates during the year. Resulting currency translation adjustments
are recorded directly to accumulated other comprehensive income within stockholders’ equity. Gains and losses resulting from
transactions in non-functional currencies are recorded in the statements of comprehensive income.
Below is a summary of closing exchange
rates as of March 31, 2013 and December 31, 2012, and average exchange rates for the three-month periods ended March 31, 2013 and
2012, respectively.
($1 to foreign currency)
|
|
March 31, 2013
|
|
|
December 31, 2012
|
|
Australian Dollar
|
|
|
0.96
|
|
|
|
0.96
|
|
Philippine Peso
|
|
|
40.94
|
|
|
|
41.19
|
|
Hong Kong Dollar
|
|
|
7.76
|
|
|
|
7.75
|
|
|
|
Three-Month Periods Ended March 31,
|
|
($1 to foreign currency)
|
|
2013
|
|
|
2012
|
|
Australian Dollar
|
|
|
0.96
|
|
|
|
0.94
|
|
Philippine Peso
|
|
|
40.83
|
|
|
|
42.64
|
|
Hong Kong Dollar
|
|
|
7.76
|
|
|
|
7.76
|
|
Fair Value Measurements
Fair value is defined under ASC 820,
Fair
Value Measurements and Disclosures
, as the exchange price that would be received for an asset or paid to transfer a liability
(an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market
participants on the measurement date. Valuation techniques used to measure fair value under ASC 820 must maximize the use of observable
inputs and minimize the use of unobservable inputs. The standard establishes a fair value hierarchy based on three levels of input,
of which the first two are considered observable and the last unobservable.
|
·
|
Level 1 — Quoted prices in active markets for identical assets or liabilities. These are
typically obtained from real-time quotes for transactions in active exchange markets involving identical assets.
|
|
·
|
Level 2 — Input, other than quoted prices included within Level 1, which are observable for
the asset or liability, either directly or indirectly. These are typically obtained from readily-available pricing sources for
comparable instruments.
|
|
·
|
Level 3 — Unobservable input, where there is little or no market activity for the asset or
liability. This input reflects the reporting entity’s own assumptions of the data that participants would use in pricing
the asset or liability, based on the best information available under the circumstances.
|
As of March 31, 2013, the fair values
of cash and cash equivalents, restricted cash, accounts receivable and accounts payable approximate carrying values due to the
short maturity of these items.
Guarantees
The Company recognizes a guarantee
at its inception which is the greater of (i) the fair value of the guarantee and (ii) the contingent liability amount. The
fair value of a guarantee is determined by using expected present value measurement techniques. The initial liability
recognized is amortized over the guarantee period.
Recently Issued Accounting Standards
In February 2013, the FASB issued ASU 2013-02,
Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income
. The amendments do not change the current
requirements for reporting net income or other comprehensive income in financial statements. However, the amendments require an
entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition,
an entity is required to present, either on the face of the statement when net income is presented or in the notes, significant
amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount
reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For public
entities, the amendments are effective prospectively for reporting periods beginning after December 15, 2012. The adoption of ASU
2013-02 did not have a significant effect on the Company's consolidated financial statements.
The Company currently conducts business
in two operating segments: (i) gaming operations, which includes electronic gaming machine (EGM) participation and casino
operations; and (ii) gaming products, which consist of the design, manufacture and distribution of gaming chips and plaques.
During the reporting period, the Company was also engaged in the design, manufacture and distribution of other, non-gaming
plastic products, primarily for the automotive industry. These operations were sold March 28, 2013 and related historical revenues
and expenses have been reclassified as discontinued operations. The accounting policies of these segments are consistent with the
Company’s policies for the accompanying consolidated financial statements.
|
|
Three-Month Periods Ended March 31,
|
|
(amounts in thousands)
|
|
2013
|
|
|
2012
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Gaming operations
|
|
$
|
5,274
|
|
|
$
|
4,956
|
|
Gaming products
|
|
|
1,427
|
|
|
|
532
|
|
Total revenues
|
|
$
|
6,701
|
|
|
$
|
5,488
|
|
|
|
|
|
|
|
|
|
|
Operating (loss)/income:
|
|
|
|
|
|
|
|
|
Gaming operations gross margin
|
|
$
|
1,689
|
|
|
$
|
2,645
|
|
Gaming products gross margin
|
|
|
(69
|
)
|
|
|
111
|
|
Corporate and other operating costs and expenses
|
|
|
(2,014
|
)
|
|
|
(1,969
|
)
|
Total operating (loss)/income
|
|
$
|
(394
|
)
|
|
$
|
787
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
Gaming operations
|
|
$
|
1,844
|
|
|
$
|
1,800
|
|
Gaming products
|
|
|
55
|
|
|
|
25
|
|
Corporate
|
|
|
3
|
|
|
|
10
|
|
Total depreciation and amortization
|
|
$
|
1,902
|
|
|
$
|
1,835
|
|
Geographic segment revenues for the three-month periods ended
March 31, 2013 and 2012 consisted of the following:
|
|
Three-Month Periods Ended March 31,
|
|
(amounts in thousands)
|
|
2013
|
|
|
2012
|
|
Cambodia
|
|
$
|
4,337
|
|
|
$
|
4,179
|
|
Macau
|
|
|
667
|
|
|
|
212
|
|
Philippines
|
|
|
1,361
|
|
|
|
1,064
|
|
Australia
|
|
|
163
|
|
|
|
33
|
|
Other
|
|
|
173
|
|
|
|
—
|
|
|
|
$
|
6,701
|
|
|
$
|
5,488
|
|
For the three-month periods ended March 31,
2013 and 2012, in the gaming operations segment, the largest customer represented 58% and 78%, respectively, of total gaming operations
revenue. For the three-month periods ended March 31, 2013 and 2012, in the gaming products segment, the largest customer represented
41% and 54%, respectively, of total gaming products sales.
Inventories consisted of the following:
(amounts in thousands)
|
|
March 31, 2013
|
|
|
December 31, 2012
|
|
|
|
(Unaudited)
|
|
|
|
|
Raw materials
|
|
$
|
643
|
|
|
$
|
867
|
|
Finished goods
|
|
|
—
|
|
|
|
973
|
|
Spare parts
|
|
|
93
|
|
|
|
106
|
|
Casino inventories
|
|
|
33
|
|
|
|
101
|
|
|
|
$
|
769
|
|
|
$
|
2,047
|
|
|
Note 4.
|
Prepaid Expenses and Other Current Assets
|
Prepaid expenses and other current assets consisted of the following:
(amounts in thousands)
|
|
March 31, 2013
|
|
|
December 31, 2012
|
|
|
|
(Unaudited)
|
|
|
|
|
Prepayments to suppliers
|
|
$
|
234
|
|
|
$
|
174
|
|
Restricted cash
|
|
|
—
|
|
|
|
168
|
|
Prepaid leases
|
|
|
92
|
|
|
|
45
|
|
|
|
$
|
326
|
|
|
$
|
387
|
|
Accounts and other receivables consisted of the following:
(amounts in thousands)
|
|
March 31, 2013
|
|
|
December 31, 2012
|
|
|
|
(Unaudited)
|
|
|
|
|
Trade accounts
|
|
$
|
581
|
|
|
$
|
1,856
|
|
Other
|
|
|
1,652
|
|
|
|
112
|
|
|
|
|
2,233
|
|
|
|
1,968
|
|
Less: allowance for doubtful accounts
|
|
|
(15
|
)
|
|
|
(15
|
)
|
Net
|
|
$
|
2,218
|
|
|
$
|
1,953
|
|
On March 28, 2013, the Company sold the
non-gaming operations of its Dolphin Australia business to Mario Renzo Turcarelli. Other receivables included approximately $1.2
million due from Mr. Turcarelli as a result of the sale and related settlement of working capital (see Note 15).
Gaming equipment is stated at cost. The
major categories of gaming equipment and accumulated depreciation consisted of the following:
|
|
|
Useful Life
|
|
|
|
|
|
|
|
(amounts in thousands)
|
|
|
(years)
|
|
|
March 31, 2013
|
|
|
December 31, 2012
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
EGMs
|
|
|
3-5
|
|
|
$
|
17,867
|
|
|
$
|
16,222
|
|
Systems
|
|
|
5
|
|
|
|
1,587
|
|
|
|
1,093
|
|
Other gaming equipment
|
|
|
3-5
|
|
|
|
263
|
|
|
|
150
|
|
|
|
|
|
|
|
|
19,717
|
|
|
|
17,465
|
|
Less: accumulated depreciation
|
|
|
|
|
|
|
(8,816
|
)
|
|
|
(7,741
|
)
|
|
|
|
|
|
|
$
|
10,901
|
|
|
$
|
9,724
|
|
Depreciation expense of approximately $1.1 million was included
in cost of gaming operations in the consolidated statements of comprehensive income for both the three-month periods ended March 31,
2013 and 2012.
|
Note 7.
|
Property and Equipment
|
Property and equipment are stated at cost.
Property and equipment consisted of the following:
|
|
|
Useful Life
|
|
|
|
|
|
|
|
(amounts in thousands)
|
|
|
(years)
|
|
|
March 31, 2013
|
|
|
December 31, 2012
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
Equipment, vehicles, furniture and fixtures
|
|
|
3-10
|
|
|
$
|
2,787
|
|
|
$
|
2,900
|
|
Land and building
|
|
|
20
|
|
|
|
4,263
|
|
|
|
2,483
|
|
Leasehold improvements
|
|
|
1-2
|
|
|
|
19
|
|
|
|
180
|
|
Construction in progress
|
|
|
N/A
|
|
|
|
1,548
|
|
|
|
1,477
|
|
|
|
|
|
|
|
|
8,617
|
|
|
|
7,040
|
|
Less: accumulated depreciation
|
|
|
|
|
|
|
(680
|
)
|
|
|
(870
|
)
|
|
|
|
|
|
|
$
|
7,937
|
|
|
$
|
6,170
|
|
Depreciation expense for the three-month
periods ended March 31, 2013 and 2012 was approximately $89,000 and $NIL, respectively, which were recorded in cost of gaming operation
in the consolidated statements of comprehensive income.
Depreciation of property and equipment
of approximately $41,000 and $17,000 were included in cost of operations (gaming products) in the consolidated statement of comprehensive
income for the three-month periods ended March 31, 2013 and 2012, respectively.
|
Note 8.
|
Goodwill and Intangible Assets, including Casino Contracts
|
Intangible assets, if any, are stated at
cost. The Company’s intangible assets are summarized as follows:
|
|
Useful Life
|
|
|
|
|
|
|
(amounts in thousands)
|
|
(years)
|
|
March 31, 2013
|
|
|
December 31, 2012
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
Gaming operation agreement
|
|
4-5
|
|
$
|
1,236
|
|
|
$
|
1,232
|
|
Less: accumulated amortization
|
|
|
|
|
(378
|
)
|
|
|
(315
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
N/A
|
|
|
382
|
|
|
|
380
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents
|
|
5-6
|
|
|
114
|
|
|
|
114
|
|
Less: accumulated amortization
|
|
|
|
|
(47
|
)
|
|
|
(42
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
5-9
|
|
|
26
|
|
|
|
26
|
|
Less: accumulated amortization
|
|
|
|
|
(7
|
)
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Technical know-how
|
|
10
|
|
|
261
|
|
|
|
259
|
|
Less: accumulated amortization
|
|
|
|
|
(21
|
)
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Casino contracts
|
|
5-6
|
|
|
12,949
|
|
|
|
12,934
|
|
Less: accumulated amortization
|
|
|
|
|
(5,577
|
)
|
|
|
(4,952
|
)
|
|
|
|
|
$
|
8,938
|
|
|
$
|
9,615
|
|
Amortization expense for finite-lived intangible assets was
approximately $695,000 and $684,000 for the periods ended March 31, 2013 and 2012, respectively.
Goodwill movements during the periods consisted of the following:
(amounts in thousands)
|
|
2013
|
|
|
2012
|
|
|
|
(Unaudited)
|
|
|
|
|
Balance as of January 1
|
|
$
|
380
|
|
|
$
|
357
|
|
Foreign currency translation adjustment
|
|
|
2
|
|
|
|
23
|
|
Balance as of March 31/December 31
|
|
$
|
382
|
|
|
$
|
380
|
|
|
Note 9.
|
Prepaids, Deposits and Other Assets
|
Prepaids, deposits and other assets consisted of the following:
(amounts in thousands)
|
|
March 31, 2013
|
|
|
December 31, 2012
|
|
|
|
(Unaudited)
|
|
|
|
|
Prepaid taxes
|
|
$
|
962
|
|
|
$
|
922
|
|
Prepaid leases
|
|
|
738
|
|
|
|
747
|
|
Prepayments to suppliers
|
|
|
201
|
|
|
|
585
|
|
Deposits on EGM orders
|
|
|
136
|
|
|
|
257
|
|
Rentals, utilities and other deposits
|
|
|
509
|
|
|
|
240
|
|
Restricted cash
|
|
|
—
|
|
|
|
163
|
|
|
|
$
|
2,546
|
|
|
$
|
2,914
|
|
As of March 31, 2013, prepaid leases consisted of land
lease prepayments of approximately $230,000 and $508,000 for the casino projects located in the respective Cambodian provinces
of Kampot and Pailin.
|
Note 10.
|
Accrued
Expenses
|
Accrued expenses consisted of the following:
(amounts in thousands)
|
|
March 31, 2013
|
|
|
December 31, 2012
|
|
|
|
(Unaudited)
|
|
|
|
|
Payroll and related costs
|
|
$
|
549
|
|
|
$
|
1,292
|
|
Legal, accounting and tax
|
|
|
272
|
|
|
|
336
|
|
Tax expenses
|
|
|
549
|
|
|
|
514
|
|
Rental expenses
|
|
|
346
|
|
|
|
—
|
|
Project costs
|
|
|
314
|
|
|
|
—
|
|
Other
|
|
|
408
|
|
|
|
477
|
|
|
|
$
|
2,438
|
|
|
$
|
2,619
|
|
Payroll and related costs as of December 31,
2012 included accruals related to operations in Australia of approximately $726,000, which was fully settled during the three-month
period ended March 31, 2013.
|
Note 11.
|
Other
Liabilities
|
Other liabilities consisted of the following:
(amounts in thousands)
|
|
March 31, 2013
|
|
|
December 31, 2012
|
|
|
|
(Unaudited)
|
|
|
|
|
Other tax liabilities
|
|
$
|
588
|
|
|
$
|
555
|
|
Provision for long service leave
|
|
|
—
|
|
|
|
369
|
|
Others
|
|
|
141
|
|
|
|
154
|
|
|
|
$
|
729
|
|
|
$
|
1,078
|
|
|
Note 12.
|
Stock-Based
Compensation
|
Options
The Company effected a 1-for-4 reverse
stock split of its common shares as of June 12, 2012. All historical share amounts and share price information presented in this
Note 12 have been proportionally adjusted to reflect the impact of this reverse stock split.
At the annual shareholders meeting held
on September 8, 2008, a new stock option plan, the “2008 Stock Incentive Plan” (the “2008 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 (the “Stock Option Plans”), thereby terminating
both of the Stock Option Plans on December 31, 2008.
The 2008 Plan allows for incentive awards
to eligible recipients consisting of:
·
|
Options to purchase shares of common stock that qualify as incentive stock options
within the meaning of the Internal Revenue Code;
|
·
|
Non-statutory stock options that do not qualify as incentive options;
|
·
|
Restricted stock awards; and
|
·
|
Performance stock awards which are subject to future achievement of performance criteria or free of any performance or
vesting.
|
The maximum number of shares reserved
for issuance under the 2008 Plan was originally 1,250,000 shares, and in July 2010 the Company’s shareholders approved an
increase in the number of shares reserved for issuance to 2,500,000 shares. At the annual shareholders meeting held on July 13,
2012, the Company’s shareholders approved a further increase in the number of shares reserved for issuance to 3,750,000
shares. The exercise price 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 from six-months and one-day to over three years and have ten-year contractual terms.
During the three-month period ended March
31, 2013, stock options for the purchase of 360,000 shares of common stock were granted with a weighted average exercise price
of $1.93 and weighted average fair value of $1.18 (2012: $0.76) per share and will vest from six-month and one day to three-year
periods. During the three-month period ended March 31, 2013, 50,000 shares of restricted stock awards with a fair value of $1.97
per share were issued. The shares of restricted stock shall vest, subject to and upon the recipient’s achievement of key
operational and financial performance milestones. 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 any changes in the assessment of probabilities.
During the three-month period ended March
31, 2013, there was no exercise of outstanding stock options.
Prior to January 1, 2009, the Company
had two stock options plans, the Amended and Restated 1999 Stock Option Plan and the Amended and Restated 1999 Directors’
Stock Option Plan (the “Previous Stock Option Plans”), through which 3,750,000 shares and 75,000 shares were authorized,
respectively. Both Previous Stock Option Plans expired on December 31, 2008; however, options granted under the Previous Stock
Option Plans that were outstanding as of the date of termination remain outstanding and subject to termination according to their
terms.
As of March 31, 2013, stock options for
the purchase of 936,864 and 22,500 shares of common stock, respectively, were outstanding in relation to the Amended and Restated
1999 Stock Option Plan and the Amended and Restated 1999 Director’s Stock Option Plan.
As of March 31, 2013, there were no outstanding
non-plan options to purchase common stock. All previously granted non-plan options had expired by December 31, 2012. The non-plan
options were issued to certain employees and non-employees of EGT Entertainment Holding as approved by the Company’s stockholders
in September 2007 pursuant to the initial closing of the transactions under the Securities Purchase and Product Participation
Agreement dated June 12, 2007 between the Company and EGT Entertainment Holding.
As of March 31, 2013, stock options for
the purchase of 2,357,374 shares of common stock were outstanding under the 2008 Plan.
As of March 31, 2013, 2,573,405 stock
options were exercisable with a weighted average exercise price of $2.21, a weighted average fair value of $0.83 and an aggregate
intrinsic value of approximately $2.1 million. The total fair value of shares vested during the three-month period ended March
31, 2013 was approximately $483,000. The total compensation cost related to unvested shares as of March 31, 2013 was approximately
$695,000. The amount was expected to be recognized over 1.87 years.
A summary of all current and expired plans
as of March 31, 2013 and changes during the period then ended are presented in the following table:
|
|
Number of
Shares
|
|
|
Weighted Average
Exercise Price
|
|
|
Weighted Average
Remaining Contractual
Life
(in years)
|
|
|
Aggregate
Intrinsic Value
(in thousands)
|
|
Outstanding as of December 31, 2012
|
|
|
2,956,738
|
|
|
$
|
2.13
|
|
|
|
6.13
|
|
|
$
|
2,293
|
|
Granted
|
|
|
360,000
|
|
|
|
1.93
|
|
|
|
—
|
|
|
|
6
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Forfeited or expired
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding as of March 31, 2013
|
|
|
3,316,738
|
|
|
|
2.11
|
|
|
|
5.32
|
|
|
|
2,299
|
|
Exercisable as of March 31, 2013
|
|
|
2,573,405
|
|
|
$
|
2.21
|
|
|
|
5.32
|
|
|
$
|
2,149
|
|
Restricted Stock
|
|
Number of shares
|
|
|
Weighted Average
Fair Value at
Grant Date
|
|
|
Weighted Average
Remaining
Contractual Life
(in years)
|
|
Unvested balance as of December 31, 2012
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
Granted
|
|
|
50,000
|
|
|
|
1.97
|
|
|
|
0.75
|
|
Vested (1)
|
|
|
(12,500
|
)
|
|
|
1.97
|
|
|
|
0.75
|
|
Unvested balance as of March 31, 2013
|
|
|
37,500
|
|
|
$
|
1.97
|
|
|
|
0.75
|
|
|
(1)
|
Vested shares included 12,500 shares of restricted common stock
issued in 2013 for which final vesting is subject to the approval
by Company’s compensation committee.
|
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 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, 2013 and 2012.
|
|
Three-Month Periods
Ended March 31,
|
|
|
|
2013
|
|
|
2012
|
|
Range of values:
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
Expected volatility
|
|
|
75.02
|
%
|
|
|
76.49
|
%
|
|
|
113.46
|
%
|
|
|
127.83
|
%
|
Expected dividends
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Expected term (in years)
|
|
|
3.73
|
|
|
|
9.47
|
|
|
|
3.73
|
|
|
|
9.02
|
|
Risk free rate
|
|
|
0.55
|
%
|
|
|
1.91
|
%
|
|
|
0.63
|
%
|
|
|
1.95
|
%
|
For stock-based compensation accrued to
employees and non-employee directors, the Company recognizes stock-based compensation expense for all service-based awards with
graded vesting schedules on the straight-line basis over the requisite service period for the entire award. Initial accruals of
compensation expense are based on the estimated number of shares for which requisite service is expected to be rendered. Estimates
are revised if subsequent information indicates that forfeitures will differ from previous estimates, and the cumulative effect
on compensation cost of a change in the estimated forfeitures is recognized in the period of the change.
For non-employee awards, the Company remeasures
compensation cost each period until the service condition is complete and recognizes compensation cost on the straight-line basis
over the requisite service period.
The Company estimates forfeitures and
recognizes compensation cost only for those awards expected to vest assuming all awards would vest and reverses 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
|
Effective January 1, 2010, the Company
began sub-leasing office space from Melco Services Limited, a wholly-owned subsidiary of Melco International Development Limited,
which is also the parent of the Company’s principal shareholder, EGT Entertainment Holding. This sub-lease expired at the
end of March 2013 and the Company moved its principal executive office to the premises of the new Hong Kong Dolphin facilities
in April 2013. The relocation of the Company’s principal executive office serves to minimize costs and improve oversight
of its Dolphin operations.
On April 21, 2008, the Company entered
into a Trade Credit Facility Agreement (the “Facility Agreement”) with Elixir International Limited (“Elixir
International”), a company which used to be a wholly-owned subsidiary of EGT Entertainment Holding, the Company’s
principal shareholder. Upon entering into the Agreement, the Company issued the first note pursuant to the terms of the Facility
Agreement in the principal amount of $15.0 million (the “Initial Advance”). The Initial Advance extinguished
a then trade payable of an equivalent amount to Elixir International with respect to EGMs previously acquired.
As a result of the disposal of Elixir
International by EGT Entertainment Holding, Elixir International assigned and novated all its rights and obligations under the
Facility Agreement and the related promissory note (as amended) to EGT Entertainment Holding in April 2010.
Subsequent to its origination, the Facility
Agreement was amended three times, mostly recently on May 25, 2010 on which date the Company entered into Amendment No.3
to the Facility Agreement with EGT Entertainment Holding (the “Third Amendment”), pursuant to which the Company issued
a new note (the “Third Amended Note) to replace the previous terms. Under the payment schedule of the Third Amended
Note, the outstanding principal balance of $9.2 million and the interest accrued thereon were restructured in the following manner:
(a) the total interest accrued on the Outstanding Principal Balance during the period from July 1, 2009 to June 30,
2010 in the amount of $458,000 was to be paid by us in a lump sum payment on July 1, 2010; (b) on the first day of each
calendar month during the period from August 1, 2010 to June 1, 2011, the Company was to pay interest in arrears on
the Outstanding Principal Balance at the same rate of 5% per annum for the preceding month; and (c) the Company was to repay
the Outstanding Principal Balance and interest accrued thereon at the rate mentioned above in 18 equal monthly installments commencing
on July 1, 2011. As of December 31, 2012, the notes payable to EGT Entertainment Holding were fully settled.
Significant revenues, purchases and expenses arising from transactions
with related parties consisted of the following:
|
|
Three-Month Periods Ended March 31,
|
|
(amounts in thousands)
|
|
2013
|
|
|
2012
|
|
|
|
(Unaudited)
|
|
|
|
|
EGT Entertainment
Holding
|
|
|
|
|
|
|
|
|
Principal and interest payments
|
|
$
|
—
|
|
|
$
|
1,588
|
|
|
|
|
|
|
|
|
|
|
Melco
Crown Gaming (Macau) Ltd
|
|
|
|
|
|
|
|
|
Sales of gaming products
|
|
$
|
630
|
|
|
$
|
152
|
|
|
|
|
|
|
|
|
|
|
Melco
Services Limited
|
|
|
|
|
|
|
|
|
Technical services
|
|
$
|
8
|
|
|
$
|
8
|
|
Office rental
|
|
$
|
40
|
|
|
$
|
34
|
|
The Company recorded income tax expense
of $41,000 and $54,000 for the three-month periods ended March 31, 2013 and 2012, respectively. The Company’s effective
income tax rates were (14.2)% and 5.8% for the three-month periods ended March 31, 2013 and 2012, respectively. EGT Cambodia
and Dreamworld Casino (Pailin) are tax exempt, paying a fixed monthly tax rather than a tax on income. The change in effective
tax rate was mainly due to an increase in consolidated pre-tax loss.
The fixed obligation tax arrangement is
subject to annual renewal and negotiation. Earlier this year, the Company renewed the fixed obligation tax arrangement for both
EGT Cambodia and Dreamworld Casino (Pailin) for 2013.
The Company is subject to income tax examinations
by tax authorities from 2005 through the present period in jurisdictions in which it operates. During the years ended December
31, 2011 and 2012, the United States Internal Revenue Service (the “IRS”) conducted an audit of the Company’s
2008 and 2009 tax returns in the United States. On January 23, 2013, the IRS formally notified the Company that it had completed
the review of the examination of the above-mentioned years with no changes to the Company’s tax.
The Company’s 2008 to 2012 Australian
income tax returns remain subject to examination by the Australian Taxation Office. The Company’s 2009 to 2012 Cambodian
income tax returns remain subject to examination by the General Department of Taxation. The Company’s 2009 to 2012 Philippines
income tax returns also remain subject to examination by the Philippines Bureau of Internal Revenue.
|
Note 15.
|
Discontinued
Operations
|
On February 22, 2013, the Company entered
into a Share Sale Agreement pursuant to which it agreed to sell the portion of its business dedicated to the manufacture and sale
of non-gaming plastic products, mainly automotive parts. The sale was completed on March 28, 2013. In connection with the sale
of non-gaming operations, the Company relocated its gaming chips and plaques operations from Melbourne, Australia to Hong Kong.
Commercial production of the new facility commenced in May 2013.
Since July 2006, the Company conducted
the development, manufacture and sale of gaming chips and plaques from its Dolphin subsidiary in Melbourne, Australia. It also
conducted the development, manufacture and sale of non-gaming plastic products for a number of industries, including the automotive
industry, from the Melbourne facility. Pursuant to the Share Sale Agreement entered into between the Company and Mario Renzo Turcarelli,
the then general manager of the Company’s Dolphin Australia operations, the Company agreed to sell to Mr. Turcarelli all
of the share capital of Dolphin Products Pty Limited (“Dolphin Australia”), an Australian company through which the
Company had conducted both its gaming chips and plaques operations and its non-gaming plastic products operations. Prior to the
completion of the sale, the Company transferred out of Dolphin Australia to Elixir Gaming Technologies (Hong Kong) Limited and
a newly formed Dolphin Products Limited company in Hong Kong, both of which are subsidiaries wholly-owned by the Company, all
working capital on hand and all assets and operations relating to the Company’s gaming chips and plaques operations, including
all trademarks, patent rights and other intellectual property.
The purchase price paid by Mr. Turcarelli
pursuant to the Share Sale Agreement was AUD350,000 (approximately $365,000). The Company also agreed to assume Dolphin Australia’s
liability for (i) severance under Australian labor laws for those employees to be terminated by Dolphin Australia as part of the
transactions, approximately $750,000, (ii) the lease for the Melbourne facility through the end of its present term expiring in
January 2014, net of sub-lease income, approximately $350,000, and (iii) all Dolphin Australia payables, net of receivables, relating
to both gaming and non-gaming operations up to March 28, 2013. This resulted in the amount of approximately $1.2 million due from
Mr. Turcarelli.
As part of the sale transaction, the Company
also agreed to grant Dolphin Australia a non-transferable, substantially royalty-free license to utilize certain trademarks and
patent rights in connection with Dolphin Australia’s manufacture and sale of plastic products for the non-gaming industries.
The following table details selected financial information
for the discontinued operations in the consolidated statements of comprehensive income.
|
|
Three-Month Periods Ended
March 31,
|
|
(amounts in thousands)
|
|
2013
|
|
|
2012
|
|
Income from operations
|
|
$
|
236
|
|
|
$
|
91
|
|
Loss on disposal
|
|
|
(2,442
|
)
|
|
|
—
|
|
Income tax benefit
|
|
|
28
|
|
|
|
—
|
|
(Loss)/income from discontinued
operations, net of tax
|
|
$
|
(2,178
|
)
|
|
$
|
91
|
|
Income tax benefit represented a reversal of previously recognized
uncertain tax benefits.
|
Note 16.
|
Commitments
and Contingencies
|
Legal Matters
Prime Mover/Strata Litigation
On March 26, 2010, a complaint (as
subsequently amended on May 28, 2010) (the “Complaint”) was filed by certain of the Company’s shareholders
including Prime Mover Capital Partners L.P., Strata Fund L.P., Strata Fund Q.P. L.P., and Strata Offshore Fund, Ltd (collectively,
the “Plaintiffs”) in the United States District Court for the Southern District of New York against certain defendants
including the Company and certain other of our current and former directors and officers.
The Complaint alleges claims related to
disclosures concerning our electronic gaming machine participation business (the “Slot Business”), including but not
limited to the alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5
promulgated thereunder, violations of Nevada Revised Statutes Sections 90.580(e) and 90.660(3), breach of fiduciary duty,
and negligent misrepresentations. The Plaintiffs allege that the Company and certain other defendants made false and misleading
statements about the Slot Business in filings with the SEC, press releases, and other industry and investor conferences and meetings
during the period from June 13, 2007 to August 13, 2008 and that the Plaintiffs then purchased the securities at the
inflated prices and later suffered economic losses when the price of our securities decreased.
On June 22, 2011, the court dismissed
all of the Plaintiffs’ claims except for two breach-of-contract counts against the Company. All claims against the current
and former officers and directors were dismissed. On December 20, 2011 the Plaintiffs filed a second amended Complaint (the
“Second Amended Complaint”) for re-pleading all the securities claims against the Company and all the relevant current
and/or former officers and directors.
On September 27, 2012, the District Court
dismissed all of the Plaintiffs’ claims under the Second Amended Complaint except for two breach-of-contract counts against
the Company. Again, all claims against the current and former officers and directors were dismissed.
On October 25, 2012, the Plaintiffs filed
a Notice of Appeal seeking review by the Second Circuit Court of Appeals of the trial court’s dismissal of the Second Amended
Complaint (the “Appeal”). On March 28, 2013, the Plaintiffs filed their appellant brief. The Company will file its
opposition within the following 90-day period as prescribed by the applicable court rules.
The Plaintiffs seek unspecified damages,
as well as interest, costs and attorneys’ fees. The Company intends to defend itself vigorously against the Plaintiffs’
claims. As the litigation is at an early stage, it is not possible to predict the likely outcome of the case or the probable loss,
if any, or the continuation of insurance coverage and, accordingly, no accrual has been made for any possible losses in connection
with this matter.
Note 17. (Loss)/Earnings
Per Share
Computation of the basic and diluted (loss)/earnings per share
from continuing operations consisted of the following:
|
|
Three-Month Periods Ended March 31,
|
|
|
|
2013
|
|
|
2012
|
|
(amounts in thousands except per share data)
|
|
Loss
|
|
|
Number of
Shares
|
|
|
Per Share
Amount
|
|
|
Income
|
|
|
Number of
Shares
|
|
|
Per Share
Amount
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net(loss)/income attributable to equity shareholders
|
|
$
|
(329
|
)
|
|
|
30,024
|
|
|
$
|
(0.01
|
)
|
|
$
|
881
|
|
|
|
29,900
|
|
|
$
|
0.03
|
|
Effect of dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive stock options/restricted shares (1)
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
290
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/income attributable to equity shareholders plus assumed conversion
|
|
$
|
(329
|
)
|
|
|
30,024
|
|
|
$
|
(0.01
|
)
|
|
$
|
881
|
|
|
|
30,190
|
|
|
$
|
0.03
|
|
For the three-month period ended March 31,
2013, outstanding stock options of 2,166,738 shares of common stock were excluded from the calculation of diluted earnings per
share as their effect would be anti-dilutive. For the three-month period ended March 31, 2012, outstanding stock options
of 3,081,592 shares of common stock were excluded from the calculation of diluted earnings per share as their effect would be
anti-dilutive.
(1)
|
For the three-month period ended March 31, 2013, there was no difference in diluted loss per share from basic loss per share as the assumed exercise of common stock equivalents would have an anti-dilutive effect due to losses.
|
Note 18. Accumulated Other
Comprehensive Income
The accumulated balances in respect of
other comprehensive income consisted of the following:
(amounts in thousands)
|
|
Unrealized
Actuarial
Income
|
|
|
Foreign
Currency
Translation
|
|
|
Accumulated
Other
Comprehensive
Income
|
|
Balances, January 1, 2012
|
|
$
|
14
|
|
|
$
|
545
|
|
|
$
|
559
|
|
Current period other comprehensive income
|
|
|
76
|
|
|
|
294
|
|
|
|
370
|
|
Balances, December 31, 2012
|
|
|
90
|
|
|
|
839
|
|
|
|
929
|
|
Current period other comprehensive (loss)/income
|
|
|
(28
|
)
|
|
|
11
|
|
|
|
(17
|
)
|
Balances, March 31, 2013
|
|
$
|
62
|
|
|
$
|
850
|
|
|
$
|
912
|
|
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, 2012, filed with the SEC on March 28, 2013 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, 2012
filed with the SEC on March 28, 2013.
We own or have rights to certain trademarks
that we used in connection with our business or products, including, but not limited to, Dolphin™. Other than this trademark,
this report also makes reference to trademarks and trade names of other companies.
On June 12, 2012, we effected a 1-for-4
reverse stock split of our common stock and corresponding decrease in the number of authorized shares of common stock. All historical
share amounts and share information presented in the financial statements and notes have been proportionally adjusted to reflect
the impact of this reverse stock split, including but not limited to basic and diluted weighted-average shares issued and outstanding.
Certain reclassifications have been made to the prior periods' financial statements to conform to the current period's presentation.
On March 28, 2013, we sold a portion of
our subsidiary Dolphin Products Pty Limited business dedicated to the manufacture and sale of non-gaming plastic products, mainly
automotive parts. Revenues of these non-gaming products and our gaming chips and plaques were previously consolidated under the
reporting segment “Other Products.” After the sale, we renamed “Other Products” as “Gaming Products”
and this segment now comprises exclusively our gaming chips and plaques operations. All related historical revenues and expenses
from the sold non-gaming assets have been reclassified as discontinued operations.
Overview
Our primary focus is our gaming operations,
which comprise our slot operations in Cambodia and the Philippines and the development and operation of regional style casinos
and gaming venues under our Dreamworld brand in Indo-China, and our gaming products, which presently comprise the manufacture and
sale of gaming chips and plaques under our Dolphin brand.
During
the first quarter and through the date of this report, we expanded our gaming operations with the opening of a new property, Dreamworld
Club (Poipet). In addition, we completed our plans to re-strategize our legacy businesses with the divestiture of a low-margin,
non-gaming business and repositioning of our gaming products division.
Our consolidated revenue for the
three-month period ended March 31, 2013 was approximately $6.7 million, of which revenue from our gaming operations and
gaming products segments comprised 79% and 21%, respectively, of consolidated revenue. This compares to consolidated revenue
of approximately $5.5 million for the three-month period ended March 31, 2012, of which revenue from our gaming operations
and gaming products segments comprised 90% and 10%, respectively, of consolidated revenue.
Our slot operations involve the leasing
of electronic gaming machines (“EGMs”) on a revenue sharing basis to gaming establishments. We utilize our operational
experience, established market presence and key relationships to identify and develop new gaming venues, acquire EGMs, casino management
systems and other gaming peripherals directly from manufacturers, dealers and suppliers and install the same in our contracted
venues. In addition, we assist the venue owners in brand-building and marketing promotions.
For certain of our slot contracts, such
as with NagaWorld Resorts, Sokha Hotels and Resorts and Dreamworld Club (Poipet) in Cambodia, we also function as a manager of
the EGM operations. In these venues, we either jointly manage with the relevant casino owner, as is the case with NagaWorld Resorts
and Sokha Hotels and Resorts, or exclusively manage, as is the case with Dreamworld Club (Poipet), the slot floor operations and
design marketing programs and slot promotions for our designated gaming spaces. We also hire, train and manage the floor staff
and set high expectations on the level of customer service.
As of March 31, 2013, our slot operations
were located in two countries, Cambodia and the Philippines, and totaled 1,581 EGM seats in operation in a total of six venues.
In Cambodia, we had a total of 1,008 EGM seats in operation in three venues. In the Philippines, we had a total of 573 EGM seats
in operation in three venues. Due to our ongoing efforts to improve the returns for our slot operations, we seek to selectively
add new venues and refine existing operations to focus on those venues with the greatest potential.
In March 2013, we soft opened
Dreamworld Club (Poipet) in Cambodia with 166 EGM seats in operation. This venue officially opened in May 2013 with
approximately 300 EGM seats. In March 2012, we conducted a soft opening of our slot operations at Thansur Bokor in Cambodia
with 87 EGM seats in operation. This venue officially opened in May 2012 with approximately 200 EGM seats. During the period
from May to July 2012, we terminated three contracts, one in Cambodia and two in the Philippines, with a combined total of
273 EGMs seats as these venues were not performing up to our expectations. There were minimal costs associated with the
termination of these above-mentioned contracts and the loss of these operations has had a minimal impact on our revenue.
In Cambodia, our slot operations largely
focused on operating a substantial portion of the gaming machine area in prime casino floor locations at NagaWorld, a wholly-owned
subsidiary of Hong Kong listed NagaCorp Ltd. (HKSE: 3918). NagaWorld is a premier luxury destination gaming resort and the only
licensed full service casino in a designated area around the capital city of Phnom Penh. Our slot operations at NagaWorld, which
comprise 670 EGM seats under contract, are a primary contributor to our slot revenue and cash flow. Revenue from our slot operations
in NagaWorld for the three-month period ended March 31, 2013 was $3.1 million, a decrease of approximately $776,000 from the same
period in the prior year primarily due to a decrease in average net win per machine for these operations to $217 for the three-month
period ended March 31, 2013 from $260 in the prior year period. The decline was believed to be due to normal fluctuation
as well as lower player traffic in February 2013 due to the second observed week-long official mourning period for the deceased
former King of Cambodia at the beginning of the month and the several-day strike by NagaWorld workers at the end of the month. While
normal fluctuation occurs, with prominent ground floor locations, quality product and customer service, and proactive marketing,
we believe we are well positioned to maintain strong overall performance from these operations.
Our slot operations in Cambodia also include
Thansur Bokor Highland Resort, a casino resort developed by leading Cambodian hotelier, Sokha Hotels and Resorts, in a tourist
area of the Kampot Province. The resort officially opened in May 2012 however, portions of the initial phase of the property including
the entertainment complex were not completed until the first quarter of 2013. To-date, we have placed approximately 200 EGMs in
this venue. Under the terms of the agreement, we have the ability to place up to 250 EGM seats and jointly manage these slot operations
in the resort. This strategic project expands our gaming operations in the Indo-China region with a prominent partner with multiple
properties in Cambodia.
We recently expanded our slot operations
in Cambodia to include Dreamworld Club (Poipet), which we developed and exclusively operate ourselves under our own brand. Dreamworld
Club (Poipet) is a standalone slot hall with approximately 300 EGM seats, which we developed as an extension of the existing casino
owned by a local company. It is prominently located in the established gaming market of Poipet in the Banteay Meanchey Province
of Northwestern Cambodia near the Thailand border. Dreamworld Club (Poipet) soft opened on March 28, 2013 and the official grand
opening was held on May 9, 2013.
Dreamworld Club (Poipet) operates under
a machine operation and participation agreement with a local partner that owns and operates an existing casino in Poipet. Under
the terms of the agreement, the local partner allocated part of its land with an area of approximately 16,000 square feet to us
to develop and construct, at our own design, budget and cost, the slot venue. We and the local partner split the win per unit per
day 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%. The initial project term is five years beginning from the commercial launch of the slot hall
with an option to renew for an additional five years subject to the achievement of certain financial milestones during the initial
five-year period.
Total capital expenditures for Dreamworld
Club (Poipet), which principally included the development and construction of the facility and gaming equipment, are approximately
$7.5 million, including approximately $5.0 million to source top-of-the-line EGMs. We provided the required EGMs through the purchase
of new and used machines as well as from our inventory. We are responsible for all capital expenditures for Dreamworld Club (Poipet)
and those expenditures have been funded through our internal cash resources.
In the Philippines, our slot operations
continued to post solid improvement in average net wins per machine compared to the prior year period. We attribute this to our
efforts to implement, with the support of our venue owner partners, targeted marketing programs and redeploy, when possible, our
gaming equipment from lower to higher performing venues in the market to improve returns on these assets.
Our gaming operations also include our
casino operations, which presently comprise one property, Dreamworld Casino (Pailin). Dreamworld Casino (Pailin) is located in
an emerging gaming market in the Pailin Province of Northwestern Cambodia next to the Thailand border. The mass market floor opened
in May 2012 and houses 26 tables games and 52 EGM seats.
Dreamworld Casino (Pailin) is constructed
on land leased from a local land owner and in consideration the land owner is entitled to receive a fair monthly rental fee and
20% of the profit before depreciation (the total gross revenue of the casino less any payouts paid to customers, operating expenses,
and gaming and non-gaming taxes on the casino’s revenue). The initial lease term is 20 years, which commenced in September
2011 and is subject to renewal by the parties in writing.
The initial phase of Dreamworld Casino
(Pailin) measures approximately 16,000 square feet. The local partner also owns property adjacent to Dreamworld Casino (Pailin)
measuring nearly 250,000 square feet. We have an option to lease this adjacent property at a future date and use it to develop
additional phases of the Dreamworld Casino (Pailin). Such additional phases are intended to include expanded casino operations
and complementary facilities such as hotel rooms, a spa and other entertainment amenities.
Total capital expenditures for the initial
phase of Dreamworld Casino (Pailin) were approximately $2.5 million, which was paid solely by us from our internal cash resources.
Dreamworld Casino (Pailin) contributed
approximately $1.1 million to gaming operations revenue for the three-month period ended March 31, 2013, down slightly from $1.2
million for the three-month period ended December 31, 2012. The decline was due to the refinement of marketing strategies during
the first quarter of 2013, which resulted in us utilizing fewer gaming promoters during the period. Operating costs for Dreamworld
Casino (Pailin) were approximately $1.3 million during the three-month period ended March 31, 2013, which were recorded in gaming
operations cost of sales under other operating costs.
We are focused on improving financial performance
of Dreamworld Casino (Pailn) and continue our efforts to refine and broaden our marketing strategies to attract higher quality
players and, where possible, to identify and implement cost reduction initiatives.
To-date, our marketing initiatives have
included, but have not been limited to, the use of fixed fee promoters, such as bus programs.
These
programs have been helpful in driving mass market player traffic. In addition, we are preparing to launch a junket program and
are in the final due diligence stages of signing agreements with potential operators.
By utilizing junket operators,
we expect to improve high net worth player traffic for our premium and VIP facilities while minimizing the downside risk and volatility
related to these players as the junket operators typically share in wins and losses and assume the credit risk.
In addition to Dreamworld Casino (Pailin),
we have another casino development project in the pipeline, Dreamworld Casino (Kampot). In partnership with a local land owner,
we intend to develop a small casino in the Kampot Province of Southwestern Cambodia near the Vietnam border on land owned by the
local partner. Depending on demand and the availability of capital, there is the potential to add at a future date additional casino
floor space and equipment as well as complementary facilities such as hotel rooms, a spa and other entertainment amenities.
The local partner will lease to us the
land for a period of 25 years for an annual fee of $1. We will provide funding for all development, construction and pre-opening
costs for the Dreamworld Casino (Kampot) and all necessary gaming equipment. We and the local partner will split Dreamworld Casino
(Kampot)’s net revenue (the total gross revenue of the casino less any payouts paid to customers, operating expenses, and
gaming and non-gaming taxes on the casino’s revenue) on a respective basis of 60%/40%. Total capital expenditures for the
initial phase of Dreamworld Casino (Kampot) are projected to be approximately $1.2 million as the EGMs will be sourced from our
existing inventory.
We intend to commence construction of Dreamworld
Casino (Kampot) in the second half 2013. We expect the project will open within six to nine months following the beginning of construction.
We also own a parcel of land with total
area of approximately seven acres in the Takeo Province of Cambodia near the Vietnam border and were granted in-principle approval
to build and open a casino-hotel in the Takeo Province by the Cambodian government. At the present time, we do not expect to commit
significant capital to the project on this land in order to divert our available capital to the development of projects, which
we believe will offer greater short and medium-term return potential. Our future development plans for this land will be dependent
on our available capital and local market conditions at that time.
We continue to selectively pursue additional
slot and casino development projects that will enable us to expand our market presence and increase brand equity in our Dreamworld
name in the Indo-China region. While there is no guarantee we will be successful in signing new projects, we aim to secure larger
scale projects that will allow us to better leverage operating costs and provide the opportunity for higher net returns.
With
regard to our gaming products segment, we have successfully completed our plans to re-strategize these legacy operations. On March
28, 2013, we completed the sale of the non-gaming manufacturing portion of the operations in a management-led buyout for total
consideration of AUD350,000. In connection with the sale, in March 2013, we commenced the relocation of our manufacturing facilities
for the gaming products portion of the business, namely gaming chips and plaques, to Hong Kong from Australia. Commercial operation
of the new Hong Kong facility, which is also the new home of our corporate headquarters, began in early May 2013.
These
actions not only enabled us to exit a non-core, low-margin business but also provide the opportunity to enhance the profitability
of our gaming products division through lower cost labor, elimination of redundant support functions, further automation and improved
R&D capabilities, as well as better penetrate and service the growing Asian gaming markets. In addition, it improves our ability
to expand our product mix to include other gaming products, which could add incremental revenue streams and further enhance our
competitive positioning.
Revenue from gaming chips and plaques increased
significantly to $1.4 million for the three-month period ended March 31, 2013 compared to $532,000 in the prior year period as
a result of increased orders of gaming chips and plaques from existing customers. However, we incurred additional labor costs,
which resulted in a gross loss of approximately $69,000 for these operations for the three-month period ended March 31, 2013. These
higher labor costs were primarily a result of increased overtime by the Australian workers due to the expedited fulfillment of
orders as we fast-tracked the relocation of the plant from Australia to Hong Kong and absenteeism following the announcement of
the relocation of the gaming products business.
We recorded one-time cash costs associated
with the sale and relocation, which included severance and new facility set-up, of approximately $1.3 million in the three-month period ended March 31, 2013. All incurred costs associated
with the relocation have been funded from our available working capital.
With
a quality product line, streamlined operating structure, solid existing customer base and high-security production facilities in
close proximity to the growing Asian gaming markets, we believe that we have all the right and necessary elements to best serve
our target markets and are poised to benefit from the major casino development anticipated over the next several years in Asia.
While we anticipate continued lumpiness in order flow on a quarter to quarter basis, our efforts are expected to result in improved
recurring revenue and earnings growth potential for these operations.
With gaming businesses that offer growth
potential and the ability to generate quality recurring cash flow combined with our established presence and strong relationships
in our markets, we believe have established a solid foundation from which to capitalize on the growth opportunities in our target
markets in Asia.
Results of Operations for the Three-Month Periods Ended March 31,
2013 and 2012
The following is a schedule summarizing
operating results on a consolidated basis and separately by each of our two operating segments, gaming operations and gaming products,
for the three-month periods ended March 31, 2013 and 2012.
On February 22, 2013, we entered into a
share sale agreement pursuant to which we agreed to sell the portion of our subsidiary Dolphin Products Pty Limited (“Dolphin
Australia”) business dedicated to the manufacture and sale of non-gaming plastic products, mainly automotive parts. As part
of the sale transaction, we also agreed to grant Dolphin Australia a non-transferable, royalty-free license to utilize certain
trademarks and patent rights in connection with its manufacture and sale of plastic products for the non-gaming industries. The
sale closed on March 28, 2013. All historical revenues and expenses associated with our non-gaming plastic products operations
for the periods ended March 31, 2013 and 2012 have been reclassified as discontinued operations.
|
|
Three-Month Periods Ended March 31,
|
|
(amounts in thousands, except per share data)
|
|
2013
|
|
|
2012
|
|
Total:
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
6,701
|
|
|
$
|
5,488
|
|
Gross profit
|
|
$
|
1,620
|
|
|
$
|
2,756
|
|
Gross margin percentage
|
|
|
24
|
%
|
|
|
50
|
%
|
Adjusted EBITDA from continuing operations (1)
|
|
$
|
1,861
|
|
|
$
|
3,064
|
|
Operating (loss)/income from continuing operations
|
|
$
|
(394
|
)
|
|
$
|
787
|
|
Net (loss)/income from continuing operations
|
|
$
|
(329
|
)
|
|
$
|
881
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings per share
|
|
$
|
(0.01
|
)
|
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
|
|
|
|
|
|
Basic
|
|
|
30,024
|
|
|
|
29,900
|
|
Diluted
|
|
|
30,024
|
|
|
|
30,190
|
|
|
|
|
|
|
|
|
|
|
Gaming operations:
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
5,274
|
|
|
$
|
4,956
|
|
Gross profit
|
|
$
|
1,689
|
|
|
$
|
2,645
|
|
Gross margin percentage
|
|
|
32
|
%
|
|
|
53
|
%
|
|
|
|
|
|
|
|
|
|
Gaming products:
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
1,427
|
|
|
$
|
532
|
|
Gross (loss)/profit
|
|
$
|
(69
|
)
|
|
$
|
111
|
|
Gross margin percentage
|
|
|
(5
|
)%
|
|
|
21
|
%
|
|
(1)
|
We define “Adjusted EBITDA" as earnings from continuing operations
before interest, taxes,
depreciation, amortization, stock-based
compensation, and other non-cash operating
income and expenses. Adjusted EBITDA is presented
exclusively as a supplemental disclosure because our management believes that it is widely used to measure the performance,
and as a basis for valuation, of gaming companies. Our management uses Adjusted EBITDA as a measure of the operating
performance of its segments and to compare the operating performance of its operations with those of its competitors. We
also present Adjusted EBITDA because it is used by some investors
as a way to measure a company’s ability to incur and
service debt, make capital expenditures and meet working capital
requirements. Gaming companies have historically reported
EBITDA as a supplement to financial measures in accordance with generally accepted accounting principles in the United
States (“GAAP”). Adjusted EBITDA should not be
considered as an alternative to operating income as an indicator of our
performance, as an alternative to cash flows from operating activities as a measure of liquidity, or as an alternative to
any other measure determined in accordance with GAAP. Unlike net
income, Adjusted EBITDA does not include depreciation or interest
expense and, therefore, does not reflect current or future capital expenditures or the cost of capital. We
compensate for these limitations by using Adjusted EBITDA as only one of several comparative tools, together with GAAP
measurements, to assist in the evaluation of operating performance. Such GAAP measurements include operating income, net
income, cash flows from operations and cash flow data. We have significant uses of cash flows, including capital
expenditures, interest payments, debt principal repayments, taxes and other non-recurring charges, which are not reflected
in Adjusted EBITDA. Our calculation of Adjusted EBITDA may be
different from the calculation methods used by other companies and,
therefore, comparability may be limited.
|
A reconciliation of EBITDA from continuing
operations, as adjusted, to the net (loss)/income from continuing operations is provided below.
|
|
Three-Month Periods Ended March 31,
|
|
(amounts in thousands)
|
|
2013
|
|
|
2012
|
|
Net(loss)/income from continuing operations
— GAAP basis
|
|
$
|
(329
|
)
|
|
$
|
881
|
|
Interest expense
|
|
|
4
|
|
|
|
53
|
|
Interest income
|
|
|
(4
|
)
|
|
|
(12
|
)
|
Income tax expenses
|
|
|
41
|
|
|
|
54
|
|
Depreciation and amortization
|
|
|
1,902
|
|
|
|
1,835
|
|
Stock-based compensation expense
|
|
|
247
|
|
|
|
265
|
|
Gain on dispositions of assets
|
|
|
—
|
|
|
|
(12
|
)
|
EBITDA from continuing operations, as adjusted
|
|
$
|
1,861
|
|
|
$
|
3,064
|
|
Total revenues
increased approximately $1.2 million to $6.7 million for the three-month period ended March 31, 2013 compared to
approximately $5.5 million in the same period of the prior year due to increases in both business divisions. Revenue from our
gaming operations increased primarily as a result of incremental revenue from Dreamworld Casino (Pailin), which opened in May
2012, partially offset by decreased revenue from our slot operations. Revenue from gaming products division increased as a result of
higher sales of gaming chips and plaques to existing customers.
Gross profit decreased approximately
$1.1 million to $1.6 million for the three-month period ended March 31, 2013 compared to approximately $2.7 million in
the same period of the prior year primarily as a result of lower slot operations revenue mainly due to lower average daily
net wins per machine from our operations in NagaWorld, a gross loss for our casino operations and higher non-recurring labor
costs associated with our gaming products division (as described more fully below) compared to the prior year period.
Operating loss
increased approximately $1.2 million to $394,000 for the three-month period ended March 31, 2013 compared to operating income
of approximately $787,000 in the same period of the prior year. Net loss from continuing operations increased approximately
$1.2 million to $329,000 compared to net income of approximately $881,000 for the same period in the prior year. The increase
in operating loss and net loss from continuing operations was primarily the result of lower gross profit.
Gaming Operations
Revenues from our gaming operations consisted
of our slot and casino development operations.
|
|
Three-Month Periods Ended March 31,
|
|
(amounts in thousands, except per unit data)
|
|
2013
|
|
|
2012
|
|
Net revenue to the Company
|
|
|
|
|
|
|
|
|
Cambodia slot operations (1)
|
|
$
|
3,243
|
|
|
$
|
3,892
|
|
Philippines slot operations
|
|
|
937
|
|
|
|
1,064
|
|
Net revenue from slot operations
|
|
$
|
4,180
|
|
|
$
|
4,956
|
|
Dreamworld Casino (Pailin)
|
|
|
1,094
|
|
|
|
—
|
|
Consolidated total
|
|
$
|
5,274
|
|
|
$
|
4,956
|
|
|
|
|
|
|
|
|
|
|
Average net win per unit per day (2)
|
|
|
|
|
|
|
|
|
Cambodia
|
|
$
|
176
|
|
|
$
|
239
|
|
Philippines
|
|
$
|
86
|
|
|
$
|
73
|
|
Consolidated total
|
|
$
|
139
|
|
|
$
|
154
|
|
|
|
Three-Month Periods Ended March 31,
|
|
|
|
2013
|
|
|
2012
|
|
EGM seats in operation
|
|
|
|
|
|
|
|
|
Cambodia slot operations (1)
|
|
|
1,008
|
|
|
|
799
|
|
Philippines slot operations
|
|
|
573
|
|
|
|
761
|
|
EGM seats in slot operations
|
|
|
1,581
|
|
|
|
1,560
|
|
Dreamworld Casino (Pailin)
|
|
|
52
|
|
|
|
—
|
|
Consolidated total
|
|
|
1,633
|
|
|
|
1,560
|
|
|
(1)
|
Includes Dreamworld Club (Poipet), which operates under a machine operation and participation agreement.
Dreamworld Club (Poipet) soft opened on March 28, 2013 and the grand opening was on May 9, 2013.
|
|
(2)
|
Average net win figures (“WUD”) exclude EGM seats in operation during venue soft
launch opening periods, if applicable, and apply revenue recognized on a cash basis in the calculation of WUD for venues for
which revenues are recognized on a cash basis. During the three-month period ended March 31, 2013, one venue in Cambodia
operated during a soft launch. During the three-month period ended March 31, 2012, one venue in Cambodia operated during
a soft launch and one venue in the Philippines recognized revenue on a cash basis. There were no material differences to
average WUD figures for the above-mentioned periods had these seats been included in the WUD calculations.
|
Revenue from our gaming
operations during the three-month period ended March 31, 2013 increased approximately $318,000 to $5.3 million compared
to approximately $5.0 million in the same period of the prior year. The increase was primarily the result of incremental
revenue from Dreamworld Casino (Pailin) and our slot operations at Thansur Bokor, both of which officially opened in May
2012. The increase was partially offset by a decrease in slot operations revenue due to lower average daily net wins per
machine for our operations in NagaWorld and lower installed machine base for our Philippines operations.
Gross profit from gaming
operations decreased approximately $1.0 million to $1.7 million for the three-month period ended March 31, 2013 compared
to approximately $2.7 million in the same period of the prior year primarily due to lower slot operations revenue mainly as
a result of lower average daily net wins per machine from our operations in NagaWorld and a gross loss for our casino
operations compared to the prior year period. Cost of sales for the three-month period ended March 31, 2013
included approximately $1.1 million of depreciation of gaming assets, $620,000 amortization of casino contracts, $63,000
amortization of other gaming related intangibles and $1.8 million of other operating costs.
As of March 31, 2013, we had a total
of 2,009 EGM seats of which 376 were held in inventory and 1,633 were in operation. Of the 1,633 EGM seats in operation,
1,060 were in operation in four venues in Cambodia (including Dreamworld Casino (Pailin) and Dreamworld Club (Poipet)) and 573
were in operation in three venues in the Philippines.
|
|
March 31, 2013
|
|
|
December 31, 2012
|
|
(amounts in thousands)
|
|
Units
|
|
|
Carrying Value
|
|
|
Units
|
|
|
Carrying Value
|
|
EGMs and systems used in operations (1,2)
|
|
|
1,633
|
|
|
$
|
8,283
|
|
|
|
1,457
|
|
|
$
|
5,377
|
|
EGMs and systems held for future use
|
|
|
376
|
|
|
|
2,618
|
|
|
|
455
|
|
|
|
4,347
|
|
Total EGMs and systems
|
|
|
2,009
|
|
|
$
|
10,901
|
|
|
|
1,912
|
|
|
$
|
9,724
|
|
(1)
|
EGMs and systems used in operations as of December 31, 2012 included 12 EGM
seats, which were in operation on a trial basis subject to achieving certain performance objectives prior to acceptance, and,
as a result, their carrying values were not included.
|
(2)
|
Includes both slot and Dreamworld Casino (Pailin) operations.
|
Due to our ongoing efforts to improve the
returns on our slot operations, we seek to refine our operating machine base to focus on those venues with the greatest potential
and selectively add new venues. In March 2013, we soft opened Dreamworld Club (Poipet) in Cambodia with 166 EGM seats. This venue
officially opened in May 2013, with approximately 300 EGM seats. In March 2012, we soft opened Thansur Bokor in Cambodia with 87
EGM seats. This venue officially opened in May 2012 with approximately 200 EGM seats. During the period from May to July 2012,
we terminated three contracts, one in Cambodia and two in the Philippines, with a combined total of 273 EGMs seats as these venues
were not performing up to our expectations.
A large portion of our gaming operations
income is derived from our slot operations within NagaWorld. NagaWorld is a luxury casino resort in the capital city of Phnom Penh,
Cambodia that operates under an exclusive casino license in a designated area around the city and is currently the only gaming
establishment in that area.
In December 2008, we established a relationship
with NagaWorld Limited to place EGMs on a revenue sharing or participation basis at NagaWorld and jointly operate those EGMs with
them. Due to our successful performance, we subsequently amended our contract and expanded our relationship with NagaWorld and
increased our EGM seats under contract in NagaWorld to 670.
Our current operations at NagaWorld are
governed under the Machines Operation and Participation Consolidation Agreement dated December 31, 2009, which was subsequently
amended on May 25, 2010. Under the terms of these agreements, we and NagaWorld control the operation of a total of 670 of our EGMs,
including floor staff and respective audit rights. We and NagaWorld split the win per unit per day from all the 670 EGMs and certain
operating costs related to marketing and floor staff on a respective basis of 25%/75%. Win per unit per day from all the 670 EGMs
are settled and our share is distributed daily to us. The 670 EGM seats are under contract for a term of six years commencing March
1, 2010.
Average net win per machine for our operations
in NagaWorld was $217 for the three-month period ended March 31, 2013 compared to $260 in the prior year period. The decline was
the result of normal fluctuation as well as reduced player traffic in February 2013 due to the second observed, week-long official
mourning period for the deceased former King of Cambodia in the beginning of the month and several-day strike by NagaWorld workers
at the end of the month. While normal fluctuation occurs, with prominent ground floor locations, quality product and customer service,
and proactive marketing, we believe we are well positioned to maintain strong overall performance from these operations.
Our slot operations in Cambodia also include
our operations at Thanur Bokor Highland Resort, a casino resort developed by leading Cambodian hotelier, Sokha Hotels and Resorts,
in a tourist area of the Kampot Province. This resort officially opened in May 2012 however, certain aspects of the initial phase
of the property, such as the entertainment complex, were not completed until early 2013.
Our operations at Thansur Bokor are governed
under a gaming machine participation and management agreement with Sokha Hotels and Resorts to place up to 250 EGM seats and jointly
manage these slot operations. Under the terms of the agreement, we and Sokha split the gross win and certain operating expenses
on a respective basis of 27/73%. We collect our share of the gross win on a semi-monthly basis and settle our share of the operating
costs on a monthly basis. The contract duration is five years commencing in May 2012.
As of March 31, 2013, we had incurred approximately
$1.1 million in capital expenditures for this project, which was funded from our internal cash resources. Due to our minimal operating
costs at the venue, our operations at Thansur Bokor were a positive contributor to consolidated adjusted EBITDA for the three-month
period ended March 31, 2013.
We recently expanded our slot operations
in Cambodia to include Dreamworld Club (Poipet), which we developed and operate. Dreamworld Club (Poipet) is a standalone slot
hall developed as an extension of the existing casino owned by a local company. Dreamworld Club (Poipet) soft opened on March 28,
2013 and the official grand opening was held on May 9, 2013. Due to soft opening date, Dreamworld Club (Poipet) did not make a
material contribution to gaming revenue for the three-month period ended March 31, 2013.
In the Philippines, we continued efforts
to focus on our most promising venues to improve our overall returns and growth potential in this market. These efforts included:
implementing, with the support of our venue owner partners, targeted marketing programs and the redeployment, when possible, of
our gaming assets from lower to higher performing venues in the market. While revenue from our Philippines’ slot operations
declined to approximately $937,000 for the three-month period ended March 31, 2013 from $1.1 million in the prior year period,
average net wins per machine for these operations improved significantly to $86 in the three-month period ended March 31, 2013
from $73 in the prior year period as we improved returns on the installed asset base.
In May 2012, we expanded our gaming operations
in Cambodia to include casino operations with the opening of our first casino development project, Dreamworld Casino (Pailin).
Dreamworld Casino (Pailin) houses 26 table games and 52 EGM seats.
Dreamworld Casino (Pailin) contributed
approximately $1.1 million to gaming operations revenue for the three-month period ended March 31, 2013, down slightly from $1.2
million for the three-month period ended December 31, 2012. The decline was due to the refinement of marketing strategies during
the first quarter of 2013, which resulted in us utilizing fewer gaming promoters during the period. Operating costs for Dreamworld
Casino (Pailin) were approximately $1.3 million during the three-month period ended March 31, 2013, which were recorded in gaming
operations cost of sales under other operating costs.
We are focused on improving the
financial performance of Dreamworld Casino (Pailn) and continue our efforts to refine and broaden our marketing strategies to
attract higher quality players and, where possible, to identify and implement cost reduction initiatives.
To-date, our marketing initiatives have
included, but have not been limited to, the use of fixed fee promoters, such as bus programs.
These
programs have been helpful in driving mass market player traffic. In addition, we are preparing to launch a junket program and
are in the final due diligence stages of signing agreements with potential operators.
By utilizing junket operators,
we expect to improve high net worth player traffic for our premium and VIP facilities while minimizing the downside risk and volatility
related to these players as the junket operators typically share in wins and losses and assume the credit risk.
We have one other casino development project,
Dreamworld Casino (Kampot), in the pipeline. We expect to begin full construction efforts for this project in the second half of
2013 and open the property within six to nine months of commencing construction.
In addition, we continue to selectively
pursue additional gaming projects in our target markets. Total company-wide EGM placements can fluctuate due to our strategic efforts
to optimize average daily net wins. In the event that the EGM performance at a contracted venue does not meet our original expectations,
and to the extent that this is legally permitted under the terms of the relevant contracts, we may discuss with the venue owner
withdrawing all or a portion of our EGMs from such venue for future redeployment in new or existing venues with better performance
prospects.
Gaming Products
Gaming products revenue, which consisted
of gaming chips and plaques sales, increased approximately $895,000 to $1.4 million for the three-month period ended March 31,
2013 compared to approximately $532,000 in the same period of the prior year. The increase was mainly a result of higher existing
customer reorders during the three-month period ended March 31, 2013.
Gross loss on gaming
products increased approximately $180,000 to $69,000 in the three-month period ended March 31, 2013 compared to gross
profit of approximately $111,000 in the same period of the prior year. The increase in gross loss was mainly due to higher
labor costs as a result of increased overtime by the Australian workers due to the expedited fulfillment of orders as we
fast-tracked the relocation of the plant from Australia to Hong Kong and absenteeism following the announcement of the
relocation of the gaming products business.
Operating Expenses
The schedule of expenses on a consolidated basis consisted of
the following:
|
|
Three-Month Periods Ended March 31,
|
|
(amounts in thousands)
|
|
2013
|
|
|
2012
|
|
Selling, general and administrative (1)
|
|
$
|
1,617
|
|
|
$
|
1,585
|
|
Stock-based compensation expense
|
|
|
247
|
|
|
|
265
|
|
Gain on dispositions of assets
|
|
|
—
|
|
|
|
(12
|
)
|
Product development expenses
|
|
|
120
|
|
|
|
100
|
|
Depreciation and amortization
|
|
|
30
|
|
|
|
31
|
|
|
|
$
|
2,014
|
|
|
$
|
1,969
|
|
(1)
|
Consisted of cash selling, general and administrative expenses and excluded non-cash selling, general and administrative expenses such as the stock-based compensation expense.
|
Selling, General and Administrative Expenses
Selling, general and administrative expenses
increased approximately $32,000 to $1.6 million for the three-month period ended March 31, 2013 compared to $1.6 million in the
same period of the prior year. The increase was due to approximately $89,000 of start-up costs related to the soft opening of Dreamworld
Club (Poipet) in the three-month period ended March 31, 2013. Insurance, utilities and other expenses increased approximately $107,000
primarily due to increased scale of operations and sales commission increased approximately $54,000 primarily due to higher gaming
products sales. These increases were partially offset by salaries and wages expense, which decreased approximately $54,000 primarily
due to adjustment of overprovision regarding 2012 bonus, advertising, travel and entertainment expenses, which decreased approximately
$88,000 mainly as a result of decreased advertising and traveling required in relation to the new gaming projects, and legal, investor
relations and other expenses, which decreased by approximately $76,000 primarily due to fewer gaming projects.
Stock-Based Compensation Expense
Stock-based compensation expense decreased
approximately $18,000 to $247,000 for the three-month period ended March 31, 2013 compared to $265,000 in the prior year period
primarily due to a decrease in average stock prices during the three-month period ended March 31, 2013 as compared to the prior
year period.
Loss on Disposition of Assets
There was no disposition of assets for
the three-month period ended March 31, 2013. Gain on disposition of assets was $12,000 for the three-month period ended March 31,
2012, which was related to sale of non-performing EGMs and systems during the period.
Product Development Expenses
Product development expenses increased
approximately $20,000 to $120,000 for the three-month period ended March 31, 2013 compared to approximately $100,000 in the
prior year period mainly as a result of increased activities for new product development for our gaming products division, specifically
gaming chips and plaques.
Depreciation and Amortization Expenses
Total depreciation and amortization expenses
decreased approximately $1,000 to $30,000 for the three-month period ended March 31, 2013 compared to $31,000 in the prior
year period as there were no major changes in related assets.
Other Income/(Expenses)
|
|
Three-Month Periods Ended March 31,
|
|
(amounts in thousands)
|
|
2013
|
|
|
2012
|
|
Interest expense and finance fees
|
|
$
|
(4
|
)
|
|
$
|
(53
|
)
|
Interest income
|
|
|
4
|
|
|
|
12
|
|
Foreign currency gains
|
|
|
103
|
|
|
|
189
|
|
Other
|
|
|
3
|
|
|
|
—
|
|
Total
|
|
$
|
106
|
|
|
$
|
148
|
|
Interest Expense and Finance Fees
Interest expense and finance fees decreased
approximately $49,000 to $4,000 for the three-month period ended March 31, 2013 compared to approximately $53,000 in the same
period of the prior year primarily due to the full repayment of notes payable to a related party in December 2012.
Interest Income
Interest income decreased approximately
$8,000 to $4,000 for the three-month period ended March 31, 2012 compared to approximately $12,000 in the same period of the
prior year primarily as a result of lower bank balances.
Foreign Currency Transactions
Foreign currency gains decreased approximately
$86,000 to $103,000 for the three-month period ended March 31, 2013 compared to approximately $189,000 for the same period
in the prior year. The decrease was primarily due to the comparatively lower percentage appreciation in the value of United States
dollar denominated payables from our Philippines operations, whose functional currency is the Philippine peso.
Other
Other income was approximately $3,000 for
the three-month period ended March 31, 2013 compared to $NIL in the prior year period primarily due to miscellaneous income
received by the Philippines operations.
Income Tax Provisions
Effective tax rates for the three-month
periods ended March 31, 2013 and 2012 were approximately (14.2)% and 5.8%, respectively. We continue to review the treatment of
tax losses and future income generated by our foreign subsidiaries to minimize taxation costs.
|
|
Three-Month Periods Ended March 31,
|
|
(amounts in thousands)
|
|
2013
|
|
|
2012
|
|
Income tax provisions
|
|
$
|
41
|
|
|
$
|
54
|
|
FINANCIAL CONDITION
Liquidity and Capital Resources
As of March 31, 2013, we had total
cash and cash equivalents of approximately $4.5 million and working capital of approximately $3.7 million. Our cash and working
capital during the three-month period ended March 31, 2013 was positively impacted by the cash received from our slot operations
but was negatively impacted by expenses associated with our casino and gaming development projects, including the construction
and soft opening of Dreamworld Club (Poipet), the purchase of EGMs for our gaming operations and relocation of Dolphin gaming chips
and plaques operations.
From April 1, 2013 to May 15, 2013,
our working capital position was negatively impacted by the payment of approximately $200,000 associated with the completion
and grand opening of Dreamworld Club (Poipet) and approximately $400,000 related to completing the relocation of our gaming chips
and plaques operations from Australia to Hong Kong. This has been partly offset by cash received from operations.
As part of our growth strategy for our
gaming operations, we intend to incur initial planning and construction costs related to our casino and gaming development plans.
In addition, we expect to purchase EGMs to supplement existing inventory and source future targeted deployment plans. Our
current casino and gaming development plans for the remainder of 2013 include our Dreamworld Casino (Kampot) project.
Total capital expenditure
for Dreamworld Club (Poipet), which principally included the development and construction of the facility and approximately
$5.0 million for gaming equipment, is approximately $7.5 million. Of the estimated $7.5 million total expenditure for
Dreamworld Club (Poipet), we incurred approximately $6.8 million as of March 31, 2013 and approximately $200,000 between
April 1, 2013 and May 15, 2013. The remaining $500,000 is expected to be incurred in June 2013. We expect the initial phase
of the Dreamworld Casino (Kampot), which includes the construction, purchase of gaming equipment and initial working capital needs,
will require a total expenditure of approximately $1.2 million. This does not include the cost of EGMs as they will be
sourced from our existing inventory. Of the estimated $1.2 million of total expenditure for the Dreamworld Casino (Kampot), we had
incurred approximately $500,000 as of March 31, 2013 and there were no additional expenditures between April 1, 2013 and May
15, 2013, leaving an estimated $700,000 in capital expenditure for the completion of this project.
We also continue to pursue other new gaming
projects; however, there is no guarantee we will successfully secure any of these new projects.
We presently expect that our capital expenditures
for the remainder of 2013 based on our current contractual commitments will be approximately $3.0 to $4.5 million. This includes:
approximately $700,000 for the development of Dreamworld Casino (Kampot), approximately $1.8 to $3.3 million for EGM purchases,
upgrades, and general maintenance; and approximately $500,000 related to Dreamworld Club (Poipet).
We anticipate our available working
capital, along with cash expected to be generated from operations, will allow us to meet our capital expenditures for our
Dreamworld Casino (Kampot) and Dreamworld Casino (Poipet) projects and the purchase of EGMs for the remainder of 2013.
As noted above, however, we continue to
pursue additional casino and gaming projects. While there is no guarantee we will be successful in securing new projects, if we
were to secure new projects our capital expenditures for the remainder of 2013 would increase beyond the $3.0 to $4.5 million currently
contemplated. At this time, we are unable to predict the amount of additional capital expenditures that could be required in 2013
for such potential projects. Where possible, we intend to fund our casino and gaming projects from our cash flow from operations
and cash on hand. Further, we will seek to structure the development of these projects in phases to better control and pace the
related expenditure of capital. However, should we commit to large projects, to the concurrent development of multiple casinos
and gaming projects or a new project requires large upfront payments, we may need to acquire additional capital. We would endeavor
to obtain any required additional capital from various financing sources including commercial debt financing and the sale of our
debt or equity securities. However, there are no commitments or arrangements in place as of the date of this report for receipt
of additional capital and there is no assurance we will be able to acquire additional capital if, and when, needed on commercially
reasonable terms or at all.
Cash Flows Summary
|
|
Three-Month Periods Ended March 31,
|
|
(amount in thousands)
|
|
2013
|
|
|
2012
|
|
Cash (used in)/provided by:
|
|
|
|
|
|
|
|
|
Operations
|
|
$
|
(569
|
)
|
|
$
|
2,008
|
|
Investing
|
|
|
(5,360
|
)
|
|
|
(1,538
|
)
|
Financing
|
|
|
—
|
|
|
|
(1,574
|
)
|
Effect of exchange rate change in cash
|
|
|
49
|
|
|
|
40
|
|
|
|
$
|
(5,880
|
)
|
|
$
|
(1,064
|
)
|
Operations
Cash used in operations was approximately
$569,000 for the three-month period ended March 31, 2013 compared to cash provided by operations of approximately $2.0 million
in the same period of the prior year. The increase in cash used in operations was primarily due to lower revenue from slot operations,
increased operating costs associated with the casino operations and one-off costs, including severance, relocation charges and
contract termination fees, of approximately $1.3 million associated with the sale of our non-gaming products assets and relocation
of our gaming chips and plaques operations from Australia to Hong Kong in the three-month period ended March 31, 2013.
Investing
Cash used in investing activities was approximately
$5.4 million for the three-month period ended March 31, 2013 compared to approximately $1.5 million in the same period of
the prior year. The increase in cash used in investing activities was mainly a result of the capital expenditures related
to the construction of Dreamworld Club (Poipet) as well as purchase of a greater amount of EGMs and related systems in the three-month
period of ended March 31, 2013.
Financing
Cash used in financing activities was
$NIL for the three-month period ended March 31, 2013 compared to approximately $1.6 million in the same period of the
prior year. The decrease in cash used in financing activities was primarily a result of the full repayment of the notes
payable to EGT Entertainment Holding (see Note 13) in December 2012.
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, 2013, we had net accounts
receivable of approximately $566,000, representing 1.5% of our 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 allowance to aged account balances. Revenue is recognized on a cash basis for customers with doubtful accounts
receivable. Our allowance for doubtful accounts receivable was approximately $15,000 as of March 31, 2013 and December 31,
2012.
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.
Gaming Equipment and Property and Equipment
As of March 31, 2013, we had gaming
equipment and property and equipment of approximately $18.8 million, representing 49.0% of our total assets. We depreciate gaming
equipment and property and equipment on a straight-line basis over their estimated useful lives. The estimated useful lives are
based on the nature of the assets as well as the current operating strategy 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 a change 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 flows scenarios based on management’s 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 the asset group.
Intangible Assets, including Goodwill
and Casino Contracts
As of March 31, 2013, we had intangible
assets, including goodwill and casino contracts of $8.9 million, representing 23.3% 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 will be recognized in an amount equal to that excess. If its carrying
amount does not exceed the fair value, no impairment is recognized.
Finite-lived intangible assets, including
casino contracts are amortized on a straight-line basis over their estimated useful lives. The estimated useful lives are based
on the nature of the assets as well as legal considerations such as contractual life. Future events, such as technology obsolescence
could result in a change in the manner in which we use the assets and require a change in the estimated useful lives of such assets.
Finite-lived intangible assets, including casino contracts are tested for impairment and recoverability when there are indicators
of impairment. The impairment test consists of a comparison of its fair value with its carrying amount. If the carrying amount
is not recoverable and exceeds its fair value, an impairment will be recognized in an amount equal to that excess. If its carrying
amount does not exceed the fair value, no impairment is recognized.
As of March 31, 2013, we had casino
contracts and gaming operation agreement of $8.2 million, representing 92.1% of our total intangible assets. The fair value of
our casino contracts and gaming operation agreement was estimated using a form of the income approach known as the excess earnings
method, excess earnings were discounted to present value at rates commensurate with our capital structure and the prevailing borrowing
rates within the industry in general. Determining the fair value of the casino contracts and gaming operation agreement is judgmental
in nature and requires the use of significant estimates and assumptions, including revenue, operating expenses, growth rates, discount
rates and future market conditions, among others. Future changes to our estimates and assumptions based upon changes in macro-economic
factors, operating results or management’s intentions may result in future changes to the fair value of the casino contracts
and gaming operation agreement.
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 expense for all service-based awards to employees and non-employee directors with graded vesting schedules
on the straight-line basis over the requisite service period for the entire award. Estimates are revised if subsequent information
indicates that forfeitures will differ from previous estimates, and the cumulative effect on compensation costs of a change in
the estimated forfeitures is recognized in the period of the change. For non-employee awards, we remeasure compensation costs
each period until the service condition is complete and recognize compensation costs on the straight-line basis over the requisite
service period. Option valuation models require the input of highly subjective assumptions, and changes in the assumptions
used can materially affect the fair value estimate. Judgment is required in estimating stock price volatility, forfeiture rates,
expected dividends, and expected terms that options remain outstanding. For restricted stock awards with performance conditions,
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. 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 expense totaled
approximately $247,000 and $265,000 for the three-month periods ended March 31, 2013 and 2012, respectively, in the accompanying
consolidated statements of operations.
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 income.
Recently Issued Accounting Standards
In February 2013, the FASB issued ASU
2013-02,
Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income
. The amendments do no change
the current requirements for reporting net income or other comprehensive income in financial statements. However, the
amendments require an entity to provide information about the amounts reclassified out of accumulated other comprehensive
income by component. In addition, an entity is required to present, either on the face of the statement when net income is
presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective
line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in
its entirety in the same reporting period. For public entities, the amendments are effective prospectively for reporting
periods beginning after December 15, 2012. The adoption of ASU 2013-02 did not have a significant
effect on the Company’s consolidated financial statements.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet financing
arrangements.