NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and unreviewed)
Note 1 – Organization and Business of Companies
Iao Kun Group Holding
Company Limited (formerly Asia Entertainment & Resources Ltd. and formerly CS China Acquisition Corp.) ("Iao Kun"
or the “Company”) was incorporated in the Cayman Islands on September 24, 2007 as a blank check company whose objective
was to acquire, through a share exchange, asset acquisition or other similar business combination, an operating business, or control
of such operating business through contractual arrangements, that has its principal operations located in People’s Republic
of China (“PRC”, “China”). On September 30, 2013, the Company changed its name from Asia Entertainment
& Resources Ltd (“AERL”). The decision to change the name of the Company was to enhance the Company’s brand
image in Macau.
On October 6, 2009,
Iao Kun entered into a stock purchase agreement, subsequently amended on November 10, 2009, December 9, 2009, January 11, 2010
and April 18, 2011 (the “Agreement”), with Asia Gaming & Resort Limited and its wholly owned subsidiaries (collectively
“AGRL”) and Spring Fortune Investments Ltd. (“Spring Fortune”) that provided for the acquisition by Iao
Kun from Spring Fortune of all of the outstanding capital stock of AGRL. On February 2, 2010, the acquisition was consummated
pursuant to the terms of the Agreement, and AGRL became a wholly owned subsidiary of Iao Kun.
Upon the closing of
the acquisition of AGRL by Iao Kun, the Promoter Companies (defined below) became variable interest entities (“VIEs”)
of the subsidiaries of AGRL, which are the primary beneficiaries of the operations of the Promotion Entities (defined below) through
the profit interest agreements, which were entered into on February 2, 2010 and agreements subsequent to that date.
Currently, Macau laws
do not allow corporate entities, such as Iao Kun, to directly operate a gaming promotion business in Macau. Consequently,
Iao Kun’s gaming promotion business is operated through a series of contractual arrangements, including profit interest agreements
that enable the AGRL subsidiaries to receive substantially all of the economic benefits of the Promoter Companies, Collaborator
and Junket Operator (collectively “Promotion Entities”) and for AGRL to exercise effective control over the Promotion
Entities.
Iao Kun, through its
ownership of AGRL, has twelve wholly owned subsidiaries that were incorporated in the British Virgin Islands, listed in the table
below.
Subsidiaries
|
|
Date of Incorporation
|
Kasino Fortune Investments Limited ( Kasino Fortune )
|
|
February 16, 2007
|
Billion Boom International Limited ( Billion Boom )
|
|
November 1, 2007
|
Super Number Limited ( Super Number )
|
|
April 11, 2011
|
Jubilee Dynasty Ltd. ( Jubilee Dynasty )
|
|
May 18, 2012
|
Frontier Champion Limited ( Frontier )
|
|
May 28, 2013
|
Robust South Limited ("Robust") *
|
|
February 12, 2015
|
Yuwang Limited ("Yuwang")
|
|
March 11, 2015
|
Sino Hero Enterprises Limited ("Sino Hero")
|
|
March 16, 2015
|
Bliss Time Enterprises Limited ("Bliss")*
|
|
March 30, 2015
|
Brave Ring Limited ("Brave") *
|
|
March 30, 2015
|
Yong Kang Holdings Limited ("Yong") *
|
|
April 21, 2015
|
Prospect Jade Limited ("Prospect") *
|
|
April 22, 2015
|
* The subsidiary is currently inactive.
IAO KUN GROUP HOLDING COMPANY LIMITED
F/K/A ASIA ENTERTAINMENT & RESOURCES
LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and unreviewed)
The following companies
are the Promotion Entities:
VIP Gaming Promotion Entities
|
|
Date Formed
|
|
Location
|
|
Subsidiary holds 100%
of Profit Interest
|
|
Effective date of
profit interest
agreement
|
|
|
|
|
|
|
|
|
|
Sang Heng Gaming Promotion Company Limited ( Sang Heng )**
|
|
March 28, 2007
|
|
Star World Hotel and Casino Downtown Macau
|
|
Kasino Fortune
|
|
February 2, 2010
|
|
|
|
|
|
|
|
|
|
King’s Gaming Promotion Ltd. ( King's Gaming )**
|
|
April 15, 2008
|
|
Sands Cotai Central Cotai, Macau
|
|
Billion Boom
|
|
November 10, 2010
|
|
|
|
|
|
|
|
|
|
Sang Lung Gaming Promotion Company Limited ( Sang Lung )**
|
|
March 28, 2011
|
|
Galaxy Macau Resort, Macau
|
|
Super Number
|
|
May 15, 2011
|
|
|
|
|
|
|
|
|
|
Bao Li Gaming Promotion Ltd. ( Bao Li )**
|
|
November 3, 2009
|
|
City of Dreams Hotel & Casino Cotai, Macau
|
|
Jubilee Dynasty
|
|
September 1, 2012
|
|
|
|
|
|
|
|
|
|
Mr. Lam Chou In (Collaborator) ***
|
|
|
|
Le Royal Arc Casino Downtown, Macau
|
|
Frontier Champion
|
|
July 1, 2013
|
|
|
|
|
|
|
|
|
|
Mr. Lou Kan Kuong
(Crown Australia Junket Operator) ****
|
|
|
|
Crown Perth Casino in Perth, Australia and Crown Melbourne Casino in Melbourne, Australia
|
|
Sino Hero and Yuwang
|
|
May 16, 2015
|
** This is a Promoter
Company in Macau.
*** According to Macau
laws, a collaborator needs to enter into an agreement with a licensed gaming promoter and register with the Gaming Inspection and
Coordination Bureau of the Macau SAR.
**** On May 15, 2015,
the Company entered into agreements to acquire all of the profit interests of Mr. Lou Kan Kuong (“Mr. Lou” or the “Crown
Australia Junket Operator”) promotion activities at the Crown Perth Casino in Perth, Australia and at the Crown Melbourne
Casino in Melbourne, Australia for an aggregate consideration of $200. Mr. Lou, who is currently an officer of Iao Kun, entered
into agreements to act as a junket operator for the above two casinos on June 24, 2013. The profit interests were acquired as an
asset purchase for the historical costs of establishing the agreements between Mr. Lou and the Australian casinos as a related
party transaction. The Company entered into the agreement to expand to overseas markets for its existing agent network in Macau.
In addition to the
above Promotion Entities, Iao Pou Gaming Promotion Company Limited (“Iao Pou”) promoted a VIP Room at the MGM Grand
Paradise in Macau until it ceased operations in June 2011. During November 2015, Iao Pou was dissolved. The dissolution of Iao
Pou did not have a significant impact on the consolidated financial statements.
Management’s
determination of the appropriate accounting method with respect to the AGRL VIEs is based on Financial Accounting Standards Board
(“FASB”) Accounting Standards Codification (“ASC”) Topic 810 “Consolidation of Variable Interest
Entities" (“Topic 810”). AGRL consolidates the VIEs because the equity investors in the Promotion Entities do
not have the characteristics of a controlling financial interest and Iao Kun through AGRL is the primary beneficiary.
In accordance with
FASB ASC Topic 810, the operations of the Promotion Entities are consolidated with those of Iao Kun for all periods subsequent
to the closing of the acquisition of AGRL by Iao Kun.
IAO KUN GROUP HOLDING COMPANY LIMITED
F/K/A ASIA ENTERTAINMENT & RESOURCES
LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and unreviewed)
The operations of AGRL's
Promotion Entities are primarily based in Macau, and are subject to Macau jurisdiction. The Company operates a gaming promotion
business in VIP gaming rooms located in hotels and casinos in Macau and Australia. Iao Kun, its subsidiaries (including AGRL) and
the Promotion Entities are collectively referred to as the "Group."
VIP Gaming Promoter and Collaborator
Agreements
Sang Heng’s Gaming
Representative (VIP Room Promoter) Agreement dated as of February 1, 2008 entered into between Galaxy Casino, S.A., and Sang Heng
allowed for the sharing of profits as a gaming representative of Iao Kun VIP Room in Star World Hotel and Casino in Macau for the
period from November 30, 2007 to December 31, 2008. Pursuant to an agreement in October 2009, both parties agreed that Sang Heng
should be compensated in accordance with Order no. 83/2009 of the Secretary for the Economy and Finances of the Macau SAR, which
provides the maximum commission for gaming activity of promotion of games at 1.25% of the rolling chip volume. The agreement became
effective on November 1, 2009. The agreement must be, and has been, renewed annually. Effective September 1, 2012, both parties
agreed to change to the revenue sharing model to provide that Sang Heng be compensated based upon a mutually agreed upon percentage
of the win/losses of the VIP gaming room.
King’s Gaming’s
Gaming Representative (VIP Room Promoter) Agreement was entered into in July 2008 between Venetian Macau S.A. and King's Gaming
which allowed for the sharing of profits as a gaming representative of Wenzhou VIP Room in Venetian Hotel and Casino in Macau for
the period ended December 31, 2008. The agreement was renewed in January 2009 for the period from January 1, 2009 to December 31,
2009. Pursuant to an agreement in September 2009, both parties agreed that King's Gaming should be compensated in accordance with
Order no. 83/2009 of the Secretary for the Economy and Finances of the Macau SAR, which provides the maximum commission for gaming
activity of promotion of games at 1.25% of the rolling chip volume. The agreement became effective on November 1, 2009. The agreement automatically
renews annually. Effective September 1, 2012, both parties agreed to change to the revenue sharing model to provide that King’s
Gaming be compensated based upon a mutually agreed upon percentage of the wins/losses of the VIP gaming room. King’s Gaming
moved its VIP gaming room to Sands Cotai Central in February 2013.
Sang Lung’s Gaming
Representative (VIP Room Promoter) Agreement dated as of June 24, 2011 entered into between Galaxy Casino, S.A., and Sang Lung
allowed for Sang Lung to be compensated in accordance with Order no. 83/2009 of the Secretary for the Economy and Finances of the
Macau SAR, which provides the maximum commission for gaming activity of promotion of games at 1.25% of the rolling chip volume.
The agreement became effective on July 1, 2011. The agreement must be, and has been, renewed annually. Effective September 1, 2012,
both parties agreed to change to the revenue sharing model to provide that Sang Lung be compensated based upon a mutually agreed
upon percentage of the wins/losses of the VIP gaming room.
Bao Li’s Gaming
Promoter Agreement dated as of February 7, 2011 entered into between Melco Crown Gaming (Macau) Limited and Bao Li Gaming which
allowed for Bao Li Gaming to be compensated in accordance with Order no. 83/2009 of the Secretary for the Economy and Finances
of the Macau SAR, which provides the maximum commission for gaming activity of promotion of games at 1.25% of the rolling chip
volume. The agreement automatically renews annually. As a matter of convenience and to maintain flexibility in remuneration
methods, the Company also entered into an agreement with Melco Crown Gaming (Macau) Limited (“Melco Crown”) to share
in the casino’s VIP gaming room wins/losses from the players recruited by the Company. Either the Gaming Promoter or Melco
Crown may adjust these arrangements with adequate notice and agreement by both parties to the arrangement. Effective September
1, 2012, both parties agreed to change to the revenue sharing model to provide that Bao Li Gaming be compensated based upon a mutually
agreed upon percentage of the wins/losses of the VIP gaming room.
The Collaborator Agreement
dated October 15, 2013 entered into between the licensed gaming promoter of Le Royal Arc Casino and the Collaborator allows the
Collaborator to be compensated based upon a mutually agreed-upon percentage of the win/losses of the Oriental VIP Room at the Le
Royal Arc Casino.
The Junket Operator
Agreement dated June 24, 2013 entered into between Mr. Lou Kan Kuong, Crown Melbourne and Crown Perth, Australia, allows the Crown
Australia Junket Operator to be compensated based upon a mutually-agreed percentage of the rolling chip turnover at Crown Melbourne
and Crown Perth, Australia.
IAO KUN GROUP HOLDING COMPANY LIMITED
F/K/A ASIA ENTERTAINMENT & RESOURCES
LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and unreviewed)
Note 2 — Summary of Significant Accounting
Policies
Basis of Presentation
The consolidated financial
statements as of March 31, 2016 and for the three month periods ended March 31, 2016 and 2015 are unaudited and unreviewed. The
accompanying unaudited and unreviewed consolidated financial statements have been prepared by the Company in accordance with accounting
principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial reporting. In the
opinion of management, all adjustments (consisting of normal recurring adjustments) have been made that are necessary to present
fairly the financial position, the results of its operations and cash flows. Operating results as presented are not necessarily
indicative of the results to be expected for a full year. These financial statements and related notes should be read in conjunction
with the financial statements and notes thereto included in the Company’s Form 20-F for the year ended December 31, 2015
filed on March 11, 2016 with the Securities and Exchange Commission.
Principles of Consolidation
The operations of the
Promotion Entities are consolidated with those of AGRL and its wholly owned subsidiaries and Iao Kun as of March 31, 2016 and December
31, 2015 and for the three month periods ended March 31, 2016 and 2015. Intercompany transactions and account balances have been
eliminated. Unless otherwise indicated all currency amounts are in United States Dollars.
Fiscal Year End
The fiscal year end
of the Company is December 31.
Use of Estimates
The preparation of
the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America
(“U.S. GAAP”) requires management to make estimates and judgments that affect the reported amounts of assets and liabilities,
revenues and expenses, and related disclosures of contingent assets and liabilities. These estimates and judgments are based on
historical information, information that is currently available to management and on various other assumptions that management
believes to be reasonable under the circumstances. The Company has made significant estimates of the contingent purchase price
obligation for the King's Gaming, Bao Li Gaming and the Oriental VIP Room acquisitions and other intangible assets in these consolidated
financial statements. Actual results could vary from those estimates.
Revenue Recognition
Revenue from VIP gaming
room promotion operations in Macau is recorded monthly based upon the Promotion Entities’ share of the net gaming wins/losses
in VIP gaming rooms. The amounts due to the Promotion Entities are calculated and reported by the casino operators and the
Promotion Entities on a monthly basis, usually within two days of the month end. Revenue from VIP operations in Australia is based
upon a fixed commission as a percentage of rolling chip turnover.
IAO KUN GROUP HOLDING COMPANY LIMITED
F/K/A ASIA ENTERTAINMENT & RESOURCES
LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and unreviewed)
Additionally, the Promotion
Entities in Macau earn revenues based upon percentages of non-negotiable chips exchanged in the VIP gaming rooms (typically 0.05%),
which is available to offset costs incurred for accommodations, food and beverage and other services furnished to players and is
included in gross revenues. These revenues are included in revenue from VIP gaming room promotion operations in the accompanying
consolidated statements of operations.
Beginning on September
1, 2012, the Company changed its remuneration model from a fixed commission model of 1.25% of the rolling chip turnover to a revenue
sharing model in Macau. The decision to change from the fixed commission model to the revenue sharing model was made as a result
of the Company’s expansion into four VIP gaming rooms with the ability to spread the risk of fluctuations surrounding gaming
wins and losses. Additionally, management has initiated a program for junket agents who purchase non-negotiable chips in cash from
the Promotion Entities in Macau (“super-agent”), allowing the super-agent to assume some of the risk of gaming losses
or receive increased commissions as a result of gaming wins.
The win rate is the
percentage of rolling chip turnover exchanged in the VIP gaming room that is won by the casino (gross wins and losses divided by
rolling chip turnover). Win rate and total rolling chip turnover in the Group’s VIP gaming rooms for
the
three month periods ended March 31, 2016 and 2015 are as follows:
|
|
For the Three Months Ended
|
|
|
|
March 31, 2016
|
|
|
March 31, 2015
|
|
Win rate
|
|
|
3.28
|
%
|
|
|
4.19
|
%
|
|
|
|
|
|
|
|
|
|
Total rolling chip turnover
|
|
$
|
1,198,221,000
|
|
|
$
|
2,195,664,000
|
|
VIP Gaming Room Cage and Marker Accounting
In the VIP gaming rooms,
VIP gaming patrons primarily purchase non-negotiable chips from the cage either with cash, cash chips, cashier’s order, or
markers (short term, non-interest bearing loans). Non-negotiable chips can only be used to make wagers. Winning wagers are paid
in cash chips. If the VIP gaming patrons continue to play, they must exchange the cash chips for non-negotiable chips, which is
the basis for commission. The exchange of the non-negotiable chips by the VIP gaming patrons in the VIP gaming room is recorded
as rolling chip turnover and provides a basis for measuring VIP gaming room win percentage. It is customary in Macau to measure
VIP gaming room play using this rolling chip method.
A VIP gaming patron
can be a player, a junket agent or a super-agent. Whoever signs on the marker and takes delivery of the non-negotiable chips at
the casino cage and carries them over to the game table is the borrower. It is also common practice that the VIP gaming patron
taking delivery of the non-negotiable chips shares the chips with other VIP gaming patrons for the purpose of achieving a higher
rolling volume (if the VIP gaming patron is a junket agent, they are entitled to receive commission even when the non-negotiable
chips are wagered by third parties acquainted with them) without receiving immediate payment in cash for the non-negotiable chips.
Under Macau law, licensed gaming promoters are permitted to extend credit to VIP gaming patrons creating a civil obligation to
pay.
The Group, through
the Promotion Entities, extends credit to junket agents. A majority of the Group’s consolidated markers receivable are owed
by junket agents from Macau and the rest are primarily in mainland China. In addition to enforceability issues, the collectability
of markers receivable from foreign junket agents is affected by a number of factors including changes in economic conditions in
the junket agents’ home countries.
IAO KUN GROUP HOLDING COMPANY LIMITED
F/K/A ASIA ENTERTAINMENT & RESOURCES
LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and unreviewed)
The Group may not be
able to collect all of their markers receivable from the junket agents. Management expects that the Group will be able to enforce
these obligations only in a limited number of jurisdictions, including Macau and Hong Kong. To the extent that junket agents of
the Group, through the Promotion Entities, are from other jurisdictions, the Group may not have access to a forum in which they
will be able to collect all of their markers receivable because, among other reasons, courts of many jurisdictions do not enforce
gaming debts and the Group may encounter forums that will refuse to enforce such debts. The Group’s inability to collect
gaming debts could have a significant negative impact on their operating results.
The following is a
summary of an aging of the Company’s markers receivable by jurisdiction that may refuse to enforce such debts:
Jurisdiction/Aging
|
|
March 31,
2016
|
|
|
% of total
markers
receivable
|
|
|
December 31,
2015
|
|
|
% of total
markers
receivable
|
|
PRC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0-30 days
|
|
$
|
11,985,767
|
|
|
|
|
|
|
$
|
10,405,378
|
|
|
|
|
|
31-60 days
|
|
|
9,752,859
|
|
|
|
|
|
|
|
8,907,468
|
|
|
|
|
|
61-90 days
|
|
|
12,204,932
|
|
|
|
|
|
|
|
9,906,074
|
|
|
|
|
|
91-180 days
|
|
|
21,385,383
|
|
|
|
|
|
|
|
28,120,968
|
|
|
|
|
|
Greater than 180 days
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
Total
|
|
$
|
55,328,941
|
|
|
|
32
|
%
|
|
$
|
57,339,888
|
|
|
|
34
|
%
|
The Group regularly
evaluates the allowance for uncollectible marker receivable based on a specific review of junket agent accounts as well as management’s
prior experience with collection trends in the casino industry and current economic and business conditions. Upon the acquisition
of King’s Gaming, Mr. Mok has guaranteed the collection of all markers receivable attributable to Mr. Mok and his network
of junket agents at both King’s Gaming’s existing VIP gaming room and the Company’s existing and future VIP gaming
rooms for as long as he is employed by the Company. Upon the acquisition of Bao Li Gaming, Mr. Lou and Mr. Lei guaranteed the collection
of all markers receivable attributable to them and their network of junket agents at both Bao Li Gaming’s existing VIP gaming
room and the Company’s existing and future VIP gaming rooms through December 31, 2015. Upon the acquisition of the Oriental
VIP room, Mr. Vong Veng Im guaranteed the collection of all markers receivable attributable to the Collaborator and his network
of junket agents at both the Oriental VIP Room and the Company’s existing and future VIP gaming rooms through June 30, 2016.
Upon the acquisition of the profit interests of the Crown Australia Junket Operator, Mr. Lou Kan Kuong guaranteed the collection
of all markers receivable attributable to the Crown Australia Junket Operator and his network of junket agents at Crown Australia,
Melbourne and Perth until the earlier of the date he is no longer employed by the Company or the termination of the Australia junket
business. As of March 31, 2016 and December 31, 2015, management believes that an allowance for uncollectible markers receivable
is not necessary.
No junket agent, individually,
accounted for more than 10% of markers receivable as of March 31, 2016. Two junket agents accounted for approximately 13% and 11%
of markers receivable as of December 31, 2015.
Fair Value of Financial Instruments
FASB ASC Topic 820
“Fair Value Measurements and Disclosures” defines fair value, the methods used to measure fair value and the expanded
disclosures about fair value measurements. Fair value is the price that would be received to sell an asset or paid to transfer
a liability in an orderly transaction between the buyer and the seller at the measurement date. In determining fair value, the
valuation techniques consistent with the market approach, income approach and cost approach shall be used to measure fair value.
FASB ASC Topic 820 establishes a fair value hierarchy for inputs, which represent the assumptions used by the buyer and seller
in pricing the asset or liability. These inputs are further defined as observable and unobservable inputs. Observable inputs are
those that buyer and seller would use in pricing the asset or liability based on market data obtained from sources independent
of the Company. Unobservable inputs reflect the Company’s assumptions about the inputs that the buyer and seller would use
in pricing the asset or liability developed based on the best information available in the circumstances.
IAO KUN GROUP HOLDING COMPANY LIMITED
F/K/A ASIA ENTERTAINMENT & RESOURCES
LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and unreviewed)
The fair value hierarchy
is categorized into three levels based on the inputs as follows:
|
Level 1 —
|
Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Valuation adjustments and block discounts are not being applied. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these assets and liabilities does not entail a significant degree of judgment.
|
|
Level 2 —
|
Valuations based on (i) quoted prices in active markets for similar assets and liabilities, (ii) quoted prices in markets that are not active for identical or similar assets, (iii) inputs other than quoted prices for the assets or liabilities, or (iv) inputs that are derived principally from or corroborated by market through correlation or other means.
|
|
Level 3 —
|
Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
|
For certain of the
Group's financial instruments, none of which are held for trading purposes, including cash and cash equivalents, accounts receivable,
markers receivable, certain other current assets, lines of credit payable, accrued expenses, and loan payable to shareholders,
the carrying values of these financial instruments approximate their fair value due to their short maturities. The contingent
purchase price obligations-King’s Gaming, Bao Li Gaming and Oriental VIP Room acquisitions were initially recognized for
the fair values of the acquisition contingent consideration and are adjusted to the fair value at each subsequent reporting date
(see Note 8, Note 9 and Note 10).
At least annually,
management determines if the current valuation techniques used in the fair value measurements are still appropriate and evaluates
and adjusts the unobservable inputs used in the fair value measurements based on current market conditions and other information.
There were no changes in the valuation techniques during the three month period ended March 31, 2016.
The following are the classes of assets and liabilities measured
at fair value:
Recurring fair value measurements:
|
|
|
|
|
Fair Value Measurements Using
|
|
|
|
|
|
|
Quoted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Active
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Markets
|
|
|
|
|
|
|
|
|
Total Gains
|
|
|
|
|
|
|
for
|
|
|
Significant
|
|
|
|
|
|
for the three
|
|
|
|
As of
|
|
|
Identical
|
|
|
Other
|
|
|
Significant
|
|
|
Months ended
|
|
|
|
March 31,
|
|
|
Liabilities
|
|
|
Observable
|
|
|
Unobservable
|
|
|
March 31,
|
|
|
|
2016
|
|
|
(Level 1)
|
|
|
Inputs (Level 2)
|
|
|
Inputs (Level 3)
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value of Contingent Consideration:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oriental VIP Room
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recurring fair value measurements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
IAO KUN GROUP HOLDING COMPANY LIMITED
F/K/A ASIA ENTERTAINMENT & RESOURCES
LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and unreviewed)
|
|
|
|
|
Fair Value Measurements Using
|
|
|
|
|
|
|
Quoted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Active
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Markets
|
|
|
|
|
|
|
|
|
Total Gains
|
|
|
|
|
|
|
for
|
|
|
Significant
|
|
|
|
|
|
for the three
|
|
|
|
As of
|
|
|
Identical
|
|
|
Other
|
|
|
Significant
|
|
|
Month ended
|
|
|
|
March 31,
|
|
|
Liabilities
|
|
|
Observable
|
|
|
Unobservable
|
|
|
March 31,
|
|
|
|
2015
|
|
|
(Level 1)
|
|
|
Inputs (Level 2)
|
|
|
Inputs (Level 3)
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value of Contingent Consideration:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oriental VIP Room
|
|
$
|
31,825,993
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
31,825,993
|
|
|
$
|
3,504,233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bao Li Gaming
|
|
$
|
38,788,856
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
38,788,856
|
|
|
$
|
9,577,452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recurring fair value measurements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
13,081,685
|
|
Additional information regarding the valuation technique and
inputs used is as follows:
Quantitative Information
about Level 3 Fair Value Measurements:
|
|
Fair Value
|
|
|
|
|
|
|
|
|
Contingent
Consideration
|
|
as of
3/31/2016
|
|
|
Valuation
Techniques
|
|
Unobservable Input
|
|
Range
|
|
|
|
|
|
|
|
|
|
|
|
|
Oriental VIP Room
|
|
$
|
-
|
|
|
Forecasted Performance, June 2016
|
|
Chip Turnover Annual Growth
|
|
|
(80%)-(50%
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Monte Carlo Method
|
|
Average Simulated Share Prices
|
|
$
|
1.05
|
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
Contingent
Consideration
|
|
as of
3/31/2015
|
|
|
Valuation
Techniques
|
|
Unobservable Input
|
|
Range
|
|
|
|
|
|
|
|
|
|
|
|
|
Oriental VIP Room
|
|
$
|
31,825,993
|
|
|
Forecasted Performance, 2015-June 2016
|
|
Chip Turnover Annual Growth
|
|
|
(80%) – (5%
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Monte Carlo Method
|
|
Average Simulated Share Prices
|
|
|
$1.60- $1.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bao Li Gaming
|
|
$
|
38,788,856
|
|
|
Forecasted Performance, 2015
|
|
Chip Turnover Annual Growth
|
|
|
(40%) - (10%
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Monte Carlo Method
|
|
Average Simulated Share Prices
|
|
$
|
1.62
|
|
The significant unobservable
inputs used in the fair value measurement of the Company’s contingent consideration for the Bao Li Gaming and Oriental VIP
Room acquisitions are the forecasted performance results of the operations of Bao Li Gaming and Oriental VIP Room and the simulated
share prices of the Company’s ordinary shares (the “Ordinary Shares”) under the Monte Carlo method. Significant
increases (decreases) in any of those inputs in isolation would result in a significantly higher (lower) fair value measurement.
As of December 31, 2015, the Bao Li Gaming final contingent consideration was determined based upon actual performance and no future
estimates are required.
IAO KUN GROUP HOLDING COMPANY LIMITED
F/K/A ASIA ENTERTAINMENT & RESOURCES
LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and unreviewed)
Cash and Cash Equivalents
Cash and cash equivalents
consist of cash, cash chips, non-negotiable chips and short-term investments with original maturities of less than 90 days.
Cash equivalents are placed with high credit quality financial institutions.
Accounts Receivable and Concentration of Credit Risk
Accounts receivable
are principally comprised of net gaming revenues, fees and incentives revenues receivable, which do not bear interest and are recorded
at amounts due from the casino operators.
When deemed necessary,
the Group records an allowance for doubtful accounts which represents management’s best estimate of the amount of probable
credit losses in the Group’s existing accounts receivable. Management believes that all outstanding balances are collectible
and therefore an allowance has not been established. Although management believes that no allowance is currently necessary, it
is possible that the estimated amount of cash collections with respect to accounts receivable could change.
Earnings Per Share
Basic net earnings
(loss) per common share is computed by dividing net earnings (loss) applicable to common shareholders by the weighted-average number
of common shares outstanding during the period. Diluted net earnings (loss) per common share is determined using the weighted-average
number of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents, consisting
of shares that might be issued upon exercise of common stock options. In periods where losses are reported, the weighted-average
number of common shares outstanding excludes common stock equivalents, because their inclusion would be anti-dilutive.
The calculations of
earnings (loss) per share are computed as follows for the three months ended March 31,:
|
|
2016
|
|
|
2015
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to Ordinary Shareholders for basic and diluted earnings per share
|
|
$
|
(3,495,553
|
)
|
|
$
|
17,082,486
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Denominator for basic (loss) earnings per share
|
|
|
|
|
|
|
|
|
- Weighted-average Ordinary Shares outstanding during the year
|
|
|
63,103,781
|
|
|
|
61,589,044
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings per share
|
|
|
63,103,781
|
|
|
|
61,589,044
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per share
|
|
$
|
(0.06
|
)
|
|
$
|
0.28
|
|
Diluted (loss) earnings per share
|
|
$
|
(0.06
|
)
|
|
$
|
0.28
|
|
Bao Li Gaming met its
rolling chip turnover target for the base earnout of $2,500,000,000 in December 2015 and 625,000 Ordinary Shares will be issued
in the third quarter of 2016. Bao Li Gaming has also earned an additional 25,000 Ordinary Shares under the incremental earnout
clause as of December 31, 2015 and the shares will be issued in the third quarter of 2016. The issuable Ordinary Shares have been
included in basic and diluted earnings per share based on the weighted average shares for the three month period ended March 31,
2016.
IAO KUN GROUP HOLDING COMPANY LIMITED
F/K/A ASIA ENTERTAINMENT & RESOURCES
LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and unreviewed)
In 2011, the Company
decided that a portion of the directors fees and officers remuneration would be paid in Ordinary Shares. Such Ordinary Shares are
to be issued in January of each year. In November 2015, a new equity incentive plan was adopted to allow for additional shares
to be issued. A total of 111,730 Ordinary Shares were issued during the fourth quarter of 2015 to satisfy the Company’s obligations
for 2014 and have been included in diluted earnings per share based on the weighted average shares for the three months ended March
31, 2015. A total of 145,980 Ordinary Shares are to be issued to satisfy the Company’s obligations for 2015 and have been
included in diluted earnings per share based on the weighted average shares for the three months ended March 31, 2016.
Property and Equipment
Property and equipment
is stated at cost. Depreciation and amortization is recorded on a straight-line basis over the estimated useful lives of the assets
ranging from two to five years, which do not exceed the lease term for leasehold improvements, if applicable.
Goodwill and Other Intangible Assets
The Company amortizes
intangible assets over their estimated useful lives unless it is determined their lives to be indefinite. Goodwill and other intangible
assets with indefinite lives are not amortized but are subject to tests for impairment at least annually. Management performs impairment
tests more frequently than annually if events or circumstances indicate that the value of goodwill or intangible assets with indefinite
lives might be impaired.
The following are the
useful lives of the respective finite-lived intangible assets:
Bad Debt Guarantee
|
|
3 to 5.5 years
|
|
Based upon six months after the expiration of the employment agreement or at the expiration of the employment agreement
|
|
|
|
|
|
Non-Compete agreement
|
|
9 to 11.7 years
|
|
Based upon the termination date of the casino's license or June 2022
|
|
|
|
|
|
Profit interest agreement
|
|
9 to 11.7 years
|
|
Based upon the termination date of the casino's license or June 2022
|
Indefinite Useful Life Assets
In accordance
with U.S. GAAP, the Company performs impairment testing for goodwill at least annually unless indicators of impairment exist in
interim periods. The Company performs its annual test of goodwill on December 31 each year.
Goodwill impairment
testing follows the two-step approach as defined in FASB ASC Topic 350, which is performed at the entity level as the Company has
one reporting unit, which is the gaming promotion business mainly located in Macau. The first step (“Step 1”) compares
the fair value of the reporting unit to its carrying value. If the carrying value of the reporting unit exceeds its fair value,
the second step of the impairment test is performed to measure the amount of impairment loss to be recognized. In the second step
(“Step 2”), the fair value of the reporting unit resulting from the first step of the evaluation is allocated to the
fair value of all of the assets and liabilities of the reporting unit in order to determine an implied goodwill value. This allocation
is similar to the purchase price allocation performed in purchase accounting. If the carrying value of goodwill exceeds the implied
fair value, the excess of the carrying value is required to be recorded as an impairment loss. The loss recognized cannot exceed
the carrying value of goodwill.
Impairment of Long-lived Assets
The Company evaluates
when events or circumstances indicate that the carrying amount of long-lived assets to be held and used might not be recoverable,
the expected future undiscounted cash flows from the assets are estimated and compared with the carrying amount of the assets.
If the sum of the estimated undiscounted cash flows was less than the carrying amount of the assets, an impairment loss would be
recorded. The impairment loss would be measured on a location by location basis by comparing the fair value of the asset with its
carrying amount. Long-lived assets that are held for disposal are reported at the lower of the assets’ carrying amount or
fair value less costs related to the assets’ disposition.
IAO KUN GROUP HOLDING COMPANY LIMITED
F/K/A ASIA ENTERTAINMENT & RESOURCES
LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and unreviewed)
Advertising Costs
Costs for advertising
and marketing are expensed the first time the advertising or marketing takes place or as incurred. Advertising and marketing costs
for ongoing operations are included in selling, general and administrative expense. During the three months ended March 31,
2016 and 2015, the Group incurred advertising costs of $131,199 and $154,612, respectively.
Stock-Based Compensation
The Company awards
stock and other equity-based instruments to its employees, directors and consultants (collectively "share-based payments").
Compensation cost related to such awards is recorded when earned. Ordinary Shares are issued to the directors subsequent
to year end based on the average trading price prior to December 31 each year. All of the Company's stock-based compensation
is based on grants of equity instruments and no liability awards have been granted. All of the Company directors presently receive
$20,000 payable in Ordinary Shares, valued at the average of the closing prices of the Ordinary Shares over the three-month period
preceding the end of each fiscal year.
The shareholders approved
the 2011 Omnibus Securities and Incentive Plan in December 2011 and the Board of Directors approved the 2015 Omnibus Equity Incentive
Plan in November 2015 (collectively, the “Incentive Plan”). The purpose of the Incentive Plan is to assist the Company
in attracting, retaining and providing incentives to key management employees and nonemployee directors, and nonemployee consultants
to the Company and its affiliates, and to align the interests of such employees, nonemployee directors and nonemployee consultants
with those of the Company’s shareholders. The Incentive Plan provides for the granting of Distribution Equivalent Rights,
Incentive Share Options, Non-Qualified Share Options, Performance Share Awards, Performance Unit Awards, Restricted Share Awards,
Restricted Share Unit Awards, Share Appreciation Rights, Tandem Share Appreciation Rights, Unrestricted Share Awards or any combination
of the foregoing up to a maximum of 200,000 Ordinary Shares and 500,000 Ordinary Shares for the 2011 Incentive Plan and 2015 Incentive
Plan, respectively, as may be best suited to the circumstances of the particular employee, director or consultant. On December
10, 2015, 111,730 Ordinary Shares were issued as compensation owed for 2014. 145,980 Ordinary Shares are to be issued as compensation
owed for 2015. A liability of approximately $259,000 and $209,000 is included in accrued expenses at March 31, 2016 and December
31, 2015, respectively.
Foreign Currency
The reporting currency
of Iao Kun is in the United States dollar ("US $", "$", “Reporting Currency”). The Group’s
functional currency is the Hong Kong Dollar (“HKD $”, “Functional Currency”). Monetary assets and
liabilities denominated in currencies other than the Functional Currency are translated into the Functional Currency at rates of
exchange prevailing at the balance sheet dates. Transactions denominated in currencies other than the Functional Currency are translated
into the Functional Currency at the exchange rates prevailing on the dates of the transaction.
Exchange gains or losses
arising from foreign currency transactions are included in the determination of net income (loss) for the respective period.
For financial reporting
purposes, the consolidated financial statements of the Group, which are prepared using the Functional Currency, are then translated
into the Reporting Currency. Assets and liabilities are translated at the exchange rates at the balance sheet dates and revenue
and expenses are translated at the average exchange rates and shareholders' equity is translated at historical exchange rates.
Any translation adjustments resulting are not included in determining net income (loss) but are included in foreign currency translation
adjustment in other comprehensive income, a component of shareholders' equity.
|
|
March 31,
2016
|
|
|
March 31,
2015
|
|
|
December 31,
2014
|
|
Period end HK$:US$ exchange rate
|
|
$
|
7.76
|
|
|
$
|
7.75
|
|
|
$
|
7.75
|
|
Average HK$:US$ exchange rate
|
|
$
|
7.77
|
|
|
$
|
7.76
|
|
|
$
|
7.75
|
|
IAO KUN GROUP HOLDING COMPANY LIMITED
F/K/A ASIA ENTERTAINMENT & RESOURCES
LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and unreviewed)
Comprehensive Income
The Group follows
standards for the reporting and display of comprehensive income (loss) and its components in the financial statements.
Comprehensive income (loss) is defined as the change in equity of a company during the period from transactions and other
events and circumstances excluding transactions resulting from investments from owners and distributions to
owners. Accumulated other comprehensive income (loss), as presented on the accompanying consolidated statements of changes in
equity, is the cumulative foreign currency translation adjustment.
Economic and political risks
The Group’s current
operations are mainly conducted in Macau and Hong Kong. Accordingly, the Group’s consolidated financial condition and results
of operations may be influenced by the political, economic and legal environment in the PRC and by the general state of the PRC
economy.
The Group’s operations
in Macau and Hong Kong are subject to special considerations and significant risks not typically associated with companies in North
America and Western Europe. These include risks associated with, among others, the political, economic and legal environment and
foreign currency exchange. The Group’s consolidated results may be adversely affected by changes in the political and social
conditions in the PRC and by changes in governmental policies with respect to laws and regulations, anti-inflationary measures,
currency conversion, remittances abroad and rates and methods of taxation, among other things.
Management does not
believe that any recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on
the accompanying financial statements.
Note 3 — Accounts Receivable
Accounts receivable
consisted of the following:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2015
|
|
|
2015
|
|
Gaming revenues receivable
|
|
$
|
7,901,050
|
|
|
$
|
1,460,251
|
|
As of March 31, 2016,
accounts receivable were due from four casino operators and were 56%, 33%, 6% and 5% of total receivables, respectively. As of
December 31, 2015, accounts receivable were due from two casino operators and one gaming promoter and were 41%, 35% and 24% of
total receivables, respectively.
IAO KUN GROUP HOLDING COMPANY LIMITED
F/K/A ASIA ENTERTAINMENT & RESOURCES
LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and unreviewed)
Note 4 — Intangible
Assets
Intangible assets as
of March 31, 2016 and December 31, 2015 consist of the following:
|
|
Bad Debt
Guarantee
|
|
|
Non-
Compete
Agreement
|
|
|
Profit Interest
Agreement
|
|
|
Total
|
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross carrying amounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 1, 2015
|
|
$
|
606,498
|
|
|
$
|
1,823,778
|
|
|
$
|
161,644,338
|
|
|
$
|
164,074,614
|
|
Foreign currency translation
|
|
|
251
|
|
|
|
753
|
|
|
|
66,737
|
|
|
|
67,741
|
|
Balance as of December 31, 2015
|
|
|
606,749
|
|
|
|
1,824,531
|
|
|
|
161,711,075
|
|
|
|
164,142,355
|
|
Foreign currency translation
|
|
|
(462
|
)
|
|
|
(1,387
|
)
|
|
|
(123,003
|
)
|
|
|
(124,852
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2016
|
|
|
606,287
|
|
|
|
1,823,144
|
|
|
|
161,588,072
|
|
|
|
164,017,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 1, 2015
|
|
|
448,069
|
|
|
|
501,545
|
|
|
|
41,156,352
|
|
|
|
42,105,966
|
|
Amortization expense
|
|
|
127,317
|
|
|
|
176,329
|
|
|
|
16,065,821
|
|
|
|
16,369,467
|
|
Foreign currency translation
|
|
|
215
|
|
|
|
248
|
|
|
|
20,722
|
|
|
|
21,185
|
|
Balance as of December 31, 2015
|
|
|
575,601
|
|
|
|
678,122
|
|
|
|
57,242,895
|
|
|
|
58,496,618
|
|
Amortization expense
|
|
|
22,587
|
|
|
|
43,959
|
|
|
|
4,005,192
|
|
|
|
4,071,738
|
|
Foreign currency translation
|
|
|
(386
|
)
|
|
|
(416
|
)
|
|
|
(34,399
|
)
|
|
|
(35,201
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2016
|
|
|
597,802
|
|
|
|
721,665
|
|
|
|
61,213,688
|
|
|
|
62,533,155
|
|
Total amortized intangible assets
|
|
$
|
8,485
|
|
|
$
|
1,101,479
|
|
|
$
|
100,374,384
|
|
|
$
|
101,484,348
|
|
Amortization expense
for the three month periods ended March 31, 2016 and 2015 was $4,071,738 and $4,090,678, respectively.
Estimated amortization
expense of intangibles for the next five years and thereafter is as follows:
2016 (9 months)
|
|
$
|
12,155,919
|
|
2017
|
|
|
16,196,606
|
|
2018
|
|
|
16,196,606
|
|
2019
|
|
|
16,196,606
|
|
2020
|
|
|
16,196,606
|
|
Thereafter
|
|
|
24,542,005
|
|
|
|
$
|
101,484,348
|
|
IAO KUN GROUP HOLDING COMPANY LIMITED
F/K/A ASIA ENTERTAINMENT & RESOURCES
LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and unreviewed)
Note 5 — Lines of Credit Payable
Lines of Credit Payable
consisted of the following:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Due to casino operators
|
|
$
|
52,482,746
|
|
|
$
|
41,908,984
|
|
Due to casino operators
represents an advance of non-negotiable chips to Sang Heng, Sang Lung, King’s Gaming and Bao Li Gaming and are interest free
and renewable monthly and advances of commission income.
The casino operators,
both in Macau and Australia, have extended lines of credit totaling approximately $57,616,000 and $57,582,000 as of March 31, 2016
and December 31, 2015, respectively. The lines of credit may be exceeded from time to time at the discretion of the casino
operators. The lines of credit for Sang Heng, Sang Lung and King’s Gaming are guaranteed by Mr. Lam or Mr. Vong
and are secured by their personal checks and a deposit paid by Mr. Lam. The lines of credit for Bao Li Gaming and the Crown
Australia Junket Operator are guaranteed by Mr. Lou and are secured by his personal checks.
Note 6 — Accrued Expenses
Accrued Expenses consist
of the following:
|
|
March 31,
2016
|
|
|
December 31,
2015
|
|
|
|
|
|
|
|
|
Commission payable-the junket agents
|
|
$
|
4,716,613
|
|
|
$
|
4,531,003
|
|
Management fee payable-related party (Note 13)
|
|
|
360,978
|
|
|
|
399,959
|
|
Management and Directors' compensation
|
|
|
351,029
|
|
|
|
440,234
|
|
Others
|
|
|
755,018
|
|
|
|
659,800
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,183,638
|
|
|
$
|
6,030,996
|
|
One junket agent accounted
for approximately 14% of commission payable as of March 31, 2016 and no junket agent, individually, accounted for more than 10%
of the rolling chip turnover during the three month period ended March 31, 2016. One junket agent accounted for approximately 12%
of the rolling chip turnover during the year ended December 31, 2015 and another junket agent accounted for approximately 12% of
commission payable as of December 31, 2015.
IAO KUN GROUP HOLDING COMPANY LIMITED
F/K/A ASIA ENTERTAINMENT & RESOURCES
LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and unreviewed)
Note 7 — Loans Payable, Shareholders
As of March 31, 2016
and December 31, 2015, the amount of the funding advanced to AGRL by Messrs. Lam and Vong was approximately $3,510,000 and $2,828,000,
respectively. All amounts due as of March 31, 2016 are considered short-term advances and are due on demand.
Note 8 — Acquisition of King’s Gaming Promotion
Limited
On November 10, 2010,
the Company completed the purchase of the profit interest pursuant to a Profit Interest Purchase Agreement (“King’s
Gaming Purchase Agreement”) with Mr. Mok and Mr. Wong (together, the “King’s Gaming Seller”),
to acquire the right to 100% of the profit interest derived by King’s Gaming, effective November 1, 2010, from the promotion
of the Wenzhou VIP Room at the Venetian Hotel and Casino in Macau for an aggregate amount of (i) up to $36,000,000, of which $9,000,000
was paid at the closing, and (ii) 1,500,000 Ordinary Shares of the Company (the “Purchase Price”) issued at the closing.
The balance of $27,000,000 of the Purchase Price will be maintained as working capital at the cage of King’s Gaming (and
shall be the sole property of the Company until paid to the King’s Gaming Seller in accordance with the terms of the King’s
Gaming Purchase Agreement) and shall be paid to the Seller in installments of $9,000,000 (each, an “Installment Payment”),
subject to meeting a minimum Gross Profit requirement equal to $6,150,000 (the “Minimum Gross Profit Requirement”)
for each of the three fiscal years following the closing date commencing with fiscal year 2011, which shall be evidenced by the
management prepared financial statements of King’s Gaming approved by the Audit Committee of the Company. In the event
King’s Gaming fails to achieve the Minimum Gross Profit Requirement in any of the three fiscal years following the closing
date, the Installment Payment shall be reduced by an amount equal to the product of (x) $9,000,000 and (y) the quotient obtained
by dividing (A) the actual Gross Profit for such year, by (B) the Minimum Gross Profit Requirement.
The Earnout Shares,
Incentive Shares and Additional Incentive Shares (each as defined in the King’s Gaming Purchase Agreement) shall be released
and issued to the Seller as follows:
|
|
Gross Profit Target
|
|
|
Earnout/Incentive
|
|
|
Additional
|
|
Year
|
|
For Earnout/Incentive Shares
|
|
|
Shares
|
|
|
Incentive Shares
|
|
2011
|
|
$
|
6,150,000
|
|
|
|
500,000
|
|
|
|
*
|
|
2012
|
|
$
|
7,380,000
|
|
|
|
500,000
|
|
|
|
*
|
|
2013
|
|
$
|
8,860,000
|
|
|
|
500,000
|
|
|
|
*
|
|
2014
|
|
$
|
9,740,000
|
|
|
|
100,000
|
|
|
|
*
|
|
2015
|
|
$
|
10,720,000
|
|
|
|
100,000
|
|
|
|
*
|
|
2016
|
|
$
|
11,790,000
|
|
|
|
100,000
|
|
|
|
*
|
|
2017
|
|
$
|
12,970,000
|
|
|
|
100,000
|
|
|
|
*
|
|
2018
|
|
$
|
14,260,000
|
|
|
|
100,000
|
|
|
|
*
|
|
2019
|
|
$
|
15,690,000
|
|
|
|
100,000
|
|
|
|
*
|
|
2020
|
|
$
|
17,260,000
|
|
|
|
100,000
|
|
|
|
*
|
|
*- For each $1,000,000 in which the Gross
Profit target for such year is exceeded, 10,000 Additional Incentive Shares will be issued. The Seller is not entitled to
any Additional Shares on a pro rata basis for multiples of less or greater than $1,000,000.
IAO KUN GROUP HOLDING COMPANY LIMITED
F/K/A ASIA ENTERTAINMENT & RESOURCES
LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and unreviewed)
King’s Gaming
did not meet its Gross Profit Targets in year 2012 through March 31, 2016 and accordingly no incentive shares were issued. Additionally,
Mr. Mok has agreed to provide a personal guaranty, for so long as he is employed by the Company or King’s Gaming, providing
for the guaranty of all obligations of King’s Gaming and the Seller pursuant to the King’s Gaming Purchase Agreement,
including, but not limited to, any bad debts the Seller network of junket agents may have incurred or may incur in the future.
As of November 10,
2010, the total estimated purchase price of $75,973,890, consisting of $9 million in cash, 1.5 million Ordinary Shares valued at
$10.74 per share for a value of $16,110,000, and estimated contingent consideration of $50,863,890 consisting of contingent cash
and Ordinary Shares, was allocated based on valuations performed to determine the fair values of the acquired assets, as follows:
Gaming License Deposit
|
|
$
|
12,446
|
|
Bad Debt Guarantee
|
|
|
466,116
|
|
Non-Compete agreement
|
|
|
792,304
|
|
Profit interest agreement
|
|
|
59,694,600
|
|
Goodwill (fully impaired during three months ended June 30, 2015)
|
|
|
15,008,424
|
|
|
|
|
|
|
Total Estimated Purchase Price
|
|
$
|
75,973,890
|
|
In accordance with
the FASB ASC Topic 805 on business combinations, a liability of $50,857,564 was recognized for the estimated acquisition fair value
of the contingent consideration based on the probability of the achievement of the Gross Profit targets at December 31, 2010. Any
change in the fair value of the acquisition-related contingent consideration subsequent to the acquisition date, including changes
from events after the acquisition date, such as changes in the Group’s estimate of the gross profit expected to be achieved,
will be recognized in earnings in the period that estimated fair value changes. The fair value estimate assumes probability-weighted
gross profits are achieved over the earn-out period. A change in the fair value of the acquisition-related contingent consideration
could have a material impact on the Group’s statement of operations and financial position in the period of change in estimate.
During the three months ended March 31, 2016 and 2015, the Company did not recognize any gains or losses due to the change in the
fair value of the contingent consideration utilizing Level 3 fair value measurements as King’s Gaming is not expected to
meet the Gross Profit Target and no Ordinary Shares are expected to be issued. Fluctuations in the market value of the Company's
Ordinary Shares and subsequent performance will cause the fair value to increase or decrease and the resulting change will be recognized
in earnings.
Note 9 — Acquisition of Bao Li Gaming Promotion Limited
On September 12, 2012,
the Company completed the purchase of the profit interest pursuant to a Profit Interest Purchase Agreement (“Bao
Li Purchase Agreement”) with Mr. Lou and Mr. Lei (together, the “Bao Li Seller”), to acquire the right
to 100% of the profit derived by Bao Li Gaming, effective September 1, 2012, from the promotion of the VIP gaming room at the City
of Dreams Hotel and Casino in Macau for an aggregate amount of $15,000,000, of which $7,500,000 was paid upon the satisfaction
of all conditions to closing and $7,500,000 paid at the closing (the “Purchase Price”). Additionally, the Company reimbursed
the Seller approximately $146,026 for cash and incentive receivables acquired.
IAO KUN GROUP HOLDING COMPANY LIMITED
F/K/A ASIA ENTERTAINMENT & RESOURCES
LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and unreviewed)
For purposes of the
Bao Li Purchase Agreement, “Base Rolling Chip Turnover” means $2,500,000,000 of non-negotiable chips that the Bao Li
Seller’s network of junket agents purchases from Bao Li Gaming’s and the Company’s VIP gaming rooms attributable
to the Bao Li Seller’s network of junket agents at Bao Li Gaming’s existing VIP gaming room and the Company’s
existing and future VIP gaming rooms.
In addition, as more
fully set forth below, the Company is required to issue to the Bao Li Seller (i) up to an aggregate of $39,000,000 and 1,875,000
Ordinary Shares in the event certain rolling chip turnover targets are achieved for each of the three years following the closing
date (the “Base Earnout Payment”), (ii) and additional cash payments and Ordinary Shares in the event the rolling chip
turnover targets for each of the three years following the closing date are exceeded, in increments of $25,000,000 (the “Incremental
Earnout Payment”). For each $25,000,000 increment in which the rolling chip Turnover target for such year is exceeded,
the Company shall pay an additional $130,000 and issue 6,250 Ordinary Shares. The Bao Li Seller is not entitled to any additional
Incremental Earnout Payments in the event that the Seller’s rolling chip turnover exceeds $5,000,000,000. As a result, in
any year the maximum Incremental Earnout Payment cannot exceed $13,000,000 in cash and 625,000 in Ordinary Shares. In the event
that the Seller fails to achieve the Base Rolling Chip Turnover in any year, the Bao Li Seller will not be entitled to receive
any earnout payments.
The Earnout Shares,
Incentive Shares and Additional Incentive Shares (each as defined in the Bao Li Purchase Agreement) shall be released and issued
to the Bao Li Seller as follows:
|
|
Rolling Chip
Turnover Target
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
For Base
Earnout
Payments
|
|
|
Base Earnout
Cash
Payments
|
|
|
Base
Earnout
Shares
|
|
|
Incremental
Earnout
Payment
|
|
2013
|
|
$
|
2,500,000,000
|
|
|
$
|
13,000,000
|
|
|
|
625,000
|
|
|
|
*
|
|
2014
|
|
$
|
2,500,000,000
|
|
|
$
|
13,000,000
|
|
|
|
625,000
|
|
|
|
*
|
|
2015
|
|
$
|
2,500,000,000
|
|
|
$
|
13,000,000
|
|
|
|
625,000
|
|
|
|
*
|
|
*- For each $25,000,000 increment in which the rolling chip
turnover target for such year is exceeded, the Company shall pay an additional $130,000 and 6,250 Ordinary Shares will be issued.
Additionally, Mr. Lou
and Mr. Lei have agreed to provide personal guarantees, through December 31, 2015 providing for the guaranty of all obligations
of Bao Li Gaming and the Seller pursuant to the Bao Li Purchase Agreement, including, but not limited to any bad debts the Bao
Li Seller network of junket agents may have incurred or may incur in the future.
As of September 12,
2012, the total estimated purchase price of $48,007,120 consisting of $15,146,026 in cash, and estimated contingent consideration
of $32,861,094 consisting of contingent cash and Ordinary Shares has been allocated based on valuations performed to determine
the fair values of the acquired assets as follows:
Gaming License Deposit
|
|
$
|
12,520
|
|
Cash and Incentive Receivables
|
|
|
146,026
|
|
Bad Debt Guarantee
|
|
|
122,381
|
|
Non-Compete agreement
|
|
|
723,484
|
|
Profit interest agreement
|
|
|
45,016,159
|
|
Goodwill (fully impaired during three months ended June, 30 2015)
|
|
|
1,986,550
|
|
|
|
|
|
|
Total Estimated Purchase Price
|
|
$
|
48,007,120
|
|
IAO KUN GROUP HOLDING COMPANY LIMITED
F/K/A ASIA ENTERTAINMENT & RESOURCES
LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and unreviewed)
There is no further
change in fair value of contingent consideration for the three months ended March, 2016 as the Bao Li Purchase Agreement expired
as at December 31, 2015. Bao Li achieved the rolling chip target for 2013, 2014 and 2015, and Earnout cash and Earnout Ordinary
Shares earned and issued are as follows:
|
|
Base Earnout
|
|
|
Base Earnout
|
|
|
Incremental Earnout
|
|
|
Incremental
Earnout
|
|
Year
|
|
Cash Payments
|
|
|
Shares Issued
|
|
|
Cash Payments
|
|
|
Shares Issued
|
|
2013
|
|
$
|
13,000,000
|
|
|
|
625,000
|
|
|
$
|
13,000,000
|
|
|
|
625,000
|
|
2014
|
|
$
|
13,000,000
|
|
|
|
625,000
|
|
|
$
|
8,320,000
|
|
|
|
400,000
|
|
*2015
|
|
$
|
13,000,000
|
|
|
|
625,000
|
|
|
$
|
520,000
|
|
|
|
25,000
|
|
*It is anticipated
that the cash payment and share issuance for the 2015 earnout will be made in the third quarter of 2016.
IAO KUN GROUP HOLDING COMPANY LIMITED
F/K/A ASIA ENTERTAINMENT & RESOURCES
LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and unreviewed)
Note 10 — Acquisition of the Oriental VIP
Room
On June 26, 2013, the
Company completed the purchase of the profit interest pursuant to a Profit Interest Purchase Agreement (“Oriental
VIP Room Purchase Agreement”) with Mr. Vong Veng Im (the “Oriental VIP Room Seller”), to acquire the right to
100% of the profit derived from the operations, effective July 1, 2013, from the promotion of a VIP gaming room at the Le Royal
Arc Casino in Macau for an aggregate amount of $20,000,000 in cash, of which $10,000,000 was paid at the closing and $10,000,000
was paid at a subsequent closing (the “Purchase Price”), upon the completion of certain conditions. Mr. Vong is a collaborator
for the gaming promoter license holder at the Le Royal Arc Casino.
For purposes of the
Oriental VIP Room Purchase Agreement, “Base Rolling Chip Turnover” means $2,500,000,000 of non-negotiable chips that
the Oriental VIP Room Seller’s network of junket agents purchases from Oriental VIP Room’s and the Company’s
VIP gaming rooms.
In addition, as more
fully set forth below, the Company is required to pay and issue to the Oriental VIP Room Seller (i) up to an aggregate of $39,000,000
and 1,875,000 Ordinary Shares in the event certain rolling chip turnover targets are achieved for each of the three 12 month periods
ending June 30, 2014, 2015 and 2016 following the closing date (the “Base Earnout Payment”), (ii) and additional cash
payments and Ordinary Shares in the event the rolling chip turnover targets for each of the three 12 month periods ending June
30, 2014, 2015 and 2016 following the closing date are exceeded, in increments of $25,000,000 (the “Incremental Earnout Payment”).
For each $25,000,000 increment in which the rolling chip turnover target for such year is exceeded, the Company shall pay an additional
$130,000 and issue 6,250 Ordinary Shares. The Oriental VIP Room Seller is not entitled to any additional Incremental Earnout
Payments in the event that the Seller’s rolling chip turnover exceeds $5,000,000,000. As a result, in any year the maximum
Incremental Earnout Payment cannot exceed $13,000,000 in cash and 625,000 in Ordinary Shares. In the event that the Seller fails
to achieve the Base Rolling Chip Turnover in any year, the Oriental VIP Room Seller will not be entitled to receive any earnout
payments. If the Oriental VIP Room Seller achieves an aggregate Rolling Chip Turnover of at least $15,000,000,000 for the 36 month
period ending June 30, 2016, the Company shall pay an additional $2,500,000 for every $1,000,000,000 of rolling chip turnover in
excess of $15,000,000,000 up to a maximum of $12,500,000.
The Earnout Shares,
Incentive Shares and Additional Incentive Shares (each as defined in the Oriental VIP Room Purchase Agreement) shall be released
and issued to the Oriental VIP Room Seller as follows:
|
|
Rolling Chip
Turnover Target
|
|
|
|
|
|
|
|
|
|
|
12 Month Period
|
|
For Base
Earnout
Payments
|
|
|
Base Earnout
Cash
Payments
|
|
|
Base
Earnout
Shares
|
|
|
Incremental
Earnout
Payment
|
|
June 30, 2014
|
|
$
|
2,500,000,000
|
|
|
$
|
13,000,000
|
|
|
|
625,000
|
|
|
|
*
|
|
June 30, 2015
|
|
$
|
2,500,000,000
|
|
|
$
|
13,000,000
|
|
|
|
625,000
|
|
|
|
*
|
|
June 30, 2016
|
|
$
|
2,500,000,000
|
|
|
$
|
13,000,000
|
|
|
|
625,000
|
|
|
|
*
|
|
*- For each $25,000,000 increment in which
the rolling chip turnover target for such year is exceeded, the Company shall pay an additional $130,000 and 6,250 Ordinary Shares.
In addition, an aggregate rolling chip turnover of at least $15,000,000,000 for the 36 month period ending June 30, 2016 the Company
shall pay an additional $2,500,000 for every $1,000,000,000 of rolling chip turnover in excess of $15,000,000,000 up to a maximum
of $12,500,000.
Additionally, Mr. Vong
Veng Im has agreed to provide a personal guarantee, through June 30, 2016 providing for the guaranty of all obligations of Oriental
VIP Room and the Oriental VIP Room Seller pursuant to the Oriental VIP Room Purchase Agreement, including, but not limited to any
bad debts the Oriental VIP Room Seller network of junket agents may have incurred or may incur in the future.
IAO KUN GROUP HOLDING COMPANY LIMITED
F/K/A ASIA ENTERTAINMENT & RESOURCES
LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and unreviewed)
As of June 26, 2013,
the total estimated purchase price of $57,803,560 consisting of $10,000,000 in cash, and estimated contingent consideration of
$47,803,560 consisting of contingent cash and Ordinary Shares has been allocated based on valuations performed to determine the
fair values of the acquired assets as follows:
Bad Debt Guarantee
|
|
$
|
16,881
|
|
Non-Compete agreement
|
|
|
305,927
|
|
Profit interest agreement
|
|
|
56,758,004
|
|
Goodwill (fully impaired during three months ended June 30, 2015)
|
|
|
722,748
|
|
|
|
|
|
|
Total Estimated Purchase Price
|
|
$
|
57,803,560
|
|
In accordance
with the FASB ASC Topic 805 on business combinations, no liability was recognized for the estimated acquisition fair value of
the contingent consideration based on the probability of the achievement of the rolling chip turnover targets at March 31,
2016 and December 31, 2015, respectively. Any change in the fair value of the acquisition-related contingent consideration
subsequent to the acquisition date, including changes from events after the acquisition date, such as changes in the
Group’s estimate of the rolling chip turnover expected to be achieved, will be recognized in earnings in the period
that estimated fair value changes. The fair value estimate assumes probability-weighted rolling chip turnover targets are
achieved over the earn-out period. A change in the fair value of the acquisition-related contingent consideration could have
a material impact on the Group’s statement of operations and financial position in the period of change in estimate.
During the three months ended March 31, 2016, the Company did not recognize any gains or losses and recognized a gain of
$9,577,452 during the three months ended March 31, 2015, due to the change in the fair value of the contingent
consideration utilizing Level 3 fair value measurements. Fluctuations in the market value of the Company's Ordinary
Shares and subsequent performance will cause the fair value to increase or decrease and the resulting change will be
recognized in earnings.
The Oriental VIP Room
achieved the rolling chip target for 12 month periods ended June 30, 2015 and 2014 and Earnout cash and Earnout Ordinary Shares
earned and issued are as follows:
|
|
|
|
|
Base Earnout
|
|
|
Incremental
|
|
|
Incremental
Earnout
|
|
|
|
Base Earnout
|
|
|
Shares
|
|
|
Earnout
|
|
|
Shares
|
|
Period ended
|
|
Cash Payments
|
|
|
Issued/Earned
|
|
|
Cash Payments
|
|
|
Issued/Earned
|
|
June 30, 2014
|
|
$
|
13,000,000
|
|
|
|
625,000
|
|
|
$
|
13,000,000
|
|
|
|
625,000
|
|
June 30, 2015
|
|
$
|
13,000,000
|
|
|
|
625,000
|
|
|
$
|
1,950,000
|
|
|
|
93,750
|
|
As of March 31, 2016, management does not
expect the Oriental VIP Room will meet the June 30, 2016 rolling chip target and therefore has not recorded a liability for
the June 30, 2016 earnout cash payment and share based payment.
IAO KUN GROUP HOLDING COMPANY LIMITED
F/K/A ASIA ENTERTAINMENT & RESOURCES
LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and unreviewed)
Management determined
that the acquisition of the operations of Oriental VIP Room at the Le Royal Arc Casino in Macau would allow the Company to expand
its operations in downtown Macau and appeal to a wider number of players. Prior to the acquisition, the Company's had only one
VIP gaming room in downtown Macau. Additionally, the acquisition of the operations of Oriental VIP Room brought an additional network
of junket agents and collaborators that may increase revenues at the Company's Macau VIP rooms.
Note 11 — Shareholders’ Equity
Ordinary Shares
Iao Kun is authorized
to issue 500,000,000 Ordinary Shares, par value $.0001. There were no shares issued during the three month period ended March
31, 2016.
The holders of the
Ordinary Shares have no conversion, preemptive or other subscription rights and there are no sinking fund or redemption provisions
applicable to the Ordinary Shares.
Directors Compensation
All of the Company’s
directors presently receive annual compensation of $30,000 in cash and $20,000 payable in Ordinary Shares, valued at the average
of the closing prices of the Ordinary Shares over the three-month period preceding the end of each fiscal year. The Ordinary Shares
will be issued the following year. The chairman of the audit committee will receive additional annual cash compensation of
$10,000 and the other members of the audit committee will each receive additional annual cash compensation of $5,000. The chairman
of the compensation and nominating committees each receive additional annual cash compensation of $5,000 and the other members
of these committees each receive additional annual cash compensation of $3,000. Each director will also receive cash compensation
of $1,000 for each board or committee meeting that he or she attends (whether in person or telephonically) that is at least an
hour in duration and $500 for each board or committee meeting he or she attends that is less than an hour in duration. Total
director fees charged to operations during the three month periods ended March 31, 2016 and 2015 were $124,250 and $124,250, respectively.
Share Repurchase Program
In March 2013, the Board
of Directors established a new share repurchase program with an expiration date at any time in the discretion of appropriate company
officers (the “2013 Repurchase Plan”). The 2013 Repurchase Plan authorizes the Company to purchase up to four million
of its Ordinary Shares on the open market at prices to be determined by the Company’s management. The Company did not
repurchase any additional shares for the year ended December 31, 2015 and the three months ended March 31, 2016.
Dividend
The Board of Directors
has authorized a regular cash dividend each year after the release of the Company’s financial results for the six months
ending June 30 (the “Six Month Dividend”), an amount per outstanding Ordinary Share equal to: (i) 15% of the Company’s
non-GAAP net income (defined as operating income before amortization of intangible assets and change in fair value of contingent
consideration) for the most recently completed six months ended June 30, divided by (ii) the number of Ordinary Shares outstanding
on the record date for such dividend; and, an annual dividend each year after the release of the Company’s annual financial
results (the “Annual Dividend”), equates to an amount per outstanding Ordinary Share equal to (i) 15% of the Company’s
non-GAAP net income for the most recently completed fiscal year, less the amount paid pursuant to the immediately previous six-month
dividend, divided by (ii) the number of Ordinary Shares outstanding on the record date for such dividend. For the Six Month Dividend
payable for 2015, this is equal to a dividend of approximately $0.014 per share, which was paid on October 19, 2015. An additional
dividend approximate $483,500 will be paid on third quarter for 2015 Annual Dividend and will be based upon the number of Ordinary
Shares outstanding on record date for such dividend.
The record date for
each period’s dividend will be set by the Company’s management to be as close as practicable to, but no less than,
15 days after the public release by the Company of the financial results for the applicable six-month period and fiscal year end.
The payment date for each period’s dividend will be set by the Company’s management to be as close as practicable to,
but no less than, 10 days after the record date.
IAO KUN GROUP HOLDING COMPANY LIMITED
F/K/A ASIA ENTERTAINMENT & RESOURCES
LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and unreviewed)
Payment Date
|
|
Amount
|
|
|
|
|
|
April 26, 2013 (for the year 2012 Annual Dividend)
|
|
$
|
4,142,199
|
|
|
|
|
|
|
September 20, 2013 (for the 2013 Six Month Dividend)
|
|
$
|
4,803,178
|
|
|
|
|
|
|
October 14, 2014 (for the 2014 Six Month Dividend)
|
|
$
|
1,539,260
|
|
|
|
|
|
|
June 22, 2015 (for the 2014 Annual Dividend)
|
|
$
|
1,038,967
|
|
|
|
|
|
|
October 19, 2015 (for the 2015 Six Month Dividend)
|
|
$
|
870,745
|
|
Preferred Stock
The Company is authorized
to issue 1,150,000 preferred shares with such designations, voting and other rights and preferences as may be determined from time
to time by the Board of Directors. There are no issued and outstanding preferred shares at March 31, 2016 and December 31, 2015.
Ordinary Shares Reserved for Future Issuance
At March 31, 2016 and
December 31, 2015, the Company has reserved 2,816,470 shares, respectively, of its authorized but unissued Ordinary Shares for
possible future issuance in connection with the following:
|
|
March 31,
2016
|
|
|
December 31,
2015
|
|
|
|
|
|
|
|
|
Incentive Plans Shares
|
|
|
416,470
|
|
|
|
416,470
|
|
|
|
|
|
|
|
|
|
|
Contingently Issuable Incentive Shares-King's Gaming
|
|
|
500,000
|
|
|
|
500,000
|
|
|
|
|
|
|
|
|
|
|
Contingently Issuable Incentive Shares-Bao Li Gaming
|
|
|
650,000
|
|
|
|
650,000
|
|
|
|
|
|
|
|
|
|
|
Contingently Issuable Incentive Shares-Oriental VIP Room
|
|
|
1,250,000
|
|
|
|
1,250,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,816,470
|
|
|
|
2,816,470
|
|
IAO KUN GROUP HOLDING COMPANY LIMITED
F/K/A ASIA ENTERTAINMENT & RESOURCES
LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and unreviewed)
Note 12 — Commitments and Contingencies
Employment Agreements
Upon the closing of
the acquisition of King’s Gaming, Iao Kun has entered into two additional employments contracts with Mr. Mok and Mr. Wong.
Upon the closing of the acquisition of Bao Li, the Company entered into employment agreements with Mr. Lou and Mr. Lei. Upon the
acquisition of the Oriental VIP Room, the Company entered into a 5 year employment agreement with Vong Veng Im. The agreement with
Mr. Lam Man Pou expired on February 2, 2015 and is continuing on the same terms on a month to month basis.
On May 1, 2015, the
Company entered into employment agreements with Mr. Vong (Chief Executive Officer), Mr. Lam Chou In (Chief Operating Officer) and
Mr. Yip Cheuk Fai (Chief Financial Officer). Each of the agreements is for a period of three years and each executive is entitled
to paid vacation in accordance with the Company’s policies and other customary benefits.
Annual minimum compensation
for the terms of the employment agreements for terms greater than one year, as amended, is as follows at March 31, 2016:
2016 (9 months)
|
|
$
|
961,129
|
|
2017
|
|
|
1,173,505
|
|
2018
|
|
|
483,898
|
|
Total
|
|
$
|
2,618,532
|
|
The employment agreements
provide that the executive, during the period of five years following the termination of his employment, shall not compete with
AGRL or solicit any of its employees. The agreements with each of Leong Siak Hung, Li Chun Ming Raymond, Lam Man Pou, Vong Hon
Kun and Lam Chou In contain provisions prohibiting the executives, during their respective terms of employment, from selling, hypothecating
or otherwise transferring more than 20% of any Ordinary Shares that may be transferred to them by Spring Fortune from shares it
received or receives as a result of the acquisition. If an executive’s employment is terminated for any reason prior to the
expiration of the employment term, or if the executive breaches the confidentiality and non-competition and non-solicitation provisions
of his employment agreement, the executive is obligated to transfer and assign to the Company all securities then held by him and
all rights to receive securities in the future, which securities will be canceled.
Total compensation
charged to operations during the three months ended March 31, 2016 and 2015, related to these employment contracts were approximately
$320,376 and $222,865, respectively.
Office Lease
The Company has an
office lease in Macau for executive offices which will expire in April 2018. The Company also rents a storage space
on a month to month basis for $1,544 per month. Minimum future lease payments are $31,951, $42,601 and 10,650 for the year ended
December 31, 2016, 2017 and 2018, respectively. Rent expense was $15,281 and $24,981 for the three months ended March 31, 2016
and 2015, respectively.
IAO KUN GROUP HOLDING COMPANY LIMITED
F/K/A ASIA ENTERTAINMENT & RESOURCES
LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and unreviewed)
Gaming Table Rentals
Beginning in September
2015, the Company no longer pays a monthly rental for gaming tables in the Oriental VIP Room and has reduced its percentage of
revenue sharing. Rental expense charged to operations for gaming table rentals was $0 and $928,338 for the three months ended March
31, 2016 and 2015, respectively.
Revenue Sharing
Beginning in September
2012, the Company has adopted a new program to allow certain cash basis junket agents (non-marker) to share in the risk of wins
and losses in the VIP gaming rooms. The maximum percentage of sharing that the junket agent may elect to share in the risk of wins
and losses is limited to their percentage of rolling chip turnover during the previous month. The junket agent must make its election
by the second day of the subsequent month and may elect from zero percent to the maximum percent. A total of approximately $190,000
was recorded as additional commission income in April 2016 for participating junket agents based on March 2016 rolling chip turnover.
Due to fluctuations in wins and losses as well as the agents’ participation, levels, the total amount of revenues and losses
shared as well as their percentage of rolling chip turnover may fluctuate significantly.
Certain Risks and Uncertainties
The Group’s operations
are dependent on the annual renewal of the gaming licenses by the Macau SAR to the Promoter Companies and the registration of the
Collaborator by the licensed gaming promoter. The tenure of the Promotion Entities acting as gaming promoters and collaborator
for the Casinos is subject to the Gaming Representative / Gaming Promoter Arrangements and Collaborator Agreement.
The Group may not be
able to collect all of their markers receivable from the junket agents. Management expects that the Group will be able to enforce
these obligations only in a limited number of jurisdictions, including Macau. To the extent that junket agents of the Group, through
the Promotion Entities, are from other jurisdictions, the Group may not have access to a forum in which they will be able to collect
all of their markers receivable because, among other reasons, courts of many jurisdictions do not enforce gaming debts and the
Group may encounter forums that will refuse to enforce such debts. The Group’s inability to collect gaming debts could have
a significant negative impact on their operating results.
The Group receives
all of their revenue from casino operators within the Asia-Pacific Region. If economic conditions in these areas were to decline
materially or additional casino licenses to new casino operators were awarded in these locations, the Group’s consolidated
results of operations could be materially affected.
Note 13 — Related Party Transactions
Management Agreements
Part of day-to-day
management and operation of the VIP gaming rooms is contracted by the Promotion Entities to Pak Si Management and Consultancy Limited
of Macau (“Pak Si”), a related party management company that is responsible for hiring and managing staff needed for
operations. This includes local managers and executives to provide supervision, finance and cage personnel, public relations,
drivers and other service staff (waiters, cleaners, etc.). The agreements renew annually. The principal of Pak Si is
the sister-in-law of Mr. Vong, a director of the Company and its chief executive officer.
IAO KUN GROUP HOLDING COMPANY LIMITED
F/K/A ASIA ENTERTAINMENT & RESOURCES
LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and unreviewed)
Effective January 1,
2015, the monthly payments were revised for Sang Heng and Sang Lung from $142,000 to $103,000 each, and Bao Li, King’s Gaming
and the Oriental VIP Room were revised from $97,000 to $65,000 each.
Effective January 1,
2016, the monthly payments were revised for Bao Li, King’s Gaming and the Oriental VIP Room from $65,000 to $52,000 each.
Total expenses for
Pak Si's services were $1,080,469 and $1,199,103 during the three months ended March 31, 2016 and 2015, respectively. Amounts
due to Pak Si as of March 31, 2016 and December 31, 2015 were $360,978 and $399,959, respectively and have been recorded in accrued
expenses. Overall fees for services provided by Pak Si have been reduced as a result of the direct hire of employees by the Company
as well as reduced volumes of business in the Company’s VIP Gaming Rooms.
Entertainment Expense
The Group incurred
entertainment expense for catering and restaurant services provided by a related party in which three directors have the majority
ownership interest. Such entertainment expenses during the three months ended March 31, 2016 and 2015 were approximately $116,000
and $143,000, respectively.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis contains
forward-looking statements about our plans and expectations of what may happen in the future. Forward-looking statements are based
on a number of assumptions and estimates that are inherently subject to significant risks and uncertainties, and our results could
differ materially from the results anticipated by our forward-looking statements as a result of many known and unknown factors.
You should read the following management
discussion and analysis (“MD&A”) in conjunction with the unaudited and unreviewed consolidated financial statements
and related footnotes thereto included in this report for the three months ended March 31, 2016 and the audited consolidated financial
statements and related footnotes thereto included in in our annual report on Form 20-F for the year ended December 31, 2015. All
capitalized terms in this MD&A that are not defined shall have the meaning ascribed to them in the Notes to the Consolidated
Financial Statements included herewith.
OVERVIEW
We are a Cayman Islands company listed
on the NASDAQ. We conduct VIP gaming promotion business at five VIP gaming rooms located in major casinos in Macau and two major
casinos in Australia through the Promotion Entities, which include the Promoter Companies, the Collaborators (who are licensed
gaming promoters and DICJ registered gaming collaborators) in Macau and the Junket Operator in Australia. The principal business
activities of our subsidiaries are to hold profit interest agreements with the Promotion Entities that confer upon us the right
to enjoy all the economic benefits of the Promotion Entities, and exercise effective control over the structure, the underlying
assets and net worth of the Promotion Entities. Since September 1, 2012, we have generated revenue by sharing a pre-determined
percentage of the net gaming win/loss of the VIP Rooms with the respective casino operators and the L’Arc Promoter in Macau.
Revenue from VIP operations in Australia is based upon a mutually-agreed percentage of the rolling chip turnover. Virtually all
of the Promotion Entities’ revenue is ultimately generated by VIP players who are brought to the VIP Rooms by our management
team and junket agents.
BASIS OF PRESENTATION
The Financial Information has been prepared
in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for annual
financial reporting.
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
(All figures are in thousands except earnings (loss) per share)
Statements of operations data (unaudited and unreviewed)
|
|
For the three months ended
March 31, 2016
|
|
|
For the three months ended
March 31, 2015
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
17,922
|
|
|
$
|
41,701
|
|
Expenses
|
|
|
|
|
|
|
|
|
Commission to junket agents
|
|
|
(13,725
|
)
|
|
|
(27,988
|
)
|
Selling, general and administrative expenses
|
|
|
(3,501
|
)
|
|
|
(5,392
|
)
|
Special rolling tax
|
|
|
(120
|
)
|
|
|
(219
|
)
|
Amortization of intangible assets
|
|
|
(4,072
|
)
|
|
|
(4,091
|
)
|
Operating (loss) income before change in fair value of contingent consideration
|
|
|
(3,496
|
)
|
|
|
4,001
|
|
Change in Fair value of Contingent Consideration for the acquisitions
|
|
|
—
|
|
|
|
13,081
|
|
|
|
|
|
|
|
|
|
|
N
et
(loss) income before tax
|
|
|
(3,496
|
)
|
|
|
17,082
|
|
Income tax expense
|
|
|
—
|
|
|
|
—
|
|
Net (loss) income for the period attributable to Ordinary Shareholders
|
|
|
(3,496
|
)
|
|
|
17,082
|
|
Other comprehensive (loss) income after tax
|
|
|
(184
|
)
|
|
|
18
|
|
Total comprehensive (loss) income for the period attributable to Ordinary Shareholders
|
|
$
|
(3,680
|
)
|
|
$
|
17,100
|
|
Net (loss) earnings per share
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.06
|
)
|
|
$
|
0.28
|
|
Diluted
|
|
$
|
(0.06
|
)
|
|
$
|
0.28
|
|
Balance sheet data
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(Unaudited and
unreviewed)
|
|
|
|
|
Current assets
|
|
$
|
188,764
|
|
|
$
|
176,853
|
|
Non-current assets
|
|
$
|
101,706
|
|
|
$
|
105,888
|
|
Current liabilities
|
|
$
|
76,405
|
|
|
$
|
64,996
|
|
Non-current liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
Total shareholders’ equity
|
|
$
|
214,065
|
|
|
$
|
217,745
|
|
Cash flow data (unaudited and unreviewed)
|
|
For the three month
ended March 31,
2016
|
|
|
For the three month
ended March 31,
2015
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
4,893
|
|
|
$
|
419
|
|
Net cash used in investing activities
|
|
|
-
|
|
|
|
-
|
|
Net cash from (used in) financing activities
|
|
|
683
|
|
|
|
(340
|
)
|
Net increase in cash and cash equivalents
|
|
$
|
5,576
|
|
|
$
|
79
|
|
SIGNIFICANT FACTORS AFFECTING OUR RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Macau’s gaming and tourism markets
Our business is and will be influenced
most significantly by the growth or decline of the gaming and tourism markets in Macau. Rapid growth in the Macau gaming market
commenced with the decision to grant new gaming concessions by the Macau Government in late 2001, and this growth has been facilitated
by a number of drivers and initiatives which include, among others, favorable population demographics and economic growth across
each of our Asian tourism source markets, substantial capital investment made by concessionaires in the development of branded
and diversified destination resort properties, and the demonstrated commitment by central and local governments to improve or develop
infrastructure connecting Macau with the rest of greater China. From 2008 to 2015, gross gaming revenues in Macau increased at
a compound annual growth rate (“CAGR”) of 11.21% and the number of hotel guests staying in Macau increased at a CAGR
of 4.36%, according to the Gaming Inspection and Coordination Bureau (“DICJ”) and the Directhe dos ServiSer de Estatstatip
e Censos (Statistics and Census Service) (“DSEC”), respectively. In 2011, 2012, 2013, 2014 and 2015, gross gaming revenues
in Macau reached US$33.4 billion, US$38.0 billion, US$45.2 billion, US$44.1 billion and $28.9 billion, respectively, according
to the DICJ. In the years ended December 31, 2011, 2012, 2013, 2014 and 2015, the total number of hotel guests staying in Macau
was approximately 12.9 million, 13.6 million, 14.3 million, 14.6 million and 14.3 million, respectively, according to the DSEC.
The total number of visitors to Macau increased
at a CAGR of 4.26% from 2008 to 2015 according to the DSEC. From 2011 to 2015, there were approximately 28.0 million, 28.1 million,
29.3 million, 31.5 million and 30.7 million visitors to Macau, respectively, according to the DSEC. A majority of these visitors
come from Greater China. Stable progress in the economic expansion of the domestic economy in China and further development of
policy measures designed to advance economic cooperation between the Pearl River Delta, Hong Kong and Macau are key to the future
development of our business opportunities. Starting from the first quarter of 2015, the number of visitors to Macau, particularly
visitors from China’s Guangdong province (where most of our visitors come from), began to decline significantly due to the
tightening of Chinese government policies and regulatory factors, such as visa restrictions and restrictions on credit card usage,
which also greatly impacted the overall gross gaming revenues in Macau.
According to the DICJ, gross gaming revenues
in Macau increased by 13.4% from 2011 to 2012, increased by 18.6% from 2012 to 2013, decreased by 2.5% from 2013 to 2014, significantly
decreased by 34.3% from 2014 to 2015, and further decreased by 13.3% during the three months ended March 31, 2016, primarily due
to the decline in revenue growth (as a percentage of total gross gaming revenue) of VIP baccarat since 2012, which accounted for
73.2%, 69.3%, 66.1%, 60.5%, 55.4% and 54.1% of total gross gaming revenue in Macau in 2011, 2012, 2013, 2014, 2015 and the three
months ended March 31, 2016, respectively. Such decline was primarily a result of slower economic growth in parts of mainland
China, the on-going anti-corruption campaign in mainland China, as well as the continued tightening of government policies (including
visa restrictions and restrictions on credit card usage) by the Chinese government in recent years. The continued economic slowdown
in mainland China will likely adversely affect the Macau gaming industry and our results of operations.
Our credit extension policies
The availability of cage capital and our
credit extension policies have significant impact on our revenue. Our cage capital mainly consists of retained earnings, lines
of credit from casino operators and temporary credit from certain shareholders. As of March 31, 2016, we had an aggregate of US$57.6
million in total available lines of credit from casino operators in Macau and Australia, and the casino operators may extend temporary
credit in excess of this amount to us from time to time.
In light of the decreasing trend of VIP
baccarat, the casino game offered in the VIP Rooms, as well as the slower growth of China’s economy, the on-going anti-corruption
campaign and the continued tightening of government policies in recent years, we believe we have adopted a prudent approach in
the extension of gaming credit since May 2012 by (i) tightening gaming credit to VIP gaming patrons; and (ii) taking steps to closely
monitor the collection of outstanding markers. As a result, our total rolling chip turnover since 2012 were adversely impacted.
While our efforts to monitor the collection of outstanding markers have successfully mitigated our risk of bad debt, we have experienced
a lengthening of the collection period on certain markers, though they remain within our collection policy of 180 days.
To effectively mitigate the adverse impact
such tightening of credit had on our operating results, we have been pursuing strategic acquisitions to enlarge our junket agent
base, similar to the Bao Li Acquisition in 2012 and the Oriental VIP Room Acquisition in 2013. In addition, we believe that VIP
Gaming Promoters and Collaborators with fewer financial resources than we have will either cease operations or be targets for acquisition
as the VIP Gaming sector consolidates into fewer, more financially secure VIP Gaming Promoters. As a result of our conservative
extension of credit, we believe we are well positioned to expand our operations as part of this consolidation. While we have
not identified specific VIP Gaming Promoters and Collaborators suitable for an acquisition, we continue to evaluate the sector
and the potential expansion opportunities including overseas.
We have offered higher fixed commission
rates to non-credit agents (agents that we do not extend credit to) since January 2013 and implemented a super-agent program in
September 2012, which provides certain non-credit agents an option to participate in sharing our overall win/loss each month based
on their proportionate contribution of our total rolling chip turnover of the previous month in addition to receiving a fixed rate
commission. We intend to continue such initiatives in an effort to attract a higher proportion of non-credit agents who have the
financial resources to purchase non-negotiable chips from us rather than relying on gaming credit extended by us, which in turn
increases the number of VIP players and rolling chip turnover without additional credit risk.
Our network of junket agents
Virtually all our revenue is ultimately
generated by VIP players brought to the VIP Rooms by junket agents. With the decreasing trend of VIP gaming in Macau, the competition
for services provided by junket agents has increased. Our network of junket agents, our ability to maintain good relationships
with them and our ability to continue to develop relationships with new junket agents will continue to have a significant impact
on our results of operations.
Our revenue model
Macau
Beginning September 1, 2012, we changed
our remuneration model from a fixed rate commission of not more than 1.25% of rolling chip turnover to a revenue sharing model
where we currently share 40% to 45% of the net gaming win/loss before expenses with the respective casino operators and the L’Arc
Promoter in Macau. In respect of the Oriental VIP Room, we elected to pay a fixed amount of table rentals to the L’Arc Promoter
in exchange for a higher percentage of net gaming win/loss. Beginning in September 2015, we are no longer paying a table rental
fee and our percentage of net gaming win/loss was reduced.
Such a shift in revenue model was affected
primarily taking into consideration the following:
|
·
|
the industry trend of shifting from a fixed rate commission model to a revenue sharing model, which is currently the standard
model of compensating gaming promoters and is believed to be preferred by the concessionaires who prefer a less volatile earnings
stream provided by the revenue sharing model;
|
|
·
|
depending on the win/loss of the VIP Rooms, we may generate higher revenue under a revenue sharing model;
|
|
·
|
our expansion into five VIP gaming rooms following the acquisitions in 2012 and 2013 provided us with more tables and enabled
us to spread the risk of fluctuation in our operating results;
|
|
·
|
our increased cage capital;
|
|
·
|
a revenue sharing model gains us access to additional casinos which operate exclusively under such model; and
|
|
·
|
a revenue sharing model increases our competitiveness in attracting non-credit agents.
|
Our operating results under the revenue
sharing model directly correlate with the win/loss rate in the VIP Rooms and are therefore subject to greater fluctuation as compared
to a fixed rate commission model. As a result, our short-term results may be materially affected by the win/loss variances in
the VIP Rooms and may not be indicative of our future performance. As a result of the shift in revenue model, our revenue as a
percentage of rolling chip turnover changed from 1.26% in 2011, to 1.30% in 2012, 1.39% in 2013, 1.41% in 2014, 1.63% in 2015
and to 1.50% during the three months ended March 31, 2016. However, according to Union Gaming, the generally expected win rate
for VIP baccarat, the table game played at the VIP Rooms, is between 2.7% to 3.0% and our quarterly win rates from January 1,
2011 to March 31, 2016 ranged from 2.18% to 4.19%.
Since our change in revenue model, we have
increased commission payments to non-credit agents and have allowed super-agents to participate in sharing our overall win/loss,
which contributed to an overall higher percentage of commission paid to junket agents in relation to rolling chip turnover. As
our network of non-credit agents and super-agent program expand, we expect a higher percentage of commissions payable to junket
agents in relation to rolling chip turnover.
Australia
On May 15, 2015, we entered into agreements
to acquire all of the profit interests of Mr. Lou Kan Kuong (“Mr. Lou”) for acting as a junket operator for the Crown
Perth Casino in Perth, Australia, and for the Crown Melbourne Casino in Melbourne, Australia, for $200 of consideration in the
aggregate. Mr. Lou, who is currently an officer of IKGH, entered into agreements to act as a junket operator for the above two
casinos on June 24, 2013. We have started trial operations in the Australian casinos to gain a greater understanding of the preferences
of our junket agents and VIP players and the logistics of the market. As of today, nominal revenues have been generated by the
Australia operation, equal to our costs as we test this market. We receive a fixed percentage of the rolling chip turnover we generate
at the Australian casinos and do not currently share in the win/loss results. The profit interests were acquired as an asset purchase
for the historical costs of establishing the agreements between Mr. Lou and the Australian Casinos as a related party transaction.
We entered into the agreement to expand to overseas markets for our existing agent network in Macau.
Goodwill Impairment
Goodwill is recorded when the purchase
price for an acquisition exceeds the estimated fair value of the net tangible and identified intangible assets acquired. The Company
currently has only one reporting unit which is the gaming promotion business mainly located in Macau. Current operations in Australia
are managed under the same reporting unit as Macau. As our international business expands, we may have additional reporting units.
The Company has adjusted the rolling chip
turnover guidance to reflect the decline in revenue of the VIP gaming business in Macau. During the year ended December 31, 2015,
the Company has been actively exploring alternatives to diversify the source of revenue in overseas markets. These results, along
with changes in the competitive marketplace led to a shift in strategic direction and reduced future revenue and profitability
expectations for the business. As a result of these changes in strategy and expectations, the Company forecasted reductions in
rolling chip turnover growth rates and lower future cash flows used to estimate the fair value of the business unit, which resulted
in an impairment charge for goodwill recorded in the consolidated financial statements for the year ended December 31, 2015.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management’s discussion and analysis
of our results of operations and liquidity and capital resources are based on our consolidated financial information. We describe
our significant accounting policies in Note 2, Summary of Significant Accounting Policies, of the Notes to unaudited Consolidated
Financial Statements included in this report. Our unaudited consolidated financial statements have been prepared in accordance
with U.S. GAAP for interim financial reporting. In the opinion of management, all adjustments (consisting of normal recurring adjustments)
have been made that are necessary to present fairly the financial position, the results of its operations and cash flows. Operating
results as presented are not necessarily indicative of the results to be expected for a full year. These financial statements and
related notes should be read in conjunction with the financial statements and notes thereto included in the Company’s Form
20-F filed on March 11, 2016 with the Securities and Exchange Commission for the year ended December 31, 2015. Certain of our accounting
policies require that management apply significant judgments in defining the appropriate assumptions integral to financial estimates.
On an ongoing basis, management reviews the accounting policies, assumptions, estimates and judgments to ensure that our financial
statements are presented fairly and in accordance with U.S. GAAP. Judgments are based on historical experience, terms of existing
contracts, industry trends and information available from outside sources, as appropriate. However, by their nature, judgments
are subject to an inherent degree of uncertainty, and, therefore, actual results could differ from our estimates.
Management regularly evaluates accounting
estimates, including those relating to income taxes, intangible assets and amortization, impairment of goodwill, fair value of
contingent consideration payables, and impairment of markers receivable
CERTAIN STATEMENTS OF OPERATIONS ITEMS
Revenue from VIP gaming promotion operations
Our source of revenue is primarily commissions
received from the casino operators and the L’Arc Promoter from VIP gaming promotion operations in Macau. We have started
trial operations in Australia and believe the operations will contribute to future revenues. We also received a small amount of
service revenue which is disbursement income from junket agents for providing transportation, accommodation, food and beverage
and other complimentary services to them starting in 2013. The profits derived from our VIP gaming promotion operations depend
on the gaming volumes and win rate in the VIP Rooms. Revenue from VIP gaming promotion operations in Macau is recorded based on
our share of the gaming win/loss. Our Australian operations are based upon a fixed percentage of rolling chip turnover.
Commission to junket agents
We pay commissions to junket agents typically
based on their rolling chip turnover. We implemented a super-agent program in September 2012 which allowed certain non-credit agents
to participate in sharing overall win/loss with us in addition to receiving a fixed rate commission. During the three month periods
ended March 31, 2016 and 2015, the junket agents who participated in such super-agent program received more commissions than they
would have under the fixed rate commission model.
Selling, general and administrative
expenses
Selling, general and administrative expenses
consist of legal and professional fees, management salaries and director fees, management fees associated with the administration
of the VIP gaming rooms, staff costs (excluding directors’ remuneration), VIP room operating costs and other expenses.
The following table sets out the breakdown
of our selling, general and administrative expenses for the periods indicated (all figures are in thousands).
|
|
For the
three months
ended
March 31,
2016
|
|
|
For the
three months
ended
March 31,
2015
|
|
|
|
|
|
|
|
|
|
|
Legal and professional fees
|
|
$
|
138
|
|
|
$
|
121
|
|
Management salaries and director fees
|
|
|
575
|
|
|
|
687
|
|
Management fees
|
|
|
1,081
|
|
|
|
1,199
|
|
Staff costs excluding directors’ remuneration
|
|
|
987
|
|
|
|
1,229
|
|
VIP room operating costs
|
|
|
22
|
|
|
|
952
|
|
Other
(1)
|
|
|
698
|
|
|
|
1,045
|
|
Hong Kong Listing Expenses
|
|
|
-
|
|
|
|
159
|
|
Total
|
|
$
|
3,501
|
|
|
$
|
5,392
|
|
Note:
|
(1)
|
Other mainly includes entertainment expenses, investor relations fees, advertising expenses and overseas travelling expenses by management.
|
RESULTS OF OPERATIONS
For the Three Months Ended March
31, 2016 Compared to the Three Months Ended March 31, 2015
The following table sets forth certain
information regarding our unaudited and unreviewed results of operations for the three months ended March 31, 2016 and 2015 (all
figures are in $ thousands except ratios and percentages).
|
|
Three Months Ended
March 31,
2016
|
|
|
Three Months Ended
March 31,
2015
|
|
|
% change
from 2015
to 2016
|
|
Revenue from VIP gaming promotion
|
|
$
|
17,922
|
|
|
$
|
41,701
|
|
|
|
(57
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commission to junket agents
|
|
$
|
13,725
|
|
|
$
|
27,998
|
|
|
|
(51
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
$
|
3,501
|
|
|
$
|
5,392
|
|
|
|
(35
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income before change in fair value of contingent consideration
|
|
$
|
(3,496
|
)
|
|
$
|
4,001
|
|
|
|
(187
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of operating (loss) income before change in fair value of contingent consideration/Revenue from VIP gaming promotion
|
|
|
(19.51
|
)%
|
|
|
9.59
|
%
|
|
|
|
|
Non-GAAP Financial Results
The following Non-GAAP financial results
for the three months ended March 31, 2016 and 2015 are used by management to evaluate our financial performance prior to the deduction
of amortization of intangible assets and change in fair value of contingent consideration related to the acquisitions of King's
Gaming, Bao Li Gaming and the Oriental VIP Room (all figures are in $ thousands except ratios and percentages) (see Non-GAAP Financial
Measures).
|
|
Three Months Ended
March 31,
2016
|
|
|
Three Months Ended
March 31,
2015
|
|
|
% change
from 2015
to 2016
|
|
Non-GAAP income before amortization of intangible assets and change in fair value of contingent consideration
|
|
$
|
576
|
|
|
$
|
8,091
|
|
|
|
(93
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of Non-GAAP income before amortization of intangible assets and change in fair value of contingent consideration/Revenue from VIP gaming promotion
|
|
|
3.21
|
%
|
|
|
19.40
|
%
|
|
|
|
|
Rolling Chip Turnover Ratios
Rolling Chip Turnover is used by casinos
to measure the volume of VIP gaming room business transacted and represents the aggregate amount of non-negotiable chips exchanged
by VIP gaming patrons. Bets are wagered with ‘‘non-negotiable chips’’ and winning bets are paid out by
casinos in so-called ‘‘cash’’ chips. If a player continues to make bets, they have to change the cash chips
to non-negotiable chips.
Rolling Chip Turnover ratios are calculated
as percentages of Rolling Chip Turnover, and represent the changes in revenue, expenses and income in comparison to the change
in gaming volume which investors and management use to assess the operating efficiencies of the Promotion Entities.
The following table sets forth certain
information regarding our results relating to our Rolling Chip Turnover and certain performance ratios for the three months
ended March 31, 2016 and 2015 (all figures are in $ thousands except for ratios and percentages).
|
|
Three Months
Ended
March 31,
2016
|
|
|
Three Months
Ended
March 31,
2015
|
|
|
% change
from 2015
to 2016
|
|
Rolling Chip Turnover
|
|
$
|
1,198,221
|
|
|
$
|
2,195,664
|
|
|
|
(45.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from VIP gaming promotion/Rolling Chip Turnover
|
|
|
1.50
|
%
|
|
|
1.90
|
%
|
|
|
(21.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commission to junket agents/Rolling Chip Turnover
|
|
|
1.15
|
%
|
|
|
1.28
|
%
|
|
|
(10.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin (Revenue less commissions and special rolling tax)/Rolling Chip Turnover
|
|
|
0.34
|
%
|
|
|
0.61
|
%
|
|
|
(44.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses/Rolling Chip Turnover
|
|
|
0.29
|
%
|
|
|
0.25
|
%
|
|
|
19.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income before change in fair value of contingent consideration/Rolling Chip Turnover
|
|
|
(0.29
|
)%
|
|
|
0.18
|
%
|
|
|
(260.1
|
)%
|
Below is a quarterly analysis of the win
rate in our VIP gaming rooms from January 1, 2013 to March 31, 2016:
Period
|
|
Win Rate %
|
|
|
|
|
|
|
Q1 2013
|
|
|
3.29
|
%
|
Q2 2013
|
|
|
3.06
|
%
|
Q3 2013
|
|
|
3.18
|
%
|
Q4 2013
|
|
|
2.39
|
%
|
Q1 2014
|
|
|
3.60
|
%
|
Q2 2014
|
|
|
2.18
|
%
|
Q3 2014
|
|
|
2.51
|
%
|
Q4 2014
|
|
|
3.95
|
%
|
Q1 2015
|
|
|
4.19
|
%
|
Q2 2015
|
|
|
2.73
|
%
|
Q3 2015
|
|
|
3.91
|
%
|
Q4 2015
|
|
|
3.42
|
%
|
Q1 2016
|
|
|
3.28
|
%
|
Revenue from VIP gaming promotion operations
was US$17.9 million for the three months ended March 31, 2016, as compared to US$41.7 million for the three months ended March
31, 2015, representing a decrease of 57%, and revenue as a percentage of rolling chip turnover decreased from 1.90% for the three
months ended March 31, 2015 to 1.50% for the three months ended March 31, 2016, representing a decrease of 21.2%. Such decreases
were primarily a result of a low win rate of 3.28% for the three months ended March 31, 2016 compared to a high win rate of 4.19%
for the three months ended March 31, 2015.
During the first quarter of 2016, we experienced
a significant decrease in our Rolling Chip Turnover compared to the same period of 2015. Our Rolling Chip Turnover was $1.2 billion
and $2.2 billion in the first quarter of 2016 and 2015, respectively, a 45.4% decrease. Our Rolling Chip Turnover was significantly
impacted by:
|
·
|
potential players being deterred by a variety of factors including increased oversight of credit cards that many gamblers use
to access funds in Macau;
|
|
·
|
a lack of demand from high rollers and less visits to Macau primarily due to anti-corruption enforcement by the PRC government;
and
|
|
·
|
our tightening policy to provide gaming credit as a result of lengthened collection periods on certain markers, which remain
within our collection policy of 180 days.
|
The commissions paid to junket agents decreased
by US$14.3 million, or 51%, to US$13.7 million for the three months ended March 31, 2016, as compared to the three months ended
March 31, 2015, primarily as a result of significantly lower Rolling Chip Turnover compared to the prior period. The commission
paid to junket agents as a percentage of rolling chip turnover was 1.90% for the three months ended March 31, 2015, down to 1.50%
for the three months ended March 31, 2016, a decrease of 21.2%. Beginning in January 2013, we began an upward adjustment in commission
rates to stay competitive in the Macau VIP gaming industry and to compensate our junket agents for no longer providing any complimentary
hotel and casino services to them, as well as higher commissions paid to non-credit agents and super-agents. The decrease in the
commissions paid to junket agents as a percentage of Rolling Chip Turnover was primarily a result of the lower win rate.
Selling, general and administrative expenses
decreased by US$1.9 million, or 35%, to US$3.5 million for the three months ended March 31, 2016 as compared to the three months
ended March 31, 2015. VIP gaming room operating costs and other costs decreased by US$0.9 million during the three months ended
March 31, 2016 as a result of the reduced number of junket agents and VIP players visiting Macau and no longer pays monthly table
rental to the L’Arc casino since September 2015. Staff costs decreased by US$0.4 million as a result of a decrease in executive
compensation and no year-end bonus paid to cage employees. As a result of no longer pursuing a listing on the Hong Kong Stock Exchange,
no listing expenses were incurred during the three months ended March 31, 2016 compared to US$0.2 million recorded in the prior
period. We do not anticipate additional listing costs.
The special rolling tax decreased by US$0.1
million, or 45%, to US$0.1 million for the three months ended March 31, 2016 from the three months ended March 31, 2015 as a result
of the decrease in rolling chip turnover. The percentage of the special rolling tax to revenue from VIP gaming promotion remained
consistent in a range of 0.7% to 0.5% for the three months ended March 31, 2016 and 2015.
Amortization of intangible assets for the
three months ended March 31, 2016 and 2015 was US$4.1 million.
Operating loss before change in the fair
value of contingent consideration payables was US$3.5 million for the three month March 31, 2016, as compared to operating income
of US$4.0 million for the three months ended March 31, 2015, representing an increase in net loss of 187%, primarily as a result
of a significant decrease in revenues as a result of low Rolling Chip Turnover and low win rate.
There was no fair value of the contingent
consideration liability in respect of the Oriental VIP Room Acquisition because we do not expect the Oriental VIP room will meet
the base earnout rolling chip target as of March 31, 2016. Bao Li Gaming met its last rolling chip target for the year ended December
31, 2015 and the agreement expired as of December 31, 2015. There was no fair value change of the contingent consideration payable
in respect of the King’s Gaming acquisition for the three months ended March 31, 2016 as the forecasted gross profit level
of King’s Gaming resulted in no additional earn-out shares expected to be earned by the King’s Gaming seller. As required
by U.S. GAAP, any change in the fair value of the acquisition-related contingent consideration subsequent to the acquisition date,
including changes from events after the acquisition date, such as changes in our estimate of the gross profit and rolling chip
turnover expected to be achieved, will be recognized in earnings in the period that estimated fair value changes. A change in the
fair value of the acquisition-related contingent consideration could have a material impact on our statement of operations and
financial position.
As a result of the above, we had a net
loss of US$3.5 million for the three months ended March 31, 2016 compared to a net income of $17.1 million for the three months
ended March 31, 2015.
Basic and diluted loss per share for the
three months ended March 31, 2016 was US$0.06 based upon the weighted average share count of 63,103,781.
Non-GAAP Financial Measures
Our calculation of Non-GAAP income (operating
income before amortization of intangible assets, impairment of goodwill and change in fair value of contingent consideration) and
Non-GAAP EPS differs from EPS based on net income because it does not include amortization of intangible assets and change in fair
value of contingent consideration. We use this information internally in evaluating our operations and believe this information
is important to investors because it provides users of our financial information with additional useful information in evaluating
operating performance for the periods and is more consistently comparable to the prior periods. Notwithstanding the foregoing,
Non-GAAP income and EPS should not be considered an alternative to, or more meaningful than, net income and EPS as determined in
accordance with GAAP. The following is a reconciliation of our net income to Non-GAAP income and GAAP EPS to our Non-GAAP
EPS:
|
|
For the
Three
Months Ended
March 31,
2016
|
|
|
For the
Three
Months Ended
March 31,
2015
|
|
|
|
|
|
|
|
|
|
|
Net (Loss) Income attributable to ordinary shareholders
|
|
$
|
(3,495,553
|
)
|
|
$
|
17,082,486
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets
|
|
|
4,071,738
|
|
|
|
4,090,678
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of contingent consideration
|
|
|
-
|
|
|
|
(13,081,685
|
)
|
|
|
|
|
|
|
|
|
|
Non-GAAP income (before amortization of intangible assets and change in fair value of contingent consideration)
|
|
$
|
576,185
|
|
|
$
|
8,091,479
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Shares Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
63,103,781
|
|
|
|
61,589,044
|
|
Diluted
|
|
|
63,103,781
|
|
|
|
61,589,044
|
|
|
|
For the Three Months Ended
March 31, 2016
|
|
|
For the Three Months Ended
March 31, 2015
|
|
|
|
Basic
|
|
|
Fully
Diluted
|
|
|
Basic
|
|
|
Fully
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (Loss) Income per share attributable to ordinary shareholders
|
|
$
|
(0.06
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
0.28
|
|
|
$
|
0.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets
|
|
|
0.07
|
|
|
|
0.07
|
|
|
|
0.07
|
|
|
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of contingent consideration
|
|
|
-
|
|
|
|
-
|
|
|
|
(0.22
|
)
|
|
|
(0.22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP earnings per share (before amortization of intangible assets and change in fair value of contingent consideration)
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
|
$
|
0.13
|
|
|
$
|
0.13
|
|
TAXATION
Cayman Islands
We are incorporated in the Cayman Islands.
Under the current laws of the Cayman Islands, we are not subject to income or capital gain tax. In addition, payment by us to our
shareholders is not subject to withholding tax in the Cayman Islands.
United States
We are not incorporated nor do we engage
in any trade or business in the United States and are, therefore, not subject to United States federal income taxes.
Hong Kong
We are not subject to Hong Kong profits
tax because all of our operations are performed outside Hong Kong, and Hong Kong adopts a territorial tax regime under which only
Hong Kong-sourced income is subject to the profit tax.
British Virgin Islands
All of our BVI subsidiaries are incorporated
under the BVI Business Companies Act, 2004 (No. 16 of 2004) and are exempt from payment of BVI taxes.
Macau
The Promoter Companies, Sang Heng, King’s
Gaming, Bao Li and Sang Lung, and the L’Arc Collaborator are not subject to Macau Complementary Tax, because their gaming
revenue is received net of taxes collected by the Macau Government which are paid directly by the casino operators on a monthly
basis. As a result, no provision for Macau Complementary Tax has been made.
The exemption from Macau Complementary
Tax, however, does not apply to the dividends to be distributed by the Company’s Macau subsidiaries. We are, therefore, subject
to Macau Complementary Tax at a progressive rate of up to maximum of 12% for dividends we receive from our Macau subsidiaries.
Accordingly, we are required to recognize deferred tax liabilities for taxable temporary differences associated with its investments
in Macau subsidiaries except where we will be able to control the timing of the reversal of the temporary differences and it is
probable that the temporary differences will not reverse in the foreseeable future.
During the reporting period, no liability
was recognized in respect of these differences because we were in a position to control the timing of reversal of the temporary
differences and it is probable that such differences will not reverse in the foreseeable future.
The Promotion Entities in Macau are subject
to special rolling tax which is deducted and withheld by each casino operator and the L’Arc Promoter on a monthly basis.
The rate of special rolling tax is 0.01% on the rolling chip turnover of the VIP gaming room, and the special rolling tax is deducted
as a cost of operation.
Australia
The Junket Operator in Australia is currently
not subject to Goods and Services Tax (“GST”) or any income tax in Australia.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2016, our total available
cage capital was US$179 million, consisting of markers receivable of US$171 million and cash and cash chips on hand of US$8 million.
As of March 31, 2016, we had a total cash
and cash equivalents balance of US$8 million, compared to cash and cash equivalents of US$3 million as of December 31, 2015. The
increase is mainly a result of increased utilization of our line of credit and increased shareholder loans, offset by lower extension
of credit and longer collection periods for markers receivable. Our credit risk is primarily attributable to markers receivable.
As of March 31, 2016, we had available
lines of credit of US$57.6 million from casino operators in Macau and Australia excluding temporary credits, of which US$52 million
was outstanding as of March 31, 2016. If the casino operators decide not to renew the lines of credit in any given month, our rolling
chip turnover may be reduced as a result of reduced credit extended to our VIP gaming patrons. As a result, our gaming revenue
from the casino operators and the L’Arc Promoter and our net operating income could also be reduced.
As of March 31, 2016, we had interest free
loans from shareholders of US$3.5 million which are temporary credit extended to us from time to time as part of our cage capital
to meet additional gaming credit demand by our VIP gaming patrons.
Our expected sources of repayment of the
lines of credit extended by the casino operators and our shareholders are the repayment of markers receivable from our VIP gaming
patrons as well as receivables due from the casino operators and the L’Arc Promoter.
In March 2013, the Board of Directors established
the 2013 Repurchase Plan, which authorized us to purchase up to four million shares on the open market at prices to be determined
by our management. During the year ended December 31, 2013 we repurchased an aggregate of 732,900 shares for an aggregate purchase
price of US$2.3 million pursuant to the 2013 Repurchase Plan. During the year ended December 31, 2014, we repurchased an aggregate
of 1,415,300 shares for an aggregate purchase price of US$4.2 million pursuant to the 2013 Repurchase Plan. The shares repurchased
under the 2013 Repurchase Plan were retired and the purchase price was allocated to ordinary shares and additional paid in capital.
There were no shares repurchased during the year ended December 31, 2015 and the three months ended March 31, 2016. The 2013 Repurchase
Plan remains effective until terminated by our officers, who are authorized to discontinue such plan at any time in their discretion.
Working capital
We believe that we have sufficient working
capital available for the next twelve months.
Cash flow
Historically, we have financed our working
capital and other capital requirements primarily through cash generated from our operations and shareholder loans. The following
table sets forth a summary of our cash flows for the periods indicated (all figures are in thousands).
|
|
For the three months
ended March 31,
2016
|
|
|
For the three months
ended March 31,
2015
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
4,893
|
|
|
$
|
419
|
|
Net cash used in investing activities
|
|
|
-
|
|
|
|
-
|
|
Net cash from (used in) financing activities
|
|
|
683
|
|
|
|
(340
|
)
|
Net increase in cash and cash equivalents
|
|
$
|
5,576
|
|
|
$
|
79
|
|
Cash flow generated from operating activities
The increase in net cash provided by operating
activities for the three months ended March 31, 2016 compared to the three months ended March 31, 2015 was primarily due to increase
utilization of lines of credit and decrease in providing gaming markers due to lower rolling for the three month period ended March
31, 2016. Other fluctuations in cash from operating activities were due primarily to miscellaneous timing differences.
Cash flow from (used in) financing activities
The increase in net cash from
financing activities for the three months ended March 31, 2016 compared to the three months ended March 31, 2015 was primarily
due to an increase in short term advances from shareholder.
Future sources and uses of cash
We generally funded our operations from cash generated from
operating activities.
We expect that our future liquidity and capital requirements
will be affected by:
|
·
|
capital requirements related to prior and future acquisitions;
|
|
·
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cash flow from prior and future acquisitions;
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|
·
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working capital requirements;
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|
·
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dividend distributions;
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|
·
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repurchase of outstanding shares;
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|
·
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funds raised through the issuance of our securities; and
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·
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earnings accumulated and reinvested.
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Off-Balance Sheet Arrangements
None.