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EGT > SEC Filings for EGT > Form 10-Q on 8-Aug-2014All Recent SEC Filings

Show all filings for ENTERTAINMENT GAMING ASIA INC.

Form 10-Q for ENTERTAINMENT GAMING ASIA INC.


8-Aug-2014

Quarterly Report


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

CAUTIONARY STATEMENT

The following discussion and analysis should be read in conjunction with our unaudited consolidated financial statements and the related notes thereto contained elsewhere in this report. The information contained in this quarterly report on Form 10-Q is not a complete description of our business or the risks associated with an investment in our common stock. We urge you to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the Securities and Exchange Commission, or SEC, including our annual report on Form 10-K for the year ended December 31, 2013, filed with the SEC on March 31, 2014 and subsequent reports on Form 8-K, which discuss our business in greater detail.

In this report we make, and from time to time we otherwise make, written and oral statements regarding our business and prospects, such as projections of future performance, statements of management's plans and objectives, forecasts of market trends, and other matters that are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Statements containing the words or phrases "will likely result," "are expected to," "will continue," "is anticipated," "estimates," "projects," "believes," "expects," "anticipates," "intends," "target," "goal," "plans," "objective," "should" or similar expressions identify forward-looking statements, which may appear in documents, reports, filings with the Securities and Exchange Commission, news releases, written or oral presentations made by officers or other representatives made by us to analysts, stockholders, investors, news organizations and others, and discussions with management and other of our representatives. For such statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

Our future results, including results related to forward-looking statements, involve a number of risks and uncertainties. No assurance can be given that the results reflected in any forward-looking statements will be achieved. Any forward-looking statement speaks only as of the date on which such statement is made. Our forward-looking statements are based upon assumptions that are sometimes based upon estimates, data, communications and other information from suppliers, government agencies and other sources that may be subject to revision. Except as required by law, we do not undertake any obligation to update or keep current either (i) any forward-looking statement to reflect events or circumstances arising after the date of such statement, or (ii) the important factors that could cause our future results to differ materially from historical results or trends, results anticipated or planned by us, or which are reflected from time to time in any forward-looking statement.

There are several important factors that could cause our future results to differ materially from historical results or trends, results anticipated or planned by us, or results that are reflected from time to time in any forward-looking statement. Some of these important factors, but not necessarily all important factors, are included in this Management's Discussion and Analysis of Financial Condition and Results of Operations and in the section "Risk Factors" in our annual report on Form 10-K for the year ended December 31, 2013 filed with the SEC on March 31, 2014.

We own or have rights to certain trademarks that we used in connection with our business or products, including, but not limited to, Dolphin™. Other than this trademark, this report also makes reference to trademarks and trade names of other companies.

Overview

This discussion is intended to provide the reader with information that will assist in understanding our financial statements, the changes in certain key items in those financial statements from year to year, and the primary factors that accounted for those changes, as well as how certain accounting principles affect our financial statements. The discussion also provides information about the financial results of the various segments of our business to provide a better understanding of how those segments and their results affect our financial condition and results of operations as a whole. This discussion should be read in conjunction with our consolidated financial statements and accompanying notes as of and for the three-month and six-month periods ended June 30, 2014 and 2013 included elsewhere in this report.

We are a gaming company focused on capitalizing on the growth opportunities in emerging gaming markets of Asia. We generate revenue in two principal ways:
gaming operations and gaming product sales. Our gaming operations comprise slot participation operations in Cambodia and the Philippines through contracts with venue owners or the development and operations of our own venues under our Dreamworld brand. Our gaming products comprise the manufacture and sale of gaming chips and plaques under our Dolphin brand and the distribution of gaming products in select markets for third-party suppliers.

Our consolidated revenue for the three-month and six-month periods ended June 30, 2014 was approximately $4.9 million and $9.6 million, of which revenue from the gaming operations and gaming products segments comprised 89% and 11% and 86% and 14%, respectively. This compares to consolidated revenue of approximately $5.2 million and $11.0 million for the three-month and six-month periods ended June 30, 2013, of which revenue from the gaming operations and gaming products segments comprised 97% and 3% and 86% and 14%, respectively.

We have developed our business model with the goal of creating growth potential and the ability to generate quality recurring cash flow. We believe that this model combined with our established presence and relationships in our markets provide us the potential to capitalize on the growth opportunities in our target markets in Asia. We seek to improve revenue by making our gaming properties quality leaders in their markets by providing our customers with their favorite games, superior customer service and attractive and comfortable surroundings. We seek to increase and expand our diversified revenue streams through our gaming products division. We seek to improve margins by focusing on operational efficiencies and cost controls. Our long-term strategy includes responsible investment in improving and maintaining our existing operations and selectively securing new projects that will serve to enhance our presence and build deeper brand equity for the Dreamworld name in our markets and drive long-term growth for the Company. We intend to implement these strategies in ways that we believe will benefit our shareholders.

Gaming Operations

Our gaming operations involve the leasing of EGMs on a revenue sharing basis to gaming establishments. We utilize our operational experience, established market presence and key relationships to identify and develop new gaming venues, acquire EGMs, casino management systems and other gaming peripherals directly from manufacturers, dealers and suppliers and install the same in our contracted venues. In addition, we assist the venue owners in brand-building and marketing promotions.

For certain of our contracts, such as with NagaWorld Resorts, Sokha Hotels and Resorts ("Sokha") and Dreamworld Club (Poipet) in Cambodia, we also function as a manager of the EGM operations. In these venues, we either jointly manage with the relevant casino owner, as is the case with NagaWorld Resorts and Sokha, or exclusively manage, as is the case with Dreamworld Club (Poipet), the slot floor operations and design marketing programs and slot promotions for our designated gaming spaces. We also hire, train and manage the floor staff and set high expectations on the level of customer service.

Total company-wide EGM placements can fluctuate due to our strategic efforts to optimize average daily net wins. In the event that the EGM performance at a contracted venue does not meet our original expectations, and to the extent permitted under the terms of the relevant contracts, we may discuss with the venue owner withdrawing all or a portion of our EGMs from such venue for future redeployment in new or existing venues with better performance prospects.

As of June 30, 2014, our gaming operations were located in two countries, Cambodia and the Philippines, and totaled 1,694 EGM seats in operation in six venues. In Cambodia, we had a total of 1,126 EGM seats in operation in three venues. In the Philippines, we had a total of 568 EGM seats in operation in three venues.

In Cambodia, our gaming operations largely focus on operating a substantial portion of the gaming machine area in prime casino floor locations at NagaWorld, a wholly-owned subsidiary of Hong Kong listed NagaCorp Ltd. (HKSE: 3918). NagaWorld is a premier luxury destination gaming resort and the only licensed full service casino in a designated area around the capital city of Phnom Penh. In December 2008, we established a relationship with NagaCorp to place EGMs on a revenue sharing or participation basis at NagaWorld and jointly operate those EGMs with them. Due to our successful performance, we subsequently amended our contract and expanded our relationship with NagaWorld to 670 EGM seats under contract. Our slot operations in NagaWorld are a primary contributor to our slot revenue and cash flow.

Our current operations in NagaWorld are governed under the Machines Operation and Participation Consolidation Agreement dated December 31, 2009, which was subsequently amended on May 25, 2010. Under the terms of these agreements, we and NagaWorld control the operation of a total of 670 of our EGMs, including floor staff and respective audit rights. We and NagaWorld split the win per unit per day from all the 670 EGMs and certain operating costs related to marketing and floor staff on a respective basis of 25%/75%. Win per unit per day from all the 670 EGMs are settled and our share is distributed daily to us. The contract term is six years commencing from March 1, 2010.

Our gaming operations in Cambodia also include Thansur Bokor Highland Resort, a casino resort developed by leading Cambodian hotelier, Sokha, in a tourist area of the Kampot Province. The resort officially opened in May 2012 but portions of the initial phase of the property including the entertainment complex were not completed until early 2013. To-date, we have placed approximately 180 EGMs in this venue. Under the terms of the agreement, we have the ability to place up to 250 EGM seats and jointly manage these slot operations in the resort. We and Sokha split the gross win and certain operating expenses for the placed EGMs on a respective basis of 27%/73%. The contract duration is five years commencing from May 2012. This project expanded our gaming operations in the Indo-China region with a prominent partner who has multiple hotel and resort properties in Cambodia.

Our most recent project in Cambodia is Dreamworld Club (Poipet). Unlike our other slot operations, we solely developed and operate this property. Dreamworld Club (Poipet) is a standalone slot hall with approximately 300 EGM seats. It is prominently located in the established gaming market of Poipet in the Banteay Meanchey Province of Northwestern Cambodia near the Thailand border. Dreamworld Club (Poipet) soft opened in March 2013 and the official grand opening was held in May 2013.

Dreamworld Club (Poipet) operates under a machine operation and participation agreement with a local partner that owns and operates an existing casino in Poipet. Under the terms of the agreement, the local partner allocated part of its land with an area of approximately 16,000 square feet to us to develop and construct, at our own design, budget and cost, the slot venue. We and the local partner split the win per unit per day from all the EGMs placed by us at Dreamworld Club (Poipet) and certain operating costs related to marketing and floor staff on a respective basis of 40%/60%. The initial project term is five years beginning from the commercial launch of the slot hall in 2013 with an option to renew for an additional five years subject to the achievement of certain financial milestones during the initial five-year period.

Total capital expenditures for Dreamworld Club (Poipet), which principally included the development and construction of the facility and gaming equipment, were approximately $7.5 million, including approximately $5.0 million to source top-of-the-line EGMs. We are responsible for all capital expenditures for Dreamworld Club (Poipet) and those expenditures have been funded through our internal cash resources.

In the Philippines, our gaming operations comprise three venues in the greater Manila area. For these three venues, our share of the net win per unit per day ranges from 15% to 35%. The typical initial term for these contracts is five years with renewal options. The strong Philippine economy, the interest of the government to expand gaming in the country and close geographic proximity to major markets in Asia, among other reasons, has led to increased development of major casinos in the market. While this results in increasing competition for our venues in this market, we remain focused on enhancing returns on assets in the Philippines through targeted marketing programs and strategic management of the machine mix.

During the reporting periods, we operated one casino property, Dreamworld Casino (Pailin), which opened in May 2012 and closed in June 2014. Dreamworld Casino (Pailin) measured approximately 16,000 square feet and was located in the Pailin Province of Northwestern Cambodia next to the Thailand border.

Dreamworld Casino (Pailin) was constructed on land leased from a local land owner and, in consideration, the land owner was entitled to receive monthly a rental fee in the amount of $5,000 and 20% of the profit before depreciation (the total gross revenue of the casino less any payouts paid to customers, operating expenses, and gaming and non-gaming taxes on the casino's revenue). The initial lease term was 20 years, commencing in September 2011 and was subject to renewal by the parties in writing. Total capital expenditures for Dreamworld Casino (Pailin) were approximately $2.5 million, which was paid solely by us from internal cash resources.

The performance of Dreamworld Casino (Pailin) did not meet our expectations primarily due to an insufficient level of natural player traffic and the high costs associated with acquiring a quality player base in this market. After exploring all avenues to improve performance, we determined to seek strategic alternatives for the property. After careful evaluation of all other options, on June 20, 2014 we entered into an agreement to sell 100% of the issued capital shares of Dreamworld Leisure (Pailin) Limited ("DWP"), a wholly-owned Cambodian subsidiary of the Company established for the purposes of owning and operating Dreamworld Casino (Pailin) ("Dreamworld Pailin"), to a local Cambodian individual. In connection with the sale of the issued capital shares of DWP, on June 20, 2014 we and our partner in the operations entered into an agreement to terminate the undertaking agreement and lease agreements with our partner and all future obligations thereunder including future lease payments owed by us.

The sale includes all assets of DWP with the exception of all electronic gaming machines, certain surveillance equipment and other assets excluded in the agreement and prohibits any use of the Dreamworld brand name by the buyer. Total consideration paid to us by the buyer will be $500,000, of which $100,000 was paid at the time of entering the agreement and the balance is to be paid in sixteen $25,000 monthly installments commencing within one month of the signed agreement. The parties expect to complete the sale transaction subject to the buyer's receipt of certain government approvals, which is expected within the next few months.

In compliance with the annual valuation review of the Dreamworld Casino (Pailin) facility and gaming assets under U.S. Generally Accepted Accounting Principles (GAAP), we had previously recorded an impairment charge of approximately $2.5 million as of December 31, 2013 related to these operations.

We continue to selectively pursue gaming projects for both slot participation and casino development. For slot operations, we intend to pursue additional opportunities in certain markets in Indo-China and place our EGMs in prime locations on the gaming floors of major casinos and/or hotels in our target markets. For casino development, we intend to pursue projects in Indo-China and other growing gaming markets in Asia that will enable us to expand our market presence and increase brand equity in our Dreamworld name. We intend to pursue projects that are relatively larger in size and investment than our existing Dreamworld projects and in more established markets with a strong level of existing natural player traffic. There is no assurance we will be successful in establishing new projects or that any such projects will be successful.

Gaming Products

As part of our efforts to complete the restructuring of our legacy operations, on March 28, 2013, we sold the non-gaming manufacturing portion of the operations in a management-led buyout for total consideration of AUD350,000. In connection with the sale, in March 2013, we commenced the relocation of our manufacturing facilities for the gaming products portion of the business, namely gaming chips and plaques, to Hong Kong from Australia. Commercial operation of the new Hong Kong facilities, which is also our corporate headquarters, began in May 2013.

We recorded one-time cash costs associated with the above sale and relocation, which included severance and relocation charges, of approximately $1.3 million. These costs were all incurred during the three-month period ended March 31, 2013 and were funded from our available working capital.

We believe these actions not only enabled us to exit a non-core, low-margin business but also better position us to secure large new orders in the growing Asian gaming markets as well as provide for increased production capacity and economies of scale and improved R&D capabilities. In addition, it improves our ability to expand our product mix to include other gaming products, which could add incremental revenue streams and further enhance our competitive positioning. We have two distribution agreements with third-party suppliers for gaming accessories and gaming systems and terminals. None of our distribution agreements require purchase commitments from us.

Discontinued Operations

On June 1, 2014, we ceased operations of Dreamworld Casino (Pailin), a casino it developed, owned and operated in the Pailin Province of Cambodia. On June 20, 2014, we entered into an agreement to sell 100% of the issued capital shares of Dreamworld Leisure (Pailin) Limited, a wholly-owned Cambodian subsidiary established for the purpose of owning and operating the casino. The sale is expected to close in the next few months, at which time we intend to recognize the anticipated gain on the disposal of the entity.

On March 28, 2013, we sold a portion of our subsidiary, Dolphin Products Pty Limited, business dedicated to the manufacture and sale of non-gaming plastic products, mainly automotive parts. Revenues of these non-gaming products and our gaming chips and plaques were previously consolidated under the reporting segment "Other Products." After the sale, we renamed "Other Products" as "Gaming Products" and this segment now comprises our gaming chips and plaques operations and, beginning in October 2013, the distribution of third-party gaming products to select locations in Indo-China and the Philippines.

All related historical revenues and expenses from Dreamworld Casino (Pailin) and the non-gaming plastic products operations have been reclassified as discontinued operations.

Results of Operations for the Three-Month and Six-Month Periods Ended June 30, 2014 and 2013

The following is a schedule summarizing operating results on a consolidated basis and separately by each of our two operating segments, gaming operations and gaming products, for the three-month and six-month periods ended June 30, 2014 and 2013.

On February 22, 2013, we entered into a share sale agreement pursuant to which we agreed to sell the portion of our subsidiary Dolphin Products Pty Limited ("Dolphin Australia") business dedicated to the manufacture and sale of non-gaming plastic products, mainly automotive parts. As part of the sale transaction, we also agreed to grant Dolphin Australia a non-transferable, royalty-free license to utilize certain trademarks and patent rights in connection with its manufacture and sale of plastic products for the non-gaming industries. The sale closed on March 28, 2013.

On June 1, 2014, we ceased the operations of Dreamworld Casino (Pailin), a casino we developed, owned and operated in the Pailin Province of Cambodia. On June 20, 2014, we entered into an agreement to sell 100% of the issued capital shares of Dreamworld Leisure (Pailin) Limited, a wholly-owned Cambodian subsidiary established for the purposes of owning and operating the casino. The sale is expected to close in the next few months.

All historical revenues and expenses associated with Dreamworld Casino (Pailin) and the non-gaming plastic products operations for the three-month and six-month periods ended June 30, 2014 and 2013 have been reclassified as discontinued operations.

                                                          Three-Month Periods Ended June 30,             Six-Month Periods Ended June 30,
(amounts in thousands, except per share data)                2014                     2013                 2014                    2013
Total:
Revenues                                               $          4,944         $          5,196      $         9,638         $        11,021
Gross margin                                           $          1,541         $          1,948      $         2,348         $         3,761
Gross margin percentage                                              31 %                     37 %                 24 %                    34 %
Adjusted EBITDA from continuing operations (1)         $          2,136         $          2,252      $         3,097         $         4,290
Operating income/(loss) from continuing operations     $            212         $            340      $          (638 )       $           263
Net income/(loss) from continuing operations           $            217         $             92      $          (657 )       $            52
Net loss                                               $            (22 )       $           (286 )    $        (1,052 )       $        (2,794 )

Basic and diluted earnings/(loss) per share from
continuing operations                                  $           0.01         $              -      $         (0.02 )       $             -

Weighted average common shares outstanding
Basic                                                            30,013                   29,975               30,016                  29,975
Diluted                                                          30,148                   30,713               30,016                  30,712

Gaming operations:
Revenues                                               $          4,420         $          5,034      $         8,303         $         9,432
Gross margin                                           $          1,942         $          2,332      $         3,426         $         4,213
Gross margin percentage                                              44 %                     46 %                 41 %                    45 %

Gaming products:
Revenues                                               $            524         $            162      $         1,335         $         1,589
Gross margin                                           $           (401 )       $           (384 )    $        (1,078 )       $          (452 )
Gross margin percentage                                             (77 )%                    NM                  (81 )%                  (28 )%



(1) We define "Adjusted EBITDA" as earnings from continuing operations before interest, taxes, depreciation, amortization, stock-based compensation, and other non-cash operating income and expenses. Adjusted EBITDA is presented exclusively as a supplemental disclosure because our management believes that it is widely used to measure the performance, and as a basis for valuation, of gaming companies. Our management uses Adjusted EBITDA as a measure of the operating performance of its segments and to compare the operating performance of its operations with those of its competitors. We also present Adjusted EBITDA because it is used by some investors as a way to measure a company's ability to incur and service debt, make capital expenditures and meet working capital requirements. Gaming companies have historically reported EBITDA as a supplement to financial measures in accordance with generally accepted accounting principles in the United States ("GAAP"). Adjusted EBITDA should not be considered as an alternative to operating income as an indicator of our performance, as an alternative to cash flows from operating activities as a measure of liquidity, or as an alternative to any other measure determined in accordance with GAAP. Unlike net income, Adjusted EBITDA does not include depreciation or interest expense and, therefore, does not reflect current or future capital expenditures or the cost of capital. We compensate for these limitations by using Adjusted EBITDA as only one of several comparative tools, together with GAAP measurements, to assist in the evaluation of operating performance. Such GAAP measurements include operating income, net income, cash flows from operations and cash flow data. We have significant uses of cash flows, including capital expenditures, interest payments, debt principal repayments, taxes and other non-recurring charges, which are not reflected in Adjusted EBITDA. Our calculation of Adjusted EBITDA may be different from the calculation methods used by other companies and, therefore, comparability may be limited.

A reconciliation of Adjusted EBITDA from continuing operations to the net income/(loss) from continuing operations is provided below.

                                            Three-Month Periods Ended June 30,                Six-Month Periods Ended June 30,
(amounts in thousands)                       2014                        2013                  2014                      2013
Net income/(loss) from continuing
operations- GAAP                       $             217           $              92     $            (657 )       $              52
Interest expense                                       -                           1                     2                         5
Interest income                                        -                           -                     -                        (4 )
Income tax expenses                                   15                           7                    30                        48
Depreciation and amortization                      1,824                       1,954                 3,570                     3,744
Stock-based compensation expenses                     69                         198                   141                       445
Impairment of assets                                  19                           -                    19                         -
Gain on dispositions                                  (8 )                         -                    (8 )                       -
Adjusted EBITDA from continuing
operations                             $           2,136           $           2,252     $           3,097         $           4,290

Total revenues decreased approximately $252,000 to $4.9 million for the three-month period ended June 30, 2014 compared to approximately $5.2 million in the same period of the prior year as lower gaming operations revenue was . . .

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