WASHINGTON, D.C. 20549
ASIA ENTERTAINMENT & RESOURCES LTD.
Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82-_______________.
This Report of Foreign Private Issuer on Form 6-K filed by Asia Entertainment & Resources Ltd. (the “Company”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements relate to future events or the Company’s future financial performance. The Company has attempted to identify forward-looking statements by terminology including “anticipates,” “believes,” “expects,” “can,” “continue,” “could,” “estimates,” “intends,” “may,” “plans,” “potential,” “predict,” “should” or “will” or the negative of these terms or other comparable terminology. These statements are only predictions, uncertainties and other factors may cause the Company’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels or activity, performance or achievements expressed or implied by these forward-looking statements. The information in this Report on Form 6-K is not intended to project future performance of the Company. Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company does not guarantee future results, levels of activity, performance or achievements. The Company expectations are as of the date this Form 6-K is filed, and the Company does not intend to update any of the forward-looking statements after the date this Report on Form 6-K is filed to confirm these statements to actual results, unless required by law.
Results of Operations and Financial Condition.
ASIA ENTERTAINMENT & RESOURCES LTD.
CONSOLIDATED BALANCE SHEETS
(Unaudited and Unreviewed)
| | | March 31,
2011 | | | December 31,
2010 | |
| ASSETS | | | | | | |
| CURRENT ASSETS | | | | | | |
| | | | | | | |
| Cash and Cash Equivalents | | $ | 19,553,488 | | | $ | 13,843,622 | |
| Accounts Receivable, Net | | | 5,101,780 | | | | 10,802,582 | |
| Markers Receivable | | | 137,744,619 | | | | 120,140,393 | |
| Prepaid Expenses and Other Assets | | | 114,699 | | | | 152,869 | |
| Total Current Assets | | | 162,514,586 | | | | 144,939,466 | |
| | | | | | | | | |
| Intangible Assets (net of accumulated amortization of $2,106,674 at March 31, 2011 and $842,712 at December 31, 2010, respectively) | | | 58,771,779 | | | | 60,110,307 | |
| | | | | | | | | |
| Goodwill | | | 14,990,063 | | | | 15,008,424 | |
| | | | | | | | | |
| TOTAL ASSETS | | $ | 236,276,428 | | | $ | 220,058,197 | |
| | | | | | | | | |
| LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) | | | | | | | | |
| | | | | | | | | |
| CURRENT LIABILITIES | | | | | | | | |
| | | | | | | | | |
| Line of Credit Payable | | $ | 11,826,155 | | | $ | 11,840,640 | |
| Accrued Expenses | | | 11,841,964 | | | | 10,815,135 | |
| Payable-King's Gaming Acquisition, current portion | | | 13,886,210 | | | | 12,835,395 | |
| Loan payable, shareholders, current | | | 1,169,367 | | | | 61,066,220 | |
| Total Current Liabilities | | | 38,723,696 | | | | 96,557,390 | |
| | | | | | | | | |
| Loan payable, shareholders | | | 60,000,000 | | | | - | |
| | | | | | | | | |
| Long-term Payable-King's Gaming Acquisition, net of current portion | | | 39,282,843 | | | | 38,022,169 | |
| Total Liabilities | | | 138,006,539 | | | | 134,579,559 | |
| | | | | | | | | |
| COMMITMENTS AND CONTINGENCIES | | | | | | | | |
| | | | | | | | | |
| SHAREHOLDERS' EQUITY (DEFICIT) | | | | | | | | |
| Preferred shares, $0.0001 par value Authorized 1,150,000 shares; none issued | | | | | | | - | |
| Ordinary Shares, $0.0001 par value Authorized 200,000,000 shares; issued and outstanding 22,544,064 at March 31, 2011, 22,544,064 at December 31, 2010 | | | 2,255 | | | | 2,255 | |
| Additional paid-in capital | | | 52,581,098 | | | | 52,581,098 | |
| Retained Earnings (Accumulated Deficit) | | | 45,823,219 | | | | 32,936,819 | |
| Accumulated Other Comprehensive Income | | | (136,683 | ) | | | (41,534 | ) |
| Total Shareholders' Equity (Deficit) | | | 98,269,889 | | | | 85,478,638 | |
| | | | | | | | | |
| TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) | | $ | 236,276,428 | | | $ | 220,058,197 | |
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
ASIA ENTERTAINMENT & RESOURCES LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2011 AND 2010
(Unaudited and Unreviewed)
| | | March 31,
2011 | | | March 31,
2010 | |
| | | | | | | |
| Revenue from VIP gaming operations | | $ | 51,253,219 | | | $ | 25,279,369 | |
| | | | | | | | | |
| Expenses | | | | | | | | |
| - Commission to agents | | | 31,030,955 | | | | 13,219,878 | |
| - Selling, general and administrative expenses | | | 3,292,285 | | | | 2,205,841 | |
| - Special Rolling Tax | | | 407,540 | | | | 189,366 | |
| - Amortization of intangible assets | | | 1,264,069 | | | | - | |
| Total Expenses | | | 35,994,849 | | | | 15,615,085 | |
| | | | | | | | | |
| Operating income including pre-acquisition profit before change in fair value of contingent consideration | | | 15,258,370 | | | | 9,664,284 | |
| | | | | | | | | |
| Prior owners' interest in pre-acquisition profit | | | - | | | | (4,329,385 | ) |
| | | | | | | | | |
| Operating income attributable to ordinary shareholders before change in fair value of contingent consideration | | | 15,258,370 | | | | 5,334,899 | |
| | | | | | | | | |
| Change in fair value of contingent consideration for the acquisition of King's Gaming | | | (2,371,970 | ) | | | - | |
| | | | | | | | | |
| Net Income Attributable to Ordinary Shareholders | | | 12,886,400 | | | | 5,334,899 | |
| | | | | | | | | |
| Other Comprehensive Income (Loss) | | | | | | | | |
| Foreign Currency | | | | | | | | |
| - Translation adjustment | | | (95,149 | ) | | | (677 | ) |
| | | | | | | | | |
| Total Comprehensive Income | | $ | 12,791,251 | | | $ | 5,334,222 | |
| | | | | | | | | |
| Net Income Per Share | | | | | | | | |
| Basic | | $ | 0.37 | | | $ | 0.45 | |
| Diluted | | $ | 0.37 | | | $ | 0.31 | |
| | | | | | | | | |
| Weighted average shares outstanding | | | | | | | | |
| Basic | | | 34,614,025 | | | | 11,740,309 | |
| Diluted | | | 35,270,917 | | | | 17,430,576 | |
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
ASIA ENTERTAINMENT & RESOURCES LTD.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2011 AND 2010
(Unaudited and Unreviewed)
| | | March 31, 2011 | | | March 31,
2010 | |
| Cash flows provided by (used in) operating activities | | | | | | |
| Net Income Attributable to Ordinary Shareholders | | $ | 12,886,400 | | | $ | 5,334,899 | |
| | | | | | | | | |
| Adjustments to reconcile net income attributable to ordinary shareholders to net cash provided by (used in) operating activities | | | | | | | | |
| | | | | | | | | |
| Amortization of intangible assets | | | 1,264,069 | | | | - | |
| Change in fair value of contingent consideration for the acquisition of King's Gaming | | | 2,371,971 | | | | - | |
| | | | | | | | | |
| Change in assets and liabilities | | | | | | | | |
| Accounts Receivable | | | 5,700,802 | | | | (5,533,951 | ) |
| Markers Receivable | | | (17,604,226 | ) | | | (38,702,075 | ) |
| Prepaid Expenses and Other Assets | | | 38,170 | | | | (6,464,406 | ) |
| Line of Credit Payable | | | (14,485 | ) | | | 11,852,519 | |
| Accrued Expenses | | | 1,026,829 | | | | 4,253,824 | |
| Net cash provided by (used in) operating activities | | | 5,669,530 | | | | (29,259,190 | ) |
| | | | | | | | | |
| Cash flows provided by (used in) financing activities | | | | | | | | |
| Shareholder loans, net | | | 103,147 | | | | 48,380,643 | |
| Cash received from reverse merger | | | - | | | | 452,044 | |
| Net cash provided by (used in) financing activities | | | 103,147 | | | | 48,832,687 | |
| | | | | | | | | |
| Net increase in cash and cash equivalents | | | 5,772,677 | | | | 19,573,497 | |
| | | | | | | | | |
| Effect of foreign currency translation on cash | | | (62,811 | ) | | | (677 | ) |
| | | | | | | | | |
| Cash and cash equivalents at beginning of period | | | 13,843,622 | | | | 7,734 | |
| | | | | | | | | |
| Cash and cash equivalents at end of period | | $ | 19,553,488 | | | $ | 19,580,554 | |
| | | | | | | | | |
| Supplemental Disclosure of Cash Flow Information | | | | | | | | |
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
ASIA ENTERTAINMENT & RESOURCES LTD.
Notes To Consolidated Financial Statements
(Unaudited and Unreviewed)
For the Three Months Ended March 31, 2011 and 2010
Note 1 – Organization and Business of Companies
Basis of Presentation
Asia Entertainment & Resources Ltd. (formerly CS China Acquisition Corp.) ("AERL" 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 October 6, 2009, AERL 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 AERL 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 AERL, as discussed in Note 8.
The acquisition has been accounted for as a “reverse merger” and recapitalization since the shareholder of AGRL (i) owns a majority of the outstanding ordinary shares of AERL, par value $0.0001 (the “Ordinary Shares”) immediately following the completion of the transaction, and (ii) has significant influence and the ability to elect or appoint or to remove a majority of the members of the governing body of the combined entity, and AGRL’s senior management dominates the management of the combined entity immediately following the completion of the transaction in accordance with the provision of Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) Topic 805 "Business Combinations". Accordingly, AGRL is deemed the accounting acquirer in the transaction and, consequently, the transaction is treated as a recapitalization of AGRL. Accordingly, the assets and liabilities and the historical operations that are reflected in the financial statements are those of AGRL and its VIP gaming promoters (sometimes referred to as “The Promoter Companies”) and are recorded at the historical cost basis of AGRL and the VIP gaming promoters. AERL’s assets, liabilities and results of operations are consolidated with the assets, liabilities and results of operations of AGRL, its subsidiaries and the Promoter Companies subsequent to the acquisition.
AERL, its subsidiaries (including AGRL) and the VIP gaming promoters are collectively referred to as the "Group".
Upon the closing of the acquisition of AGRL by AERL, the Promoter Companies became variable interest entities (‘‘VIEs’’) of the subsidiaries of AGRL, which are the primary beneficiaries of the operations of the Promoter Companies through the profit interest agreements which were entered into on February 2, 2010.
On November 10, 2010, the Company entered into an agreement to acquire the right to 100% of the profit derived by King's Gaming Promotion Limited (“King's Gaming”) from the promotion of the Wenzhou VIP Room at the Venetian Hotel and Casino in Macau as discussed in Note 9.
Current Macau laws do not allow non-Macau companies, such as AERL, to directly operate a gaming promotion business in Macau. Consequently, AERL’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 and for AGRL to exercise effective control over the Promoter Companies.
ASIA ENTERTAINMENT & RESOURCES LTD.
Notes To Consolidated Financial Statements
(Unaudited and Unreviewed)
For the Three Months Ended March 31, 2011 and 2010
Management’s determination of the appropriate accounting method with respect to the AGRL variable interest entities is based on FASB ASC Topic 810, “Consolidation of Variable Interest Entities". AGRL consolidates the VIEs because the equity investors in the Promoter Companies do not have the characteristics of a controlling financial interest and AERL through AGRL is the primary beneficiary and will disclose significant variable interests in VIEs of which it is not the primary beneficiary, if any.
In accordance with FASB ASC Topic 810 "Consolidations", the operations of the Promoter Companies are consolidated with those of AGRL for all periods subsequent to the closing of the acquisition of AGRL by AERL. Prior to the closing of the acquisitions, all revenue and expenses of the Promoter Companies has been attributed to the former beneficiaries of the VIEs and has been disclosed as the prior owners' interest in pre-acquisition profit and has reduced income available to the ordinary shareholders.
AGRL Business
The following are the 100% owned subsidiaries of AGRL, which have relationships with the Promoter Companies (effective February 2, 2010):
Foxhill Group Limited (‘‘Foxhill’’) was incorporated in the British Virgin Islands on February 15, 2007. The main asset of Foxhill is the right to 100% of the profit derived by Iao Pou Gaming Promotion Limited (“Iao Pou”) from the promotion of the Iao Kun VIP Room at the MGM Grand Hotel and Casino in Macau, pursuant to the profit interest agreement between Foxhill and Iao Pou.
Kasino Fortune Investments Limited (“Kasino Fortune”) was incorporated on February 16, 2007. The main asset of Kasino Fortune is the right to 100% of the profit derived by Sang Heng Gaming Promotion Company Limited (“Sang Heng”) from the promotion of the Iao Kun VIP Room at the StarWorld Grand Hotel and Casino in Macau, pursuant to the profit interest agreement between Kasino Fortune and Sang Heng.
Well Mount International Limited (“Well Mount”) was incorporated on November 1, 2007. The main asset of Well Mount is the right to 100% of the profit derived by Doowell Limited (“Doowell”) from the promotion of the VIP gaming room at T.H.E. Hotel and Casino in Jeju the Republic of Korea, pursuant to the profit interest agreement between Well Mount and Doowell. The VIP gaming room at T.H.E. Hotel and Casino is currently not operating and both Well Mount and Doowell are presently inactive.
Billion Boom International Limited ("Billion Boom") was incorporated on November 1, 2007. The main asset of Billion Boom is the right to 100% of the profit derived by King's Gaming from the promotion of the Wenzhou VIP Room at the Venetian Hotel and Casino in Macau, pursuant to the profit interest agreement between Billion Boom and King's Gaming.
On November 14, 2009, Link Bond International Limited (“Link Bond”), entered into a profit interest agreement with Champion Lion Limited (“Champion Lion”) relating to 100% of the profit derived by Champion Lion from the promotion of the VIP gaming room at the Unicorn Hyatt Regency Casino in Jeju the Republic of Korea. However, management is considering delaying the proposed expansion in Jeju due to the continued strength of the Macau VIP gaming market, and currently intends to increase its operations in Macau.
During the year ended December 31, 2010, AGRL established AERL Company Limited (Macau) to perform certain executive management functions for the Promoter Companies.
Profit Interest Agreements
Each Promoter Company has entered into an agreement with the casino operators and license holders to promote a VIP gaming room in the respective casino. These agreements provide that the Promoter Company receives a commission or share in the net win/loss of the VIP gaming room. Current Macau laws do not allow non-Macau companies, such as AGRL, to directly operate a gaming promotion business in Macau. Consequently, the Promoter Company enters into a profit interest agreement with a subsidiary of AGRL, providing for the assignment to the AGRL subsidiary of 100% of the profits derived by the Promoter Company from its promotion of the VIP gaming room. The manner of calculation of the profit is set out in an exhibit to the profit interest agreement. The profit agreements do not have expiration dates and continue conterminously with the operation of the respective VIP gaming rooms.
ASIA ENTERTAINMENT & RESOURCES LTD.
Notes To Consolidated Financial Statements
(Unaudited and Unreviewed)
For the Three Months Ended March 31, 2011 and 2010
In addition to the assignment of the profit interest, each profit interest agreement provides that the VIP gaming promoter will not terminate its underlying agreement with the casino without AERL's consent and that it will at all times maintain all licenses, agreements and other permissions it requires to perform its obligations pursuant to such agreement.
In connection with the profit interest agreements, Messrs Lam Man Pou (Mr. Lam)(Chairman and Director of AERL and principal stockholder of AERL) and Vong Hon Kun (Mr. Vong) (Chief Operating Officer and Director of AERL) have agreed to make loans to AGRL for use by AGRL for working capital and to make loans to AGRL’s VIP gaming promoters of not less than $45,000,000. Prior to amendments made on April 18, 2011 (see Note 7), the funding commitment terminated at the end of the fiscal quarter that AGRL’s working capital was not less than $100,000,000, exclusive of any working capital provided by Messrs. Lam and Vong. Messrs. Lam and Vong will also guaranty to AGRL the repayment of the loans made by AGRL to the VIP gaming promoters. As amended, loans totaling $60,000,000 are fixed, non interest bearing and due on April 18, 2014.
VIP Gaming Promoter Agreements
Sang Heng Gaming Representative (VIP Room Promoter) Agreement dated as of February 1, 2008 entered 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, which provides the maximum commission for gaming activity of promotion of games at 1.25% of the rolling chips turnover, the agreement became effective on November 1, 2009. The agreement is renewed annually.
Iao Pou Gaming Representative (VIP Room Promoter) Agreement dated as of June 22, 2009 entered between MGM Grand Hotel and Casino in Macau and Iao Pou allows for the sharing of profits as a Gaming Promoter of Iao Kun VIP Room in the MGM Grand Hotel and Casino in Macau for the period from June 22, 2009 to March 31, 2010. A new agreement was entered into on November 9, 2009 and is automatically renewed on January 1 for one year periods unless terminated earlier.
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, which provides the maximum commission for gaming activity of promotion of games at 1.25% of the rolling chips turnover, the agreement became effective on November 1, 2009. The agreement is renewed annually.
Spring (as defined under “Operations of Promoter Companies” below) Gaming Representative (VIP Room Promoter) Agreement dated as of February 1, 2008 entered between Galaxy Casino, S.A., and Spring allowed for the sharing of profits as a gaming representative of Spring VIP Room in Grand Waldo Hotel and Casino for the period from August 9, 2007 to December 31, 2008. The agreement was renewed on March 29, 2009 for the period from January 1, 2009 to December 31, 2009. The agreement was terminated effective May 30, 2009, when the Spring VIP Room was closed.
ASIA ENTERTAINMENT & RESOURCES LTD.
Notes To Consolidated Financial Statements
(Unaudited and Unreviewed)
For the Three Months Ended March 31, 2011 and 2010
Doowell Gaming Promotion (VIP Room Promoter) Agreement dated as of January 18, 2008 entered between Gillmann Investments Asia, Ltd (“GIA”) and Doowell allows for the sharing of profits as a gaming promoter of a VIP gaming room in the Nam Seoul Plaza Hotel and Casino (now called T.H.E. Hotel and Casino) located on Jeju. The Doowell Agreement no longer in effect,and Doowell is inactive.
Operations of Promoter Companies
VIP gaming rooms are well appointed suites generally located within a large casino and serve the purpose of providing luxury accommodations and privacy exclusively for the high-tier gaming patrons.
The following is a summary of the VIP gaming promoters and their predecessors:
Sang Heng was a sole proprietorship, owned by Mr. Lam. The operations of Sang Heng VIP Room were to promote a VIP gaming room at the Grand Waldo Hotel and Casino located on the Cotai Strip in Macau. Sang Heng VIP Room was licensed by the Macau SAR as a gaming promoter to promote the VIP gaming room and commenced operation on May 22, 2006. It operated until August 8, 2007, at which point the operations were transferred to Sang Heng, which continued to promote the Sang Heng VIP Room. In December 2007, Sang Heng relocated the operations of the VIP gaming room at the Grand Waldo Hotel and Casino to the Iao Kun VIP Room at the Star World Hotel and Casino, located in downtown Macau.
Spring VIP Room was a sole proprietorship, owned by Mr. Lam. The operations of Spring VIP Room were to promote a VIP gaming room at the Grand Waldo Hotel and Casino located on the Cotai Strip in Macau. Spring VIP Room was licensed by the Macau SAR as a gaming promoter to promote the VIP gaming room and commenced operation on May 25, 2006. It operated until August 8, 2007, at which point the operations were transferred to Spring Gaming Promotion Company Limited (“Spring”), which continued to promote the Spring VIP Room until May 30, 2009. In June 2009, the operations of the Spring VIP Room at the Grand Waldo and Casino was relocated to the Iao Kun VIP Room at the MGM Grand Hotel and Casino, located in downtown Macau.
At the request of Galaxy S.A., the primary concessionaire for Star World Hotel and Casino, Mr. Lam and Mr. Zheng Anting (former Operating Officer and shareholder of the Company) incorporated Iao Pou in Macau SAR, with Mr. Zheng as the major shareholder and promotion license holder, to promote the MGM Grand Hotel and Casino Iao Kun VIP Room located in downtown Macau. Iao Pou is licensed by the Macau SAR as a gaming promoter to promote the VIP gaming room.
King’s Gaming was incorporated in Macau on April 15, 2008, owned by Mr. Mok Chi Hung ("Mr. Mok") and Mr. Wong Hon Meng ("Mr. Wong"), who collectively own 100% of the equity interests of King's Gaming. Mr. Wong is the brother of Mr. Vong. Mr. Wong owns 4% of the equity interests of King's Gaming. The operations of King’s Gaming are to promote the Wenzhou VIP Room at the Venetian Hotel and Casino located on the Cotai Strip in Macau. King's Gaming was licensed by the Macau SAR as a gaming promoter to promote the VIP gaming room and commenced operation in September 2008.
Doowell is a British Virgin Islands limited company incorporated under the BVI Business Companies Act, 2004 (No. 16 of 2004), owned by Mr. Lam. Doowell promoted the Iao Kun VIP Room at T.H.E. Hotel and Casino (formerly Nam Seoul Plaza Hotel and Casino), a luxury hotel located in Jeju. T.H.E. Hotel and Casino had a trial opening in May 2008. Doowell had limited activity during 2009 and no activity during 2010. The Company is delaying its proposed expansion in Jeju because the continued strength of the Macau VIP gaming market makes it desirable to continue to increase its efforts there. Also, the favorable risk/reward of the commission model in Macau offers more stability than the capital risk of the win/loss split model used in Jeju. Management is evaluating the continuation of operations.
ASIA ENTERTAINMENT & RESOURCES LTD.
Notes To Consolidated Financial Statements
(Unaudited and Unreviewed)
For the Three Months Ended March 31, 2011 and 2010
Champion Lion is a British Virgin Islands limited company incorporated under the BVI Business Companies Act, 2004 (No. 16 of 2004), owned by Mr. Vong and Leong Siak Hung (Chief Executive Officer and Director of AERL). Champion Lion was established to promote the VIP gaming room at the Unicorn Hyatt Regency Casino, a luxury hotel located on Jeju. Champion Lion has had no activity since incorporation.
Note 2 — Summary of Significant Accounting Policies
The consolidated financial statements as of March 31, 2011 and for the three month periods ending March 31, 2011 and 2010 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 for interim financial reporting. In the opinion of management, all adjustments (consisting of normal adjustments) have been made that are necessary to present fairly the financial position of the Company as of March 31, 2011 and the results of its operations and cash flows for the three month periods ending March 31, 2011 and 2010. Operating results as presented are not necessarily indicative of the results to be expected for a full year. These financial statements and related footnotes should be read in conjunction with the financial statements and footnotes thereto included in the Company’s Form 20-F filed with the Securities and Exchange Commission for the year ended December 31, 2010.
Principles of Consolidation
In accordance with FASB ASC Topic 810, the operations of the Promoter Companies are consolidated with those of AGRL and its wholly owned subsidiaries and AERL as of March 31, 2011 and December 31, 2010 and for the three month periods ended March 31, 2011 and 2010 and 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 is December 31.
Use of Estimates
The preparation of the consolidated/combined financial statements in conformity with accounting principles generally accepted in the United States of America requires the 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 the management and on various other assumptions that the management believes to be reasonable under the circumstances. The Company has made significant estimates of the contingent purchase price due for the King's Gaming acquisition in these consolidated financial statements. Actual results could vary from those estimates.
Revenue Recognition
Revenue from VIP gaming room operations is recorded monthly based upon the Promoter Companies’ share of the net gaming wins or as a percentage of non-negotiable chips wagered in VIP gaming rooms. The amounts due the Promoter Companies are calculated and reported by the casino operators on a monthly basis, usually within ten days of the month end.
In accordance with long standing industry practice in Macau, the Promoter Companies’ operations in Grand Waldo Hotel and Casino, Star World Hotel and Casino and MGM Grand Hotel and Casino had similar revenue and loss sharing arrangements. Under these arrangements, Sang Heng, Spring and Iao Pou shared in the casino’s VIP gaming room wins or losses from the gaming patrons recruited by the Promoter Companies. Typically, wins and losses are allocated as 40.25% to 45% of net gaming wins on a pre-gaming tax basis. The Promoter may or the Casino Operators may adjust these arrangements with adequate notice and agreement by both parties to the arrangement.
ASIA ENTERTAINMENT & RESOURCES LTD.
Notes To Consolidated Financial Statements
(Unaudited and Unreviewed)
For the Three Months Ended March 31, 2011 and 2010
Additionally, the Promoter Companies earn revenues based upon percentages of non-negotiable chips wagered 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 VIP gaming room patrons without charge and is included in gross revenues and then deducted as promotional allowances as incurred. These revenues are recorded as fees and incentive revenues in the accompanying consolidated statements of operations.
In July 2009, all concessionaires and sub-concessionaires entered into an agreement to cap gaming promoter commissions. Under this agreement, commission payments to gaming promoters cannot exceed 1.25% of rolling chip volumes regardless of the commission structure adopted. As a result of the amendments made to Administrative Regulation No. 6/2002 by Administrative Regulation 27/2009 dated August 10, 2009, the Secretary of Economy and Finance of the Macau SAR now has the authority to issue a dispatch implementing the 1.25% gaming promoter commission cap, as agreed between all concessionaires and sub-concessionaires. The amendment sets forth standards for what constitutes a commission to gaming promoters, including all types of payments, either monetary or in specie, that are made to gaming promoters such as food and beverage, hotel and other services and allowances. The amendment also imposes obligations on gaming promoters and casino operators to report regularly to the Gaming Inspection and Coordination Bureau of the Macau SAR and imposes fines or other sanctions for noncompliance with the commission cap or the monthly obligations to report and detail the amount of commissions paid to gaming promoters.
Beginning in October 2009, Star World Hotel and Casino agreed to revise the Sang Heng Agreement and removed the win/loss sharing component and replaced it with a commission payable to Sang Heng at a rate of 1.25% of rolling chips turnover. Management has requested that the MGM Grand Hotel and Casino revise the Iao Pou Agreement to remove the win/loss sharing component and replace it with a commission payable to Iao Pou at a rate of 1.25% of rolling chips turnover. MGM Grand Hotel and Casino has declined our request to allow for fixed commissions, rather than win/loss sharing. Management believes that this change in the revenue structure will reduce the inherent risk in promoting a VIP gaming room, due to the fluctuation surrounding gaming wins and losses. The fixed commission revenues will be based only on the amount of chip turnover, rather than the win/loss of the gaming operations. The King’s Gaming arrangement with the Venetian Hotel and Casino is also based on 1.25% of the rolling chip turnover.
Total chip turnover in the Group’s VIP gaming rooms during the three month periods ended March 31, 2011 and 2010, was approximately $4,075,447,000 and $1,894,489,000, respectively.
VIP Gaming Room Cage and Marker Accounting
As of December 31, 2009 and through the period prior to the reverse merger on February 2, 2010, the Promoter Companies did not extend credit to junket agents. Previously, the operations of the cage, which is where cash, non-negotiable and cash chips transactions and extension of credit occur, were owned by the individual owners of the Promoter Companies. Subsequent to the acquisition of AGRL by AERL (see Note 8), the operations and extension of credit by the cage became controlled by the Group through the Promoter Companies and Messrs. Lam and Vong assigned the assets of the cage to AERL and its subsidiaries as a loan in the amount of $20,220,000 to enable AERL and its subsidiaries to extend credit to the VIP gaming promoters and not less than $45,000,000 on and after March 31, 2010 and until the agreement is terminated. At March 31, 2011 and December 31, 2010, the loan amounted to $61,169,337 and $61,066,220, respectively. On April 18, 2011, the loans were converted into two $30,000,000 interest-free notes ($60,000,000 in the aggregate, expiring in April 2014, which are convertible into ordinary shares at a price of $20 per share at the option of the holder and callable at the Company's option at $20 per share if the closing price of its ordinary shares for any ten consecutive trading days exceeds $25 (see Note 7).
ASIA ENTERTAINMENT & RESOURCES LTD.
Notes To Consolidated Financial Statements
(Unaudited and Unreviewed)
For the Three Months Ended March 31, 2011 and 2010
In the VIP gaming rooms, junket agents 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 patron continues to play, they must exchange the cash chips for non-negotiable chips, which is the basis for commissions. The wager of the non-negotiable chips by the 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.
The law in Macau permits VIP gaming promoters to extend credit to junket agents, who act as patron representatives.
With the completion of the acquisition of AGRL by AERL, the Group, through the Promoter Companies, 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 Asia. In addition to enforceability issues, the collectability of markers from foreign junket agents is affected by a number of factors including changes in economic conditions in the agents’ home countries.
The Group may not be able to collect all of their markers receivables 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 Promoter Companies, 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 receivables 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 regularly evaluates the reserve for bad debts 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 completion of the acquisition, Messrs. Lam and Vong guaranty all markers receivables; therefore, as of March 31, 2011 and December 31, 2010, management believes that a reserve for bad debts is not deemed necessary. The guarantee of Messrs. Lam and Vong can be offset against the loans provided by them for the working capital. In addition, Mr. Mok has guaranteed the collection of all markers attributable to Mr. Mok and his network of junket agents and collaborators at both King’s Gaming existing VIP gaming room and the Company’s existing and future VIP gaming rooms.
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.
ASIA ENTERTAINMENT & RESOURCES LTD.
Notes To Consolidated Financial Statements
(Unaudited and Unreviewed)
For the Three Months Ended March 31, 2011 and 2010
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 securities 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. |
| 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, accounts receivable, accounts payable and accrued expenses, the carrying amounts approximate fair value due to their short maturities.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash, non negotiable chips and short-term investments with original maturities of less than 90 days. Such investments are carried at cost, which approximates their fair value. 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
The calculations of earnings per share are computed as follows for the three months ended March 31, 2011 and 2010:
| | | Three Months
Ended
March 31, 2011 | | | Three Months
Ended
March 31, 2010 | |
| Numerator: | | | | | | | |
| Net income attributed to ordinary shareholders for basic and diluted earnings per share | | $ | 12,886,400 | | | $ | 5,334,689 | |
| Denominator: | | | | | | | | |
| Denominator for basic earnings per share | | | 34,614,025 | | | | 11,740,309 | |
| - Weighted-average Ordinary Shares outstanding during the year | | | | | | | | |
| Effect of dilutive securities: | | | | | | | | |
| - Weighted average Warrants | | | - | | | | 5,270,476 | |
| -Weighted average-Director shares issuable for 2010 | | | - | | | | - | |
| - Weighted average Unit Purchase Option | | | 656,892 | | | | 419,791 | |
| | | | 35,270,917 | | | | 17,430,576 | |
| Basic earnings per share | | $ | 0.37 | | | $ | 0.45 | |
| Diluted earnings per share | | $ | 0.37 | | | $ | 0.31 | |
ASIA ENTERTAINMENT & RESOURCES LTD.
Notes To Consolidated Financial Statements
(Unaudited and Unreviewed)
For the Three Months Ended March 31, 2011 and 2010
During the fourth quarter of 2010, the contingent Ordinary Shares of 12,050,000 for the 2010 earnings incentive were earned and have been included in the basic and diluted earnings per share based on the weighted average shares for the three months ended March 31, 2011.
The Company has 1,440,000 dilutive potential Ordinary Shares related to the Underwriter Unit Purchase Option and 4,210,000 Ordinary Shares to be issued upon the Company filing its Form 20-F for 2010 that are outstanding for the three month periods ended March 31, 2011 and 2010.
The Company agreed that a portion of the 2010 Directors fees be paid in Ordinary Shares and will be issued in 2011. A total of 19,961 shares will be issued in 2011 to satisfy this liability and have been included in the basic and diluted earnings per share based on the weighted average shares for the three months ended March 31, 2011. A liability of $204,000 and $159,000 is included in accrued expenses at March 31, 2011 and December 31, 2010, respectively.
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, which do not exceed the lease term for leasehold improvements, if applicable.
Goodwill and Other Intangible Assets
In accordance with the provisions of FASB ASC Topic 350, “Intangibles—Goodwill and Other”, 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. FASB ASC Topic 350 requires that that management perform 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 intangible assets:
| Bad Debt Guarantee | | 5 and 1/2 years | | Based upon six months after the expiration of the employment agreement |
| | | | | |
| Non-Compete agreement | | 12.2 years | | Based upon the termination date of the casino's license |
| | | | | |
| Profit interest agreement | | 12.2 years | | Based upon the termination date of the casino's license |
ASIA ENTERTAINMENT & RESOURCES LTD.
Notes To Consolidated Financial Statements
(Unaudited and Unreviewed)
For the Three Months Ended March 31, 2011 and 2010
Indefinite Useful Life Assets
Goodwill is evaluated for possible impairment by comparing the fair value of a business unit with its carrying value, including the goodwill assigned to that business unit. Fair value of a business unit is estimated using a combination of income-based and market-based valuation methodologies. Under the income approach, forecasted cash flows of a business unit are discounted to a present value using a discount rate commensurate with the risks of those cash flows. Under the market approach, the fair value of a business unit is estimated based on the revenues and earnings multiples of a group of comparable public companies and from recent transactions involving comparable companies. An impairment charge is recorded if the carrying value of the goodwill exceeds its implied fair value. Assets with indefinite useful lives are not subject to amortization and are tested for impairment annually or more frequently if events or circumstances indicate that the assets might be impaired. The impairment test consists of a comparison of the fair value of the asset with its carrying amount. If the carrying amount of the asset exceeds its fair value, an impairment will be recognized in an amount equal to that excess. If the carrying amount of the asset does not exceed the fair value, no impairment is recognized.
Impairment of Long-lived Assets
In accordance with the provisions of FASB ASC Topic 360, “Impairment or Disposal of Long-Lived Assets”, 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. No impairment has been recognized.
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. The Group did not incur advertising or marketing expenses during the three month periods ended March 31, 2011 and 2010.
Stock-Based Compensation
The Company awards stock and other equity-based instruments to its employee, directors and consultant (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 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. As of December 31, 2010, the Company has reserved 19,961 Ordinary Shares for issuance to the Company's directors.
Foreign Currency
The functional and reporting currency of AERL is in the United States dollar ("US $", "$", “Reporting Currency”). AGRL’s and the Promoter Companies' functional currency is the Hong Kong Dollar (“HKD $”, “Functional Currency”). Monetary assets and liabilities denominated in currencies other than the Functional Currency are translated into the Functional Currency at rates of exchange prevailing at the balance sheet dates. Transactions denominated in currencies other than the Functional Currency are translated into the Functional Currency at the exchange rates prevailing at the dates of the transaction.
Exchange gains or losses arising from foreign currency transactions are included in the determination of net income for the respective period.
For financial reporting purposes, the consolidated/combined financial statements of the Group, which are prepared using the Functional Currency, are then translated into the Reporting Currency. Assets and liabilities are translated at the exchange rates at the balance sheet dates and revenue and expenses are translated at the average exchange rates and shareholders' equity is translated at historical exchange rates. Any translation adjustments resulting are not included in determining net income but are included in foreign currency translation adjustment in other comprehensive income, a component of shareholders' equity.
| | | March 31, | | | March 31, | | | December 31, | |
| | | 2011 | | | 2010 | | | 2010 | |
| Period end HK$:US$ exchange rate | | $ | 7.78 | | | $ | 7.76 | | | $ | 7.75 | |
| Average annual HK$:US$ exchange rate | | $ | 7.79 | | | $ | 7.76 | | | $ | 7.79 | |
ASIA ENTERTAINMENT & RESOURCES LTD.
Notes To Consolidated Financial Statements
(Unaudited and Unreviewed)
For the Three Months Ended March 31, 2011 and 2010
Other Comprehensive Income
The Group follows FASB ASC Topic 220 “Comprehensive Income”, which establishes standards for the reporting and display of comprehensive income and its components in the financial statements. Other comprehensive income 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, as presented on the accompanying consolidated statements of changes in equity, was cumulative foreign currency translation adjustment.
Economic and political risks
The Group’s current operations are 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.
Income Taxes
Sang Heng, King's Gaming and Iao Pou are not subject to Macau Complimentary tax, because, pursuant to the VIP gaming promoter agreements with the Casino Operators, gaming revenue is received net of taxes collected by the Macau SAR paid directly by the Casino Operator on a monthly basis. No provision for Macau Complimentary tax has been made.
As VIP gaming promoters, Sang Heng, King's Gaming and Iao Pou are subject to a tax on the amount of non-negotiable chips wagered by gaming patrons in the VIP gaming rooms (“rolling chips turnover”), which is referred to as a “rolling tax”. The rolling tax is deducted and paid by the Casino Operator on a monthly basis. The rate of rolling tax is 0.01% on the rolling chips turnover of the VIP gaming room and the rolling tax is deducted as a cost of revenues.
Doowell and Champion Lion are incorporated under the BVI Business Companies Act, 2004 (No. 16 of 2004) and are exempted from payment of BVI taxes. Doowell and Champion Lion are not subject to Korean Income tax because all promotion services are performed outside Korea. No provision for Korean Income tax has been made.
The Korean government levies a tax for contributions to the government’s “Tourism Promotion and Development Fund”/betting duty and /or tax on the gross win of the VIP gaming room (“Gaming Tax”), and the Casino Operator represents that the Gaming Tax rate currently does not exceed 10% per annum. Pursuant to the VIP gaming room promoter agreement with the Casino Operator, the gaming revenue is received net of taxes collected by the Korean government paid directly by the Casino Operator on a monthly basis.
ASIA ENTERTAINMENT & RESOURCES LTD.
Notes To Consolidated Financial Statements
(Unaudited and Unreviewed)
For the Three Months Ended March 31, 2011 and 2010
AGRL is not subject to Hong Kong profits tax because all operations are performed outside Hong Kong.
All subsidiaries are incorporated under the BVI Business Companies Act, 2004 (No. 16 of 2004) and are exempted from payment of BVI taxes.
The Company is not incorporated in the United States and is not subject to United States federal income taxes. The Company did not derive any significant amount of income subject to such taxes after completion of the Share Exchange and accordingly, no relevant tax provision is made in the consolidated statements of operations.
The Group accounts for income taxes under FASB ASC Topic 740 “Income Taxes”. Deferred income tax assets and liabilities are determined based upon differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be effective when the differences are expected to reverse.
Deferred tax assets are reduced by a valuation allowance to the extent that management concludes it is more likely than not that the assets will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the consolidated statements of income in the period that includes the enactment date.
FASB ASC Topic 740 prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken in the tax return. This interpretation also provides guidance on de-recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, accounting for interest and penalties associated with tax positions, accounting for income taxes in interim periods and income tax disclosures. As of March 31, 2011 and December 31, 2010, there were no amounts that had been accrued with respect to uncertain tax positions.
Recently issued accounting pronouncements
New accounting guidance issued by the FASB, but not effective until after March 31, 2011, is not expected to have a significant effect on the Company’s consolidated financial position, results of operations or disclosures.
Note 3 — Accounts Receivable, Net
Accounts receivable consisted of the following:
| | | March 31, | | | December 31, | |
| | | 2011 | | | 2010 | |
| Gaming revenues receivable | | $ | 5,090,515 | | | $ | 10,769,940 | |
| Incentives revenues receivable | | | 11,265 | | | | 32,642 | |
| | | $ | 5,101,780 | | | $ | 10,802,582 | |
ASIA ENTERTAINMENT & RESOURCES LTD.
Notes To Consolidated Financial Statements
(Unaudited and Unreviewed)
For the Three Months Ended March 31, 2011 and 2010
As of March 31, 2011, accounts receivable were due from three Casino Operators. The accounts receivable from the three casinos at March 31, 2011 were 59% (Star World), 27% (Venetian) and 14% (MGM) of total receivables. Prior to March 31, 2011, Sang Heng received an advance commission payment of $10,280,000 for revenues earned in March 31, 2011. As of December 31, 2010, accounts receivable were due from three Casino Operators. The accounts receivable from the three casinos at December 31, 2010 were 63% (Star World), 19% (Venetian) and 18% (MGM) of total receivables.
Note 4 — Intangible Assets
Intangible assets as of March 31, 2011 and December 31, 2010 consists of the following:
| | | March 31,
2011 | | | December 31, 2010 | |
| | | | | | | |
| Bad Debt Guarantee | | $ | 465,546 | | | $ | 466,116 | |
| Non-Compete Agreement | | | 791,333 | | | | 792,303 | |
| Profit Interest Agreement | | | 59,621,574 | | | | 59,694,600 | |
| | | | 60,878,453 | | | | 60,953,019 | |
| Accumulated Amortization | | | (2,106,674 | ) | | | (842,712 | ) |
| | | $ | 58,771,779 | | | $ | 60,110,307 | |
Amortization expense for the three month periods ended March 31, 2011 and 2010 was $1,264,069 and $0, respectively.
Estimated amortization expense of intangibles for the years ending December 31, 2011 through 2015 and thereafter is as follows:
| 2011 | | $ | 5,056,275 | |
| 2012 | | | 5,056,275 | |
| 2013 | | | 5,056,275 | |
| 2014 | | | 5,056,275 | |
| 2015 | | | 5,056,275 | |
| Thereafter | | | 34,828,932 | |
| | | $ | 60,110,307 | |
Note 5 — Line of Credit Payable
Line of Credit Payable consisted of the following:
| | | March 31, | | | December 31, | |
| | | 2011 | | | 2010 | |
| Due to Casino Operators | | $ | 11,826,155 | | | $ | 11,840,640 | |
Due to Casino Operators represents an advance of non-negotiable chips to Sang Heng and is interest free and renewable monthly, secured by personal guarantees of Messrs. Lam and Vong.
ASIA ENTERTAINMENT & RESOURCES LTD.
Notes To Consolidated Financial Statements
(Unaudited and Unreviewed)
For the Three Months Ended March 31, 2011 and 2010
According to an agreement made between Sang Heng and the Star World Hotel and Casino for the promotion of Iao Kun VIP Room at Star World Hotel and Casino, Sang Heng was granted a credit line of non-negotiable chips to the extent of approximately $5,400,000. In January of 2010, the credit line was increased to approximately $11,870,000. There were repayments and draws on the credit line during the year ended December 31, 2010, the balances as of March 31, 2011 and December 31, 2010 was $11,826,155 and $11,840,640, respectively. The line of credit is guaranteed by Mr. Vong and is secured by a personal check of $6.4 million. Prior to the acquisition of AGRL by AERL, it was the Promoter Companies’ policy not to extend credit to patrons and gaming agents, and as a result, this line of credit was extended to Messrs. Lam and Vong by Sang Heng as an advance and was used by Messrs. Lam and Vong as additional chips to the VIP room cage. During the period subsequent to the acquisition of AGRL by AERL, all prior advances to Messrs. Lam and Vong were repaid to the Promoter Companies.
Note 6 — Accrued Expenses
Accrued Expenses consist of the following:
| | | March 31, | | | December 31, | |
| | | 2011 | | | 2010 | |
| Commission payable-Junket Agents | | $ | 10,852,933 | | | $ | 9,802,113 | |
| Management fee payable-related party (Note 11) | | | 385,505 | | | | 385,977 | |
| Directors' compensation | | | 362,750 | | | | 286,286 | |
| Others | | | 240,776 | | | | 340,759 | |
| | | | | | | | | |
| | | $ | 11,841,964 | | | $ | 10,815,135 | |
Note 7 — Loans Payable, Shareholders
On February 2, 2010, AGRL entered in to an agreement with Messrs. Lam and Vong to provide funding for working capital and to advance funds to the Promoter Companies. Pursuant to the agreement the loans will be in an amount not less than $19,300,000 on and after February 2, 2010 (the date of the acquisition of AGRL by AERL), not less than $45,000,000 on and after March 31, 2010 and until the agreement is terminated. This funding commitment terminates at the end of the fiscal quarter that AGRL’s working capital is not less than $100,000,000, exclusive of any working capital provided by Messrs. Lam and Vong. If at any time the balance exceeds the minimum requirement, the lenders may request repayment for the excess amount. On February 2, 2010, the amount of the funding advanced to AGRL by Messrs. Lam and Vong was $20,220,000. As of March 31, 2011 and December 31, 2010, the amount of the funding advanced to AGRL by Messrs. Lam and Vong was approximately $61,169,367 and $61,066,220, respectively. Messrs. Lam and Vong also guaranty to AGRL the repayment of the loans made by AGRL to the Promoter Companies. Any amounts due to AGRL pursuant to the guaranty provided by Messrs. Lam and Vong may, at AGRL's election, be offset against amounts owing Messrs. Lam and Vong by AGRL pursuant to the agreement.
On April 18, 2011, the terms of the loan were amended and the loan amount totaling $60,000,000 ($30,000,000 each to Messrs. Lam and Vong) was fixed, non interest bearing and due on April 18, 2014. Therefore, the loan amount as of March 31, 2011 has been classified as a long term liability. In conjunction with the loan amendment, the loans are convertible at the option of the lenders at a rate of $20 per Ordinary Share or an aggregate of 3,000,000 Ordinary Shares. Additionally, should the closing price of the Ordinary Shares as reported by the Nasdaq Stock Market for any ten (10) consecutive Trading Days following the date of amendment equals or exceeds $25.00, the Company shall have the right to convert all of the loans at a rate of $20 per Ordinary Shares, or an aggregate of 3,000,000 Ordinary Shares.
Note 8 — Acquisition of AGRL
On October 6, 2009, AERL 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 AGRL and Spring Fortune that provided for the acquisition by AERL 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 AERL.
ASIA ENTERTAINMENT & RESOURCES LTD.
Notes To Consolidated Financial Statements
(Unaudited and Unreviewed)
For the Three Months Ended March 31, 2011 and 2010
The amendment dated April 18, 2011 increased the amount of the incentive targets from $49,500,000 to $65,000,000 for the year ended December 31, 2011 and from $58,000,000 to $78,000,000 for the year ended December 31, 2012. Additionally, the additional incentive target to earn 530,000 Ordinary Shares in 2011 and 2012 was increased from $75,000,000 to $78,000,000 and from $82,500,000 to $94,000,000, respectively.
Additionally, on April 18, 2011, members of management who are also designees of Spring Fortune with respect to ordinary shares issued in connection with the acquisition of AGRL, and are anticipated to be designees of the ordinary shares issuable to Spring Fortune upon the filing of the Company's Annual Report on Form 20-F for 2010, entered into lock-up agreements pursuant to which such members of management would be restricted from transferring ordinary shares of the Company. 20% of such shares would be released from lock-up each year beginning one year after the execution of the agreement. The following persons and entities had entered into lock-up agreements: Mr. Lam with respect to 2,940,000 ordinary shares, Mr. Vong with respect to 3,940,000 ordinary shares; Legend Global International Limited (whose ordinary shares are deemed to be beneficially owned by Leong Siak Hung, chief executive officer and director) with respect to 16,000 ordinary shares; and Lam Chou In with respect to 2,860,000 ordinary shares. This is an aggregate of 9,756,000 ordinary shares, or 60% of the 16,260,000 ordinary shares issuable upon the filing of our Annual Report on Form 20-F for 2010.
The acquisition of AGRL by AERL has been accounted for as a “reverse merger” and recapitalization since Spring Fortune, the former shareholder of AGRL, became the owner of a majority of the outstanding Ordinary Shares of AERL immediately following the completion of the transaction and has significant influence and the ability to elect or appoint or to remove a majority of the members of the governing body of the combined entity, and AGRL’s senior management dominates the management of the combined entity, in accordance with the provision of FASB ASC Topic 805 “Business Combinations”. Accordingly, AGRL was deemed to be the accounting acquirer in the transaction and, consequently, the transaction is treated as a recapitalization of AGRL. AERL’s assets, liabilities and results of operations were consolidated with the assets, liabilities and results of operations of AGRL after consummation of the acquisition. For periods after the consummation of the acquisition, the assets and liabilities and the historical operations that are reflected in the consolidated financial statements will be those of AGRL and the Promoter Companies and will be recorded at their historical cost basis.
Upon closing, AERL acquired all the outstanding capital stock of AGRL from Spring Fortune for a total consideration of 10,350,000 Ordinary Shares of AERL that were issued to Spring Fortune and its designees and an additional 4,210,000 Ordinary Shares that will be issued upon the filing of AERL’s annual report on Form 20-F for the 2010 fiscal year. In addition, Spring Fortune shall be entitled to receive additional Ordinary Shares of AERL stock for each of the years 2011 and 2012 in which AGRL, through the Promoter Companies, meets or exceeds the following net after tax income targets specified for such year in the Agreement (the “Incentive Targets”) as amended:
| Year | | Incentive Target | | Incentive Shares |
| 2011 | | $ | 65,000,000 and above | | 2,573,000 |
| 2012 | | $ | 78,000,000 and above | | 2,573,000 |
ASIA ENTERTAINMENT & RESOURCES LTD.
Notes To Consolidated Financial Statements
(Unaudited and Unreviewed)
For the Three Months Ended March 31, 2011 and 2010
As of March 31, 2011 the maximum number of incentive shares that Spring Fortune may receive for achieving Incentive Targets is 17,196,000 (including 12,050,000 earned in 2010). Also, for each of the years 2011 and 2012, AERL will issue an additional 530,000 Ordinary Shares if AGRL has adjusted net income equal to, or greater than, $78 million, and $94 million, respectively, which would amount to an additional 1,060,000 Ordinary Shares to Spring Fortune if all of such targets are achieved. However, if for any fiscal year through the fiscal year ending December 31, 2012, (i) at the end of any fiscal quarter during such fiscal year, AGRL does not have at least $10,000,000 in cash and cash equivalents (including redeemable chips and receivables from casinos with respect to operations during such fiscal quarter that are received within five (5) days after the end of such fiscal quarter) and (ii) based on the audited financial statements for such fiscal year, positive cash flow from operations, as determined in accordance with U.S. GAAP, Spring Fortune shall not be entitled to receive one-half of the incentive shares it would otherwise be entitled to receive with respect to such fiscal year. Total incentive shares and additional earnout shares potentially issuable pursuant to the above targets are 18,256,000 (including 12,050,000 earned in 2010).
AGRL achieved the performance target for the year ended December 31, 2010 of net after tax income in excess of $41,800,000 as calculated under US GAAP, pursuant to the Agreement, and accordingly 12,050,000 shares will be issued 30 days subsequent to the filing of the 2010 annual report on Form 20-F.
Note 9—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 (“Purchase Agreement”) with Mr. Mok and Mr. Wong (together, the “Seller”), to acquire the right to 100% of the profit 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 US$36,000,000, of which US$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 US$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 Seller in accordance with the terms of the Purchase Agreement) and shall be paid to the Seller in installments of US$9,000,000 (each, an “Installment Payment”), subject to meeting a minimum Gross Profit (as defined below) requirement equal to US$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) US$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.
For purposes of the Purchase Agreement, “Gross Profit” means 1.25% of the rolling chip turnover (which means the amount of non-redeemable chips that the Seller’s network of agents purchase from King’s Gaming and the Company’s VIP gaming rooms) attributable to the Seller’s network of gaming agents and collaborators at both King’s Gaming existing VIP gaming room and the Company’s existing and future VIP gaming rooms, after deducting commissions and fees paid to the Seller’s network of gaming agents and collaborators and a fixed management fee of $77,500 per month unless otherwise agreed by the parties. Revenues from VIP gaming rooms not employing a flat percentage of rolling chip turnover may not account for more than 30% of the rolling chip turnover and to the extent that revenues from such VIP gaming rooms account for more than 30% of the rolling chip turnover, such excess amount shall not be deemed Gross Profit for purposes of the Purchase Agreement.
In addition, as more fully set forth below, the Company shall issue to the Seller (i) up to an aggregate of 1,500,000 Ordinary Shares in the event certain Gross Profit targets are achieved for each of the three years following the closing date (the “Earnout Shares”), (ii) up to an aggregate of 700,000 Ordinary Shares in the event certain Gross Profit targets are achieved for each of the seven years following the third anniversary of the closing date (the “Incentive Shares”), and (iii) additional Ordinary Shares in the event the Gross Profit targets for each of the ten years following the closing date are exceeded by at least US$1,000,000 (the “Additional Incentive Shares”). For each US$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 Incentive Shares on a pro rata basis for multiples of less or greater than US$1,000,000.
ASIA ENTERTAINMENT & RESOURCES LTD.
Notes To Consolidated Financial Statements
(Unaudited and Unreviewed)
For the Three Months Ended March 31, 2011 and 2010
The Earnout Shares, the Incentive Shares and Additional Incentive Shares shall be released and issued to the Seller as follows:
| | | Gross Profit Target | | | | | | | |
| Year | | For Earnout/Incentive Shares | | | | | | Additional 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 US$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 US$1,000,000.
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 Purchase Agreement, including, but not limited to any bad debts the Seller network of agents may have incurred or may incur in the future.
As of December 31, 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 has been 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 | | | 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. Actual achievement of gross profit range for this assumed earn-out period could reduce the liability to zero. 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, 2011, the Company recognized an expense of $2,371,970 due to the change in the fair value of the contingent consideration. Fluctuations in the market value of the Company's ordinary shares will cause the fair value to increase or decrease and the resulting change will be recognized in earnings.
ASIA ENTERTAINMENT & RESOURCES LTD.
Notes To Consolidated Financial Statements
(Unaudited and Unreviewed)
For the Three Months Ended March 31, 2011 and 2010
The following is a summary of the current and long term portions of the estimated contingent consideration to be paid for the acquisition of King's Gaming:
| Years Ended December 31, | | Total Contingent Consideration | |
| | | | |
| 2011 | | $ | 13,886,210 | |
| 2012 | | | 13,912,609 | |
| 2013 | | | 13,997,419 | |
| 2014 | | | 1,317,352 | |
| 2015 | | | 1,526,201 | |
| Thereafter | | | 8,529,262 | |
| | | $ | 53,169,053 | |
The operations of King’s Gaming acquired assets have been included in the results of operations of the Company from November 1, 2010 the date for such inclusion per the acquisition agreement dated November 10, 2010. The acquisition has been accounted for using the acquisition method of accounting and accordingly, the aggregate consideration has been allocated based on estimated fair values as of the acquisition date.
Transaction costs for the acquisition of King's Gaming charged to operations in 2010 were $241,730.
Note 10 — Shareholders’ Equity
Ordinary Shares
AERL is authorized to issue 200,000,000 Ordinary Shares, par value $.0001. As of March 31, 2011 and December 31, 2010, 22,544,064 Ordinary Shares are outstanding. The Company will issue 12,050,000, 4,210,000 and 19,961 ordinary shares related to achieving earnings targets in 2010, filing of Form 20-F and director compensation, during the second quarter of 2011. 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.
On June 30, 2010, AERL issued a press release announcing that it received approval to list its Ordinary Shares (the “Ordinary Shares”) and ordinary share purchase warrants (the “Warrants”) on the NASDAQ Global Market under the symbols AERL and AERLW, respectively. On July 2, 2010, the Ordinary Shares and Warrants commenced trading on the NASDAQ Global Market.
Private Placement
On May 18, 2010, pursuant to certain Share Purchase Agreements dated as of April 15, 2010 (each a “Share Purchase Agreement” and together the “Share Purchase Agreements”) by and between AERL and 200 individual investors, the Company consummated the sale of 60,000 Ordinary Shares of the Company (the “Shares”) for a purchase price of $9.50 per share or an aggregate purchase price of $570,000. The sale of the Shares was exempt from the registration requirements of the Securities Act of 1933, as amended (the “Act”) pursuant to Regulation S under the Act due to the fact that the offering of the Shares was not made in the United States and that none of the investors were U.S. Persons (as defined in the Act).
ASIA ENTERTAINMENT & RESOURCES LTD.
Notes To Consolidated Financial Statements
(Unaudited and Unreviewed)
For the Three Months Ended March 31, 2011 and 2010
Directors Compensation
All of the Company 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 in January of 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 $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.
Warrants
As of March 31, 2011 and December 31, 2010, there are no warrants outstanding from AERL's initial public offering ("IPO"), with the exception of the warrants issuable upon the exercise of the underwriter unit purchase option described below. The AERL IPO originally sold a unit which consisted of one Ordinary Share and a warrant which entitled the holder to purchase two Ordinary Shares at $5.00 per share. Prior to the redemption described below, each warrant entitled the registered holder to purchase one Ordinary Share at a price of $5.00 per share, subject to adjustment. The warrants became exercisable upon the completion of AERL's acquisition of AGRL. However, no warrant (other than the Founders’ Warrants) was exercisable and AERL was not be obligated to issue Ordinary Shares unless, at the time a holder exercised such warrant, a prospectus relating to the Ordinary Shares issuable upon exercise of the warrant is current and the Ordinary Shares have been registered or qualified or deemed to be exempt under the securities laws of the state of residence of the holder of the warrants. A prospectus relating to the Ordinary Shares issuable upon exercise of the warrants was declared effective on May 28, 2010. The Founders’ Warrants were exercisable for unregistered Ordinary Shares even if a prospectus relating to the Ordinary Shares issuable upon such exercise is not current.
In connection with its IPO, AERL also issued a Unit Purchase Option, for $100, to EarlyBird Capital (the underwriter) (and its designees) to purchase 480,000 units at an exercise price of $6.60 per unit. The units issuable upon exercise of this option are identical to the units sold in AERL's IPO. The Unit Purchase Option may be exercised for cash or on a “cashless” basis, at the holder’s option, such that the holder may use the appreciated value of the Unit Purchase Option (the difference between the exercise prices of the Unit Purchase Option and the underlying Warrants and the market price of the Units and underlying Ordinary Shares) to exercise the Unit Purchase Option without the payment of any cash. The Company has no obligation to net cash settle the exercise of the Unit Purchase Option or the Warrants underlying the Unit Purchase Option. The holder of the Unit Purchase Option will not be entitled to exercise the Unit Purchase Option or the Warrants underlying the Unit Purchase Option unless a registration statement covering the securities underlying the Unit Purchase Option is effective or an exemption from registration is available. If the holder is unable to exercise the Unit Purchase Option or underlying Warrants, the Unit Purchase Option or Warrants, as applicable, will expire worthless. The Unit Purchase Option expires in 2013.
ASIA ENTERTAINMENT & RESOURCES LTD.
Notes To Consolidated Financial Statements
(Unaudited and Unreviewed)
For the Three Months Ended March 31, 2011 and 2010
On June 28, 2010, AERL sent a notice (the “Notice”) to all record holders of the ordinary share purchase warrants of the Company that, pursuant to the Warrant Agreement between the Company and Continental Stock Transfer and Trust Company, the warrants would be redeemed for cash at the redemption price of $0.01 per warrant (the “Redemption Price”) on October 28, 2010 (the “Redemption Date”) if not exercised by that date. Management did not exercise its option to require the holders of the warrants to exercise warrants on a “cashless basis.” Accordingly, after 5:00 p.m. New York time on the Redemption Date, the warrants not exercised are no longer exercisable for Ordinary Shares of the Company and the holders of 4,046,439 warrants received the Redemption Price totaling $40,464.
| | | Warrants Outstanding (A) | | | Warrants Exercisable | | | Weighted Average Exercise Price | | Average Remaining Contractual Life |
| Outstanding December 31, 2009 | | | 16,088,000 | | | | — | | | $ | 5.05 | | 3.5 years |
| Granted | | | — | | | | | | | | — | | |
| Redeemed | | | (4,046,439 | ) | | | | | | | 5.00 | | |
| Exercised | | | (10,601,561 | ) | | | | | | | 5.00 | | |
| Outstanding December 31, 2010 | | | 1,440,000 | | | | 1,440,000 | | | $ | 5.64 | | 2.5 years |
| Granted | | | — | | | | | | | | — | | |
| Redeemed | | | — | | | | | | | | — | | |
| Exercised | | | — | | | | | | | | — | | |
| Outstanding March 31, 2011 | | | 1,440,000 | | | | 1,440,000 | | | $ | 5.64 | | 2.25 years |
| (A) | Includes shares and warrants issuable under the Underwriter Unit Purchase Option of 1,440,000. |
During the year ended December 31, 2010, 7,095,790 warrants were exercised for the purchase of 7,095,790 Ordinary Shares for a purchase price of $5.00 per share or an aggregate purchase price of $35,478,950 which will be used for working capital for the Company. Additionally, 3,505,771 "founder warrants" were exercised on a cashless basis for 1,343,050 Ordinary Shares.
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, 2011 and December 31, 2010.
Note 11 — Commitments and Contingencies
Management Agreements
Day-to-day management and operation of the VIP gaming rooms is contracted by the Promoter Companies to Pak Si Management and Consultancy Limited of Macau (“Pak Si”) a related party management company that is responsible for hiring and managing all 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.). Sang Heng and Iao Pou, have entered into one year agreements to provide such services with Pak Si, pursuant to which each of them pays Pak Si $155,000 per month, for King's Gaming the amount is $77,500 per month, from which Pak Si is responsible to pay all salaries, benefits and other expenses of operation. The principal of Pak Si is the sister-in-law of Mr. Vong, a director of the Group and its chief operating officer. Total amounts paid to Pak Si were $1,155,669 and $798,485 during the three month periods ended March 31, 2011 and 2010, respectively. Amounts due to Pak Si as of March 31, 2011 and December 31, 2010 were $385,505 and $385,977, respectively and have been recorded in accrued expenses.
Employment Agreements
During 2010, AGRL has entered into employment agreements with six executive officers: Mr. Lam (Chairman of the Board), Leong Siak Hung (Chief Executive Officer), Li Chun Ming (Chief Financial Officer), Mr. Vong (Director), Lam Chou In (Operating Officer), and Zheng Anting (Operating Officer) that became effective upon the closing of the acquisition of AGRL. Zheng Anting resigned on December 15, 2010. In addition, upon the closing of the acquisition of King’s Gaming, AERL has entered into two additional employments contracts with Mr. Mok and Mr. Wong.
ASIA ENTERTAINMENT & RESOURCES LTD.
Notes To Consolidated Financial Statements
(Unaudited and Unreviewed)
For the Three Months Ended March 31, 2011 and 2010
Annual minimum compensation for the terms of the employment agreements is as follows:
| 2011 | | $ | 775,200 | |
| 2012 | | | 775,200 | |
| 2013 | | | 412,200 | |
| 2014 | | | 379,200 | |
| 2015 | | | 127,600 | |
| Total | | $ | 2,469,400 | |
Each executive is entitled to paid vacation in accordance with AGRL’s policies and other customary benefits. The employment agreements provide that the executive, during the period of five years following the termination of his employment (three years in the case of Messrs. Leong and Li), shall not compete with AGRL or solicit any of its employees. The agreements 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 month periods ended March 31, 2011 and 2010 related to these employment contracts was $211,800 and $122,000, respectively.
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. The tenure of the Promoter Companies acting as gaming promoters for the Casinos is subject to the Gaming Representative / Gaming Promoter Arrangements.
The Group may not be able to collect all of their markers receivables 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 Promoter Companies, 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 receivables 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 a significant amount of their revenue from patrons within the Asia-Pacific Region. If economic conditions in theses 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 12 — Segment and Geographic Information
During the three month periods ended March 31, 2011 and 2010, all of the Group’s principal operating and developmental activities occurred in Macau. Management reviews the results of operations for its key operating segment in Macau.
ASIA ENTERTAINMENT & RESOURCES LTD.
Notes To Consolidated Financial Statements
(Unaudited and Unreviewed)
For the Three Months Ended March 31, 2011 and 2010
Note 13—Subsequent Events
On April 18, 2011, the Company's Board of Directors accepted the invitation to open a VIP room with up to 12 tables at the brand-new Galaxy Macau Resort in Cotai through its related promoter company, Sang Lung Gaming Promotion Company Limited. The VIP room was opened on May 15, 2011, the same day as the grand opening of the resort.
During April 2011, King's Gaming was granted a line of credit of non-negotiable chips of approximately $3,900,000. The line of credit is personally guaranteed by Mr. Vong and is secured by a personal check of approximately $3,900,000.
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 consolidated and combined financial statements and related footnotes thereto included in this report. All capitalized terms in this MD&A that are not defined shall have the meaning ascribed to them in the Notes to the Financial Statements included herewith.
Overview
We are a holding company that conducts our primary business operations through our wholly owned subsidiary, Asia Gaming & Resort Limited (“AGRL”), and its subsidiaries.
We were incorporated in the Cayman Islands on September 24, 2007 under the name “CS China Acquisition Corp.” for the purpose of acquiring, through a stock exchange, asset acquisition or other similar business combination, or controlling, through contractual arrangements, an operating business, that had its principal operations in the People’s Republic of China (including Hong Kong and Macau).
Prior to the business combination with AGRL, we had no operating business.
On February 2, 2010, we acquired all of the outstanding securities of AGRL from Spring Fortune Investment Ltd (“Spring Fortune”), resulting in AGRL becoming our wholly owned subsidiary. Upon the business combination with AGRL, we changed our name to “Asia Entertainment & Resources Ltd.”
AGRL was incorporated on May 2, 2007 in Hong Kong. It is an investment holding company of subsidiaries that, through profit interest agreements with affiliated companies known as VIP gaming promoters, are entitled to receive all of the profits of the VIP gaming promoters from VIP gaming rooms promoted by the VIP gaming promoters in casinos at major hotels in Macau.
The acquisition of AGRL has been accounted for as a “reverse merger” and recapitalization since Spring Fortune, the former shareholder of AGRL, became the owner of a majority of the outstanding ordinary shares immediately following the completion of the transaction and has significant influence and the ability to elect or appoint or to remove a majority of the members of the governing body of the combined entity, and AGRL’s senior management dominates the management of the combined entity, in accordance with the provisions of FASB ASC Topic 805 Business Combinations. Accordingly, AGRL was deemed to be the accounting acquirer in the transaction and, consequently, the transaction is treated as a recapitalization of AGRL. Accordingly, the assets and liabilities and the historical operations that are reflected in the financial statements are those of AGRL and are recorded at the historical cost basis of AGRL. Our assets, liabilities and results of operations were consolidated with the assets, liabilities and results of operations of AGRL after consummation of the acquisition.
Foxhill Group Limited (“Foxhill”), Billion Boom International Limited (“Billion Boom”), and Kasino Fortune Investments Limited (“Kasino Fortune”) are the significant subsidiaries of AGRL, which have relationship with AGRL’s VIP gaming promoters.
Upon the closing of the acquisition of AGRL by AERL, the Promoter Companies became variable interest entities (“VIEs”) of the subsidiaries of AGRL, which are the primary beneficiaries of the operations of the Promoter Companies.
Management’s determination of the appropriate accounting method with respect to the AGRL variable interest entities is based on FASB ASC Topic 810, “Consolidation of Variable Interest Entities”. AGRL consolidates the VIEs in which it is the primary beneficiary and will disclose significant variable interests in VIEs of which it is not the primary beneficiary, if any.
In accordance with FASB ASC Topic 810, the operations of the Promoter Companies will be consolidated with those of AGRL for all periods subsequent to the closing of the acquisition of AGRL by AERL.
We completed the acquisition of the right to 100% of the profit derived by King’s Gaming Promotion Limited ("King's Gaming") for the promotion of the Wenzhou VIP Room at the Venetian Hotel and Casino in Macau in November 2010.
Sang Heng Gaming Promotion Company Limited (“Sang Heng”), King’s Gaming Promotion Limited, and Iao Pou Gaming Promotion Limited (“Iao Pou”) are promoters of VIP gaming rooms, which are private room gaming facilities in casinos, in Macau, Special Administrative Region (“Macau” or “Macau SAR”), China.
The gaming industry in Macau is somewhat seasonal in nature as a result of the various week-long holidays celebrated in China which increases the number of patrons who visit our VIP gaming rooms. The most significant holidays which impact our revenue by quarter are as follows:
| Quarter | | |
| 1 | | Chinese New Year Celebration |
| 2 | | Labor Day Golden Week |
| 3 | | None |
| 4 | | National Day Golden Week |
Highlights
When compared to that of the period ended March 31, 2010, we performed substantially better in the period ended March 31, 2011. Our revenue growth in the three months ended March 31, 2011 was 103% (of which 12.6% was attributable to our acquisition of King’s Gaming), which far exceeded the overall growth in Macau of 42.9%. Our income growth in the three months ended March 31, 2011 was 58.0%. The following factors contributed to our improved performance:
| | • | Gaming in Macau has had revenue growth of 42.9% period-over-period in 2011; |
| | • | Organic growth in both retained earnings and our network of agents; |
| | • | Increased cage capital as a result of reinvesting profits, increased shareholder loans, and the recent warrant exercises of $35.5 million, during October 2010; |
| | | |
| | • | The acquisition of King's Gaming effective November 1, 2010. For the first quarter of 2011, revenue from King’s Gaming’s VIP gaming operations was approximately $6,500,000. |
| | • | The reduction in the number of tables from eleven to six at the MGM Grand Hotel and Casino, during 2011, which allowed us to allocate additional cage capital to our VIP gaming promoters compensated with 1.25% fixed commission. By the end of March 31, 2011, approximately $2,500,000 had been re-allocated. |
| | • | The increase in the number of tables from eleven to twelve at the Iao Kun VIP Room at the Star World Hotel and Casino, during 2011, which caused the average daily chips turnover to increase by approximately $ 7,400,000. |
| | • | The rapidly emerging “rich” class of Chinese year over year; |
| | • | Increased marketing efforts to increase the number of patrons and the amount of play at the Iao Kun VIP Room at the Star World Hotel and Casino. This resulted in higher fixed commission income. The Iao Kun VIP Room at the Star World Hotel and Casino and King's Gaming contributed over 91% of our business and 91% of our revenue in 2011. |
Three months ended March 31, 2011 Compared to three months ended March 31, 2010
The following table sets forth certain information regarding our results for the three months ended March 31, 2011 and 2010 (all figure are in $ thousands except ratios and percentages).
| | | For the Three Months Ended
March 31,
2011 | | | For the Three Months Ended
March 31,
2010 | | | 2011 to 2010 | |
| Revenue from VIP gaming operations | | $ | 51,253 | | | $ | 25,279 | | | | 103 | % |
| Commission to agents | | $ | 31,031 | | | $ | 13,220 | | | | 135 | % |
| Selling, general and administrative expenses | | $ | 3,292 | | | $ | 2,206 | | | | 49 | % |
| Operating income including pre-acquisition income and before the change in fair value of contingent consideration | | $ | 15,258 | | | $ | 9,664 | | | | 58 | % |
| Operating income including pre-acquisition income and before the change in fair value of contingent consideration/Revenue from VIP gaming operations | | | 29.77 | % | | | 38.23 | % | | | | |
Non-GAAP Financial Results
The following Non-GAAP financial results operations for the three monthss ended March 31, 2011 and 2010 are used by management to evaluate the financial performance of the Company prior to the deduction of amortization of intangible assets related to the acquisition of King's Gaming (all figure are in $ thousands except ratios and percentages) (see Reconciliation of Non-GAAP to GAAP financial results).
| | | For the Three Months Ended
March 31,
2011 | | | For the Three Months Ended
March 31,
2010 | | | 2011 to 2010 | |
| Non-GAAP income before amortization of intangible assets including pre-acquisition income and the change in fair value of contingent consideration | | $ | 16,522 | | | $ | 9,664 | | | | 71 | % |
| Non-GAAP income before amortization including pre-acquisition income and the change in fair value of contingent consideration/Revenue from VIP gaming operations | | | 32.24 | % | | | 38.23 | % | | | | |
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 bets gaming patrons make. Bets are wagered with ‘‘non-negotiable chips’’ and winning bets are paid out by casinos in so-called ‘‘cash’’ chips, if they continue to play they have to change the cash chips to non-negotiable chips.
Rolling Chip Turnover ratios are calculated based upon percentages of Rolling Chip Turnover, represent the growth in revenues, expenses and income in comparison to the growth in gaming volume and investors and management to asses the operating efficiencies of the VIP gaming promoters.
The following table sets forth certain information regarding our results related to our Rolling Chip Turnover and certain performance ratios, for the three months ended March 31, 2011 and 2010 (all figures are in $ thousands except for ratios and percentages).
| | | For the Three Months Ended
March 31,
2011 | | | For the Three Months Ended
March 31,
2010 | | | 2011 to 2010 | |
| Rolling Chip Turnover | | $ | 4,075,447 | | | $ | 1,894,489 | | | | 115 | % |
| Revenue from VIP gaming operations/Rolling Chip Turnover | | | 1.26 | % | | | 1.33 | % | | | | |
| Commission to agents/Rolling Chip Turnover | | | 0.76 | % | | | 0.70 | % | | | | |
| Selling, general and administrative expenses/Rolling Chip Turnover | | | 0.08 | % | | | 0.12 | % | | | | |
| Operating income including pre-acquisition income and before the change in fair value of contingent consideration/Rolling Chip Turnover | | | 0.37 | % | | | 0.51 | % | | | | |
Revenue from VIP gaming promotion was $51,253,219 for the three months ended March 31, 2011, as compared to $25,279,369 for the three months ended March 31, 2010, an increase of 103%. Rolling Chip Turnover has increased by $2,181,873,478, or 115.2%, in the three months ended March 31, 2011 as compared to that of the same period in 2010, principally as a result of the following factors:
(i) the acquisition of King's Gaming effective November 1, 2010, which contributed approximately $6,456,000 of revenue during the three months ended March 31, 2011;
(ii) increased cage capital as a result of, reinvesting profits, increased shareholder loans, and the warrant exercises of $35.5 million.
Revenue for the three months ended March 31, 2011 from VIP gaming promotion increased in proportion to the increase in Rolling Chip Turnover due to the Iao Kun VIP room in the Star World Hotel and Casino in Downtown Macau and the Wenzhou VIP Room at the Venetian Hotel and Casino in Macau on the Cotai strip earning revenues on a fixed 1.25% commission on Rolling Chip Turnover. Fixed commission of 1.25% is effectively equivalent to 2.9% of gross win as a percentage of Rolling Chip Turnover based on a 43% win share (2.9% x 0.43 = 1.25%). Gross win rates for the three months ended March 31, 2011 were 2.92% (Iao Kun VIP room at the MGM Hotel and Casino only). In January 2011, Sang Heng increased the number of gaming tables from 11 to 12 at the Galaxy Star World Hotel and Iao Pou decreased the number of gaming tables from 11 to 6 at the MGM Grand Hotel in the respective VIP gaming rooms. The reduction of tables at the MGM Hotel and Casino is not expected to materially impact our revenues due to the percentage of revenues in relationship to total Rolling Chip Turnover is less than 10% and our concentration of our business at our other VIP rooms, which are under the fixed 1.25% commission revenue model.
Revenues from VIP gaming promotion, as a percentage of Rolling Chip Turnover, decreased 5.8% to 1.26% during the three months ended March 31, 2011, down from 1.33% during the three months ended March 31, 2010 due to higher win rate of 3.61% at the Iao Kun VIP room in MGM Hotel and Casino. The VIP rooms in the Star World Hotel and Casino and in the Venetian Hotel and Casino constitute over 91% of the Company’s revenue. The gross win rate for the Iao Kun VIP room in MGM Hotel and Casino was 2.92% for the three months ended March 31, 2011, above the effective gross win average of 2.9% under the 1.25% fixed commission scheme.
Availability of cage capital has the most significant impact on revenues. During the fourth quarter of 2010, additional cage capital was made available as a result of the warrant exercises in October 2010 of $35.5 million, reinvestment of profits and additional shareholder loans. Approximately 91% of our revenues are based upon a fixed commission on Rolling Chip Turnover of approximately $3,712,000,000, which has reduced the risk of volatility associated with our revenues. As a result, we are able to concentrate our marketing efforts and increase our rolling chips turnover. Rolling Chip Turnover is impacted by the availability of cage capital. With the increase in cage capital, we can increase our rolling chips turnover, which then results in increased revenues under the fixed commission revenue model.
The commission paid to agents increased by $17,811,077, or 134.7%, during the three months ended March 31, 2011 as compared to the same period in 2010 as a result of an increase in Rolling Chip Turnover. The commissions to agents, as a percentage of Rolling Chip Turnover, was 0.76% in the three months ended March 31, 2011, up from 0.70% for the three months ended March 31, 2010 as a result of greater non-marker commissions paid in the quarter and a smaller percentage of direct business in relation to total Rolling Chip Turnover.
Sales, general and administrative expenses increased by approximately $1,086,000, or 49%, during the during the three months ended March 31, 2011 as compared to that of the same period in 2010. The increase included a decrease in administrative overhead costs as a result of not incurring merger related expenses during the three months ended March 31, 2011, compared to increased activities in the two months in the same period of 2010, including legal and professional fees associated with our merger, and other regulatory filings of $194,000. Management salaries and director fees increased approximately $209,000 as a result of employment contracts and director fees initiated in the first quarter of 2010. Management fees increased approximately $357,000 as a result of the expansion of operations at the Iao Kun VIP room in the Star World Hotel and Casino in Downtown Macau as well as the addition of King’s Gaming in November 2010. Additional increased operating costs in the three VIP rooms were approximately $689,000 as a result of our expanded operations and the addition of King’s Gaming. Our investor relations expenses increased by approximately $129,000 in 2011, due to increased investor relations activity.
The special rolling tax increased by $218,174, or 1.15%, during the three months ended March 31, 2011 as compared to that of the same period in 2010 as a direct result of an increase in Rolling Chip Turnover.
Operating income before the change in the fair value of contingent consideration for the acquisition of King's Gaming, was $15,258,370 for the three months ended March 31, 2011 as compared to income, including pre-acquisition profit of $9,664,284 for the three months ended March 31, 2010, an increase of approximately 58%, principally as a result of (i) the Macau gaming markets continued recovery, from the impact of the global economic crisis; (ii) the acquisition of King's Gaming effective November 1, 2010; and (iii) increased cage capital as a result of reinvesting profits, increased shareholder loans, and the warrant exercises of $35.5 million in October 2010. Operating income as a percentage of VIP gaming revenues was 29.77% for the three months ended March 31, 2011 as compared to 38.23% for the three months ended March 31, 2010. The decrease as a percentage of VIP gaming revenues was due to higher commissions paid to non-marker agents in the current period and a lower win rate for the Iao Kun VIP room at the MGM Hotel and Casino during the current period.
Our Non-GAAP income before amortization of intangible assets and the change in fair value of contingent consideration related to the acquisition of King's Gaming, was $16,522,439 for the three months ended March 31, 2011 as compared to income, including pre-acquisition profit of $9,664,284 for the three months ended March 31, 2010, an increase of approximately 71%, principally as a result of (i) the Macau gaming markets continued recovery, from the impact of the global economic crisis; (ii) the acquisition of King's Gaming effective November 1, 2010; and (iii) increased cage capital as a result of reinvesting profits, increased shareholder loans, and the warrant exercises of $35.5 million in October 2010. Non-GAAP income as a percentage of VIP gaming revenues was 32.24% for the three months ended March 31, 2011 as compared to 38.23% for the three months ended March 31, 2010. The decrease as a percentage of VIP gaming revenues was due to higher commissions paid in the current period and a lower win rate for the Iao Kun VIP room at the MGM Hotel and Casino during the current period.
Amortization of intangible assets for the three months ended March 31, 2011 was $1,264,069 as a result of the acquisition of King's Gaming. It is expected that amortization of intangible assets will be approximately $5,056,000 for the year ended December 31, 2011.
The change in the fair value of the contingent consideration resulted in an increase to the contingent consideration liability of $2,371,970 due to the fluctuation in the market price of our ordinary shares and revisions to the estimated future performance of King's Gaming. As required by FASB ASC Topic 805 on business combinations, 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 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. Actual achievement of gross profit range for this assumed earn-out period could reduce the liability to zero. 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 in the period of change in estimate.
GAAP EPS for the three months ended March 31, 2011 was $0.37 for both basic weighted average share count of 34,614,025 and fully diluted weighted average share count of 35,270,917. The fully diluted share count includes ordinary share equivalents for the issuance of a total of 1,440,000 shares and warrants issuable upon the exercise of a unit purchase option granted to the representative of the underwriters of its initial public offering.
Non-GAAP EPS (basic and fully diluted) before amortization of intangible assets and the change in the fair value of contingent consideration for the three months ended March 31, 2011 was $0.48.
Non-GAAP Financial Measure
Our calculation of non-GAAP income (operating income before amortization of intangible assets and the change in fair value of contingent consideration) and Non-GAAP earnings per share for the three months ended March 31, 2011, differs from earnings per share based on net income because it does not include amortization of intangible assets and the 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 a complete picture of our operations for the entire period and is more accurately comparable to the prior-year period. Notwithstanding the foregoing, however, Non-GAAP income and earnings per share should not be considered an alternative to, or more meaningful than, net income and earnings per share 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,
2011 | |
| GAAP Net Income | | $ | 12,886,400 | |
| | | | | |
| Impact of amortization of intangible assets | | | 1,264,069 | |
| | | | | |
| Impact of the change in fair value of contingent consideration | | | 2,371,970 | |
| | | | | |
| Non-GAAP income (before amortization of intangible assets and the change in fair value of contingent consideration) | | $ | 16,522,439 | |
| | | For the Three Months Ended
March 31, 2011 | |
| | | Basic | | | Fully Diluted | |
| | | | | | | |
| GAAP earnings per share | | $ | 0.37 | | | $ | 0.37 | |
| | | | | | | | | |
| Impact of amortization of intangible assets | | | 0.04 | | | | 0.04 | |
| | | | | | | | | |
| Impact of the change in fair value of contingent consideration | | | 0.07 | | | | 0.07 | |
| | | | | | | | | |
| Non-GAAP Earnings per share (before amortization of intangible assets and the change in fair value of contingent consideration) | | $ | 0.48 | | | $ | 0.48 | |
Liquidity and Capital Resources — Historical Cash Flows
As of March 31, 2011, total available cage capital was approximately $156,562,000. The total available cage capital is comprised of markers receivable of approximately $137,745,000 and cash, cash chips and non-negotiable chips of approximately $18,907,000. AERL’s related parties have increased financing slightly from $61,066,220 as of December 31, 2010 to $61,169,367 for the quarter ended March 31, 2011, an increase of $0.1 million. In addition, $60,000,000 million of the loans were converted to convertible long-term loans.
As of March 31, 2011, AERL had a total cash balance of $19,553,488. Cash provided by operations was $5,669,530 for the three months ended March 31, 2011 compared to cash used in operations of $29,259,190 in the same period in 2010 as a result of the implementation by the Promoter Companies to fund the marker system with agents. Additional cash used for providing markers was $17,604,226 during the three months ended March 31, 2011 compared to $38,702,075 for the same period in 2010.
We expect to receive a line of credit of approximately HK $200 million from the Galaxy Casino, S.A. in connection with the opening of the new VIP gaming room.
Future Sources and Uses of Cash
We expect that our future liquidity and capital requirements will be affected by:
| | • | Capital requirements related to future acquisitions; |
| | • | Cash flow from acquisitions; |
| | • | Working capital requirements; |
| | • | Loans from internal and external sources; |
| | • | Raising funds through the private placement and public offerings of our securities; |
| | • | Accumulation of earnings; and |
| | • | Expansion of operations through the opening of new VIP gaming room.. |
Off-Balance Sheet Arrangements
None.
Contractual Obligations
We do not have any long term debt, capital lease obligations, operating lease obligations, purchase obligations or other long term liabilities except for the recently amended loans from shareholders ($60,000,000) and the payment of the contingent consideration (up to $51,390,511 at March 31, 2011) to the former owners of King’s Gaming and the management agreements between three of AGRL’s VIP gaming promoters and Pak Si Management and Consultancy Limited of Macau, pursuant to which that company is responsible for the hiring and management of staff at the VIP gaming rooms promoted by the VIP gaming promoters in Macau. Each of the management agreements is for a one-year term, subject to renewal. The total obligations of the VIP gaming promoters during each one-year period are approximately US $4,650,000.
Company Operations and Critical Accounting Policies
Profit Interest Agreements
Each Promoter Company has entered into an agreement with the casino operators and license holders to promote a VIP gaming room in the respective casino. These agreements provide that the Promoter Company receives a commission or share in the net win/loss of the VIP gaming room. Current Macau laws do not allow non-Macau companies, such as AGRL, to directly operate a gaming promotion business in Macau. Consequently, the Promoter Company enters into a profit interest agreement with a subsidiary of AGRL, providing for the assignment to the AGRL subsidiary of 100% of the profits derived by the Promoter Company from its promotion of the VIP gaming room. The manner of calculation of the profit is set out in an exhibit to the profit interest agreement. The profit agreements do not have expiration dates and continue conterminously with the operation of the respective VIP gaming rooms.
In addition to the assignment of the profit interest, each profit interest agreement provides that the VIP gaming promoter will not terminate its underlying agreement with the casino without AERL's consent and that it will at all times maintain all licenses, agreements and other permissions it requires to perform its obligations pursuant to such agreement.
In connection with the profit interest agreements, Messrs Lam Man Pou (Mr. Lam)(Chairman and Director of AERL and principal stockholder of AERL) and Vong Hon Kun (Mr. Vong) (Chief Operating Officer and Director of AERL) have agreed to make loans to AGRL for use by AGRL for working capital and to make loans to AGRL’s VIP gaming promoters of not less than $45,000,000. Prior to issuance of notes in April 2011, the funding commitment terminated at the end of the fiscal quarter that AGRL’s working capital was not less than $100,000,000, exclusive of any working capital provided by Messrs. Lam and Vong. Messrs. Lam and Vong will also guaranty to AGRL the repayment of the loans made by AGRL to the VIP gaming promoters.
Revenue Recognition
Revenue from VIP gaming room operations is recorded monthly based upon the Promoter Companies’ share of the net gaming wins or as a percentage of non-negotiable chips wagered in VIP gaming rooms. The amounts due the Promoter Companies are calculated and reported by the casino operators on a monthly basis, usually within ten days of the month end.
In accordance with long standing industry practice in Macau, the Promoter Companies’ operations in Grand Waldo Hotel and Casino, Star World Hotel and Casino and MGM Grand Hotel and Casino had similar revenue and loss sharing arrangements. Under these arrangements, Sang Heng, Spring and Iao Pou shared in the casino’s VIP gaming room wins or losses from the gaming patrons recruited by the Promoter Companies. Typically, wins and losses are allocated as 40.25% to 45% of net gaming wins on a pre-gaming tax basis. The Promoter may or the Casino Operators may adjust these arrangements with adequate notice and agreement by both parties to the arrangement.
Additionally, the Promoter Companies earn revenues based upon percentages of non-negotiable chips wagered 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 VIP gaming room patrons without charge and is included in gross revenues and then deducted as promotional allowances as incurred. These revenues are recorded as fees and incentive revenues in the accompanying consolidated statements of operations.
In July 2009, all concessionaires and sub-concessionaires entered into an agreement to cap gaming promoter commissions. Under this agreement, commission payments to gaming promoters cannot exceed 1.25% of rolling chip volumes regardless of the commission structure adopted. As a result of the amendments made to Administrative Regulation No. 6/2002 by Administrative Regulation 27/2009 dated August 10, 2009, the Secretary of Economy and Finance of the Macau SAR now has the authority to issue a dispatch implementing the 1.25% gaming promoter commission cap, as agreed between all concessionaires and sub-concessionaires. The amendment sets forth standards for what constitutes a commission to gaming promoters, including all types of payments, either monetary or in specie, that are made to gaming promoters such as food and beverage, hotel and other services and allowances. The amendment also imposes obligations on gaming promoters and casino operators to report regularly to the Gaming Inspection and Coordination Bureau of the Macau SAR and imposes fines or other sanctions for noncompliance with the commission cap or the monthly obligations to report and detail the amount of commissions paid to gaming promoters.
Beginning in October 2009, Star World Hotel and Casino agreed to revise the Sang Heng Agreement and removed the win/loss sharing component and replaced it with a commission payable to Sang Heng at a rate of 1.25% of rolling chips turnover. Management has requested that the MGM Grand Hotel and Casino revise the Iao Pou Agreement to remove the win/loss sharing component and replace it with a commission payable to Iao Pou at a rate of 1.25% of rolling chips turnover. MGM Grand Hotel and Casino has declined our request to allow for fixed commissions, rather than win/loss sharing. Management believes that this change in the revenue structure will reduce the inherent risk in promoting a VIP gaming room, due to the fluctuation surrounding gaming wins and losses. The fixed commission revenues will be based only on the amount of chip turnover, rather than the win/loss of the gaming operations. The King’s Gaming arrangement with the Venetian Hotel and Casino is also based on 1.25% of the Rolling Chip Turnover.
VIP Gaming Room Cage and Marker Accounting
As of December 31, 2009 and through the period prior to the reverse merger on February 2, 2010, the Promoter Companies did not extend credit to junket agents. Previously, the operations of the cage, which is where cash, non-negotiable and cash chips transactions and extension of credit occur, were owned by the individual owners of the Promoter Companies. Subsequent to the acquisition of AGRL by AERL (see Note 8), the operations and extension of credit by the cage became controlled by us through the Promoter Companies and Messrs. Lam and Vong assigned the assets of the cage to AERL and its subsidiaries as a loan in the amount of $20,220,000 to enable AERL and its subsidiaries to extend credit to the VIP gaming promoters and not less than $45,000,000 on and after March 31, 2010 and until the agreement is terminated. At March 31, 2011 and December 31, 2010, the loan amounted to $61,169,337 and $61,066,220, respectively. On April 18, 2011, the loans were converted into two $30,000,000 interest-free notes ($60,000,000 in the aggregate, expiring in April 2014, which are convertible into ordinary shares at a price of $20 per share at the option of the holder and callable at the Company's option at $20 per share if the closing price of its ordinary shares for any ten consecutive trading days exceeds $25.
In the VIP gaming rooms, junket agents 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 patron continues to play, they must exchange the cash chips for non-negotiable chips, which is the basis for commissions. The wager of the non-negotiable chips by the 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.
The law in Macau permits VIP gaming promoters to extend credit to junket agents, who act as patron representatives.
With the completion of the acquisition of AGRL by AERL, we, through the Promoter Companies, extends credit to junket agents. A majority of the our consolidated markers receivable are owed by junket agents from Macau and the rest are primarily in Asia. In addition to enforceability issues, the collectability of markers from foreign junket agents is affected by a number of factors including changes in economic conditions in the agents’ home countries.
We may not be able to collect all of their markers receivables from the junket agents. Management expects that we will be able to enforce these obligations only in a limited number of jurisdictions, including Macau. To the extent that junket agents with whom we do business, through the Promoter Companies, are from other jurisdictions, we may not have access to a forum in which they will be able to collect all of their markers receivables because, among other reasons, courts of many jurisdictions do not enforce gaming debts and we may encounter forums that will refuse to enforce such debts. Our inability to collect gaming debts could have a significant negative impact on their operating results.
We regularly evaluate the reserve for bad debts 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 completion of the acquisition, Messrs. Lam and Vong guaranty all markers receivables; therefore, as of March 31, 2011 and December 31, 2010, management believes that a reserve for bad debts is not deemed necessary. The guarantee of Messrs. Lam and Vong can be offset against the loans provided by them for the working capital. In addition, Mr. Mok has guaranteed the collection of all markers attributable to Mr. Mok and his network of junket agents and collaborators at both King’s Gaming existing VIP gaming room and the Company’s existing and future VIP gaming rooms.
Goodwill and Other Intangible Assets
In accordance with the provisions of FASB ASC Topic 350, “Intangibles—Goodwill and Other”, 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. FASB ASC Topic 350 requires that that management perform 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 intangible assets:
| Bad Debt Guarantee | | 5 and 1/2 years | | Based upon six months after the expiration of the employment agreement |
| | | | | |
| Non-Compete agreement | | 12.2 years | | Based upon the termination date of the casino's license |
| | | | | |
| Profit interest agreement | | 12.2 years | | Based upon the termination date of the casino's license |
Indefinite Useful Life Assets
Goodwill is evaluated for possible impairment by comparing the fair value of a business unit with its carrying value, including the goodwill assigned to that business unit. Fair value of a business unit is estimated using a combination of income-based and market-based valuation methodologies. Under the income approach, forecasted cash flows of a business unit are discounted to a present value using a discount rate commensurate with the risks of those cash flows. Under the market approach, the fair value of a business unit is estimated based on the revenues and earnings multiples of a group of comparable public companies and from recent transactions involving comparable companies. An impairment charge is recorded if the carrying value of the goodwill exceeds its implied fair value. Assets with indefinite useful lives are not subject to amortization and are tested for impairment annually or more frequently if events or circumstances indicate that the assets might be impaired. The impairment test consists of a comparison of the fair value of the asset with its carrying amount. If the carrying amount of the asset exceeds its fair value, an impairment will be recognized in an amount equal to that excess. If the carrying amount of the asset does not exceed the fair value, no impairment is recognized.
Impairment of Long-lived Assets
In accordance with the provisions of FASB ASC Topic 360, “Impairment or Disposal of Long-Lived Assets”, 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. No impairment has been recognized.
Stock-Based Compensation
The Company awards stock and other equity-based instruments to its employee, directors and consultant (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 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.
Foreign Currency
The functional and reporting currency of AERL is in the United States dollar ("US $", "$", “Reporting Currency”). AGRL’s and the Promoter Companies' functional currency is the Hong Kong Dollar (“HKD $”, “Functional Currency”). Monetary assets and liabilities denominated in currencies other than the Functional Currency are translated into the Functional Currency at rates of exchange prevailing at the balance sheet dates. Transactions denominated in currencies other than the Functional Currency are translated into the Functional Currency at the exchange rates prevailing at the dates of the transaction.
Exchange gains or losses arising from foreign currency transactions are included in the determination of net income for the respective period.
For financial reporting purposes, our consolidated/combined financial statements, which are prepared using the Functional Currency, are then translated into the Reporting Currency. Assets and liabilities are translated at the exchange rates at the balance sheet dates and revenue and expenses are translated at the average exchange rates and shareholders' equity is translated at historical exchange rates. Any translation adjustments resulting are not included in determining net income but are included in foreign currency translation adjustment in other comprehensive income, a component of shareholders' equity.
| | | March 31, | | | March 31, | | | December 31, | |
| | | 2011 | | | 2010 | | | 2010 | |
| | | | | | | | | | |
| Period end HK$:US$ exchange rate | | $ | 7.78 | | | $ | 7.76 | | | $ | 7.75 | |
| Average annual HK$:US$ exchange rate | | $ | 7.79 | | | $ | 7.76 | | | $ | 7.79 | |
Other Comprehensive Income
We follow FASB ASC Topic 220 “Comprehensive Income”, which establishes standards for the reporting and display of comprehensive income and its components in the financial statements. Other comprehensive income 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, as presented on the accompanying consolidated statements of changes in equity, was cumulative foreign currency translation adjustment.
Financial Statements and Exhibits.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
