UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended: September 30, 2006
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number:
CHILCO RIVER HOLDINGS INC.
(Exact name of small business issuer as specified in its charter)
NEVADA 98-0419129
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
355 LEMON AVENUE, SUITE C 91789
WALNUT, CA 91789 (zip code)
(Address of principal executive offices)
Issuer's Telephone Number: (909) 869-7933
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
As of November 14, 2006 there were 47,848,000 shares of common stock
outstanding.
Transitional Small Business Disclosure Format (check one)
Yes [ ] No [X]
CHILCO RIVER HOLDINGS INC.
QUARTERLY REPORT FOR SEPTEMBER 30, 2006
INDEX
Page
Part I - FINANCIAL INFORMATION
Item 1 Unaudited Condensed Consolidated Financial Statements ..............1
Condensed Consolidated Balance Sheet as of
September 30, 2006 .................................................1
Condensed Consolidated Statement of Operations for three
and nine months ended September 30, 2006 and 2005 ..................2
Condensed Consolidated Statement of Cash Flows for nine
months ended September 30, 2006 and 2005 ...........................3
Notes to Unaudited Condensed Consolidated Financial Statements .....4
Item 2 Plan of Operation .................................................10
Item 3 Controls and Procedures ...........................................17
Part II - OTHER INFORMATION
Item 1. Legal Proceedings .................................................18
Item 1A. Risk Factors ......................................................18
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds .......18
Item 3. Defaults Upon Senior Securities ...................................18
Item 4. Submissions of Matters to a Vote of Security Holders ..............18
Item 5 Other Information .................................................18
Item 6 Exhibits ..........................................................18
Signatures ..................................................................19
i
Explanatory Note: On July 5, 2006, Chilco River Holdings Inc. effected a
two-for-one split by way of stock dividend. Each shareholder of record on July
5, 2006 at 5:00 p.m. (Eastern Time) received one additional share of common
stock. On July 5, 2006, there were 21,840,667 shares of common stock issued and
outstanding. After giving effect to the stock dividend, the Company had
43,681,334 shares. Information contained in this quarterly report gives
retroactive effect to the stock dividend.
CHILCO RIVER HOLDINGS INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(Expressed in US$)
September 30,
2006
==============
ASSETS
Current Assets
Cash $ 534,376
Accounts receivable, net of allowance for doubtful accounts
of $ nil as of September 30, 2006 109,085
Inventory 213,217
Prepaid expense & other current assets 140,088
VAT tax recoverable 107,145
--------------
Total Current Assets 1,103,911
--------------
Property, furniture & equipment,
net of accumulated depreciation of $7,145,046
as of September 30, 2006 16,903,464
--------------
Intangible Asset, net of accumulated amortization of $115,776 9,146,324
Non Current Deferred Tax Asset 116,666
--------------
Total Other Assets 9,262,990
--------------
TOTAL ASSETS $ 27,270,365
==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 227,773
Accrued expenses and other payables 9,148
Loan from affiliates 55,558
Customer Deposit 100,000
Installment payable 2,617,589
--------------
Total Current Liabilities 3,010,067
Long-Term Liability 2,334,511
--------------
Installment Payable 5,344,578
--------------
TOTAL LIABILITIES
Shareholders' Equity
Common stock: $.001 par value, 100,000,000 authorized
shares, 47,348,000 shares issued and outstanding 47,348
Additional Paid-in Capital 24,364,840
Prepaid Stock Compensation (1,035,000)
Subscribed Capital 500,000
Accumulated deficit (2,061,9260)
Accumulated Foreign Currency Adjustment 110,525
--------------
Total Shareholders' Equity 21,925,787
--------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 27,270,365
==============
(Unaudited -- See Accompanying Notes)
1
CHILCO RIVER HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Expressed in US$)
Three Months Ending Nine Months Ending
September 30, September 30,
2006 2005 2006 2005
----------- ----------- ----------- -----------
Revenues
Casino -- $ 583,834 $ -- $ 2,333,701
Slot machine leasing 116,133 -- 288,510 --
Rooms 284,852 282,003 828,734 896,586
Food and Beverage 21,656 231,336 72,624 466,312
Other -- (50) -- 62,219
----------- ----------- ----------- -----------
Less: Promotional Allowances -- -- -- --
----------- ----------- ----------- -----------
Total Revenues 422,640 1,097,123 1,189,868 3,758,818
----------- ----------- ----------- -----------
Operating Expenses
Operating departments 167,619 382,270 420,865 966,285
General and administrative 785,998 38,294 1,849,209 404,604
Depreciation and amortization 299,580 357,648 670,266 739,680
----------- ----------- ----------- -----------
Total operating expense 1,253,197 778,212 2,940,340 2,110,569
----------- ----------- ----------- -----------
Income from Operations (830,557) 318,911 (1,750,472) 1,648,249
----------- ----------- ----------- -----------
Other Income and Expenses
Interest income 564 (51) 13,855 62,603
Other income/gains 281 45,547 444 10,578
Other expenses/losses -- (48,253) -- (43,176)
----------- ----------- ----------- -----------
845 (2,757) 14,299 30,005
----------- ----------- ----------- -----------
Income before income tax (829,712) 316,154 (1,736,173) 1,678,254
Provision for income tax (16,637) (127,170) (46,307) (534,228)
----------- ----------- ----------- -----------
Net Income (Loss) (846,349) 188,984 (1,782,480) 1,144,026
----------- ----------- ----------- -----------
Other Comprehensive Income
Unrealized gain (loss) on
Foreign Currency Translation, net of tax - Note 1,059 661,879 (6,523) 715,570
----------- ----------- ----------- -----------
Total Comprehensive Income (845,290) $ 850,862 $(1,789,003) $ 1,859,596
----------- ----------- ----------- -----------
Basic Earnings Per Share $ (0.02) $ 0.01 $ (0.04) $ 0.03
Diluted Earnings Per Share $ (0.02) $ 0.01 $ (0.04) $ 0.03
Weighted Average Shares Outstanding 46,775,536 42,863,736 45,048,245 42,900,000
----------- ----------- ----------- -----------
(Unaudited -- See Accompanying Notes)
2
CHILCO RIVER HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Expressed in US$)
For the Nine Months
Ended September 30,
2006 2005
----------------------------------
Cash Flows from Operating Activities
Net Income $ (1,782,480) $ 1,144,026
Adjustments to reconcile net income to cash flows
from operating activities
Depreciation 669,918 739,714
Prepaid expense via stock issuance 345,000
(Increase)/Decrease in account balances of:
Accounts receivable (85,373) (33,296)
Other receivable -- (113,851)
Inventory (15,413) (5,406)
Prepaid expense & other current assets (126,230) 564,108
Other Assets -- 70,081
Deferred tax asset 60,854 --
Accounts payable 163,970 (95,610)
Customer Deposit 100,000 --
Deferred tax liability -- 125,924
Accrued expenses and other payables 2,127 (157,038)
Foreign Taxes Payable (61,995) --
----------------------------------
Cash Flows from Operating Activities (729,622) 2,238,652
----------------------------------
Cash Flows from Investing Activities
Purchase of properties and equipments (256,094) (486,073)
Cash paid for construction in progress (1,090,888) --
Acquisition of intangible licensing rights (500,000)
----------------------------------
Cash Flows from Investing Activities (1,846,982) (486,073)
----------------------------------
Cash Flows from Financing Activities
Cash proceeds from shareholder loans (138,473) (47,989)
Cash lent to affiliate company 3,144 --
Cash paid for dividend -- (2,753,086)
Proceeds from issuance of common stock-Kubuk Investment 1,022,041
Proceeds from issuance of common stock-Kubuk Gaming 6,144
Cash proceeds from subscribed capital 1,817,149 --
----------------------------------
Cash Flows from Financing Activities 1,681,820 (1,772,890)
----------------------------------
Other comprehensive income from current year (6,523) 715,570
----------------------------------
Net Change in cash and cash equivalents (901,307) 695,259
----------------------------------
Cash and cash equivalents at the beginning of year 1,435,683 1,425,999
----------------------------------
Cash and cash equivalents at the end of period $ 534,376 $ 2,121,258
==================================
Cash balance appropriated for owners of Bruce Grupo
Diversion SAC and Excluded from Cash at the End of Period -- $ (1,038,680)
----------------------------------
Cash and cash equivalents at the end of period 534,376 1,082,578
==================================
Supplemental Disclosure Information:
Sale of properties, plant and equipment by Bruce Grupo
Division SAC to Kubuk Investment SAC 15,453,708
Non-cash issuance of stock compensation $ 1,380,000 15,453,708
----------------------------------
Cash paid during the period for interest -- --
----------------------------------
Cash paid during the period for income taxes $ 212,465 $ 534,228
-------------------- --------------------
(Unaudited -- See Accompanying Notes)
3
CHILCO RIVER HOLDINGS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
Unaudited
Preliminary Note
The accompanying condensed consolidated financial statements have been prepared
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. In the opinion of the management, the
accompanying interim financial statements contain all adjustments, consisting of
normal recurring accruals, necessary for a fair presentation have been included.
The results of operations for the three and nine-month periods ended September
30, 2006, are not necessarily indicative of the results for a full-year period.
It is suggested that these condensed financial statements be read in conjunction
with the financial statements and notes thereto included in the Company's annual
audited financial statements for the year ended December 31, 2005.
1. Business Organization and Reorganization
Chilco River Holdings, Inc. (CRH, or the Company) was incorporated in the
State of Nevada on May 8, 2003. The Company acquired a 100% interest in 16
mineral claim units located in British Columbia, Canada in November 2003.
After the completion of a preliminary exploration report on the claim, the
Company has suspended any mineral exploration effort. The Company abandoned
these properties in 2005.
Bruce Grupo Diversion SAC (BGD) was formed on March 1, 1996 and registered
at the Registry for Legal Persons of Lima, Peru on April 28, 1996. BGD
owned a fourteen-story building and a seven-story adjacent structure that
are operated as a casino and a hotel (the Bruce Hotel/Casino). Bruce
Hotel/Casino is licensed to operate slot machines, a night club,
discotheques, and a restaurant. As of February 2005, the casino consisted
of traditional gaming tables (blackjack, roulette, craps and poker) in the
second floor (the gaming floor) of the main building and of about 220 slot
machines in the ground floor (the slot room).
Kubuk International, Inc. (KII) is a California corporation and was
incorporated on January 7, 2002. The majority shareholders of KII also
control 99% of total voting stock of BGD.
Kubuk Investment S.A.C. (KISAC) was formed in year 2001 by the majority
shareholders of KII in Peru. KII's majority shareholders also formed Kubuk
Gaming S.A.C. (KGSAC) in year 2005 in Peru.
Starting on August 4, 2001, BGD and KISAC entered into a series of sale and
purchase agreements (Sale and Purchase Agreements) of the hotel assets and
certain casino properties owned and operated by BGD for purpose of
transferring these properties to KISAC. Total consideration for all Sale
and Purchase Agreements was in the amount of S/. 62,970,744 (US$19,357,745
using spot rate of 3.253:1 on May 21, 2005). On May 21, 2005, all assets
subject to the scope of the sale and purchase agreements were transferred
to and received by KISAC, which then commenced to carry on the hotel
lodging businesses of Bruce Hotel/Casino. The only assets that were
transferred to KISAC are the assets as listed under "Property, Furniture,
and Equipment" on the balance sheet. All other assets and liabilities
continue to belong to BGD and will subsequently be distributed to its
current shareholder. The accounting treatment used by KISAC to record the
transfer of the assets followed the guidance for transactions between
entities under common control as described in FAS 141, Business
Combinations. This standard requires that the receiving entity use the
carrying amount of the assets of the transferring entity. Therefore, no
fair market value adjustments were made to the transferred assets.
Furthermore, in accordance with Article 11-01(d) of Regulation S-X, this
transaction was treated as a business acquisition since the
revenue-producing activity remained generally the same as before the
transaction. Specifically, KISAC retained the following: physical
facilities, employee base, customer base, operating rights, operation
techniques, and trade name.
The gaming floor of Bruce Hotel/Casino has been temporarily closed for
renovation since March 2005. During the renovation, BGD continued to
operate slot machines in the casino until July 1, 2005, when MINCETUR, the
gaming authority of Peru, issued gaming licenses to KGSAC. KGSAC then took
over the slot machine operations and conducts all other gaming activities
of Bruce Hotel/Casino until the renovation project is completed. In
anticipation of the start of the planned renovation, the Company suspended
the slot room operation and closed the restaurant to the general public in
November 2005. As of December 31, 2005, the Company carried out only the
hotel lodging operations.
4
CHILCO RIVER HOLDINGS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
Unaudited
On June 15, 2005, KII and the shareholders of KISAC and KGSAC entered into
an Agreement and Plan of Reorganization (the Reorganization Agreement),
under which KII issued 50,920,000 shares of common stock to the
shareholders of KISAC and KGSAC in exchange for their entire ownership
holdings of KISAC and KGSAC. As of June 30, 2005, both KISAC and KGSAC were
100% owned by KII.
On July 15, 2005, CRH entered into a Share Exchange Agreement with KII and
certain representatives of its shareholders. Under the terms of the Share
Exchange Agreement, CRH agreed to acquire all of the issued and outstanding
capital stock of KII from KII's shareholders. On August 3, 2005, CRH
completed the acquisition of KII in accordance with the terms of the Share
Exchange Agreement by issuing 19,250,000 Exchange Shares to shareholders of
KII as consideration. KII had 51,000,400 shares of common stock issued and
outstanding at the time of acquisition. Its shareholders received
0.3749970588 Exchange Shares for each share of KII common stock tendered.
In connection with the closing of the Share Exchange, the founding
shareholder and two former officers and directors of CRH agreed to
contribute an aggregate of 3,964,000 shares of the CRH common stock to the
Company as an additional capital contribution. The shares were cancelled
effective as of August 3, 2005. See Note 6 for information regarding the
related escrow agreements and share contribution agreement.
The Company established a software development center in Shenzhen, China in
April 2006 for the purposes of developing an online poker software and
other devices related to online gaming activities. The Company intends to,
after successful software development and testing, license the online
gaming software to third parties qualified to conduct licensed online
gaming activities outside of the United States in jurisdictions where
on-line gaming is legal. The Company has applied to the local government in
China for the foreign business branch office status for its Chinese
software development center.
On July 5, 2006, the Company effected a two-for-one split by way of stock
dividend. Each shareholder of record on July 5, 2006 at 5:00 p.m. (eastern
time) received one additional share of common stock. On July 5, 2006, there
were 21,840,667 shares of common stock issued and outstanding. After giving
effect to the stock dividend, the Company had 43,681,334 shares of common
stock outstanding. These financial statements give retroactive effect to
the stock dividend.
2. Significant Accounting Policies
(a) Principles of Consolidation
The financial statements include the accounts of CRH and KII, as well as
the accounts of the latter's wholly-owned Peruvian subsidiaries, KISAC and
KGSAC, formerly Bruce Grupo Diversion SAC. All significant inter-company
balances and transactions have been eliminated in consolidation.
(b) Use of Estimates
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles in the United States requires
management of the Company to make certain estimates and assumptions. These
estimates and assumptions affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the
date of the consolidated financial statements, as well as the reported
amounts of revenue and expenses during the reporting period. Actual results
could differ from those estimates.
(c) Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less when purchased to be cash equivalents.
(d) Accounts Receivable
Trade receivables, including casino and hotel receivables, are typically
non-interest bearing and are initially recorded at cost. Accounts are
written off when management deems the account to be uncollectible.
Recoveries of accounts previously written off are recorded when received.
An estimated allowance for doubtful accounts is maintained to reduce the
Company's receivables to their carrying amount, which approximates fair
value. The allowance is estimated based on specific review of customer
accounts as well as historical collection experience and current economic
and business conditions.
5
CHILCO RIVER HOLDINGS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
Unaudited
(e) Revenue Recognition and Promotional Allowances
Casino revenue is the aggregate net difference between gaming wins and
losses, with liabilities recognized for funds deposited by customers before
gaming play occurs ("casino front money") and for chips in the customers'
possession ("outstanding chip liability"). Hotel, food and beverage,
entertainment and other operating revenues are recognized as services are
performed.
In accordance with industry practice, the retail value of accommodations,
food and beverage, and other services furnished to guests without charge is
included in gross revenue and then deducted as promotional allowances.
There was no promotional allowance for the nine months ended September 30,
2006 as all casino and slot machine operations are temporarily suspended
for renovation.
(f) Income Taxes
Provisions for income taxes are based on taxes payable or refundable for
the current year and deferred taxes on temporary differences between the
amount of taxable income and pretax financial income and between the tax
basis of assets and liabilities and their reported amounts in the financial
statements. Deferred tax assets and liabilities are included in the
financial statements at currently enacted income tax rates applicable to
the period in which the deferred tax assets and liabilities are expected to
be realized or settled as prescribed in Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes." As changes in tax
laws or rate are enacted, deferred tax assets and liabilities are adjusted
through the provision for income taxes. A valuation allowance is recognized
if it is more likely than not that some portion or all of the deferred tax
asset will not be realized. Deferred income tax asset and liability
balances are netted, as applicable, when they represent deferred amounts
within the same taxing jurisdiction.
(g) Basic and Diluted Earnings per Share
Basic earnings per share of common stock were computed by dividing income
available to common stockholders, by the weighted average number of common
shares outstanding, net of common stock held in the treasury for the year.
Diluted earnings per share were computed using the "treasury stock method"
under SFAS No. 128 "Earnings per Share."
(h) Inventories
Inventories are presented at adjusted cost or market value, whichever is
lower. Cost is established based on either the first-in, first out
assumption or, in certain cases, specific identification method.
(i) Property, Plant and Equipment
Property, plant and equipment are stated at the historical cost.
Depreciation is calculated based on straight-line method over the
properties' estimated useful lives, which range from 5 to 7 years for
machinery and equipment and 39 years for building and building
improvements. Betterment or improvements to properties are capitalized to
properties, plant and equipment accounts. Repairs and maintenance costs are
charged to expense accounts.
Certain long-lived assets of the Company are reviewed at least annually as
to whether their carrying values have become impaired in accordance with
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets." Management considers assets to be impaired if the carrying value
exceeds the undiscounted projected cash flows from operations. If
impairment exists, the assets are written down to their fair value or the
projected discounted cash flows from related operations.
(j) Concentration of Credit Risk
The Company maintains substantially all of its day-to-day operating cash
balances with Peruvian commercial banks and a California bank. Deposits
with the California bank are insured by Federal Deposit Insurance
Corporation (FDIC) up to $100,000. As of September 30, 2006, the Company
had an exposure in the amount of $332,232 that exceeded the FDIC insurance
coverage. The banks or financial institutions in Peru may not provide
sufficient deposit insurance coverage on the Company's cash positions.
6
CHILCO RIVER HOLDINGS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
Unaudited
(k) Shares-Based Compensation
In December 2004, the Financial Accounting Standards Board (FASB) issued
SFAS No. 123R, "Share Based Payment." SFAS 123R is a revision of SFAS No.
123 "Accounting for Stock-Based Compensation," and supersedes APB Opinion
No. 25, "Accounting for Stock Issued to Employees" and its related
implementation guidance. SFAS 123R establishes standards for the accounting
for transactions in which an entity exchanges its equity instruments for
goods or services. It also addresses transactions in which an entity incurs
liabilities in exchange for goods or services that are based on the fair
value of the entity's equity instruments or that may be settled by the
issuance of those equity instruments. SFAS 123R focuses primarily on
accounting for transactions in which an entity obtains employee services in
share-based payment transactions. SFAS 123R does not change the accounting
guidance for share-based payment transactions with parties other than
employees provided in SFAS 123 as originally issued and Emerging Issues
Task Force Issue No. 96-18, "Accounting for Equity Instruments That Are
Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services." SFAS 123R does not address the accounting for
employee share ownership plans, which are subject to AICPA Statement of
Position 93-6, "Employers' Accounting for Employee Stock Ownership Plans".
SFAS 123R requires a public entity to measure the cost of employee services
received in exchange for an award of equity instruments based on the
grant-date fair value of the award (with limited exceptions). That cost
will be recognized over the period during which an employee is required to
provide service in exchange for the award - the requisite service period
(usually the vesting period). SFAS 123R requires that the compensation cost
relating to share-based payment transactions be recognized in the financial
statements. That cost will be measured based on the fair value of the
equity or liability instruments issued. The scope of SFAS 123R includes a
wide range of share-based compensation arrangements including share
options, restricted share plans, performance-based awards, share
appreciation rights, and employee share purchase plans. The Company has
adopted the provisions under SFAS 123R as of March 31, 2006. The adoption
of this standard is not expected to have a material effect on the Company's
results of operations or financial position
(l) Impact of New Accounting Standards
In June 2003, the Securities and Exchange Commission ("SEC") adopted final
rules under Section 404 of the Sarbanes-Oxley Act of 2002 ("Section 404").
Commencing with the Company's Annual Report for the year ending December
31, 2007, the Company is required to include a report of management on the
Company's internal control over financial reporting. The internal control
report must include a statement of management's responsibility for
establishing and maintaining adequate internal control over financial
reporting for the Company; of management's assessment of the effectiveness
of the Company's internal control over financial reporting as of year end;
of the framework used by management to evaluate the effectiveness of the
Company's internal control over financial reporting; and that the Company's
independent accounting firm has issued an attestation report on
management's assessment of the Company's internal control over financial
reporting, which report is also required to be filed as part of the Annual
Report on Form 10-KSB.
In December 2005 the SEC's advisory committee on small business recommended
that the SEC allow most companies with market values of less than $700
million to avoid having their internal controls certified by auditors. The
advisory committee recommended that most companies with market
capitalization under $100 million be exempted totally. It further
recommended that companies with market capitalization of $100 million to
$700 million not face audits of internal controls. Some companies with
large revenues but low market values would still be required to comply with
the act. The Commissioner of the SEC has rejected the recommended exemption
proposed by the advisory committee.
The FASB issued FASB Statement No. 154 (SFAS 154) which replaces APB
Opinion No. 20, Accounting Changes, and FASB Statement No. 3, Reporting
Accounting Changes in Interim Financial Statements, and changes the
requirements for the accounting for and reporting of a change in accounting
principle. It is not believed that this will have an impact on the Company
in the foreseeable future as no accounting changes are anticipated.
(m) Reclassifications
Certain amounts have been reclassified in the prior year's financial
statements to conform to the current year's presentation.
(n) Value Added Tax Recoverable
According to sales tax laws in Peru, the Peruvian Subsidiaries are allowed
to offset sales tax paid to vendors with sales tax received from their
customers, prior to remitting the sales tax received to the local
jurisdiction. The asset balance represents sales tax paid to vendors that
is expected to be offset against future sales tax received during the one
year period following the balance sheet date.
7
CHILCO RIVER HOLDINGS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
Unaudited
(o) Dividends
The Company accrues for declared dividends which are not yet paid. As of
the balance sheet date, there were no dividends which were declared and
unpaid. All dividends occurred prior to the date of the Share Exchange
Agreement.
3. Foreign Currency Transactions
The Company conducts its gaming business at Bruce Casino in US Dollars and
the Peruvian Nuevo Soles. The hotel and other business activities are
operated using both US Dollars and the Nuevo Soles. The functional currency
of the Peruvian subsidiaries' is the Nuevo Soles, whereas the functional
currency of the US parent is the US dollar. Account balances on the balance
sheet are translated into US Dollars equivalents using the spot rate of
3.3428 and 3.3782:1 on September 30, 2006 and 2005, respectively, while the
results of operations are translated into US Dollars equivalents using the
weighted average exchange rates for each nine-month period presented.
4. Related Party Transactions
As of June 30, 2006, the Company made a short-term business loan in the
amount of $60,000 to Szchuan Enterprises, Ltd., a Canadian Corporation. The
loan is secured by a promissory note for a term of six-months. The loan
bears an interest rate of 4.39% per annum and matured on August 9, 2006.
Yong Yang is an affiliate of Szchuan Enterprises, Ltd. and a director of
CRH. The Company received the full payment of 61,317 for the principal
balance of the loan and related interest on July 19, 2006.
The Company incurred over $33,594 of cash expenditures, including amounts
capitalized as computer equipments and office furniture, at its software
development center in Shenzhen, China during the third quarter of 2006. All
of these third quarter Shenzhen expenditures have been advanced by a
director of the Company. No interest has been accrued for the amount
advanced. The Company has paid back the amount advanced by the director, as
well as $21,867 that was advanced by the same Director in the quarter ended
June 30, 2006, in October 2006.
5. Issuance of Common Stock and Warrants
On December 17, 2005, the Board of Directors authorized an initial direct
private placement offering of Units at $0.75 per Unit under the terms of a
Unit Purchase Agreement. Each Unit consisted of one share of common stock,
and a Class A Warrant exercisable at $1.00 per share for one year from the
date of closing.
Under the terms of the Unit Purchase Agreement, the Company is required to
use $1,000,000 from proceeds from the offering to renovate the casino floor
of the Bruce Hotel and Casino and $1,000,000 for marketing and business
development. The Company agreed not to offer and sell shares of common
stock or common stock equivalents for a period of 120 days following the
effectiveness of the registration for such Units, except for certain
specified transactions, including an offer and sale of up to 4,000,000
shares of common stock at $0.75 per share. The private placement was made
to non-U.S. persons in off-shore transactions in reliance upon the
exemption from registration available under Rule 903 of Regulation S of the
Securities Act and one accredited investor in the United States pursuant to
an exemption available under Section 4(2) of the Securities Act. The
private placement was closed in January 2006. The Company issued 2,731,334
Units as a result of the private placement and raised aggregate gross
proceeds in the amount of $2,048,500. 2,731,334 shares of common stock were
issued on February 14, 2006 by the Company.
On July 5, 2006, the Company's board of directors authorized and approved a
2 for 1 forward stock split of its issued and outstanding shares of common
stock, par value $0.001 per share, by way of share dividend. Immediately
prior to the stock dividend, the Company had 21,840,667 shares of common
stock issued and outstanding. After giving effect to the stock dividend,
the Company had 43,681,334 shares of common stock issued and outstanding.
As of July 13, 2006 the Company has completed an offer and sale of 666,666
units, at a price of $0.75 dollar per unit, each unit consisting of one
share of post-split common stock, par value $0.001, and one
non-transferable share purchase warrant which entitles the purchaser to
subscribe for one additional post-split common share at a price of $0.75
dollar per share by the first anniversary of the date of issuance. The
Company intends to raise additional financing on similar terms or may
pursue other debt or equity financing.
8
CHILCO RIVER HOLDINGS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2006
Unaudited
6. Cancellation of Shares
During the third quarter of the year ended December 31, 2005, we issued a
notice of default under the terms of the Escrow Agreement related to an
aggregate of 4,000,000 shares of common stock placed into escrow in
connection with the Share Exchange. Kubuk International, Inc. had
obligations to Nefilim Associates, LLC, a Massachusetts limited liability
company, T Morgan LLC, a Delaware limited liability company, and Sean
Sullivan to issue capital stock of Kubuk or an entity acquired by or
acquiring Kubuk upon satisfaction of certain conditions under the terms of
Consulting Agreements dated May 9, 2005 with respect to Sean Sullivan, May
19, 2005 with respect to Nefilim Associates, LLC and June 1, 2005 with
respect to T Morgan LLC. Under the terms of the Share Exchange, the
shareholders of Kubuk agreed to place the shares into escrow to satisfy the
obligations of Kubuk under the Consultant Agreements.
We failed to raise a total of $5,000,000 in financing within thirty days of
receiving the Kubuk audited financial statements, which resulted in a the
release of the escrowed shares. The 4,000,000 shares were tendered to our
transfer agent for cancellation and cancelled during the quarter ended
March 31, 2006.
7. Licensing Rights
On July 7, 2006 (the "Effective Date") the Company entered into a License
Agreement (the "License Agreement") with K.C. Technology, a Hong Kong
corporation ("Licensor"), under which the Company acquired from Licensor a
worldwide exclusive and perpetual license to use Licensor's technology to
manufacture, market and distribute Licensor designed slot machines and
other gaming products, including an electronic data transfer device
trademarked Smartbook (collectively, the "Technology"). The Technology
includes all technology, tools, design, components, hardware, software, and
specification necessary for the design and manufacturing of slot machines
and Smartbook and all associated patents, trademarks, copyrights, trade
secrets, know-how.
The Company agreed to pay Licensor a cash license fee of $2,500,000, of
which, $500,000 was paid by July 15, 2006, and the balance will be paid in
four equal installments of $500,000 (the "Installment Payments") each at
the end of January and June, respectively, during the next two years. The
Company also agreed to pay Licensor a licensee fee in common stock of
6,000,000 shares of restricted post-split common stock, par value $0.001,
of which 3,000,000 were issued within seven days of the Effective Date,
1,500,000 to be issued on the first anniversary of the date of the
Effective Date, and 1,500,000 to be issued on the second anniversary of the
Effective Date (the "Installment Shares"). The Company granted Licensor
registration rights and undertook to use commercially reasonable efforts to
file a registration statement with the United States Securities Commission
within 90 days of the Effective Date to register for resale the first
3,000,000 shares common stock issued to Licensor under the License
Agreement. The Company also agreed to pay a royalty of $20.00 for each
Smartbook sold by the Company under the License Agreement.
The Company recorded the value of licensing rights acquired as intangible
assets under SFAS No. 142, Goodwill and OtherIntangible Assets. The
majority portion of licensing rights acquired are not subject to
amortization. However, 10% of the total value of the licensing rights is
identified as service contract that is amortizable over the 2-year term of
the license agreement. Total valuation of the rights acquired from KC
Technology is determined to be $9,262,100, which includes (1) the $500,000
payment made on July 15, 2006; (2) the fair market value of the 3,000,000
shares issued to KC Technology on the Effective Date, using the closing
price quoted at $1.27 per share; (3) discounted present value of the
Installment Payments with imputed interest rate at 12$ per annum; and (4)
fair value of the Installment Shares, calculated based on the present value
of estimated share prices at the future issuance dates. The estimated share
prices at the issuance dates are assumed to be same as $1.27 per share. The
present value of the share prices are also discounted with imputed interest
rate of 12% per annum. Total discount, which will be amortized and
recognized as interest expense at the future payment dates, on the
Installment Payments as of September 30, 2006 was $267,447.
8. Subsequent Events
On August 23, 2006, the Company received $500,000 for the issuance of
500,000 shares of common stock pursuant to an exercise of warrants issued
in conjunction with the December 17, 2005 Unit Purchase Agreement.
9
Item 2. Plan of Operation.
All statements other than statements of historical or current facts
included in this report on Form 10-QSB or incorporated by reference herein,
including, without limitation, statements regarding our future financial
position, business strategy, budgets, projected costs and plans and objectives
of management for future operations, are forward-looking statements.
Forward-looking statements generally can be identified by the use of
forward-looking terminology such as "may", "will", "expect", "intend",
"estimate", "anticipate", "believe" or "continue" or the negative thereof or
variations thereon or similar terminology. These statements involve known and
unknown risks, uncertainties and other factors that may cause our actual results
and performance to be materially different from any future results or
performance expressed or implied by these forward-looking statements. These
factors include, those discussed under the caption "Risk Factors" attached as
Exhibit 99.1 to the Company's SB-2/A Registration Statement, filed with the
Securities and Exchange Commission on May 19, 2006, and incorporated herein by
reference, as well as the following:
o the impact of general economic conditions in the Peru;
o industry conditions, including competition;
o business strategies and intended results;
o our ability to integrate acquisitions into our operations and
management;
o our ability to market, sell, lease or profit-share slot machines under
our licensing agreement;
o risks associated with the hotel industry and real estate markets in
general;
o the impact of terrorist activity or war, threats of terrorist activity
or war and responses to terrorist activity on the economy in general
and the travel and hotel industries in particular;
o travelers' fears of exposure to contagious diseases;
o legislative or regulatory requirements;
o access to capital markets; and
o other factors beyond our control.
Although we believe that these statements are based upon reasonable
assumptions, we can give no assurance that our goals will be achieved. Given
these uncertainties, prospective investors are cautioned not to place undue
reliance on these forward-looking statements. These forward-looking statements
are made as of the date of this report. We assume no obligation to update or
revise them or provide reasons why actual results may differ.
"We", "us", "our", the "Company" and the "Registrant" in this report refers
to Chilco River Holdings Inc. and its subsidiaries, as the context requires.
OVERVIEW
We, Chilco River Holdings, Inc., through our wholly-owned subsidiaries, own
all of the assets of and operate the Bruce Hotel and Casino. The Bruce Hotel and
Casino is located Jiron Francisco Bolognesi # 171-191 in the Miraflores
District, Province and Department of Lima, Peru, approximately 30 minutes from
Jorge Charvez International Airport in the heart of Miraflores. The Bruce Hotel
and Casino is a "destination" hotel and casino location for visitors traveling
to the Republic of Peru, and we cater to local and foreign visitors, including
visitors from the People's Republic of China. The Bruce Hotel and Casino
business consists of a hotel, restaurants, a gaming casino and real property. We
acquired the Bruce Hotel and Casino in connection with a Share Exchange
transaction with the shareholders of Kubuk International, Inc., which we refer
to in this report as Kubuk, on July 15, 2005. The Bruce Hotel and Casino is a
full-service hospitality facility with standard and premium lodging
accommodations (rooms and suites). In addition, the hotel encompasses several
dining facilities and a full-featured Gambling Casino with traditional gaming
tables and slot machines.
Prior to signing the Share Exchange Agreement with Kubuk International, we
developed a plan to expand, renovate and modernize the current facilities of the
Bruce Hotel and Casino and temporarily suspended the operation of the gaming
room in February 2005 and operation of the restaurant and slot room in November
2005. Since that time, we have intended to raise capital to fund the expansion,
renovation and modernization of the Bruce Hotel and Casino.
10
In April 2006, we established a software development office in Shenzhen,
China to develop an internet-based computer application for potential future
licensing to third parties, who can legally operate licensed internet gaming
websites. Internet gaming is illegal in the United States, and we intend to
license our software, if developed, only to licensed internet gaming companies
which have established controls to operate legally. Internet gaming is subject
to substantial regulation and we cannot assure you that we will be able to
develop or license our software.
In light of the passage of the Unlawful Internet Gambling Enforcement Act
of 2006, which is signed by President Bush on October 13, 2006, we may have to
license our developed software to companies that are not subject to the
jurisdiction of the United States and operate in foreign markets including, but
not limited to, South America. This is expected to limit the potential users of
our software, if we are successful in our development efforts.
In July 2006, we acquired the exclusive world-wide license to manufacture
slot machines based on technology developed by K.C. Technology. We are in the
process of marketing these slot machines to operators of casinos in South
America. We intend to raise capital to manufacture machines beginning in the
fourth quarter of 2006 or early 2007. As of September 30, 2006, we have received
slot machine profit-sharing contracts from a number of Peruvian slot parlor
operators for the lease of more than 300 new slot machines. These contracts
allow us to share the net earnings of the slot machines that we lease out in
50%-50% or 60%-40% ratio. Because of lack of funding to mass produce the
machines, we have only delivered 22 units of new slot machine to these leasing
customers as of September 30, 2006. We do not expect to generate any material
revenue from our slot machine business until we successfully raise additional
capital.
We maintain our registered agent's office at 6100 Neil Road, Suite 500,
Reno, Nevada 89511, and an office at the Bruce Hotel and Casino at Jiron
Francisco Bolognesi # 171-191 in the Miraflores District, Province and
Department of Lima. Our executive offices are located at 355 Lemon Ave., Suite
C, Walnut, CA 91789, and our phone number is (909) 869-7933.
HISTORY
We were incorporated on May 8, 2003 under the laws of the State of Nevada.
OUR ABANDONED MINERAL EXPLORATION BUSINESS
We were previously engaged in the business of acquiring mineral exploration
properties. We purchased all right, title and interest in one unpatented claim
in the New Westminster Mining Division of the Province of British Columbia,
known as the PEG Claim under an agreement dated November 3, 2003. We were unable
to secure funding to conduct additional exploration work on the PEG Claim and we
suspended work on the PEG Claim. Our management began exploring other business
opportunities at the beginning of 2005. After we acquired our interest in the
Bruce Hotel and Casino, we abandoned the PEG Claim by giving notice to the
property owner to terminate the agreement in August 2005. We are no longer
engaged in the mineral exploration business. We no longer own any mineral
exploration properties.
EXPLANATORY NOTE ON FINANCIAL STATEMENTS
The condensed consolidated financial statements included in this quarterly
report on Form 10-QSB have been prepared without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission. Certain information
and disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted. In
the opinion of management, the accompanying interim financial statements contain
all adjustments, consisting of normal recurring accruals, necessary for a fair
presentation of our financial position as of September 30, 2006, and our results
of operations and cash flows for the quarter ended September 30, 2006. The
results of operations for the three- and nine-month periods ended September 30,
2006 are not necessarily indicative of the results for a full-year period. It is
suggested that these condensed financial statements be read in conjunction with
the financial statements and notes thereto included in the Company's Annual
Audit for the year ended December 31, 2005.
Following the Share Exchange, Kubuk International, Inc. became a
wholly-owned subsidiary of Chilco. Prior to the Share Exchange, Chilco had no
substantial assets and only nominal operations. Accordingly, the transaction is
treated as a reverse acquisition of Chilco and has been accounted for as a
recapitalization rather than a business combination. The historical financial
statements of Kubuk International, Inc. and its predecessor Bruce Grupo
Diversion S.A.C. are deemed to be the historical statements of the Chilco River
Holdings, Inc.
Due to the Agreement and the significance of the Company's operations, the
"development stage" status of Chilco is no longer in effect. The development
stage disclosures are no longer required in the Company's current status.
Historical results of operations for Chilco River Holdings, Inc. may differ
materially from future results.
11
PLAN OF OPERATION
HOSPITALITY BUSINESS
We intend to continue the operations of the Bruce Hotel and Casino over the
next twelve months and beyond. The Bruce Hotel and Casino is located at Jiron
Francisco Bolognesi # 171-191 in the Miraflores District, Province and
Department of Lima, approximately 30 minutes from Jorge Charvez International
Airport in the heart of Miraflores. The Bruce Hotel and Casino is a
"destination" hotel and casino location for visitors traveling to the Republic
of Peru, including tourists from the People's Republic of China. Prior to
closing, the casino and slot room were also popular with local residents in
Peru.
The Bruce Hotel & Casino is a full service hospitality facility with
standard and premium lodging accommodations (rooms and suites). In addition, the
hotel is expected to encompass several dining facilities and a full featured
Gambling Casino with traditional gaming tables and slot machines.
HOTEL
The Bruce Hotel & Casino is a 60 room full service hospitality facility
with standard and premium lodging accommodations (rooms and suites). The
amenities include guest suites and rooms, sauna, air conditioning, mini-bar,
telephone, hair dryer, wake-up service/alarm-clock, radio, satellite TV and safe
deposit boxes. The hotel can accommodate 200 guests. In addition, prior to
closing for renovations, the hotel offered a gaming room, meeting/banquet
facilities and a barber/beauty shop. The room fare ranges from $70 for a
standard room to $95 for an executive suite.
The Miraflores District is one of the most important financial and
commercial centers of Lima and approximately 20 minutes from the historical
center of Lima. The Bruce Hotel and Casino is supported by urban infrastructure,
such as asphalt roads, concrete sidewalks, city water and sewage, public
electricity and garbage collection and phone lines. The Bruce Hotel and Casino
is located on commercial property and is located on a major thoroughfare. Prior
to closing for renovations, our casino and restaurants attracted local residents
in Lima, Peru, and we believe a significant amount of our historical gaming
revenue was derived from local residents. We have a historic occupancy rate of
our hotel averaging approximately 70% during 2004 and 2005. Our occupancy rate
is not generally subject to seasonal fluctuation. The following table sets forth
the occupancy rate for our hotel during 2005 and the first nine months of 2006:
Hotel Average Occupancy Rate
Month 2005 2006
--------------------------------------------------------------
January 52.37 % 64.88 %
February 78.75 % 68.31 %
March 77.19 % 70.85 %
April 69.57 % 65.10 %
May 63.11 % 71.51 %
June 83.68 % 68.85 %
July 76.02 % 74.26 %
August 67.27 % 69.21 %
September 67.34 % 65.33 %
October 71.46 %
November 65.93 %
December 82.67 %
RESTAURANTS
Prior to closing for renovations, the Bruce Hotel & Casino featured two
full service restaurants serving Chinese and international cuisine. The
restaurants seated 200 guests, respectively. The Bruce Hotel & Casino holds a
retail liquor license. The restaurants were closed to the public for renovation
in November 2005, but continue to serve meals to hotel guests.
12
GAMING CASINO
Prior to closing for renovations, the gaming casino was a full featured
casino with 20 traditional gaming tables (blackjack, roulette, craps and poker)
and approximately 220 slot machines. The casino was located on the second floor
of the Hotel and is approximately 622 square meters. Once renovations are
completed, the casino will feature two full bars, VIP area and accommodate up to
300 guests.
We hold two gaming licenses for the operation of our casino and slot room,
which were granted in 2005. These gaming licenses are valid for five years.
The gaming casino is expected to operate under a gaming license issued to
Kubuk Gaming SAC by the Republic of Peru. The gaming casino is currently closed
for remodeling and is scheduled to reopen to the public in the first half of
2007, assuming adequate financing is available.
SLOT ROOM
The slot room was closed for renovation in November 2005. The slot room was
located on the first floor of the Hotel next to the lobby. Once renovations are
complete, the slot room is expected to feature 300 slot machines and accommodate
approximately 350 guests. As of September 30, 2006, we have leased out over 130
slot machines that are retired from the slot room to other local slot parlor
operators under various lease terms and profit-sharing agreements. We expect to
lease out the remaining old slot machines in the next few months. These
operating leases vary in terms and average $10 per machine per day in net rental
income. We believe the slot machine rental income should continue at least
through the end of year 2007.
REAL PROPERTY
Kubuk owns all of the real property and assets used in the operation of the
Bruce Hotel and Casino. The property consists of one seven-story building and
one fourteen-story building that are physically connected and have been
configured for use as a hotel, casino and office space. Kubuk uses the office
space in connection with its business and does not rent office space to third
parties. The property also includes a parking garage. Kubuk owns all of the
fixtures, improvements, systems, furniture, gaming machines and gaming tables
and the other contents currently used in the business of the Bruce Hotel and
Casino.
The renovation of our casino, slot room and restaurants are expected to be
completed in first half of 2007, assuming financing is available. We expect to
raise approximately $3.5 million to complete the renovations.
Historically, our operating revenue was derived from the following aspects
of our business, expressed as percentages relative to total revenue:
3rd Qtr 2006 2nd Qtr 2006 1st Qtr 2006 Year 2005 Year 2004
-------------------------------------------------------------------------
Casino/Leasing 27 % 28 % 16 % 58 % 82 %
Rooms 67 % 66 % 77 % 25 % 9 %
Food & Beverage 5 % 6 % 7 % 11 % 5 %
Other 0 % 0 % 0 % 6 % 4 %
Total 100 % 100 % 100 % 100 % 100 %
GAMING DEVICES AND SOFTWARE
In July, 2006, we entered into an exclusive world-wide license agreement to
license technology to manufacture slot machines developed by K.C. Technology, a
Hong Kong corporation. We issued K.C. Technology 3,000,000 shares of common
stock and paid an initial licensing fee of $500,000 in July 2006. We also agreed
to pay K.C. Technology an additional $2 million in four equal installments
payable every six months beginning January 31, 2007, and to issue K.C.
Technology 3,000,000 additional shares of common stock in two 1,500,000 share
installments on the first and second anniversary. We intend to raise capital to
manufacture and sell, lease or profit-share slot machines beginning in the
fourth quarter of 2006 or early 2007. We raised $500,000 to pay the initial
license fee by issuing 666,666 units at $0.75 per unit in July 2006. Each unit
consisted of one share of common stock and one share purchase warrant
exercisable to acquire one share of common stock at $0.75 per share for one
year. We anticipate that it will require at least $2.2 million to fulfill the
production of 400 slot machines immediately.
The Company had produced 22 "Kubuk" brand slot machines with the KC
technology and exhibited these new Kubuk slot machines in a gaming industry
trade show in Lima, Peru on August 3, 2006. As a result of the exhibition of
these Kubuk slot machines in the trade show, we have received slot machine
profit-sharing contracts from nine Peruvian slot parlor operators for 300 new
slot machines. These contracts allow us to share the net earnings of the slot
machines that we lease out in 50%-50% or 60%-40% ratio. Because of
13
lack of funding to mass produce the machines, we have only delivered 22 Kubuk
slot machines to these leasing customers as of September 30, 2006.
In April 2006 we started a software development project in Shenzhen, China
by contracting with several programmers to develop an internet based computer
gaming application for potential future licensing to third parties. We
anticipate that we will spend approximately $150,000 on software development
during the next 12 months, assuming adequate financing is available. The success
of this software development project depends heavily on our ability to raise
sufficient capital or borrowing from debt to fund the project through its
feasibility test stage. If, for any reason, we have difficulties raising
financial resources to complete the casino and hotel renovation, we will have to
delay or suspend the software development project.
SATISFACTION OF CASH OBLIGATIONS FOR THE NEXT TWELVE MONTHS.
Aside from the cash requirements for the Bruce Casino renovation projects,
we believe that the cash flow from our hotel and the rental of the old slot
machines will not be sufficient to meet our minimum operating cash requirements
to continue as a going concern for the next twelve months. We intend to use a
combination of available cash and additional financing to meet obligations over
the next twelve months, including the cost of renovation of the casino and
restaurant at an estimated amount of $3,500,000. As of September 30, 2006, we
raised approximately $3,000,000, we allocated $1,000,000 of the proceeds of the
offering to renovate our casino floor and $1,000,000 toward marketing efforts to
promote our business and $500,000 as the initial payment to KC Technology under
a license agreement. We intend to secure additional financing in the amount of
$7,700,000 in one or more transactions as soon as practicable. The required
financing includes funding for (1) Casino and hotel renovation in total budgeted
amount of $3,500,000; (2) voluntary and statutory cash reserves for the casino
in the amount of $1,500,000, (3) the $500,000 installment payable to KC
Technology by January 31, 2007; and (4) $2,200,000 to pay for the production of
approximately 400 new Kubuk Slot Machines.
These financing transactions may involve collateralized borrowing, equity
securities offerings, or a combination of both. We intend to use the proceeds
from these transactions, if any, to expand, renovate and modernize the current
facilities of the Bruce Hotel and Casino and to capitalize our slot machine
business. We expect to fund the remaining cash requirement of the renovation and
acquisition of new equipment through additional capital infusions, including the
proceeds from the exercise of the Class A warrants, if any, and future
offerings. If we are unable to raise the funds to complete the renovations in
debt or equity transactions, we intend to fund completion of the renovations
through cash flow from operations and reopen the casino in stages. We currently
have no firm commitments with respect to additional financing, and cannot assure
you that such financing will be available.
We received $500,000 during the quarter ended September 30, 2006 as a
result of exercise of 500,000 warrants in December, 2005.
SUMMARY OF ANY PRODUCT RESEARCH AND DEVELOPMENT THAT WE WILL PERFORM FOR
THE TERM OF THE PLAN.
EXPECTED PURCHASE OR SALE OF PLANT AND SIGNIFICANT EQUIPMENT.
Prior to the completion of renovation and reopening of the gaming room, we
will have to acquire additional gaming equipment and hotel furniture. Estimated
costs of the acquisition of equipment, furniture, and improvements are as
follows:
Slot Machines $1,400,000
Other casino equipment $1,080,000
Building improvements and furniture $ 800,000
Restaurant and lounge $ 220,000
-----------
Total $3,500,000
The total slot machine cost includes the purchase of 210 Kubuk machines and
31 used machines. The cost for 100 units of other brands of machines was not
factored in because all units are expected to be financed without upfront costs.
We acquired exclusive rights to manufacture and sell cost-competitive slot
machines. We intend to manufacture and distribute the slot machines in central
and south American markets beginning in early 2007, assuming adequate financing
is available. We do not plan to establish our own manufacturing facility to
produce Kubuk gaming machines. Instead, we plan to contract our manufacturing
with a third-party manufacturer. We anticipate we will require at least $2.2
million additional financing for our slot machines business in the next 12
months.
SIGNIFICANT CHANGES IN NUMBER OF EMPLOYEES.
As of September 30, 2006, we had approximately 50 employees. We anticipate
that we will hire approximately 50 to 70 employees prior to reopening our
casino, slot room and restaurant in 2007, assuming adequate financing is
available.
14
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2006 AND
2005.
The Company had revenues of $422,640 ($1,097,123 - 2005) during the three
months ended September 30, 2006, and revenues of $1,189,868 ($3,758,818 - 2005)
during the nine months ended September 30, 2006. Overall revenues were down 61%
for the three-month comparative periods and 68% for the nine-month periods. The
lower revenues during the periods in 2006 compared to 2005 are a direct result
of the closure of the Company's casino floor for renovation in February 2005 and
subsequent closure of the slot room in November 2005. The restaurant in the
third floor of Bruce Hotel was also closed to the public shortly after the
closure of the slot room.
Operating expenses during the three months ended September 30, 2006 were
$1,253,197 ($778,212 - 2005), and $2,940,340 ($2,110,569 - 2005) during the
nine-month period ended September 30, 2006. Despite substantial reduction in
labor and other variable costs associated with the closure of the casino and
slot room since 2005, operating expenses for the first nine months of 2006
compared to 2005 increased by $713,995 due to increased marketing expenses,
legal and accounting costs and $345,000 amortization of consulting service
expense, prepaid by issuance of our stock to a service provider during the
second quarter of 2006. We had no legal and other SEC reporting related costs in
the first nine months of 2005 at Kubuk, or its predecessor Bruce Grupo Diversion
SAC. We paid over $800,000 of expenses, which are non-recurring in nature, in
cash to various marketing and public relation firms. Consequently, loss from
operation for the three-month period ended September 30, 2006 was $(830,557),
compared to income from operation in the amount of $318,911 for the same period
in 2005. Income (loss) from operation as a percentage of revenue for the
three-month periods ended September 30, 2006 and 2005 was (197)% and 29%,
respectively, while the same percentages for the nine-month periods ended
September 30, 2006 and 2005 were (139)% and 44%. Our net loss from operation for
the nine-month period ended September 30, 2006 was $(1,750,472), compared to
income from operation in the amount of $1,648,249 for the same period in 2005.
The lower income from operation during the period in 2006 compared to 2005, was
a direct result of the closure of the Company's casino floor and slot room in
2005 for renovation and the increased public company compliance costs following
the reverse merger transaction in July 2005.
Net loss, after other income and expenses and provision for income taxes,
was $(846,349) (a net loss of $0.02 per share) for the three-month period ended
September 30, 2006, compared to net income of $188,984 ($0.01 per share) for the
three months ended September 30, 2005. The Company paid income taxes of $16,637
and $127,170 for the three-month periods ended September 30, 2006 and 2005,
respectively.
Net loss, after other income and expenses and provision for income taxes,
was $(1,782,480) (a net loss of $0.04 per share) for the nine-month period ended
September 30, 2006, compared to net income of $1,144,026 ($0.03 per share) for
the nine-month period ended September 30, 2005. The Company paid income taxes of
$46,307 and $534,228 for the nine-month periods ended September 30, 2006 and
2005, respectively.
The Company had a gain (loss) on foreign currency translation of $1,059 and
($6,523) during the three-month and nine-month periods ended September 30, 2006,
respectively, compared to a $661,863 and $715,570 gain during the same periods
in 2005.
The Company's revenues during the periods after the closure of the
Company's slot room and restaurant in November 2005 was principally derived from
hotel revenue and revenue from rental of old slot machines. The Company does not
anticipate that revenues will return to historical levels until the renovation
of its casino floor is completed. The Company has several fixed costs related to
its operations, which resulted in higher operating expenses and lower operating
revenue as a percentage of sales. The Company anticipates that its expenses as a
percentage of sales will remain at approximately the same level until its casino
floor is fully operational. The Company is currently seeking to raise $3.5
million to renovate and modernize the current facilities of the Bruce Hotel &
Casino. The Company has no firm commitments to raise such capital to complete
such renovations.
In addition, we entered into a Licensing Agreement with K.C. Technology, a
Hong Kong corporation, under which the registrant acquired from K.C. a worldwide
exclusive and perpetual license to use K.C.'s technology to manufacture, market
and distribute K.C. designed slot machines and other gaming products, including
an electronic data transfer device trademarked Smartbook. The technology
includes all technology, tools, design, components, hardware, software, and
specification necessary for the design and manufacturing of slot machines and
Smartbook and all associated patents, trademarks, copyrights, trade secrets,
know-how. We agreed to pay K.C. a cash license fee of $2,500,000, of which,
$500,000 was paid in July 2006, and the balance will be paid in four equal
installments of $500,000 each at the end of January and June, respectively,
during the next two years. We also agreed to pay Licensor a licensee fee in
common stock of 6,000,000 shares of restricted common stock, par value $0.001,
of which 3,000,000 share were issued in July 2006, 1,500,000 to be issued on the
first anniversary of the date of the effective date, and 1,500,000 to be issued
on the second anniversary of the effective date. We granted K.C. registration
rights and undertook to use commercially reasonable effort to file a
registration statement with the United States Securities Commission within 90
days of the Effective Date to register for resale the first 3,000,000 shares
common stock issued to K.C. under the License Agreement. We intend to market,
sell, lease or profit-share slot machines beginning in the first half of 2007.
The cash payments and the fair market value of the shares issued under this
licensing agreement are capitalized on our balance sheet as intangible assets
and are determined to have infinite useful lives. These capitalized intangible
licensing rights are not amortized and are tested at least annually to determine
whether impairment of value has occurred by the end of each fiscal year. If it
is determined that the carrying value of these intangibles has been impaired, a
loss will be recognized to the extent of the excess of such carrying value over
the fair value of these intangibles. No impairment loss is recorded as of
September 30, 2006.
15
We anticipate that we will need to raise at least $2.2 million in
additional capital to fund our plan of operation related to our slot machine
business. We cannot assure you that we will successfully raise such financing on
acceptable terms, if at all, or that we will be successful in marketing and
selling our slot machines.
LIQUIDITY AND CAPITAL RESOURCES
The Company is in the process of completing a comprehensive renovation of
the Bruce Hotel & Casino and will require additional capital to complete the
remodel of the casino and resume operations of the casino floor.
The Company intends to market, sell, lease or profit-share slot machines
beginning in the first quarter of 2007. The Company anticipates that it will
need to raise at least $2.2 million in additional capital to fund our plan of
operation related to our slot machine business. The Company also has commitments
to make payments of $500,000 each January and June to K.C. Technology under the
terms of the License Agreement. If the Company fails to make such payments, the
Company will default under the terms of the License Agreement and could lose the
license. We cannot assure you that we will successfully raise such financing on
acceptable terms, if at all, or that we will be successful in marketing and
selling our slot machines. The Company has no firm commitments for such
financing.
Cash flow from operations during the nine months ended September 30, 2006,
were significantly lower than cash flow from operations during the same period
in 2005. The Company's revenues during the periods after the closure of the
Company's slot room and restaurant in November 2005 was principally derived from
hotel and rental of old slot machines. The Company does not anticipate that
revenues will return to historical levels until the renovation of its casino
floor is completed. The Company has several fixed costs related to its
operations, which resulted in higher operating expenses and lower operating
revenue as a percentage of sales. The Company anticipates that its cash flow
from operations will remain at approximately the same level until its casino
floor is fully operational, except that certain non-recurring cash expenses,
including a special marketing expense in the amount of $800,000 to promote the
public awareness of the Company and its business in 2006, will not be incurred
in the future periods.
As of September 30, 2006, the Company had current assets of $1,103,911,
including cash and cash equivalents of $534,376, and current liabilities of
$1,309,174, excluding installment obligations in the amount of $1,700,893
payable in the Company's common stock to KC Technology. The Company had a
working capital deficit of $205,263. We have commitments and contractual
obligations for the Company during the next 12 months of $1,000,000, which is
attributable to the KC Technology License Agreement. The Company did not have
any long-term debt as of September 30, 2006, except for installment obligations
payable to KC Technology in the Company's common stock.
For the first nine months of 2006, our operation in Peru generates roughly
$652,000 of positive cash flow. During the same period, our U.S. headquarters
operation consumed roughly $1,557,000 in cash expenses, including an $800,000
special marketing expense mandated under the December 17, 2005 Unit Purchase
Agreement. We do not anticipate to incurring such expense in the future periods.
To address this ongoing concern, we continue to seek additional funding
both from private equity and other alternative resources. In July 2006 we raised
an additional $500,000, through a second Unit Purchase Agreement. In August
2006, we received $500,000 for the issuance of 500,000 shares of common stock
pursuant to an exercise of class A warrants.
We currently have no alternative sources of funding, and we currently rely
on cash flow from our hotel and the rental of old slot machines to meet our
working capital requirements. Our current plan is to reopen our entire gaming
and restaurant operations once we have completed all of the renovations;
however, if funds are not available to complete all of the renovations, we may
reopen portions of our gaming operation in stages as renovations are completed
beginning with our casino floor then our slot room.
During the quarter ended March 31, 2006, we made a $60,000 short-term loan
to Szchuan Enterprises, Ltd. Yong Yang is an affiliate of Szchuan Enterprises,
Ltd. and a director of the Company. Subsequently, the entire balance of $61,317,
which accounts for the principal and interest was paid off on July 19, 2006. We
are also indebted to one of our Directors for cash advanced to pay for the
expenses in our Shenzhen software development center. The unpaid borrowing
amounted to $55,558 as of September 30, 2006.
We anticipate that it will require $3.5 million to renovate our casino
floor and to purchase gaming equipment. We estimate the costs to complete
renovation of our restaurant and lounge will be approximately $220,000. We do
not have sufficient cash flow and working capital to complete our renovations.
We will not start renovating the restaurant and creating the new lounge area
until the renovation of slot room is completed or until sufficient funding for
all renovation projects is secured.
Historically, in 2004, casino and slot machine revenue accounted for 82%
(approximately $8.75 million) of out total revenue. Slot machine revenue
accounted for 45% ($3.96 million) of total casino and slot machine revenue. We
project that our future annual revenue will exceed 2004 historical revenue of
$10.7 million if we are able to complete our renovations. If we are able to
complete renovations of our casino floor, we estimate that annual casino
revenues should increase to approximately $6.4 million. If we complete
renovations of our slot room, we estimate that annual slot machine revenue
should increase to approximately $6.5 million. Restaurant revenue has
historically, based on 2004 revenue, accounted for approximately 4.67%
($500,000) of our total revenue.
16
We anticipate that we will be able to complete the renovation of our
casino, slot room, and restaurant in the first half of 2007, assuming we are
able to raise adequate financing prior to the end of 2006. We are currently
negotiating with potential investors to raise such funds; however, we currently
do not have any firm commitments for such financing. If we are unable to raise
sufficient capital through equity financing, we may seek to mortgage our real
property and assets. We estimate that we can complete the renovations in 3-5
months after we receive sufficient funding.
Our financial statements have been prepared based on the assumption that we
will be able to continue as a going concern. If we fail to raise additional
capital in the next six months, we may be unable to continue as a going concern.
OFF-BALANCE SHEET ARRANGEMENTS
The Company had no off-balance sheet transactions.
SUBSEQUENT EVENTS
EXERCISE OF WARRANTS
In August 2006, the Company received $500,000 for the issuance of 500,000
shares of common stock pursuant to an exercise of class A warrants.
ITEM 3. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, we evaluated
the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Securities
Exchange Act of 1934 (the "Exchange Act")). Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that, as of the
end of the period covered by this report, our disclosure controls and procedures
were adequately designed and are effective to ensure that information required
to be disclosed by us in the reports we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in applicable rules and forms.
In addition, our Chief Executive Officer and Chief Financial Officer have
determined that the disclosure controls and procedures are effective to ensure
that information required to be disclosed in the reports that are filed under
the Exchange Act are accumulated and communicated to management, including our
Chief Executive Officer and Chief Financial Officer, to allow timely decisions
regarding required disclosure.
During the most recent fiscal quarter ended September 30, 2006, there has
been no change in our internal control over financial reporting (as defined in
Rule 13a-15(f) or 15d-15(f) under the Exchange Act) that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
17
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 1A. RISK FACTORS
As of November 15, 2006, there have been no material changes from risk
factors as previously disclosed in the Company's Form 10-KSB, filed August 16,
2006.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On July 5, 2006, the board of directors of the Company authorized and
approved a 2 for 1 forward stock split of its issued and outstanding shares of
common stock, par value $0.001 per share, by way of share dividend. Pursuant to
Section 78.215 of the Nevada General Corporation Law, shareholder approval of
the share dividend was not required. To effect the share dividend, the Company
authorized the issuance of one share of common stock for each one outstanding
share of common stock held by the shareholders of record on July 5, 2006 at 5:00
p.m. (Eastern Daylight Saving Time) (the "Record Date"). The Company's transfer
agent is authorized and directed to issue new share certificates giving effect
to the share dividend and mail such stock certificates directly to shareholders
of the Company. Certificates were mailed on or about July 7, 2006.
On July 7, 2006, the Company completed the offer and sale of 666,666 units
of the Company, at a price of $0.75 per unit for gross proceeds of $500,000.
Each unit consisted of one share of the Company's common stock, par value
$0.001, and one non-transferable share purchase warrant which entitles the
purchaser to subscribe for one additional common share at a price of $0.75 per
share by the first anniversary of the date of issuance. The offering of units
was conducted by the Company in a private placement to non-U.S. persons outside
the United States pursuant to an exemption from registration available under
Rule 903 of Regulation S of the United States Securities Act of 1933, as
amended.
On July 7, 2006, the Company issued 3,000,000 shares of common stock to one
non-U.S. person in an off-shore transaction as a licensing fee. The offering of
units was conducted by the Company in a private placement to non-U.S. persons
outside the United States pursuant to an exemption from registration available
under Rule 903 of Regulation S of the United States Securities Act of 1933, as
amended.
In August 2006, the Company received $500,000 for the issuance of 500,000
shares of common stock pursuant to an exercise of class A warrants to one
non-U.S. Person outside the United States pursuant to an exemption from
registration available under Rule 903 of Regulation S of the United States
Securities Act of 1933, as amended. The entire proceeds received will be used
toward the renovation of Casino in Peru and as general working capital.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the quarter
ended September 30, 2006.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
A) Exhibits
Number Description
------ -----------
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14
and Rule 15d-14(a), promulgated under the Securities and Exchange
Act of 1934, as amended.
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14
and Rule 15d-14(a), promulgated under the Securities and Exchange
Act of 1934, as amended.
32.1 Certification of Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act
32.2 Certification of Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act
18
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized:
Chilco River Holdings Inc.
By: /s/ Tom Yu Liu
------------------------------------------
Tom Yu Liu
Chief Executive Officer
(Principal Executive Officer)
Date: November 14, 2006
By: /s/ Winston Yen
------------------------------------------
Winston Yen
Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: November 14, 2006
19